RBS–Zero Hora Editora Jornalística SA Zero Hora Editora

O F F E R I N G M E M O R A N D U M [FOR LISTING PURPOSES]
RBS–
RBS–Zero Hora Editora Jornalística S.A.
(a company incorporated under the laws of the Federative Republic of Brazil)
BRL 300,000,000 11.25% GUARANTEED NOTES DUE 2017
(Payable in U.S. dollars)
RBS-Zero Hora Editora Jornalística S.A. (“RBS-Zero Hora”, the “Company” or the “Issuer”), is offering BRL
300,000,000 11.25% Guaranteed Notes due 2017 (the “Notes”). The Notes will mature on June 15, 2017. Interest will
accrue from June 22, 2007 and will be payable on June 15, and December 15 of each year, beginning on December 15,
2007.
Televisão Gaúcha S.A. (“TV Gaúcha”), RBS TV de Florianópolis S.A. (“TV Florianópolis”) and Rádio Gaúcha
S.A. (“Rádio Gaúcha”) (collectively, the “Guarantors”) will jointly and severally guarantee (such guarantees, the
“Guarantees”), pari passu with all other existing and future unsecured and unsubordinated obligations of the Guarantors,
the payment of principal and interest on the Notes. When used herein, “Credit Group” refers collectively to the Issuer
and the Guarantors.
For a more detailed description of the Notes, see “Description of the Notes” beginning on page 102.
Investing in the Notes involves risks. See “Risk Factors” beginning on page 15.
The Notes (and the guarantees) have not been registered under the U.S. Securities Act of 1933 (the “Securities
Act”) and are being offered only to qualified institutional buyers in accordance with Rule 144A under the Securities Act
and outside the United States in accordance with Regulation S under the Securities Act. Prospective investors that are
qualified institutional buyers are hereby notified that the Issuer and the Guarantors may be relying on the exemption
from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of certain restrictions
on transfers of the Notes, see “Transfer Restrictions.” These listing particulars have been prepared by the Company for
use in connection with the offer and sale of the Notes and for the listing of Notes on the Alternative Securities Market of
the Irish Stock Exchange Ltd.
Application has been made to list the Notes on the Alternative Securities Market of the Irish Stock Exchange Ltd.
This Offering Memorandum constitutes the listing particulars for that purpose. The Notes sold to qualified institutional
buyers are expected to be eligible for trading in The PORTAL Market.
Price: 99.271%
Standard Bank Plc expects to deliver the Notes to purchasers in book-entry form through The Depository Trust
Company (“DTC”), on or about June 22, 2007.
The language of the listing particulars is English. Certain legislative references and technical terms have been
cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law.
Standard Bank Plc
The date of this Offering Memorandum is June 26, 2007.
You should rely only on the information contained in this Offering Memorandum. We have not
authorized anyone to provide you with different information. Neither we nor the Initial Purchaser (as
defined below) are making an offer of these securities in any jurisdiction where the offer is not
permitted. You should not assume that the information contained in this Offering Memorandum is
accurate as of any date other than the date on the front of this Offering Memorandum.
Unless otherwise indicated or the context otherwise requires, all references in this Offering
Memorandum to “RBS Group,” “we,” “our,” “ours,” “us” or similar terms refer to the RBS Group, a group
of media companies under common ownership and management. The term “RBS Network” refers to the
companies that are part of the RBS Group, plus affiliated media companies owned by members of the
controlling shareholder families of the RBS Group (other than those members indirectly controlling RBS
Comunicações S.A. (“RBS Comunicações”) and its subsidiaries). References to the “Offering” refer to the
offering of the Notes as described in this Offering Memorandum. The term “Brazil” refers to the Federative
Republic of Brazil. The phrase “Brazilian government” refers to the federal government of the Federative
Republic of Brazil, the term “Central Bank” refers to the Banco Central do Brasil, or the Central Bank of
Brazil, and the term “CVM” refers to the Comissão de Valores Mobiliários, or the Brazilian Securities
Commission.
This Offering Memorandum has been prepared by the Issuer solely for use in connection with the
proposed offer and sale of the Notes. We and Standard Bank Plc, as initial purchaser (the “Initial
Purchaser”), reserve the right to reject any offer to purchase, in whole or in part, for any reason, or to sell
less than all of, the Notes offered hereby. This Offering Memorandum is personal to you (to whom it has
been delivered by the Initial Purchaser) and does not constitute an offer to any other person or to the public
in general to acquire the Notes. Except as set forth in the paragraph below, distribution of this Offering
Memorandum to any person other than you and those persons, if any, retained to advise you with respect
thereto is unauthorized, and any disclosure of its contents without the Issuer’s prior written consent is
prohibited.
This Offering Memorandum is intended solely for the purpose of soliciting indications of interest in the
Notes from qualified investors and does not purport to summarize all of the terms, conditions, covenants and
other provisions contained in the Indenture and other transaction documents described herein. The
information provided is not all-inclusive. The market information in this Offering Memorandum has been
obtained by us from publicly available sources deemed by us to be reliable. Notwithstanding any
investigation that the Initial Purchaser may have conducted with respect to the information contained in this
Offering Memorandum, the Initial Purchaser accepts no liability in relation to the information contained in
this Offering Memorandum or its distribution or with regard to any other information supplied by us or on
our behalf.
The Issuer confirms that, having taken all reasonable care to ensure that the information contained in
this Offering Memorandum is, to the best of its knowledge, in accordance with the facts and contains no
omission likely to affect its import, and the Issuer accepts responsibility accordingly.
This Offering Memorandum contains summaries intended to be accurate with respect to certain terms
of certain documents, but reference is made to the actual documents, all of which will be made available to
prospective investors upon request to us or the Trustee for complete information with respect thereto, and all
such summaries are qualified in their entirety by such reference.
You acknowledge that:
•
You have been afforded an opportunity to request from us and to review, and have received, all
additional information considered by you to be necessary to verify the accuracy of, or to
supplement, the information contained herein;
•
You have had the opportunity to review all of the documents described herein;
i
•
You have not relied on the Initial Purchaser or any person affiliated with the Initial Purchaser in
connection with any investigation of the accuracy of such information or your investment
decision; and
•
No person has been authorized to give any information or to make any representation
concerning us or the Notes (other than as contained herein and information given by our duly
authorized officers and employees, as applicable, in connection with your examination of the
Company, the Guarantors and the terms of this Offering) and, if given or made, any such other
information or representation should not be relied upon as having been authorized by us or the
Initial Purchaser.
In making an investment decision, you must rely on your examination of our business and the
terms of this Offering, including the merits and risks involved. These Notes have not been approved
or recommended by any United States federal or state securities commission or any other United
States, Brazilian or other regulatory authority. Furthermore, the foregoing authorities have not
passed upon or endorsed the merits of the offering or confirmed the accuracy or determined the
adequacy of this document. Any representation to the contrary is a criminal offense.
Notwithstanding anything in this document to the contrary, except as reasonably necessary to comply
with applicable securities laws, you (and each of your employees, representatives or other agents) may
disclose to any and all persons, without limitation of any kind, the U.S. federal income tax treatment and tax
structure of the Offering and all materials of any kind (including opinions or other tax analyses) that are
provided to you relating to such tax treatment and tax structure. For this purpose, “tax structure” is limited
to facts relevant to the U.S. federal income tax treatment of the offering.
This Offering Memorandum does not constitute an offer to sell, or a solicitation of an offer to buy, any
Note offered hereby by any person in any jurisdiction in which it is unlawful for such person to make an
offer or solicitation. Neither the delivery of this Offering Memorandum nor any sale made hereunder shall
under any circumstances imply that there has been no change in our affairs or that the information set forth
in this Offering Memorandum is correct as of any date subsequent to the date of this Offering Memorandum.
None of the Company, the Guarantors, the Initial Purchaser, or any of the Company’s, the
Guarantors’ or the Initial Purchaser’s respective affiliates or representatives is making any
representation to any offeree or purchaser of the Notes offered hereby regarding the legality of any
investment by such offeree or purchaser under applicable legal investment or similar laws. You
should consult with your own advisors as to legal, tax, business, financial, accounting and related
aspects of a purchase of the Notes.
The Notes have not been and will not be issued nor placed, distributed, offered or negotiated in the
Brazilian capital markets. The Notes have not been and will not be registered with the CVM. Therefore,
the Initial Purchaser has represented, warranted and agreed that it has not offered or sold, and will not offer
or sell, the Notes in Brazil, except in circumstances which do not constitute a public offering, placement,
distribution or negotiation of securities in the Brazilian capital markets regulated by Brazilian legislation.
The Initial Purchaser has complied and will comply with all provisions of the Financial Services and
Markets Act 2000 (the “FSMA”) with respect to anything done by it in relation to the Notes in, from or
otherwise involving the United Kingdom. This Offering Memorandum must not be acted on or relied on by
persons who are not relevant persons. Any investment or investment activity to which this communication
relates shall be available only to relevant persons and will be engaged in only with relevant persons.
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Application has been made to list the Notes on the Alternative Securities Market of the Irish Stock
Exchange Ltd. Directive 2004/109/EC of the European Parliament and Council of December 15, 2004 on
harmonization of transparency requirements in relation to information about issuers whose securities are
admitted to trading on a regulated market and amending Directive 2001/34/EC (as amended, the “EU
Transparency Directive”) became effective on January 30, 2005. It required Member States to take measures
to comply with the EU Transparency Directive by January 20, 2007. If, as a result of the EU Transparency
Directive or any legislation implementing the EU Transparency Directive, or otherwise, we could be
required to publish financial information either more regularly than we would otherwise be required to or
according to accounting principles that are materially different from the accounting principles we would
otherwise use to prepare our published financial information, we may seek an alternative admission to
listing, trading and/or quotation for the Notes on a different section of the Irish Stock Exchange or by such
other internationally recognized listing authority, stock exchange and/or quotation system inside or outside
the European Union as we may elect.
NOTICE TO NEW HAMPSHIRE RESIDENTS
Neither the fact that a registration statement or an application for a license has been filed under
chapter 421-B with the State of New Hampshire nor the fact that a security is effectively registered or
a person is licensed in the State of New Hampshire constitutes a finding by the Secretary of State of
New Hampshire that any document filed under RSA 421-B is true, complete and not misleading.
Neither any such fact nor the fact that an exemption or exception is available for a security or a
transaction means that the Secretary of State has passed in any way upon the merits or qualifications
of, or recommended or given approval to, any person, security or transaction. It is unlawful to make,
or cause to be made, to any prospective investors, customer, or client any representation inconsistent
with the provisions of this paragraph.
__________________
INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE
Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the description
set forth herein with respect to U.S. federal tax issues was not intended or written to be used, and such
description cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be
imposed on the taxpayer under the U.S. Internal Revenue Code. Such description was written to
support the marketing of the Notes. Taxpayers should seek advice based on their particular
circumstances from an independent tax advisor.
__________________
The Company and the Initial Purchaser reserve the right to withdraw the offering of the Notes at any
time or to reject a commitment to subscribe for the Notes in whole or in part.
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TABLE OF CONTENTS
FORWARD-LOOKING STATEMENTS ................................................................................................................. 1
PRESENTATION OF FINANCIAL INFORMATION ............................................................................................ 3
SUMMARY............................................................................................................................................................... 5
RISK FACTORS ..................................................................................................................................................... 15
EXCHANGE RATES.............................................................................................................................................. 35
USE OF PROCEEDS .............................................................................................................................................. 37
CAPITALIZATION ................................................................................................................................................ 38
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS......................................................................................................................................................... 41
OVERVIEW OF THE MEDIA MARKET IN BRAZIL ......................................................................................... 64
BUSINESS .............................................................................................................................................................. 66
MANAGEMENT AND OWNERSHIP STRUCTURE........................................................................................... 91
RELATED PARTY TRANSACTIONS WITH RBS GROUP COMPANIES...................................................... 100
DESCRIPTION OF THE NOTES......................................................................................................................... 102
FORM, DENOMINATION AND TRANSFER .................................................................................................... 125
TAXATION........................................................................................................................................................... 127
PLAN OF DISTRIBUTION .................................................................................................................................. 134
TRANSFER RESTRICTIONS .............................................................................................................................. 137
SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES
GENERALLY ACCEPTED IN BRAZIL, U.S. GAAP AND IFRS...................................................................... 140
LEGAL MATTERS............................................................................................................................................... 155
ENFORCEABILITY OF CIVIL LIABILITIES.................................................................................................... 156
INDEPENDENT ACCOUNTANTS ..................................................................................................................... 158
GENERAL INFORMATION ................................................................................................................................ 159
INDEX TO FINANCIAL STATEMENTS ........................................................................................................... F-1
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FORWARD-LOOKING STATEMENTS
This Offering Memorandum contains statements that constitute forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995 with respect to the Issuer, the
Guarantors and the RBS Group. Many of the forward-looking statements contained in this Offering
Memorandum can be identified by the use of forward-looking words such as “anticipate,” “believe,”
“could,” “expect,” “should,” “plan,” “intend,” “estimate,” “target,” “forecast,” “continue,” “guideline,”
“may,” “will,” “should,” “project,” and “potential,” among others. These statements appear in a number of
places in this Offering Memorandum and include, but are not limited to, statements regarding the intents,
beliefs or current expectations of the RBS Group with respect to:
(i)
their strategic directions and future operations;
(ii)
the implementation of their principal operating strategies;
(iii)
their acquisitions, joint ventures, strategic alliances or divestiture plans;
(iv)
the implementation of their financing strategies and capital expenditure plans;
(v)
consumer demand for the RBS Group’s media;
(vi)
variations in the cost of newsprint per ton;
(vii)
the quality of the television programming offered by the Globo Network (as defined
herein);
(viii)
the financial conditions of the Issuer’s and/or the Guarantors’ customers, particularly
advertisers;
(ix)
the loss of, or lack of revenues from, programming contracts or administrative concessions
or authorizations under which the Issuer and the Guarantors operate;
(x)
the competitive nature of the industries in which they are operating;
(xi)
the cost and availability of financing;
(xii)
changes in the Brazilian economy, particularly in the States of Rio Grande do Sul and Santa
Catarina, and the impact of such changes on advertising and subscription revenue;
(xiii)
fluctuations in interest rates;
(xiv)
the exchange rates between Brazilian and foreign currencies;
(xv)
developments in, or changes to, the laws, regulations and governmental policies governing
their business;
(xvi)
the declaration or payment of dividends;
(xvii)
the factors discussed under “Risk Factors” in this Offering Memorandum;
(xviii) other factors or trends affecting the Issuer’s or Guarantors’ financial conditions or results of
operations; and
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(xix)
other statements contained in this Offering Memorandum regarding matters that are not
historical facts.
Forward-looking statements are only current expectations of the Issuer, the Guarantors and the RBS
Group and are based on their managements’ beliefs and assumptions and on information currently available
to their managements. Such statements are subject to risks and uncertainties, and actual results may differ
materially from those expressed or implied in the forward-looking statements as a result of various factors,
including, but not limited to, those identified under “Risk Factors” in this Offering Memorandum. These
risks and uncertainties include factors relating to the Brazilian economy, securities and foreign exchange
markets, which exhibit volatility and can be adversely affected by developments in other countries, factors
relating to the Brazilian and international media industry and changes in their regulatory environment and
factors relating to the highly competitive markets in which the Issuer and the RBS Group operate. Forwardlooking statements speak only as of the date they are made, and the Issuer does not undertake any obligation
to update them in light of new information or future developments or to release publicly any revisions to
these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated
events.
Prospective investors should consider these cautionary statements together with any written or oral
forward-looking statements that the Issuer, the Guarantors or the RBS Group may issue in the future.
In this Offering Memorandum, unless otherwise specified, references to “U.S.$”, “$”, “U.S. Dollar” or
“Dollar” are to the United States dollar; references to “R$”, “real” or “reais” are to Brazilian reais, the
official currency of Brazil since July 1, 1994.
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PRESENTATION OF FINANCIAL INFORMATION
Included herein are:
(i)
the financial statements of the Issuer as of December 31, 2006, 2005 and 2004 and for the
years then ended, and as of March 31, 2007 and 2006 and for the three-month periods then
ended, together with the notes thereto (the “Issuer Financial Statements”);
(ii)
the special purpose combined financial statements of the Issuer and the Guarantors as of
December 31, 2006, 2005 and 2004 and for the years then ended, and as of March 31, 2007
and 2006 and for the three-month periods then ended, presented on a combined basis after
inter-company eliminations, together with the notes thereto (the “Credit Group Financial
Statements”); and
(iii)
the financial statements for each of the three Guarantors as of December 31, 2006, 2005
and 2004 and for the years then ended, and as of March 31, 2007 and 2006 and for the
three-month periods then ended, together with the notes thereto (the “Individual Guarantors
Financial Statements”).
The Financial Statements have been prepared in accordance with accounting principles generally
accepted in Brazil (“Brazilian GAAP”). The financial statements of the Issuer and for each of the Guarantors
and the special purchase combined financial statements of the Issuer and the Guarantors as of December 31,
2006, 2005 and 2004 and for the years then ended have been audited by PricewaterhouseCoopers Auditores
Independentes, as stated in their reports appearing therein. With respect to the unaudited interim financial
statements of the Issuer, the unaudited interim combined financial statements of the Issuer and the
Guarantors, and the unaudited interim financial statements of each of the Guarantors for the three-month
periods ended March 31, 2007 and 2006, PricewaterhouseCoopers Auditores Independentes reported that
they have applied limited procedures in accordance with Brazilian professional standards for a review of
such information. However, their report included herein states that they did not audit and they do not express
an opinion on those unaudited interim financial statements. Accordingly, the degree of reliance on their
report on such information should be restricted in light of the limited nature of the review procedures
applied.
Brazilian GAAP differ in certain significant respects from generally accepted accounting principles in
certain other countries, including the United States. For a discussion of certain differences between Brazilian
GAAP and generally accepted accounting principles in the United States (“U.S. GAAP”) and International
Financial Reporting Standards (“IFRS”), see “Summary of Certain Significant Differences between
Accounting Principles Generally Accepted in Brazil, U.S. GAAP and IFRS”.
The financial statements have been monetarily corrected following the constant currency methodology
for the effects of inflation through September 30, 2001 and financial statements monetarily corrected through
September 30, 2001 are referred to as prepared following the “Constant Currenmcy Method”. Monetary
correction has been abolished in financial statements for statutory and tax purposes as from January 1, 1996;
however, general purpose financial statements may continue to be presented monetarily corrected following
the constant currency methodology. During 2001 the Conselho Federal de Contabilidade (CFC) issued
Resolution 900/01 which determined that monetary correction should be interrupted when accumulated
levels of inflation over the last three years does not exceed 100%. As a result, the Financial Statements
prepared following the Constant Currency Method have been monetarily corrected from January 1, 1996
through September 30, 2001, when the Issuer ceased such correction in application of Resolution 900/01.
For more detail, see Note 3 to the Issuer Financial Statements. Under Brazilian GAAP, monetary correction
was mandatory following a methodology known as the “Corporate Law Method” in the financial statements
for statutory and regulatory purposes through December 31, 2005. For a more deta iled description of the
“Constant Currency Method” and the “Corporate Law Method” see “Management’s Discussion and Analysis
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of Financial Condition and Results of Operations — Critical accounting policies — Application of the
constant currency method”.
The Issuer and the Guarantors measure their financial performance by EBITDA and other items, some
of which are reflected in their statement of operations. The RBS Group believes that EBITDA is a
meaningful measure of performance because it is commonly used in the media and pay-TV television
industries to analyze and compare companies on the basis of operating performance, leverage and liquidity.
However, companies define EBITDA in different ways and caution must be used in comparing this
measurement of EBITDA to other measurements of EBITDA. EBITDA is not defined under Brazilian
GAAP and is not a measure of net income or cash flow from operations and should not be considered as an
alternative to net income, as an indication of the Issuer’s or the Guarantor’s financial performance, as an
alternative to cash flow from operations or as a measure of liquidity.
You are urged to read carefully the Financial Statements and related notes included herein under
“Financial statements”. See also “Summary financial information and other data”, “Risk factors”,
“Management’s discussion and analysis of financial condition and results of operations” and “Business”.
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SUMMARY
The Offering
The following summary contains basic information about the Issuer, the Guarantors and the Notes. It
does not contain all the information that may be important in making an investment decision. Investors
should carefully consider the factors set forth under “Risk Factors”, the Financial Statements and related
notes thereto and more detailed information contained elsewhere in this offering memorandum in deciding
whether to invest in the Notes.
Overview
The Issuer and the Guarantors are part of Rede Brasil Sul (Southern Brazil Network, referred to herein
as the RBS Network), one of the largest multimedia networks in Brazil. The RBS Network operates
primarily in southern Brazil, in the States of Rio Grande do Sul and Santa Catarina (collectively, the
“Service Territory”). These two states have a combined population of approximately 16 million people,
representing approximately 9% of the Brazilian population, and its inhabitants are considered to be relatively
more prosperous and well-educated than the rest of the country. See “Business — The RBS Group — The
RBS Network Service Territory”. The RBS Network includes 18 VHF television stations, all transmitting
content provided by the Globo television network (the “Globo Network”), the largest television network in
Brazil and South America. In addition, the RBS Network together includes two community content channels
distributed through UHF (ultra high frequency) and/or pay television and a rural-oriented channel (Canal
Rural) distributed throughout Brazil through DTH (direct to home), cable and open satellite, 21 FM radio
stations, five AM radio stations, eight daily newspapers and an internet portal website that integrates content
from the TV, radio and newspaper businesses of the RBS Network and a content search portal, “hagah”, that
provides local consumer information for the regions it serves.
The RBS Network began with the acquisition in 1957 of an interest in Rádio Gaúcha, an AM news
radio station in the City of Porto Alegre, by Maurício Sirotsky Sobrinho, who was then a radio show host for
the station. Since that time, the Network has expanded beyond the City of Porto Alegre throughout the south
of Brazil, and has become a leader in major media fields in its Service Territory. See “Business — The RBS
Group — History”.
The RBS Network includes companies that are part of the RBS Group as well as certain affiliated
companies associated with TV Gaúcha, TV Florianópolis, Rádio Atlântida FM de Porto Alegre and Rádio
Itapema FM de Florianópolis. The term “RBS Group” refers to a group of media companies under common
ownership and management. The term “RBS Network” refers to the companies that are part of the RBS
Group, plus affiliated media companies owned by members of the controlling shareholder families of the
RBS Group (other than those members indirectly controlling RBS Comunicações S.A. and its subsidiaries).
In 2005, the RBS Group was reorganized, and RBS Comunicações S.A. was established for the purpose of
integrating the Group’s main businesses, as a means to create a more efficient management structure. RBS
Comunicações will be the platform through which the RBS Group expects to implement long-term strategic
plans for expansion and development. RBS Comunicações S.A. (“RBS Comunicações”) is jointly owned by
IMAH Participações Ltda. (“IMAH Par”), JAMAH Participações Ltda. (“JAMAH Par”) and FECH
Participações Ltda. (“FECH Par”), holding companies representing the families of Maurício Sirotsky
Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, respectively. Its core businesses are
currently organized under two primary subsidiaries — RBS TV Participações S.A. and RBS Radio
Participações — with the expectation that RBS-Zero Hora, RBS Participações S.A. (“RBS Par”), RBS
Administração e Cobranças (“RBS A&C”) and other RBS Group companies will be integrated into RBS
Comunicações S.A. in the future. Each of RBS TV Participações and RBS Radio Participações functions as
a subsidiary holding company for the Group’s individual television and radio stations while RBS-Zero Hora
holds the RBS Group’s interests in newspapers. Not included within the RBS Group, but a significant part
of the RBS Network, are 14 television stations and 21 radio stations owned by affiliates but which form part
5
of the RBS Network through programming assignment agreements. See “Management and Ownership
Structure”.
Operationally, the activities of each of the companies of the RBS Group are controlled by the Executive
Committee, which generally meets every week in Porto Alegre. The Executive Committee is appointed by
the Board of Directors to manage the Group’s constituent companies. See “Management”.
According to RBS Network statistics, the network is currently the third-largest media network in Brazil
as measured by revenue and the leading provider of multimedia services in the Service Territory. The RBS
Network’s VHF television stations operating in the Porto Alegre and Florianópolis metropolitan regions, the
largest population centers of the States of Rio Grande do Sul and Santa Catarina, respectively, are the most
watched television stations in their respective metropolitan regions, with average audience shares of
broadcast television viewership of 63% and 64%, respectively. Likewise, the RBS Network’s eight
newspapers, in aggregate, are the most widely-read newspapers in the Service Territory (as a percentage of
the population) and the second most widely-circulated in Brazil (in terms of the number of newspapers). The
RBS Network’s principal segments of radio broadcasting operations are news/sports, youth-oriented music,
popular music and adult contemporary music programming. The Network’s AM and FM radio stations
operating in the Porto Alegre metropolitan region, the largest population center of the Service Territory, have
aggregate audience shares of 67% and 28%, respectively, comprising in each case an audience share that is
larger than that of any of their competitors. The RBS Network also includes a multimedia internet portal,
clic RBS, an internet services portal, “hagah”, ViaLOG, a logistics distribution service business unit and a
book publishing unit called RBS Publicações.
All of the RBS Network’s 18 VHF television stations broadcast Globo Network programming regularly
and occasionally provide the Globo Network with local news. The RBS Network produces approximately
15% of the programming grid locally, maintaining high “lead-in” ratings for the local news programs.
As of December 31, 2006, the RBS Group had total assets of R$828.1 million. During 2006, the RBS
Group had net operating revenues of R$811 million and net income of R$142 million.
Prospective investors in the Notes should be aware that the Notes are not guaranteed by, nor do
they constitute obligations of, the RBS Network or the RBS Group or of RBS Comunicações, but
constitute obligations of RBS-Zero Hora, jointly and severally guaranteed by TV Gaúcha, TV
Florianópolis and Rádio Gaúcha, the businesses of which are described below.
The Issuer
RBS-Zero Hora publishes the RBS Network’s eight newspapers, Zero Hora, Diário Gaúcho,
O Pioneiro and Diário de Santa Maria, in the State of Rio Grande do Sul, plus Diário Catarinense, Jornal
de Santa Catarina, A Hora de Santa Catarina and A Notícia in the State of Santa Catarina. Together, the
eight newspapers had an average daily circulation of approximately 493,000 copies for the first three-months
of 2007 which, according to the Instituto Verificador de Circulação (the Circulation Verification Institute or
“IVC”), made RBS-Zero Hora the second largest newspaper publisher in Brazil by quantity of copies
circulated. Daily circulation includes newspapers sold by subscription, street vendors or at newsstands.
RBS-Zero Hora also serves as the informational hub for the RBS Network, making information
available to all the newspapers operated by the Issuer, as well as to the RBS Network’s television stations
and radio news and sports stations.
Furthermore, RBS-Zero Hora also operates ViaLOG, a logistics distribution service business unit, a
book publishing unit called RBS Publicações, as well as the internet-based businesses of the RBS Network ,
including clicRBS, the multimedia internet portal website for the RBS Group that integrates content from the
TV, radio and newspaper businesses of the RBS Group with internet services, plus specialty site “hagah”.
See “Business — The Issuer”.
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At December 31, 2006, the total assets of the Issuer were R$510.4 million. For the year ended
December 31, 2006, the Issuer had net operating revenues of R$409.2 million, earnings before financial
income, financial expense, income tax, depreciation and amortization (“EBITDA”) of R$80.9 million and
net income of R$21.5 million. In this context, the Issuer accounted for 50% of the net operating revenues and
33% of the EBITDA of the RBS Group for the year ended December 31, 2006. For the year ended December
31, 2005, the Issuer had operating revenues of R$386.5 million, EBITDA of R$86.2 million and net income
of R$20.3 million. See the Issuer Financial Statements included elsewhere in this Offering Memorandum.
For a discussion of the use of EBITDA as a measure of financial performance, see “Summary financial
information and other data”.
The Guarantors
Payments of principal and interest on the Notes will be jointly and severally guaranteed by Televisão
Gaúcha, TV Florianópolis and Rádio Gaúcha. The Issuer and the Guarantors on a combined basis accounted
for 90% of the net operating revenues and 86% of the EBITDA of the RBS Group at and for the year ended
December 31, 2006. During 2006, none of the other companies comprising RBS Group, on an individual
basis, accounted for more than 10% of RBS Group’s operating revenues or more than 40% of RBS Group’s
net income.
Operationally, TV Gaúcha and TV Florianópolis serve as the hub for all RBS Network broadcast
television operations in the States of Rio Grande do Sul and Santa Catarina, respectively, and operate VHF
television broadcast stations in the cities of Porto Alegre and Florianópolis, respectively. TV Gaúcha and TV
Florianópolis also receive fees under programming assignment agreements with the RBS Network’s 14
television stations that are owned by associated companies not part of the RBS Group. See “Business —
The Guarantors”.
Rádio Gaúcha owns and operates an AM news and sports radio station in Porto Alegre which, as the
head of the Gaúcha Sat radio news network, supplies selective content to 135 affiliate radio stations
throughout Brazil and is the largest radio station of all the radio stations that form part of the RBS Network.
Collectively, the Guarantors represent the largest television stations in each of the States of Rio Grande
do Sul and Santa Catarina, and the largest radio station as measured by revenue in the Service Territory. At
December 31, 2006, the total assets of the Issuer and the Guarantors on a combined basis were R$959.4
million. For the year ended December 31, 2006, the Issuer and the Guarantors had combined net operating
revenues of R$731.1 million, combined EBITDA of R$211.9 million and combined net income of R$111.9
million. Likewise, for the full year ended December 31, 2005, the Issuer and Guarantors had combined
operating revenues of R$673 million, combined EBITDA of R$196.4 million and combined net income of
R$88 million. See the Credit Group Financial Statements included elsewhere in this Offering Memorandum.
For a discussion of the use of EBITDA as a measure of financial performance, see “Summary financial
information and other data”.
Strategy
The RBS Group’s primary strategic goal is to be one of the most well-respected and profitable media
groups in Brazil, whose activities and companies meet or exceed world class standards.
Embedded in the RBS Group’s corporate strategy is to pursue growth from the Group’s core media
businesses, introduce new media-related revenue sources and enter into new markets on an opportunistic
basis, with a strategic focus on cash flow generation. Future strategic growth opportunities, particularly in
the online, radio and newspaper businesses, in the Brazilian southern, southeastern and central western
regions may be pursued, provided such growth fits within the Group’s goals.
The RBS Group seeks to maintain its leadership position by attracting and retaining the most important
media personalities in its Service Territory, by maintaining close ties with the communities in which it
operates and by encouraging entrepreneurial initiatives among its managerial staff. The RBS Group’s
business strategy is strongly-related to its unique ability to explore multimedia synergies. It believes that its
7
locally-based multimedia operating model, particularly in the radio and newspaper businesses, can be
successfully replicated in other markets beyond the current Service Territory. See “Business — The RBS
Group — Business development strategy”.
8
Set forth below is certain financial and statistical information about the RBS Group as a whole and the Credit Group (the Issuer and the
Guarantors) as of and for the year ended December 31, 2006. Financial information for the RBS Group is presented according to the Corporate
Law Method, while the financial information for the Credit Group is presented according to the Constant Currency Method. As a result
information is not directly comparable and direct comparison of the financial information for the RBS Group compared to the Credit Group is not
appropriate. See “Presentation of Financial Information” and Note 3 to the Credit Group Financial Statements:
As of December 31, 2006, 2005, 2004 and 2003 and for the years then ended
(in thousands of R$)
1
RBS Group
Credit Group
2
2006
2005
2004
2003
2006
2005
2004
2003
Net operating revenues..............................
811,369
747,507
687,609
546,184
731,105
673,001
573,462
485,034
Gross profit ........................................
509,001
456,129
415,568
297,703
442,870
395,101
309,953
251,862
Financial expenses (income) net...........
50,959
123,449
107,322
95,425
34,276
57,360
19,249
(13,704)
Net income (loss) ...............................
142.010
77,439
(86,646)
(51,952)
111,870
87,953
57,893
53,090
Current assets .....................................
445,010
203,795
180,273
210,238
425,487
267,739
159,490
108,905
Total assets.........................................
828,065
627,057
555,693
747,982
959,441
769,381
620,869
430,816
Current liabilities................................
592,160
401,180
329,402
389,468
274,465
201,898
165,306
124,909
Total debt ..........................................
576,623
540,912
542,291
693,089
391,595
313,827
214,662
57,157
Cash and cash equivalents..................
240,401
48,791
31,090
43,721
76,118
718
240
905
3
9
As of December 31, 2006, 2005, 2004 and 2003 and for the years then ended
(in thousands of R$)
1
RBS Group
Credit Group
2
2006
2005
2004
2003
2006
2005
2004
2003
336,222
492,121
511,201
649,368
315,477
313,109
214,422
56,252
(110,245)
(194,903)
(230,681)
(136,300)
347,497
287,627
236,421
200,652
245,458
217,388
147,625
96,029
211,852
196,433
128,880
86,344
.................
4.82
1.76
1.38
1.01
6.18
3.42
6.70
0
Leverage . ..........................................
1.37
2.26
3.46
6.76
1.49
1.59
1.66
0.65
4
Net debt ............................................
Stockholder’s equity (net capital deficiency)
3
EBITDA ...........................................
Interest coverage ratio
5
3
(1) Information prepared following the Corporate Law Method and as such monetarily corrected through December 31, 1995. See
“Presentation of Financial Information”.
(2) Information prepared following the Constant Currency Method and as such monetarily corrected through September 30, 2001.
(3) As defined in “Summary—The Issuer”, below.
(4) Net debt has been computed as Total debt less cash and cash equivalents.
(5) Leverage has been computed as net debt divided by EBITDA.
10
The Notes
Issuer .......................................................
RBS-Zero Hora Editora Jornalistica S.A.
Guarantors...............................................
Televisão Gaúcha S.A. (“TV Gaúcha”).
RBS TV de Florianópolis S.A. (“TV Florianópolis”).
Rádio Gaúcha S.A. (“Rádio Gaúcha”).
Currency..................................................
Brazilian Reais (payable in U.S. dollars).
The Notes ................................................
BRL 300,000,000 equivalent aggregate principal amount of fixed rate
guaranteed notes.
Issue Price ...............................................
99.271% of the principal amount.
Issue Date................................................
June 22, 2007.
Indenture .................................................
The Notes will be issued under an indenture to be dated as of June 22,
2007 (the “Indenture”) between the Issuer and The Bank of New York
(the “Trustee”).
Rating ......................................................
The Notes have been rated BB- by Standard & Poor’s.
Interest.....................................................
The Notes shall bear interest from their date of issue at the rate of
11.25% per annum (the “Rate of Interest”) payable semi-annually in
arrears on each June 15 and December 15 (each, an “Interest Payment
Date”), commencing December 15, 2007. Interest will be paid on each
Interest Payment Date on each Note in an amount equal to the
outstanding principal amount of such Note, multiplied by the Rate of
Interest, with the interest amount to be converted into U.S. dollars by
the Calculation Agent on the relevant Fixing Date using the FX Rate.
Such interest will be calculated on the basis of a 360-day year
consisting of 12 months of 30 days each and, in the case of an
incomplete month, on the basis of the actual number of days elapsed.
Maturity Date ................................ June 15, 2017.
Guarantees...............................................
The Notes will have the benefit of Guarantees by which each
Guarantor, jointly and severally with the other Guarantors, guarantees,
pari passu with all other existing and future unsecured and
unsubordinated obligations of such Guarantor, the due and punctual
payment of the principal, premium (if any), interest and additional
amounts (if any) on the Notes, when and as the same become due and
payable, whether at stated maturity, upon redemption or repayment,
upon declaration of acceleration or otherwise. The Indenture will
provide that the obligations of the Guarantors under their respective
Guarantees will be limited so as not to constitute a fraudulent
conveyance under applicable law. See “Description of the Notes —
The Guarantees”.
11
Tax Redemption................................
The Issuer, at its option, may redeem all, but not less than all, of the
Notes for certain taxation reasons as described under “Description of
the Notes — Redemption”.
Status and Ranking................................
The Notes will constitute direct, unconditional and unsecured
obligations of the Issuer and will rank pari passu with all other
unsecured and unsubordinated obligations of the Issuer, present or
future, and without any preference among themselves.
Use of Proceeds................................The Issuer intends to use the net proceeds of the issue of the Notes to
repay existing indebtedness, including in connection with the
concurrent tender offer for the Issuer’s 11% Guaranteed Notes due
2010 issued in 2004, and for general corporate purposes. See “Use of
Proceeds”.
Withholding Taxes;
All payments by the Issuer and/or the Guarantors in respect of the
Additional Amounts ................................
Notes shall be made without withholding or deduction for or on
account of any present or future taxes, duties, assessments or other
governmental charges of whatever nature imposed or levied by or on
behalf of Brazil or any political subdivision or authority thereof or
therein having power to tax, subject to certain exceptions (including
the IPMA Standard EU Exceptions). In the event the Issuer or any
Guarantor is compelled by law to make any such withholding or
deduction, the Issuer or such Guarantor, as the case may be, shall pay
such additional amounts as may be necessary to ensure that the net
amounts receivable by the holders of the Notes after such withholding
or deduction shall equal the respective amounts of principal and
interest which would have been receivable in respect of the Notes in
the absence of such withholding or deduction.
FX Rate ...................................................
FX Rate shall mean, for any Fixing Date, the BRL/U.S.$ spot offer
rate (i.e., the rate at which banks buy BRL and sell U.S.$ (“BRL/U.S.$
Rate”)) expressed as the amount of BRL per one U.S.$ reported by the
Central Bank on the SISBACEN Data System under transaction code
PTAX-800 (“Consultas de Câmbio” or “Exchange Rate Inquiry”),
Option 5 (“Cotações para Contabilidade” or “Rates for Accounting
Purposes”) (the “PTAX Rate”) at or about 6:00 p.m. São Paulo time on
the Fixing Date, as determined by the Calculation Agent, subject to the
FX Rate Fallback Provisions.
“Fixing Date” means three Brazilian Business Days immediately prior
to each Interest Payment Date, the Maturity Date or earlier date
specified for redemption of the Notes.
“Brazilian Business Day” shall mean a day on which commercial
banks and foreign exchange markets settle payments and are open for
general business (including dealings in foreign exchange and foreign
currency deposits) in any of São Paulo or Rio de Janeiro, Brazil, and
New York and London.
12
FX Rate Fallback
Provisions................................................
FX Rate Fallback Provisions shall apply in the event that the PTAX
Rate scheduled to be reported on the Fixing Date is not reported by the
Central Bank on the Fixing Date. See “Description of the Notes —
Certain definitions”.
Covenants................................................
The Indenture contains certain covenants that, among other things, will
limit the ability of the Issuer and the Guarantors to incur indebtedness,
pay dividends, make investments, engage in transactions with
stockholders and affiliates, create liens and sell substantially all of
their assets and engage in mergers and consolidations. See
“Description of the Notes — Affirmative covenants” and “Description
of the Notes — Negative covenants”.
Events of Default................................
The Notes will be subject to certain events of default, as set out in
“Description of the Notes — Events of default”.
Listing .....................................................
Issuer has applied to list the Notes on the Alternative Securities Market
of the Irish Stock Exchange. There can be no assurance, however, that
this application will be accepted.
PORTAL .................................................
Notes sold to qualified institutional buyers are expected to be eligible
for trading in The PORTAL Market.
Transfer Restrictions ...............................
There are restrictions on the transfer of the Notes sold pursuant to an
exemption from registration under the Securities Act. See “Transfer
restrictions.”
Form, Denomination and
Transfer ...................................................
The Notes will be issued in book-entry form through the facilities of
The Depository Trust Company (“DTC”) for the accounts of its
participants, including Euroclear Bank S.A./N.V., as the operator of
the Euroclear System, and Clearstream Banking, Luxembourg, socíeté
anonyme, and will trade in DTC’s same-day funds settlement system.
The Notes will be in fully registered form without interest coupons
attached. The Notes sold in reliance on Rule 144A under the
Securities Act (“Rule 144A”) will be issued in the form of a restricted
global note (the “Restricted Global Note”), and the Notes sold in
reliance on Regulation S under the Securities Act (“Regulation S”),
will be issued in the form of a Regulation S global note (the
“Regulation S Global Note,” and together with the Restricted Global
Note, the “Global Notes”). The Notes will be registered in the name of
Cede & Co. as nominee for, and deposited with The Bank of New
York as custodian for, DTC. The Notes offered and sold will be issued
in minimal denominations of R$200,000 and integral multiples of
R$1,000 in excess thereof. Holders of beneficial interests in Notes
held in book-entry form will be entitled to receive physical delivery of
certificated Notes only in very limited circumstances. See “Form,
Denomination and Transfer.”
13
Governing Law ................................The Indenture, the Notes, the Guarantees and related documents will
be governed by the laws of the State of New York.
Trustee, Transfer Agent and
Registrar..................................................
The Bank of New York.
Principal Paying Agent ...........................
The Bank of Tokyo-Mitsubishi UFJ, Ltd.
Calculation Agent................................
The Bank of New York.
Irish Stock Exchange
Listing Agent...........................................
The Bank of New York.
Irish Paying Agent................................
BNY Fund Services (Ireland) Limited.
14
RISK FACTORS
You should consider carefully, in light of your own financial circumstances and investment
objectives, the risks described below, in addition to the other information contained in this Offering
Memorandum, before determining whether to purchase the Notes. The Issuer and the Guarantors may
face additional risks and uncertainties that are not presently known, or that they currently do not deem
relevant, which may impair their businesses.
In general, investing in the securities of issuers in developing countries, such as Brazil, involves a
higher degree of risk than investing in the securities of issuers in the United States and certain other
jurisdictions. The Issuer and the Guarantors cannot predict with any degree of certainty how and to what
extent changing conditions will impact the Issuer’s and the Guarantors’ operations and adversely affect
their futures. You should be aware of the uncertainties regarding the future operations and financial
condition of the Issuer and the Guarantors and of the risks associated with such events.
Risks Relating to Brazil
The Brazilian government has exercised, and continues to exercise, significant influence over the
Brazilian economy. Brazilian economic and political conditions have a direct impact on the business of
the Issuer and the Guarantors.
The Brazilian economy has been affected by frequent and significant intervention by the Brazilian
government, which has often changed monetary, tax, credit, tariff and other policies to influence the course
of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies
have at times involved wage and price controls as well as other interventionist measures, such as
nationalization, raising interest rates, freezing bank accounts, imposing capital controls and inhibiting
international trade in Brazil. Changes in policy involving tariffs, exchange controls, regulation and taxation
could adversely affect the Issuer’s and the Guarantors’ businesses and financial results and the market price
of the Notes. Inflation, currency devaluation, social instability and other political, economic or diplomatic
developments, as well as the Brazilian government’s response to such developments, could also adversely
affect the Issuer’s and the Guarantors’ businesses and the market price of the Notes.
Exchange rate volatility may adversely affect the financial condition and results of operations of the
Issuer and the Guarantors and the ability of the Issuer and the Guarantors to meet obligations under
their U.S. dollar-denominated liabilities.
Brazil’s currency has historically been characterized by high degrees of volatility. Notwithstanding the
appreciation of the real against the U.S. Dollar in recent years, the Brazilian currency has historically
suffered frequent devaluations. Although over the longer term, devaluations of the Brazilian currency have
generally correlated with the rate of inflation in Brazil, devaluations have resulted in significant short- to
medium-term fluctuations in the value of the Brazilian currency. The relationship of Brazil’s currency to the
value of the U.S. dollar, the relative rates of devaluations of Brazil’s currency and the prevailing rates of
inflation have affected, and may in the future affect, Issuer’s and Guarantors’ financial results.
The Brazilian currency has been devalued periodically during the last four decades. Throughout this
period, the Brazilian government has implemented various economic plans and utilized a number of
exchange rate policies, including sudden depreciations and periodic mini-depreciations, including
adjustments on a monthly or even a daily basis, floating exchange rate systems, exchange controls and dual
exchange rate markets. There have been significant fluctuations in the exchange rates between the Brazilian
currency and the U.S. dollar and other currencies. For example, the real/U.S. dollar exchange rate
depreciated from R$2.3204 at December 31, 2001 to R$3.5333 at December 31, 2002 reaching R$3.9552 per
U.S.$1.00 in October 2002. However, the stability established by the economic policy initiated by the new
federal administration in 2003 restored some confidence in the Brazilian market. This new economic policy
has resulted in an appreciation of the real in 2003 and 2004 of 18.23% and 8.1%, respectively. The
real/U.S. dollar exchange rate was R$2.6544 per U.S.$1.00 at December 31, 2004. The real continued to
appreciate against the U.S. dollar in 2005 and 2006, closing at R$2.3407 per U.S.$1.00 as of December 31,
15
2005 and R$2.1380 per U.S.$1.00 as of December 31, 2006. At June 14, 2007, the real/U.S. dollar
exchange rate was R$1.9303 per U.S.$1.00. There can be no assurance, however, that there will be no more
devaluations of the Brazilian currency and that they would not impact the Issuer’s or Guarantors’ businesses
in the future.
Any devaluation of the real could make foreign currency-linked obligations or expenses of the Issuer
and the Guarantors more expensive. Any such impact could adversely affect the businesses, operations or
prospects of the Issuer or the Guarantors, as the case may be. See “ — Risks Relating to the RBS Group —
Fluctuations in paper costs may adversely affect the business prospects of the Issuer”.
Exchange controls and restrictions on remittances abroad may adversely affect holders of the Notes.
Holders of the Notes may be adversely affected if the Brazilian government imposes restrictions on the
remittance to foreign investors of the proceeds of their investments in Brazil and the conversion of the real
into foreign currencies.
The purchase and sale of foreign currency in Brazil is subject to governmental control. The Brazilian
government has implemented various economic plans and utilized a number of exchange rate policies,
including sudden devaluations, periodic mini-devaluations (with the frequency of adjustments ranging from
daily to monthly), floating exchange rate systems, exchange controls and dual exchange rate markets during
the last few decades. Since 1983, certain payments of principal on external obligations have been
centralized through the Central Bank, and the Central Bank has assumed responsibility for the external
obligations to be paid in connection with the formal restructuring of the Brazilian sovereign debt. In 1988
and 1989, the Brazilian government effectively prevented domestic public and private debtors from making
payments of principal or interest on certain international debt by restricting their access to foreign currencies
and prohibiting payment orders abroad. In 1991, partial interest payments were resumed and an agreement
was reached on the treatment of past due interest. On June 26, 1991, the Central Bank allowed all private
sector companies and certain public companies to resume the payment of all external debt obligations.
Brazil concluded negotiations with its commercial bank creditors on April 15, 1994 for a Brady Plan-type
restructuring of medium- and long-term debt and past due interest in the amount of U.S.$50.0 billion.
The Brazilian government currently does not restrict the ability of Brazilian and foreign persons or
entities to convert Brazilian currency into U.S. dollars or other currencies provided that such transactions
comply with applicable laws and are based on the economic factors and responsibilities of each of the parties
as set forth in the underlying document for each transaction that must be entered or settled through the
Central Bank. Because regulations applicable to the foreign exchange market have been recently modified,
certain operational procedures are still pending regulation by the Central Bank. The Central Bank has also
assumed responsibility for the external obligations in connection with the formal restructuring of Brazilian
sovereign debt. Furthermore, it is uncertain whether the Brazilian government will in the future institute a
more restrictive exchange control policy (including by changing existing regulations) that would have the
effect of preventing or restricting the Issuer’s or the Guarantors’ access to foreign currency with which to
meet foreign currency obligations, including the Notes.
The likelihood that such restrictions may be imposed by the Brazilian government at any time may be
affected by, among other factors beyond the Issuer’s and the Guarantors’ control, the extent of Brazil’s
foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the
size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy toward the
International Monetary Fund and political constraints to which Brazil may be subject, all of which are
factors that are beyond the Issuer’s or the Guarantors’ control. Although payments by issuers located in
Brazil in respect of securities issued in the international capital markets to date have not been subject to
restrictions imposed by the Brazilian government, no assurance can be given that such restrictions may not
be imposed in the future. Any such restrictions could adversely affect the businesses, operations or
prospects of the Issuer and the Guarantors and the ability of the Issuer and the Guarantors to make timely
payments on the Notes.
Inflation and certain governmental measures to combat inflation may contribute significantly to
economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.
16
Until mid-1994 Brazil experienced extremely high rates of inflation. Inflation contributed materially to
economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets.
In 1994, the Brazilian government implemented an economic stabilization plan known as the Real Plan,
which was intended to reduce the size of Brazil’s federal budget deficit by reducing certain public
expenditures, collecting liabilities owed to the Brazilian government, increasing tax revenues, lowering
inflation and introducing a new, stable currency, the real. Since the introduction of the Real Plan, the rate of
inflation as measured by the broad consumer price index (the “Indice de Preços ao Consumidor Ampliado”
or “IPCA”) fell steadily to 1.65% in 1998. The IPCA was 9.3% in 2003, 7.6% in 2004, 5.7% in 2005 and
3.1% in 2006. The Brazilian government has set a target rate of inflation of 4.5%, with tolerance levels of
plus 2.0% and minus 2.0% for 2007. There can be no assurance that inflation can be contained within these
targeted levels. It is uncertain whether future actions of the Brazilian government (including any further
action to adjust the value of the Brazilian currency) will cause inflation at a higher rate than predicted. A
substantial increase in inflation may weaken investor confidence in Brazil, impacting the Issuer’s and the
Guarantors’ ability to access the international capital markets.
Brazil may experience high levels of inflation in the future. In that event, the Issuer’s and the
Guarantors’ results of operations may be affected, which could adversely affect the ability to satisfy payment
obligations under the Notes. Inflationary pressures may also curtail the ability to access foreign financial
markets and may lead to further government intervention in the economy, including the introduction of
government policies that may adversely affect the overall performance of the Brazilian economy, which in
turn could adversely affect the Issuer’s and the Guarantors’ operations and the market value of the Notes.
Developments in Brazil and other countries, especially other emerging markets, may adversely affect
the business prospects and results of operations of the Issuer and the Guarantors and the market value of
the Notes.
The market for securities issued by Brazilian companies is influenced by economic, political and
market conditions in Brazil and in other emerging market countries, especially those in Latin America.
Although economic conditions are different in each country, investors’ reactions to developments in one
country may affect the capital markets in other countries. Developments or conditions in other emerging
market countries have from time to time significantly affected the availability of credit in the Brazilian
economy and resulted in considerable outflows of funds and declines in the amount of foreign currency
invested in Brazil as well as limited access to international capital markets. Such developments or
conditions may adversely affect the Issuer’s or the Guarantors’ ability to borrow funds on acceptable terms
or to raise capital when and if there should be a need.
Although market concerns that crises that have affected other South American countries would ensue in
Brazil have not become a reality, the volatility in market prices for Brazilian securities has increased from
time to time. Investors’ perception of increased risk due to crises in other emerging market countries may
adversely affect our ability to borrow funds at an acceptable interest rate or raise equity capital when and if
there is a need for us to do so. Adverse developments in other emerging market countries could also lead to
a reduction in the market price of the Notes.
The Issuer’s and the Guarantors’ financial statements may present different financial positions and
results of operations and may not give the same information as the financial statements prepared under
generally accepted accounting principles in the United States (“U.S. GAAP”) or International Financial
Reporting Standards (“IFRS”).
There are significant differences between U.S. GAAP and IFRS on the one hand and Brazilian GAAP
on the other. The financial statements contained herein may differ from those that would be prepared had
they been prepared based upon U.S. GAAP or IFRS. The Issuer and the Guarantors have made no attempt to
identify or quantify the impact of those differences. No reconciliation to U.S. GAAP or IFRS of any of the
financial statements presented in this Offering Memorandum has been prepared for the purposes of this
Offering Memorandum or for any other purpose. There can be no assurance that a reconciliation would not
identify material quantitative differences between the financial statements of the Issuer and the Guarantors as
prepared on the basis of the accounting principles determined by Brazilian GAAP and such financial
17
statements as prepared on the basis of U.S. GAAP or IFRS. In making an investment decision, investors
must rely upon their own examination, including consultations with their own professional advisors, for an
understanding of the differences between Brazilian GAAP on one hand and U.S. GAAP or IFRS on the
other, and how those differences might affect the financial information herein. See “Summary of Certain
Significant Differences between Accounting Principles Generally Accepted in Brazil, U.S. GAAP and
IFRS”.
Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of
the Notes or may adversely impact the Issuer’s and the Guarantors’ results of operations.
Generally, any capital gains generated outside Brazil as a result of a transaction between two nonBrazilian residents with assets not located in Brazil are not subject to taxation in Brazil. However, Article 26
of Law No. 10,833, of December 29, 2003, which came into force on February 1, 2004, established that
capital gains realized on the disposition of assets located in Brazil by non-residents, whether to other nonresidents or Brazilian residents and whether made outside or within Brazil, is subject to taxation in Brazil at
tax a rate of 15%, or 25% if such non-Brazilian resident is located in a tax haven jurisdiction (i.e., a country
which does not impose any income tax or which imposes it at a maximum rate lower than 20% or where the
laws impose restrictions on the disclosure of ownership composition or securities ownership). As the Notes
are offered, sold and listed outside Brazil, we have been advised by our Brazilian counsel that they do not
believe that the Notes fall within the definition of assets located in Brazil for purposes of Law No 10,833.
However, we are unable to predict whether the Notes would be deemed as assets located in Brazil for the
purposes of Law No. 10,833 and, because no judicial guidance as to application of this law yet exists, we are
unable to predict if such interpretation will ultimately prevail. If income tax is deemed to be due or if the
Notes are disposed of to a Brazilian resident, any related gain may be subject to income tax in Brazil at a rate
of 15%, or 25% if such non-Brazilian holder is located in a tax haven jurisdiction.
Furthermore, the Brazilian government frequently implements changes to tax regimes that affect us.
These changes include changes in prevailing tax rates and, on occasion, enactment of temporary taxes, the
proceeds of which are earmarked for designated governmental purposes.
Some of these changes may result in increases in our tax payments, which can adversely impact the
Issuer’s and the Guarantors’ profitability, restrict their ability to do business in their existing and target
markets and cause their financial results to suffer. There can be no assurance that the Issuer and the
Guarantors will be able to maintain their prices and projected cash flow and profitability following increases
in Brazilian taxes applicable to them, their subsidiaries and their operations.
Brazilian bankruptcy laws may be less favorable to investors than bankruptcy and insolvency laws in
other jurisdictions.
If the Issuer and the Guarantors are unable to pay their indebtedness, including their obligations under
the Notes, then they may become subject to bankruptcy proceedings in Brazil. Although a new bankruptcy
law became effective on June 9, 2005, the bankruptcy laws of Brazil currently in effect are significantly
different from, and may be less favorable to creditors than, those of certain other jurisdictions. In addition,
any judgment obtained against the Issuer and the Guarantors in Brazilian courts in respect of any payment
obligations under the Notes normally would be expressed in the real equivalent of the U.S. dollar amount of
such sum at the exchange rate in effect (1) on the date of actual payment, (2) on the date on which such
judgment is rendered or (3) on the date on which collection or enforcement proceedings are started against
them. Consequently, in the event of the Issuer’s and Guarantors’ bankruptcy, all of their debt obligations
that are denominated in foreign currency will be converted into reais at the prevailing exchange rate on the
date of declaration of the Issuer’s and Gauarantors’ bankruptcy by the court. We cannot assure investors that
such rate of exchange will afford full compensation of the amount invested in the Notes plus accrued
interest.
18
Risks Relating to the RBS Group
The Guarantors operate certain of their businesses pursuant to concessions and licenses that are
subject to termination.
The RBS Network’s broadcast television and radio businesses are dependent on licenses issued by the
President of Brazil. See “Business — Government regulation”. These licenses are generally for a term of 10
years for radio and 15 years for television. Although licenses required for the operations of the RBS
Network have in the past always been renewed upon expiration, there can be no assurance that the applicable
regulatory authorities, acting on behalf of the President of Brazil, will renew any license as it expires.
During any period of lapse, the license remains in effect pending review of the renewal application. The
Guarantors have occasionally experienced delays in the license renewal process due to bureaucratic factors
out of their control that resulted in the temporary lapse of a license. In the past, the Guarantors’ operations
and ability to carry out their businesses have not been impacted due to a license that has lapsed. However,
any failure to obtain or maintain licenses, particularly in key markets in the Service Territory, such as Porto
Alegre or Florianópolis, could have a material adverse effect on results of operations. In addition, the
government may in the future decide to issue additional licenses within or outside of the Service Territory,
which could result in increased competition for the services of the Guarantors or the RBS Network as a
whole.
Certain Guarantors rely on TV Globo for the majority of their television programming. Any change
in the RBS Network’s relationship with TV Globo may have a material adverse effect on those
Guarantors.
Pursuant to contracts entered into between the RBS Network VHF television stations and TV Globo
Limitada (“TV Globo”), approximately 85% of the programming shown on VHF television stations which
are part of the RBS Network, including stations operated by TV Gaúcha and TV Florianópolis, both of
which are Guarantors, is provided by TV Globo. Additionally, TV Globo maintains a sales force which sells
advertising to national advertising accounts on behalf of the RBS Network VHF television stations and other
Globo Network affiliates. TV Globo is the highest-rated source of television programming in Brazil
according to the Instituto Brasileiro de Opinião Pública e Estatística (the Brazilian Institute of Public
Opinion and Statistics or “IBOPE”). The current contracts with TV Globo expire in 2008 but are subject to
an automatic extension until 2011, unless terminated by either party upon 90 days written notice. As is the
case from time to time, the RBS Group is currently discussing with TV Globo the terms, conditions and
renewal of this contract. Although the RBS Network has had a network affiliation with TV Globo for almost
40 years, and the RBS Group believes these contracts will be renewed, no assurance can be given that the
current contracts will be renewed or that any renewal will be on the same terms as the current contracts.
Any change in the relationship between the RBS Network VHF television stations and TV Globo could have
a materially adverse effect on RBS Network VHF television stations (including stations operated by TV
Gaúcha and TV Florianópolis), and on the RBS Group, including the Issuer and the Guarantors.
In addition, any negative impact on TV Globo, such as an inability to finance additional investments or
to develop high quality programming, or on its ability to finance additional investments, could have a
negative impact on the RBS Network, including TV Gaúcha and TV Florianópolis.
Holders of the Notes (i) may not be able to receive the value of the cash assets of the Issuer or the
Guarantors held by a cash management affiliate if that affiliate were to default upon its outstanding
indebtedness and other potential liabilities, and (ii) may face difficulties in attaching or foreclosing on
cash assets which are held by the cash management affiliate.
RBS A&C, a company approximately 95% owned by the controlling shareholders of the RBS Group
and approximately 5% owned by RBS Participações S.A., performs treasury functions for the RBS Group
companies, including for the Issuer and the Guarantors, centralizing cash management operations. RBS
A&C is a separate legal entity under common control with the Issuer and the Guarantors but is not a
guarantor of the Notes. Since 1993, cash revenues of any of the RBS Group companies have been collected
and held by RBS A&C, as a “cash management company”, on behalf of the respective RBS Group company
19
pursuant to a contractual arrangement among the companies. As each member of the RBS Group requires
funds, it withdraws cash on deposit with RBS A&C, issues payment instructions to RBS A&C or requests a
loan from another member of the RBS Group. RBS A&C and RBS Group companies also may borrow
funds from third parties, such as banks or the shareholders of the RBS Group. Except for the advances for
future capital increases and the “balances receivable” receivables from RBS A&C, which bear no interest,
inter-company loans with the Credit Group are done on an arm’s-length basis at market rates.
At December 31, 2006, RBS A&C had outstanding indebtedness in the amount of R$40.9 million.
RBS A&C may in the future guarantee or incur additional indebtedness. If an event of default occurs under
any of RBS A&C’s present or future obligations, the creditors of RBS A&C may attempt to attach or
foreclose on the assets of RBS A&C, and the cash assets of the Issuer and the Guarantors which are in the
possession of RBS A&C in its cash management role. The Issuer and the Guarantors could be considered
unsecured creditors of RBS A&C (because of the funds that RBS A&C holds on their behalf), ranking pari
passu with the claims of the unsecured creditors of RBS A&C and junior to the claims of the secured
creditors of RBS A&C. In the event of a liquidation, insolvency or bankruptcy of RBS A&C, the Issuer and
the Guarantors, and in turn the holders of the Notes, may not be entitled to receive the value of the cash
assets of these entities held on their behalf by RBS A&C.
In addition, if an event of default occurs under the Notes or the Guarantees, as the case may be, holders
of the Notes may face difficulties in attaching or foreclosing on the cash assets of the Issuer or the
Guarantors, as the case may be, that are in the possession of RBS A&C. See “Business — RBS A&C”.
The Issuer and the Guarantors operate in a heavily regulated environment.
Certain aspects of television, radio and newspaper operations and ownership in Brazil are governed by
the Brazilian Constitution. See “Business — Government regulation.” The Brazilian government may enact
additional or new regulations applicable to the activities of the Issuer or the Guarantors or the RBS Network
as a whole. There can be no assurance that any new constitutional amendments, laws or regulations will not
have a material adverse effect on the operations or results of the Issuer and the Guarantors or the RBS
Network as a whole.
The Brazilian advertising industry is cyclical.
The Issuer and each of the Guarantors derive a significant portion of their respective revenues from
advertising. The Brazilian advertising market has historically been cyclical in nature, increasing in times of
general economic expansion and contracting during recessions. This cyclicality has in the past affected the
Issuer’s and the Guarantors’ revenues and results of operations. The Issuer and the Guarantors remain
exposed to the risk of a general economic downturn in Brazil, and particularly in the Service Territory,
which could materially affect the Brazilian advertising industry generally and their financial condition and
results of operations.
The markets of the Issuer and the Guarantors are characterized by rapid technological change,
which could render their equipment obsolete and cause the Issuer and the Guarantors to make substantial
expenditures to adapt to technological developments.
Most of the markets in which the Issuer and the Guarantors operate are currently experiencing rapid
technological developments, involving industry standards and customer demands and frequent new product
introductions and enhancements. The Issuer and the Guarantors must adapt quickly to these events in order
to compete effectively. The Issuer and the Guarantors could be required to devote significant management
and financial resources to adapt to such challenges. For example, the introduction of digital television in
Brazil may require significant investments by TV Gaúcha and TV Florianópolis to adapt to the new
standard. The Issuer and the Guarantors could be unable to hire sufficient numbers of qualified personnel to
meet future technological challenges. Technological changes could create new competitors in the broadcast
television, radio and newspaper businesses, and could provide opportunities for existing competitors to
obtain market share at the expense of the Issuer and the Guarantors. Failure to effectively adapt to
technological developments could adversely affect their business, financial condition and results of
operations.
20
The Issuer and the Guarantors are owned by a group of individuals who have the power to control
all matters relating to the Issuer’s and the Guarantors’ business, operations and management.
The Issuer and the Guarantors are owned and controlled by members of the families of Maurício
Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa. The individuals of these families
have the power to decide nearly all matters concerning the business and operations of the Issuer and the
Guarantors and the RBS Network as a whole. See “Management and ownership structure”. Given the
shareholders’ exclusive control of the Issuer and the Guarantors, there can be no assurance that decisions
taken by the shareholders will at all times address the concerns, and will not conflict with the interests, of
holders of the Notes. Neither the Issuer nor any of the Guarantors is required, under Brazilian law, to make
any disclosure of financial or operational results to any Brazilian regulatory authority. The Issuer and each
of the Guarantors is required to publish its annual financial statements in the official journal and in a
newspaper with large circulation in the State in which it is domiciled, although these financial statements are
not required to be audited and cannot be adjusted for inflation. See “Management’s discussion and analysis
of financial condition and results of operations — Introduction — Critical accounting policies”.
The Issuer and the Guarantors have engaged and may continue to engage in various transactions
with other members of the RBS Network.
The Issuer and the Guarantors have conducted certain transactions among themselves and with other
members of the RBS Network on terms that may not in all cases be the same as would be reached in arm’slength transactions with unrelated third parties. See “Related party transactions”. Although transactions
with affiliated persons are generally limited by the terms of the indentures respectively governing the Notes,
the Issuer and the Guarantors may continue to enter into certain related party transactions substantially in the
same manner as transactions engaged in by them at the date of the indenture. While the RBS Network
believes that such transactions in the past have generally had a beneficial effect on the Issuer and the
Guarantors, no assurances can be given that any such transaction, or combination of transactions, will not
have an adverse effect on the Issuer and the Guarantors in the future and will not conflict with the interests
of the holders of the Notes.
The Issuer or any Guarantor may merge with RBS Participações, a company with net capital
deficiency that may need to rely on additional resources from its shareholders or from other RBS Group
companies.
The Indenture permits the Issuer or any Guarantor to merge with RBS Participações, a company in the
RBS Group (but not in the Credit Group) with net capital deficiency plus advance for future capital increase
negative capitalization in the amount of R$433 million as of March 31, 2007. While the RBS Group is still
considering the corporate structure that will result from its current restructuring under RBS Comunicações,
any such merger would likely result in an immediate decrease in the capitalization of the combined Credit
Group companies that could be material.
The reliance on single site facilities may result in the interruption of services and loss of income.
While certain operations of the Issuer and the Guarantors have off-site back-up systems, as in the case
of the newspaper operations of the Issuer, which have alternative printing locations, the operations of the
Issuer and each Guarantor is generally dependent on a primary site facility maintained by the Issuer or such
Guarantor. Though the RBS Network maintains insurance to cover it against damage to its facilities and
equipment, any interruption in the availability of any of these facilities may result in loss of income and
additional expense.
Fluctuations in paper costs may adversely affect the business prospects of the Issuer.
Paper is the principal raw material of the RBS Network’s newspapers and accounted for 37% of RBSZero Hora’s 2006 total operating costs. Paper prices are cyclical and are affected by many factors, including
demand, mill capacity, pulp supply, energy costs and general economic conditions. Consequently, the Issuer
production costs can vary from period-to-period. Also, because the Issuer generally purchases a significant
portion of its paper from international suppliers pursuant to U.S. dollar-denominated supply contracts (at
21
market prices), any devaluation of the real would make paper more expensive. Sustained significant paper
price increases or devaluation of the real could adversely affect RBS-Zero Hora’s financial conditions and
results of operations.
In 2004, 2005 and 2006, the average cost of newsprint per ton for the Issuer went from U.S.$507 to
U.S.$605 to U.S.$689. At March 2007, the cost of newsprint per ton for the Issuer was approximately
U.S.$717. Although the Issuer believes that it can cover increases in newsprint prices with increases in the
prices for its newspapers, there can be no assurance that it will be able to do so.
The Issuer and the Guarantors may incur additional short-term debt that could affect their financial
condition.
Under existing debt agreements, the Issuer and the Guarantors have generally covenanted not to incur,
and not to permit any subsidiary of the Issuer or any Guarantor to incur, any debt with a maturity greater
than one year unless certain financial ratios are met. However, such covenants do not place limitations on
the amount of short-term debt that may be incurred by the Issuer, the Guarantors or their subsidiaries nor
their respective ability to refinance such debt at maturity.
Risks Relating to the Notes
There will be limited liquidity for the Notes.
The Notes and the Guarantees have not been and will not be registered under the Securities Act or any
other applicable securities law and are being offered for sale in transactions not requiring registration under
the Securities Act or any other securities laws. The Notes will be eligible for resales pursuant to Rule 144A
under the Securities Act. Unless so registered, the Notes and the Guarantees may not be offered, sold or
otherwise transferred except in compliance with the registration requirements of the Securities Act, or any
other applicable securities law, pursuant to an exemption therefrom or in a transaction not subject thereto.
See “Transfer Restrictions”.
There can be no assurance as to the development or liquidity of any market for the Notes. If an active
market does not develop, the market price and liquidity of the Notes may be adversely affected.
Judgments of Brazilian courts enforcing the Issuer’s and the Guarantors’ obligations under the
Notes would be payable only in reais.
If proceedings were brought in the courts of Brazil seeking to enforce the Issuer’s and Guarantors’
obligations under the Notes, the Issuer and the Guarantors would not be required to discharge their
obligations in a currency other than reais. Under the Brazilian exchange control limitations, an obligation in
Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency
at the rate of exchange, as determined by the Central Bank, in effect on the date of payment. There can be
no assurance that such rate of exchange will afford the full compensation of the amount invested in the Notes
plus accrued interest (if any).
Changes in Brazilian tax laws may have an impact on the taxes applicable to the disposition of the
Notes.
According to Brazilian Law 10,833, the disposition of assets located in Brazil by non-residents of
Brazil, whether to other non-residents of Brazil or Brazilian residents and whether made within or outside
Brazil, may become subject to taxation in Brazil. Although the Issuer and the Guarantors believe that the
Notes would not fall within the definition of assets located in Brazil for the purposes of Law 10,833,
considering the general and unclear scope of Law 10,833 and the absence of judicial guidance in respect
thereof, the Issuer and the Guarantors are unable to predict how the scope of Law 10,833 would be
interpreted in the courts of Brazil.
22
Holders of the Notes would be subordinated to certain statutory preferences in the event of
bankruptcy.
Under Brazilian law, the Issuer’s obligations or the obligations of any Guarantor under any Guarantee,
the Notes and the Indenture are subordinated to certain statutory preferences. In the event of the Issuer’s or
any Guarantor’s bankruptcy, such statutory preferences, such as claims for salaries, wages, social security
and other taxes, court fees and expenses, will have preference over any other claims, including claims by any
investor in respect of any Guarantee.
If the Brazilian real depreciates against the U.S. dollar, the effective yield on reais-denominated
Notes (in U.S. dollar terms) will decrease below the interest rate on the Notes, and the amount payable on
an interest payment date, at maturity or upon acceleration, may result in a loss to investors in the Notes.
Rates of exchange between the U.S. dollar and the Brazilian real have varied significantly over time.
See “Exchange Rates” below and “ — Risks Relating to Brazil — Exchange controls and restrictions on
remittances abroad may adversely affect holders of the Notes”. However, historical trends do not
necessarily indicate future fluctuations in rates and should not be relied upon as indicative of future trends.
Currency exchange rates can be volatile and unpredictable and may be affected by macroeconomic
factors and speculation. If the Brazilian real depreciates against the U.S. dollar, the effective yield on reaisdenominated Notes (in U.S. dollar terms) will decrease below the interest rate on the Notes and the amount
payable on an interest payment date, at maturity or upon acceleration may result in a loss to investors in the
Notes. Also, depreciation of the Brazilian real against the U.S. dollar may adversely affect the market value
of the Notes.
There is no existing significant secondary market for real-denominated Notes nor
assurance regarding the future development of a significant secondary market for them.
A significant secondary market for real-denominated Notes has not developed, and there can be no
assurance that any such market will develop in the future. The absence of a significant secondary market for
Notes linked to the real may have a material negative impact on the ability of holders to resell such Notes,
which may negatively affect the market price for such Notes.
23
SUMMARY FINANCIAL INFORMATION AND OTHER DATA
As of and for the
three month period ended
March 31,
2007
As of and for the year ended
December 31,
2006
2006
2006
(thousands
of U.S.$)1
(thousands of R$)
2005
2004
(thousands of R$)
ISSUER:
Income statement data:
Net operating revenues................................
103,163
94,352
191,408
409,231
386,479
337,557
30,368
65,587
140,224
131,883
111,147
Classified advertisements ................................
20,591
19,718
40,726
87,072
82,333
71,073
Circulation ................................
13,237
13,582
24,744
52,903
49,238
44,106
Subscriptions ................................
34,099
29,093
57,397
122,715
113,696
99,900
5,355
10,654
22,778
24,663
24,851
Advertising ................................
34,509
Other................................................................
4,928
Taxes on revenues................................
(4,201)
(3,764)
(7,699)
(16,461)
(15,334)
(13,520)
(40,216)
(34,187)
(71,978)
(153,888)
(149,917)
(150,498)
Raw materials ................................ (17,232)
(15,402)
(32,732)
(69,980)
(73,057)
(71,321)
Personnel ................................
(13,331)
(10,440)
(21,810)
(46,630)
(44,808)
(43,487)
Depreciation................................
(2,380)
(2,424)
(4,528)
(9,680)
(5,351)
(9,635)
Royalties ................................
(1,810)
(2,045)
(3,877)
(8,290)
(9,254)
(10,222)
(3,876)
(9,031)
(19,308)
(17,447)
(15,833)
62,947
60,165
119,431
255,343
236,562
187,059
Operating expenses, net................................
(57,024)
Operating costs................................
Other................................................................
(5,463)
Gross profit ................................
(47,865)
(101,677)
(217,385)
(211,367)
(172,610)
Selling................................................................
(32,637)
(25,598)
(53,191)
(113,722)
(106,436)
(102,266)
General and administrative ................................
(17,012)
(15,071)
(33,021)
(70,599)
(49,534)
(45,429)
Financial income................................ 4,461
6,203
8,602
18,392
15,510
7,437
Financial expenses ................................
(10,200)
(12,199)
(22,227)
(47,522)
(65,680)
(26,492)
(1,249)
(1,240)
(1,928)
(4,122)
(5,568)
(6,293)
(387)
40
88
188
341
433
5,923
12,300
17,754
37,958
25,195
14,449
-
(1,052)
(2,249)
-
-
(16)
452
211
452
(2,704)
(6,593)
Non-operating income (loss),
135
net................................................................
(206)
(273)
(584)
(789)
302
Depreciation................................
Other, net ................................
Operating income ................................
Equity in losses on subsidiaries................................
Reversal (establishment) of
provision for losses on
investments................................
Income before taxes on income................................
6,042
12,546
16,547
35,577
21,702
8,158
Social contribution ................................ (745)
(1,640)
(2,067)
(4,420)
(488)
(1,405)
Income tax................................................................
(1,412)
(3,888)
(4,501)
(9,624)
(919)
(2,749)
3,885
7,018
10,072
21,533
20,295
4,004
134,876
150,949
77,407
165,497
132,485
93,927
Net income ................................
Balance sheet data:
Current assets ................................
24
As of and for the
three month period ended
March 31,
2007
2006
2006
(thousands
of U.S.$)1
(thousands of R$)
Property, plant and equipment................................
97,303
As of and for the year ended
December 31,
2006
2005
2004
(thousands of R$)
89,610
43,289
92,552
88,509
89,425
499,890
444,252
238,763
510,475
435,658
384,160
Current liabilities................................ 182,268
120,227
90,797
194,125
118,945
110,375
Non-current liabilities ................................
204,772
229,575
97,000
207,385
229,281
206,648
Total assets ................................
3
Total debt ................................
222,042
247,612
116,994
250,133
239,231
210,941
Total liabilities ................................
387,040
349,802
187,797
401,510
348,226
317,023
Accumulated losses................................
(39,609)
(60,817)
(20,672)
(44,196)
(68,537)
(91,679)
Stockholders’ equity................................
112,850
94,450
50,966
108,965
87,432
67,137
5,996
13,625
29,130
50,170
19,055
Other financial data:
Financial expenses, net................................
5,739
Depreciation ................................
3,629
3,664
6,664
13,802
10,919
15,928
21,960
37,834
80,890
86,284
49,432
Interest coverage ratio 5 ................................2.57
1.99
2.78
2.78
1.72
2.59
Total debt to annualized
2.99
EBITDA ................................................................
2.73
3.09
3.09
2.77
4.27
EBITDA4 ................................................................
15,291
25
As of and for the three
month period ended
March 31,
2007
As of and for the year ended
December 31,
2006
2006
2006
(thousands
of U.S.$)1
(thousands of R$)
2005
2004
(thousands of R$)
2
CREDIT GROUP (Issuer and Guarantors combined ):
Income statement data:
Net operating revenues................................
179,521
Advertising ................................
114,216
168,229
341,957
731,105
673,001
573,462
107,111
221,904
474,431
429,621
356,513
20,591
Classified advertisements ................................
19,718
40,726
87,072
82,333
71,073
Circulation ................................
13,237
13,582
24,744
52,903
49,238
44,106
Subscriptions ................................ 34,099
29,093
57,397
122,715
113,696
99,900
4,928
Other................................................................
5,355
10,654
22,778
24,663
24,851
(7,550)
Taxes on revenues................................
(6,630)
(13,468)
(28,794)
(26,550)
(22,981)
Operating costs................................ (76,164)
(65,389)
(134,815)
(288,235)
(277,900)
(263,509)
Raw materials ................................(17,232)
(15,402)
(32,732)
(69,980)
(73,057)
(71,321)
Programming and sales................................
(23,572)
(18,332)
(40,044)
(85,615)
(79,300)
(64,760)
Personnel ................................
(21,597)
(18,098)
(37,321)
(79,793)
(77,966)
(76,422)
Depreciation................................
(3,852)
(3,742)
(7,082)
(15,142)
(11,376)
(15,753)
Royalties ................................
(3,487)
(3,799)
(7,646)
(16,347)
(17,603)
(18,799)
Other................................................................
(6,424)
(6,016)
(9,990)
(21,358)
(18,598)
(16,454)
103,357
102,840
207,142
442,870
395,101
309,953
Operating expenses, net................................
(74,764)
(65,121)
(135,192)
(289,040)
(278,021)
(228,873)
Selling................................................................
(38,777)
(30,808)
(64,334)
(137,547)
(127,970)
(123,818)
General and administrative ................................
(26,036)
(24,955)
Gross profit ................................
(50,889)
(108,801)
(82,415)
(73,441)
Financial income................................7,815
9,613
13,101
28,009
17,425
8,492
Financial expenses ................................
(15,007)
(16,598)
(29,132)
(62,285)
(74,785)
(27,711)
(2,413)
(4,024)
(8,604)
(10,617)
(12,828)
Depreciation................................
Other, net ................................
(2,372)
(387)
40
203
188
(341)
433
Operating income ................................ 28,593
37,719
71,950
153,830
117,080
81,080
Equity in earnings (losses) on
subsidiaries................................
185
122
(816)
(1,744)
511
296
Reversal (establishment) of
provision for losses on
investments................................
(16)
452
211
452
(2,704)
(6,593)
Non-operating income (loss),
228
net................................................................
(208)
(1,237)
(2,644)
(2,137)
(27)
Income before taxes on income................................
28,990
38,085
70,109
149,894
112,750
74,756
Social contribution ................................(2,815)
(3,834)
(6,874)
(14,696)
(8,899)
(7,430)
Income tax................................................................
(6,782)
(7,981)
(10,911)
(23,328)
(15,898)
(9,433)
52,325
111,870
87,953
57,893
Net income ................................
19,393
26,270
26
As of and for the three
month period ended
March 31,
2007
As of and for the year ended
December 31,
2006
2006
2006
(thousands
of U.S.$)1
(thousands of R$)
2005
2004
(thousands of R$)
Balance sheet data:
Current assets ................................
392,194
289,833
168,717
159,188
Property, plant and equipment................................
199,012
425,487
267,739
159,490
75,923
162,323
157,994
158,991
947,640
779,673
448,756
959,441
769,381
620,869
Current liabilities................................256,574
189,128
128,375
274,465
201,898
165,306
324,176
Non-current liabilities ................................
276,648
157,848
337,479
279,856
219,142
Total assets ................................
3
Total debt ................................
363,928
313,836
183,159
391,595
313,827
214,662
Total liabilities ................................ 580,750
465,776
286,223
611,944
481,754
384,448
Retained earnings
36,927
(accumulated losses) ................................
20,324
7,873
16,832
(6,648)
(27,923)
Stockholders’ equity................................
366,890
313,897
162,534
347,497
287,627
236,421
Funded debt7 ................................................................
278,773
251,984
140,503
300,396
255,501
191,645
64,063
118,599
253,564
229,324
156,144
1.44
1.18
1.18
1.11
1.23
Financial expenses, net................................
7,192
6,985
16,032
34,276
57,360
19,219
Depreciation ................................
6,155
11,107
23,746
21,993
28,581
50,859
99,089
211,852
196,433
128,880
Interest coverage ratio ................................
5.89
3.94
6.18
6.18
3.42
6.71
Total debt to annualized
EBITDA ................................................................
1.79
1.51
1.85
1.85
1.60
1.67
Financial Information about
certain terms defined in the
covenants of the Existing
Notes:
6
Combined operating cash flow ................................
53,539
Combined annualized debt to
1.15
operating cash flow ratio8 ................................
Other Financial data:
6,224
4
EBITDA ................................................................
42,009
5
Financial information by
sector9:
Net operating revenue
Television ................................
69,871
67,117
136,583
292,016
259,109
212,235
Newspaper ................................
103,163
94,352
191,408
409,231
386,479
337,557
6,760
13,965
29,858
27,413
23,670
168,229
341,957
731,105
673,001
573,462
Radio ................................................................
6,487
Combined ................................ 179,521
Net income
Television ................................
14,312
17,699
39,527
84,508
62,123
50,635
Newspaper ................................
3,885
7,018
10,072
21,533
20,295
4,004
Radio ................................................................
1,196
Combined ................................
19,393
1,553
2,726
5,829
5,535
3,254
26,270
52,325
111,870
87,953
57,893
27
As of and for the
three month period
ended
March 31,
2007
2006
As of and for the year ended
December 31,
2006
2006
(thousands
of U.S.$)1
(thousands of R$)
2005
2004
(thousands of R$)
TV GAÚCHA:
Income Statement Data:
Net operating revenues................................44,770
44,108
91,988
196,671
179,217
149,484
Advertising ................................................................
46,851
45,788
95,510
204,201
186,230
155,515
Taxes on revenues................................ (2,081)
(3,522)
(7,530)
(7,013)
(6,031)
(24,111)
(21,489)
(44,737)
(95,648)
(90,781)
(81,833)
Programming and sales................................
(14,078)
(12,091)
(26,827)
(57,357)
(55,178)
(46,101)
(5,429)
(5,063)
Personnel ................................................................
(10,292)
(22,004)
(21,859)
(21,388)
Operating costs................................
Depreciation................................
(1,680)
(1,645)
(3,518)
(3,666)
(5,042)
Royalties ................................................................
(1,018)
(1,064)
(2,343)
(5,009)
(5,191)
(5,442)
Other................................................................
(2,570)
(2,443)
(3,630)
(7,760)
(4,887)
(3,860)
Gross Profit ................................................................
20,659
22,619
47,251
101,023
88,436
67,651
Operating expenses, net................................
(10,703)
(11,314)
(19,930)
(42,611)
(42,214)
(33,974)
Selling................................................................
(3,431)
(2,901)
(6,369)
(13,617)
(13,270)
(13,109)
General and administrative ................................
(5,318)
(6,475)
(9,676)
(20,687)
(16,663)
(14,118)
2,375
3,329
4,175
8,927
1,346
485
Financial expenses ................................(3,354)
(4,294)
Financial income................................
(1,016)
(828)
(6,219)
(13,297)
(8,823)
(1,072)
Depreciation................................
(975)
(973)
(1,841)
(3,937)
(4,804)
(6,160)
Operating profit................................
9,956
11,305
27,321
58,412
46,222
33,677
122
236
505
511
296
(4)
(1,003)
(2,144)
(588)
(375)
Income before taxes on income................................
10,243
11,423
26,554
56,773
46,145
33,598
Social contribution ................................
(1,029)
(2,435)
(5,206)
(4,201)
(3,048)
Income tax................................................................
(2,319)
(1,194)
(1,305)
(2,791)
(5,061)
(1,019)
Net income ................................................................
7,002
9,200
22,814
48,776
36,883
29,531
Current assets ................................................................
158,915
102,179
77,152
164,951
103,054
42,042
Property, plant and equipment................................
62,631
60,326
28,479
60,889
60,924
59,781
Total assets ................................................................
307,402
252,658
145,683
311,470
255,512
161,978
54,023
65,935
37,443
Equity in earnings on subsidiaries ................................
185
Non-operating income (loss),
net................................................................ 102
(922)
Balance sheet data:
Current liabilities................................
50,510
56,853
25,268
Non-current liabilities ................................83,983
45,474
42,816
91,540
48,446
10,287
Total debt3 ................................................................
99,658
65,594
47,023
100,536
73,923
2,892
134,493
102,327
68,084
145,563
114,381
47,730
43,199
46,634
16,930
36,197
37,434
37,939
Stockholders’ equity................................ 172,909
150,331
77,599
165,907
141,131
114,248
Total liabilities ................................
Retained earnings ................................
28
As of and for the
three month period
ended
March 31,
2007
2006
(thousands of R$)
As of and for the year ended
December 31,
2006
2006
(thousands
of U.S.$)1
2005
2004
(thousands of R$)
Other financial data:
Financial expenses, net................................ 979
965
2,044
4,370
7,477
587
1,801
3,487
7,455
8,470
11,202
14,071
32,852
70,237
62,169
45,466
Interest coverage ratio ................................ 15.76
8.99
16.07
16.07
8.31
77.45
Total debt to annualized
EBITDA ................................................................
1.44
1.02
1.43
1.43
1.19
0.06
Depreciation ................................................................
1,991
4
EBITDA ................................................................
12,926
5
29
As of and for the
three month period
ended March 31,
2007
2006
As of and for the year ended
December 31,
2006
2006
(thousands
of U.S.$)1
(thousands of R$)
2005
2004
(thousands of R$)
TV FLORIANÓPOLIS:
Income Statement data:
Net operating revenues................................
25,101
23,009
44,595
95,345
79,892
62,751
Advertising ................................................................
26,123
23,939
46,312
99,015
83,056
65,284
Taxes on revenues................................(1,022)
(930)
(1,717)
(3,670)
(3,164)
(2,533)
(9,369)
(7,317)
(12,803)
(27,373)
(27,419)
(21,189)
Programming and sales................................
(6,410)
(4,452)
(8,125)
(17,371)
(15,643)
(11,425)
Personnel ................................................................
(1,241)
(1,084)
Operating costs................................
(2,233)
(4,774)
(4,585)
(4,266)
(336)
(598)
(1,278)
(2,123)
(816)
Royalties ................................................................
(480)
(503)
(1,050)
(2,245)
(2,326)
(2,307)
Other................................................................
(976)
(942)
(797)
(1,705)
(2,742)
(2,375)
Gross profit ................................................................
15,732
15,692
31,792
67,972
52,473
41,562
Operating expenses, net................................
(4,791)
(3,842)
(8,609)
(18,405)
(15,118)
(12,896)
Selling................................................................
(1,583)
(1,339)
(2,766)
(5,914)
(5,047)
(5,119)
General and administrative ................................
(2,654)
(2,363)
(5,345)
(11,427)
(10,042)
(7,870)
944
63
286
611
249
475
Financial expenses ................................(1,401)
(42)
(611)
(1,307)
(191)
(140)
(97)
(161)
(172)
(368)
(87)
(242)
10,941
11,850
23,184
49,567
37,355
28,666
2
27
58
(582)
42
11,852
23,211
49,625
36,773
28,708
(961)
Depreciation................................
Financial income................................
Depreciation................................
Operating income ................................
(262)
Non-operating income (loss), net ................................
(11)
Income before taxes on income................................
10,930
Social contribution ................................
(2,036)
(4,354)
(3,472)
(2,581)
Income tax................................................................
(2,635)
(985)
(2,392)
(4,462)
(9,539)
(8,061)
(5,023)
Net income ................................................................
7,310
8,499
16,713
35,732
25,240
21,104
Current assets ................................................................
88,189
29,705
Balance sheet data:
39,449
84,343
25,620
18,335
5,831
2,456
5,250
5,836
7,754
Total assets ................................................................
118,381
63,539
53,859
115,150
59,896
56,812
Property, plant and equipment................................
4,988
Current liabilities................................
19,209
7,737
9,428
20,157
12,065
11,569
Non-current liabilities ................................
35,331
1,504
Total debt3 ................................................................
42,228
17,990
38,462
2,032
2,157
630
19,142
40,926
673
829
Total liabilities ................................
54,540
9,241
27,418
58,619
14,097
13,726
Retained earnings ................................
24,227
25,250
8,015
17,137
16,751
18,030
Stockholders’ equity................................ 63,841
54,298
26,441
56,531
45,799
43,086
30
As of and for the
three month period
ended March 31,
2007
2006
As of and for the year ended
December 31,
2006
(thousands
of U.S.$)1
(thousands of R$)
2006
2005
2004
(thousands of R$)
Other financial data:
Financial expenses (income), net ................................
457
Depreciation ................................................................
359
(21)
326
696
(58)
(335)
497
770
1,646
2,210
1,058
12,326
24,279
51,909
39,507
29,389
Interest coverage ratio 5 ................................43.73
0.00
74.58
74.58
0.00
0.00
Total debt to annualized EBITDA................................
0.82
0.01
0.79
0.79
0.02
0.03
EBITDA4 ................................................................
11,757
31
As of and for the
three month period
ended March 31,
2007
2006
As of and for the year ended
December 31,
2006
2006
(thousands
of U.S.$)1
(thousands of R$)
2005
2004
(thousands of R$)
RÁDIO GAÚCHA:
Income statement data:
Net operating revenues................................6,487
6,760
13,965
29,858
27,413
23,670
Advertising ................................................................
6,733
7,016
14,495
30,991
28,452
24,567
(256)
(530)
(1,133)
(1,039)
(897)
(2,396)
(5,297)
(11,326)
(9,783)
(9,989)
Personnel ................................................................
(1,596)
(1,511)
Taxes on revenues................................ (246)
Operating costs................................
(2,468)
(2,986)
(6,385)
(6,714)
(7,281)
(154)
(312)
(666)
(236)
(260)
Royalties ................................................................
(179)
(187)
(376)
(803)
(832)
(828)
Other................................................................
(499)
(544)
(1,624)
(3,472)
(2,001)
(1,620)
Depreciation................................
(194)
Gross profit ................................................................
4,019
4,364
8,668
18,532
17,630
13,681
(2,100)
(4,976)
(10,639)
(9,322)
(9,393)
Selling................................................................
(1,126)
(970)
(2,008)
(4,294)
(3,217)
(3,324)
General and administrative ................................
(1,052)
(1,046)
(2,848)
(6,088)
(6,176)
(6,024)
Operating expenses, net................................
(2,246)
Financial income................................
35
18
37
79
320
95
Financial expenses ................................ (52)
(63)
(74)
(159)
(91)
(7)
Depreciation................................
(51)
(39)
(83)
(177)
(158)
(133)
Operating profit................................
1,773
2,264
3,692
7,893
8,308
4,288
Non-operating income (loss),
net................................................................ 2
-
12
26
(178)
4
Income before taxes on income................................
1,775
2,264
3,704
7,919
8,130
4,292
Social contribution ................................
(204)
(335)
(716)
(738)
(396)
Income tax................................................................
(416)
(507)
(643)
(1,374)
(1,857)
(642)
Net income ................................................................
1,196
1,553
2,726
5,829
5,535
3,254
Current assets ................................................................
10,214
7,000
5,003
10,696
6,580
5,204
Property, plant and equipment................................
3,795
3,421
1,699
3,632
2,725
2,239
Total assets ................................................................
22,046
19,237
10,538
22,531
18,391
17,919
4,324
2,968
6,345
5,029
5,919
95
43
92
97
50
-
-
-
-
-
4,419
3,011
6,437
5,126
5,969
(163)
Balance sheet data:
Current liabilities................................
4,666
Non-current liabilities ................................
90
3
Total debt ................................................................
Total liabilities ................................
4,756
Retained earnings ................................
8,890
9,257
3,599
7,694
7,704
7,787
Stockholders’ equity................................ 17,290
14,818
7,528
16,094
13,265
11,950
Financial expenses (income), net ................................
17
45
37
80
(229)
(88)
Depreciation ................................................................
245
193
394
843
394
393
Other financial data
32
As of and for the
three month period
ended March 31,
2007
2006
2006
2006
(thousands
of U.S.$)1
(thousands of R$)
EBITDA4 ................................................................
2,035
As of and for the year ended
December 31,
2005
2004
(thousands of R$)
2,502
4,123
8,816
8,473
4,593
0
110.20
110.20
0
0
0.00
0.00
0.00
0.00
0.00
5
Interest coverage ratio ................................
160.56
Total debt to annualized
0.00
EBITDA ................................................................
Reconciliation for the Credit Group between net income and EBITDA
For the three month period ended
March 31
2007
2006
For the year ended
December 31,
2006
(thousands of R$)
2005
2004
(thousands of R$)
Net income................................................................................................
19,393
26,270
111,870
87,953
57,893
(6,782)
(7,981)
(23,328)
(15,898)
(9,433)
(-) Social contribution ................................................................ (2,815)
(3,834)
(14,696)
(8,899)
(7,430)
228
(208)
(2,644)
(2,137)
(27)
(16)
452
452
(2,704)
(6,593)
(-) Income tax ................................................................
(-) Non-operating income (loss), net ................................
(-) Reversal (establishment) for provision for losses
in investments................................................................
185
122
(1,744)
511
296
(-) Financial expenses ................................................................(15,007)
(16,598)
(62,285)
(74,785)
(27,711)
7,815
9,613
28,009
17,425
8,492
(6,224)
(6,155)
(23,746)
(21,993)
(28,581)
(=) Combined EBITDA ................................................................42,009
50,859
211,852
196,433
128,880
(-) Equity in earnings (loss) on subisidiaries ................................
(-) Financial income................................................................
(-) Depreciation................................................................
Reconciliation for the Credit Group between net income and Combined Operating Cash Flow
For the year ended
December 31,
For the three month period ended
March 31
2007
2006
2006
(thousands of R$)
2005
2004
(thousands of R$)
Net income................................................................................................
19,393
26,270
111,870
87,953
(6,782)
(7,981)
(23,328)
(15,898)
(9,433)
(-) Social contribution ................................................................ (2,815)
(3,834)
(14,696)
(8,899)
(7,430)
(16)
452
452
(2,704)
(6,593)
185
122
(1,744)
511
296
(-) Financial expenses ................................................................(15,007)
(16,598)
(62,285)
(74,785)
(27,711)
(-) Depreciation................................................................
(6,224)
(6,155)
(23,746)
(21,993)
(28,581)
(-) Royalties ................................................................
(3,487)
(3,799)
(16,347)
(17,603)
(18,799)
(=) Combined operating cash flow................................
53,539
64,063
253,564
229,324
156,144
(-) Income tax ................................................................
57,893
(-) Reversal (establishment) of provision for losses in
investments................................................................
(-) Equity in earnings (losses) on subsidiaries................................
33
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
Translated for the convenience of the reader only at the rate of R$2.1380 per U.S.$1.00, the commercial rate in
effect at December 31, 2006, except ratios. These translations should not be construed as a representation that the
real amounts actually represent such U.S. dollar amounts could be or could have been converted into U.S. dollars
at the rate indicated on such date or at any other rate.
The Issuer and Guarantors are not required to produce consolidated financial statements, but for purposes of this
Offering Memorandum have prepared combined financial statements.
Total debt has been defined as the sum of the outstanding loans under current and non-current liabilities and does
not include balances due to related parties.
EBITDA has been computed as earnings before income tax, social contribution, non-operating income (loss),
reversal (establishment) of provision for losses on investments, equity in earnings (losses) on subsidiaries,
financial income, financial expense and depreciation and amortization. EBITDA is not defined under Brazilian
GAAP, does not represent cash flows for the years or periods presented and should not be considered an
alternative to net income as an indicator of performance or an alternative to cash flows as a source of liquidity.
The definition of EBITDA used may not be comparable with the definition of EBITDA used by other companies.
Although EBITDA as defined above does not provide a Brazilian GAAP measure of operating cash flow,
management uses it to measure financial performance. EBITDA for the combined Issuer and Guarantors have
been calculated as presented in the “Reconciliation for the Credit Group between net income and EBITDA”.
Interest coverage ratio is Annualized EBITDA divided by the financial expenses (income), net.
As defined in the “Description of the Notes” section of the Offering Memorandum. Combined Operating Cash
Flow for the combined Issuer and Guarantors have been calculated as presented in the “Reconciliation for the
Credit Group between net income and Combined Operating Cash Flow”.
Under the terms of the Notes, RBS-Zero Hora, TV Gaúcha, TV Florianópolis and Rádio Gaúcha (combined) (the
“Credit Group Companies”, as defined in the “Description of the Notes” section of the Offering Memorandum),
shall not permit any Subsidiary (also defined in the “Description of the Notes”) of any Credit Group Company to,
incur any funded debt (funded debt is non-current loans) or issue any Disqualified Stock (both defined in the
“Description of the Notes”) unless the Combined annualized debt to operating cash flow ratio for the four full
fiscal quarters next preceding the incurrence of such Funded Debt for which financial statements are available,
determined on a pro forma basis as if any such Funded Debt had been Incurred or any such Disqualified Stock had
been issued and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less
than 4.0 to 1, subject to certain exceptions.
The combined annualized debt to operating cash flow ratio is calculated by dividing (i) the Funded Debt of the
Credit Group Companies (consolidated) by (ii) the Combined Operating Cash Flow (as defined in the “Description
of the Notes”) of the Credit Group Companies (consolidated). In calculating “Funded Debt” for the purposes of
this table, the RBS Group has not included obligations in respect of interest or guarantees of interest payments, but
has included principal amounts due under the 11% Guaranteed Notes due 2010, as provided in the covenants for
the 11% Guaranteed Notes due 2010.
Net operating revenue and net income (loss) by sector are presented after eliminating the effects of inter-company
transactions that have been eliminated in preparing the combined financial statements of the Issuer and the
Guarantors.
34
EXCHANGE RATES
Prior to March 14, 2005, there were two official foreign exchange markets in Brazil:
•
the commercial rate exchange market; and
•
the floating rate exchange market.
Most trade and financial foreign exchange transactions were carried out on the commercial rate
exchange market. The floating rate exchange market generally applied to transactions to which the
commercial market rate did not apply. In March 2005, the National Monetary Council enacted Resolution
No. 3,265, as well as additional regulations, that consolidated the two foreign exchange markets into a single
foreign exchange market in order to make foreign exchange transactions simpler and more efficient. As a
result, all foreign exchange transactions in Brazil are carried out in this single foreign exchange market
through authorized financial institutions.
Foreign exchange rates continue to be freely negotiated, but may be influenced from time to time by
Central Bank intervention. From March 1995 through January 1999, the Central Bank allowed the gradual
devaluation of the real against the U.S. dollar. In January 1999, the Central Bank allowed the real/U.S.
dollar exchange rate to float freely. Since then, the real/U.S. dollar exchange rate has been established
mainly by the Brazilian interbank market and has fluctuated considerably. In the past, the Central Bank has
intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict
whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will
intervene in the exchange rate market through a currency band system or otherwise, or that the exchange
market will not be volatile as a result of political or economic instability or other factors. In light of these
factors, we also cannot predict whether the real will depreciate or appreciate in value in relation to the U.S.
dollar in the future. In addition, exchange rate fluctuations may also affect our financial condition and
results of operations. For more information on these risks, see “Risk Factors — Risks Relating to Brazil” in
this Offering Memorandum.
The following tables set forth the exchange rate, expressed in reais per U.S. dollar (R$/U.S.$) for the
periods indicated, as reported by the Central Bank.
Periodend
For the year ended December 31,
2002...............................................................................................
2003...............................................................................................
2004...............................................................................................
2005...............................................................................................
2006...............................................................................................
3.5333
2.8892
2.6544
2.3407
2.1380
Average
for
Period1
Low
(reais per U.S. dollar)
2.9309
3.0715
2.9257
2.4341
2.1771
__________________
(1)
The average of the offered rates for each year, using the PTAX closing quotations of each day.
Source: Central Bank
35
2.2709
2.8219
2.6544
2.1633
2.0586
High
3.9552
3.6623
3.2051
2.7621
2.3711
The following table sets forth the average of the offered rates of each period, using the PTAX Closing
Quotations of each day.
Average for
Period-end
Period1
(reais per U.S. dollar)
Month
January 2007 ................................................................................
February 2007 ..............................................................................
March 2007 ..................................................................................
April 2007 ....................................................................................
May 2007 .....................................................................................
2.1247
2.1182
2.0504
2.0339
1.9289
2.1385
2.0963
2.0887
2.0320
1.9839
__________________
(1)
The average of the offered rates of each period, using the PTAX closing quotations of each day.
Source: Central Bank
36
USE OF PROCEEDS
The Issuer intends to use the net proceeds of the issue of the Notes, which is expected to be
approximately R$296 million after payment of customary underwriting, accounting, legal and other fees related to the
issuance, to repay existing indebtedness, including the U.S.$56 million 11% Guaranteed Notes due 2010
issued in 2004 (the “Existing Notes”), and for general corporate purposes.
Concurrent with this Offering, the Issuer is making a tender offer to purchase for cash all of the
outstanding principal amount of the Existing Notes and a consent solicitation to amend the related indenture
to eliminate the requirement to deliver financial statements reported under the Constant Currency Inflation
adjusted (or correçâo monetária integral) method.
37
CAPITALIZATION
The Issuer
At March 31, 2007, the Issuer’s capital was R$102.4 million, represented by 98,576,642 nominal shares
with no par value, of which 69,003,649 were common shares and 29,572,993 were preferred shares, all of
which have been authorized, issued and fully paid. Each common share is entitled to one vote in the Issuer’s
General Assembly. The preferred shares do not have voting rights, but have priority in the repayment of
capital, without premium, according to the ratio of their participation in the capital stock, in case of
liquidation of the Issuer. For further details, see Note 13(a) to the Issuer Financial Statements.
The following table sets forth the capitalization (defined as loans (non-current), not including balances
due to related parties, plus total stockholders’ equity) of the Issuer at March 31, 2007 derived from financial
statements prepared in accordance with Brazilian GAAP and as adjusted to give effect to the Offering.
There has been no material change in the capitalization of the Issuer and the Guarantors on a combined
basis since March 31, 2007.
(unaudited)
As of March 31, 20071
As Adjusted1
Actual
(thousands
of R$)
(thousands
of U.S.$)2
(thousands
of R$)
(thousands
of U.S.$)
Loans (non-current) ................................ 168,637
102,445
Capital3................................................................
82,246
49,963
468,637
102,445
228,559
49,963
Capital reserves4................................
29,041
14,164
29,041
14,164
Revaluation reserve5 ................................
20,973
10,229
20,973
10,229
Accumulated losses................................
(39,609)
(19,318)
(39,609)
(19,318)
55,038
112,850
55,038
137,284
581,487
283,597
112,850
Total stockholders’ equity................................
Total capitalization................................ 281,487
(1)
(2)
Adjusted to show the effect of the Offering. No adjustment has been made to effect the debt tender offer being
made by the Issuer concurrent with this offering of Notes.
Translated for convenience of the reader only at the rate of R$2.0504 per U.S.$1.00, the Commercial Rate in effect
at March 31, 2007. These translations should not be construed as a representation that the real amounts actually
represent such U.S. dollar amounts could be or could have been converted into U.S. dollars at the rate indicated on
such date or at any other rate.
(3)
Capital consists of capital in respect of shares of common and preferred stock, all of which have been authorized,
issued and fully paid. This amount has been monetarily corrected following the constant currency methodology
for the effects of inflation through September 30, 2001. See “Presentation of Financial Information”.
(4)
Capital Reserves consist of a share premium reserve in the amount of R$28.7 million and a fiscal incentives reserve
in the amount of R$357,000.
(5)
Certain items of property and equipment, including printing presses and accessories are stated at its revalued cost,
based on appraisals carried out by independent appraisers at least every four years. Deferred tax effects on the
revaluation are recorded as non-current liabilities.
Source: The Issuer’s interim Financial Statements at March 31, 2007.
38
The Credit Group
The Issuer’s capital stock is described above. See “— The Issuer”.
At March 31, 2007, TV Gaúcha’s capital was R$38.7 million, represented by 22,755,000 nominal
common shares with no par value, all of which have been authorized, issued and fully paid. Each common
share is entitled to one vote in TV Gaúcha’s General Assembly. The preferred shares (if and when issued)
will not have voting rights, but will have priority in the repayment of capital, without premium, according to
the ratio of their participation in the capital stock, in case of liquidation of TV Gaúcha.
At March 31, 2007, TV Florianópolis’s capital was R$3.4 million, represented by 2,002,640 nominal
common shares with no par value, all of which have been authorized, issued and fully paid. Each common
share is entitled to one vote in TV Florianópolis’s General Assembly.
At March 31, 2007, Rádio Gaúcha’s capital was R$836,000, represented by 492,000 nominal common
shares with no par value, all of which have been authorized, issued and fully paid. Each common share is
entitled to one vote in Rádio Gaúcha’s General Assembly. The preferred shares (if and when issued) will not
have voting rights, but will have priority in the repayment of capital, without premium, according to the ratio
of their participation in the capital stock, in case of liquidation of Rádio Gaúcha.
The following table sets forth the capitalization (defined as loans (non-current), not including balances
due to related parties, plus total stockholders’ equity) of the Issuer and the Guarantors on a combined basis
derived from financial statements prepared in accordance with Brazilian GAAP at March 31, 2007.
There has been no material change in the capitalization of the Issuer and the Guarantors on a combined
basis since March 31, 2007.
(unaudited)
As at March 31, 20071
As Adjusted1
Actual
(thousands
of R$)
Loans (non-current) ................................ 278,773
Capital3................................................................
145,422
34,130
Capital Reserves4 ................................
5
Revaluation Reserve ................................ 20,973
Revenue Reserves6 ................................ 129,438
Retained Earnings ................................
36,927
Total Stockholders’ Equity ................................
366,890
Total Capitalization................................ 645,663
(1)
(2)
(3)
(4)
(5)
(thousands
of U.S.$)2
(thousands
of R$)
(thousands
of U.S.$)2
135,960
70,924
16,646
10,228
63,128
18,010
178,936
314,896
578,773
145,422
34,130
20,973
129,438
36,927
366,890
945,663
282,273
70,924
16,646
10,228
63,128
18,010
178,936
461,209
Adjusted to show the effect of the Offering. No adjustment has been made to effect the debt tender offer being
made by the Issuer concurrent with this offering of Notes.
Translated at the rate of R$2.0504 per U.S.$1.00, the Commercial Rate in effect at March 31, 2007. These
translations should not be construed as a representation that the real amounts actually represent such U.S. dollar
amounts or could have been converted into U.S. dollars at the rate indicated on such date.
Capital consists of capital in respect of shares of common and preferred stock (for the Issuer) or of shares of
common stock (for the Guarantors), all of which have been authorized, issued and fully paid. For further details
regarding the Issuer’s and the Guarantors’ capital stock on a combined basis, please refer to Note 15 to the Credit
Group Financial Statements. This amount has been monetarily corrected following the constant currency
methodology for the effects of inflation through September 30, 2001.
Capital Reserves consist of a share premium over book value in the amount of R$28.7 million and fiscal incentives
reserves in the amount of R$5.4 million.
Printing presses and accessories are stated at revalued cost, based on appraisals carried out by independent experts
at least every four years. Deferred tax effects on the revaluation increment are recorded as non-current liabilities.
39
As required by Brazilian law, 5% of annual net income shall be deposited in an account to constitute a legal
reserve. Such legal reserve shall not exceed 20% of the company’s capital, and can only be used by the company
to offset losses or to increase the company’s capital.
Source: The Credit Group’s interim Special-Purpose Combined Financial Statements at March 31, 2007.
(6)
40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Introduction
The information in this section should be read together with the financial statements included elsewhere
in this Offering Memorandum. Such financial statements have been prepared in accordance with Brazilian
GAAP, which differ in certain significant respects from U.S. GAAP and IFRS. For a description of certain
differences between Brazilian GAAP, U.S. GAAP, and IFRS, see “Summary of Certain Significant
Differences between Accounting Principles Generally Accepted in Brazil, U.S. GAAP and IFRS”.
As described below, the RBS Group’s financial performance and results of operations are materially
affected by:
• the performance of the Brazilian economy, changes in rates of inflation, interest
rates, foreign exchange rates and advertising demand;
•
the application of the RBS Group’s critical accounting policies; and
• the implementation of the RBS Group’s strategy to pursue world class benchmarks
in profitability and reduce and extend the maturity profile of its existing indebtedness,
particularly foreign currency-denominated debt.
During the period 2004 through 2006, and the first three-months of 2007, the RBS Group has operated
in a favorable Brazilian macroeconomic environment. During this period, Brazil has experienced significant
trade surpluses, increased foreign reserves, moderate economic growth, decreased rates of inflation, and,
since the end of 2005, decreasing domestic interest rates. At the same time, the Brazilian real has
strengthened against the U.S. dollar.
These factors have impacted the Credit Group’s results of operations and financial condition.
Brazilian Economic Environment
Balance of trade. In 2006, Brazil registered in an accumulated trade surplus of approximately
U.S.$46.1 billion, versus an accumulated trade surplus of approximately U.S.$44.7 billion in 2005. Exports
in 2006 totaled U.S.$137.5 billion, a 16.2% increase over 2005, while imports totaled U.S.$91.4 billion, a
24.2% increase from U.S.$73.6 billion recorded in 2005. The trade balance in 2006 resulted in an
accumulated current account surplus of approximately U.S.$13.5 billion, compared to an accumulated
surplus of approximately U.S.$14.0 billion in 2005. The accumulated balance of payments surplus was
approximately U.S.$30.6 billionin 2006 compared to an accumulated surplus of approximately U.S.$4.3
billion in 2005.
During the first three-months of 2007, Brazil registered a trade surplus of approximately U.S.$8.7
billion, versus a trade surplus of approximately U.S.$9.3 billion for the corresponding period in 2006.
Exports in the first three-months of 2007 totaled U.S.$33.9 billion, a 15.4% increase over the corresponding
period of 2006, while imports totaled U.S.$25.2 billion, a 25.4% increase from the U.S.$20.1 billion
recorded for the corresponding period in 2006.
International reserves. Brazil’s international reserves (which include gold and foreign exchange
holdings) totaled U.S.$49.3 billion on December 31, 2003, U.S.$52.9 billion on December 31, 2004,
U.S.$53.8 billion on December 30, 2005 and U.S.$85.8 billion on December 29, 2006. On May 2, 2007,
Brazil’s international reserves totaled U.S.$122.4 billion.
Gross domestic product. On March 21, 2007, the Fundação Instituto Brasileiro de Geografia e
Estatistica (“IBGE”), concluding a two-year effort to improve Brazil’s National Accounts System, revised
its methodology for calculating gross domestic product (“GDP”) and restated historic GDP data since 1995.
Under the new methodology, a broader range of sources of information is used to provide a more accurate
measure of Brazil’s GDP. Sources such as IBGE’s annual surveys of economic segments, tax receipts
41
information and household surveys are utilized to calculate GDP. As a result, activities that were previously
estimated under the prior methodology, such as government consumption and financial intermediation, are
now measured. In addition, the relative weights of economic activities were adjusted to give greater
importance to services such as telecommunications and transportation.
As restated, Brazil’s real GDP growth for the years 2000 through 2005 was revised upward. As a
result, Brazil registered an average real GDP growth for the six-year period from 2000 to 20005 of 3.0%,
compared to 2.6% average real GDP growth for the same period using the prior methodology. The new
methodology therefore suggests a different pace of economic growth than previously believed, and in
particular growth after 2002 was higher using the new methodology. Using the prior methodology, Brazil’s
real GDP growth was 4.9% in 2004 and 2.3% in 2005. Using the new methodology, Brazil’s real GDP
growth was 5.7% in 2004 and 2.9% in 2005. Using the prior methodology, Brazil’s real GDP grew 2.9% in
2006 relative to the previous year, while using the new methodology, Brazil’s real GDP grew 3.7% in 2006
relative to the previous year.
Inflation. In terms of inflation, the broad consumer rate index, or IPCA, rose 9.3% in 2003, 7.6% in
2004, 5.7% in 2005, 3.1% in 2006 and 3.0% in the twelve-month period ended April 30, 2007. The inflation
rate (as measured by IGP-DI) rose 7.7% in 2003, 12.1% in 2004, 1.2% in 2005, 3.8% in 2006 and 4.6% in
the twelve-month period ended April 30, 2007.
Exchange rates. The Brazilian real-U.S. dollar exchange rate (sell side), as published by the Central
Bank, was R$2.8892 to U.S.$1.00 on December 31, 2003, R$2.6544 to U.S.$1.00 on December 31, 2004,
R$2.3407 to U.S.$1.00 on December 30, 2005, R$2.1380 to U.S.$1.00 on December 29, 2006 and R$1.9303
to U.S.$1.00 on June 14, 2007. These rates reflect the overall appreciation of the real against the U.S. dollar
during the period under review.
Unemployment rates. After declining from 13.1% in April 2004 to 9.6% in December 2004, the
unemployment rate in Brazil’s six largest metropolotan areas rose to 10.8% in April 2005 before falling to
9.4% in June 2005. The unemployment rate remained relatively constant through November 2005 before
declining to 8.3% in December 2005. The unemployment rate rose to 10.7% in July 2006 before declining
to 8.4% in December 2006. In 2007, the unemployment rate rose to 9.3% in January and further to 10.1% in
March.
Interest rates. Interests rates have generally declined during the periods under review. Between
February 19, 2003 and April 14, 2004, the Central Bank reduced the Over/Selic (reference for all other
Brazilian interest rates) rate target from 26.5% to 16.0%. In an effort to manage inflationary expectations,
the Central Bank increased its Over/Selic rate target from 16.0% to 19.75% between September 15, 2004
and May 18, 2005. After leaving the Over/Selic rate target unchanged on June 15, 2005, July 20, 2005 and
August 17, 2005, the Central Bank reduced its Over/Selic rate target to 19.50% on September 14, 2005,
19.0% on October 19, 2005, 18.5% on November 23, 2005, 18.0% on December 14, 2005, 17.25% on
January 18, 2006, 16.5% on March 8, 2006, 15.75% on April 19, 2006, 15.25% on May 31, 2006, 14.75%
on July 19, 2006, 14.25% on August 31, 2006, 13.75% on October 18, 2006, 13.25% on November 29,
2006, 13.00% on January 24, 2007, 12.75% on March 7, 2007 and 12.50% on April 18, 2007.
Growth acceleration plan 2007-2010. On January 22, 2007, the Government unveiled the Growth
Acceleration Plan 2007-2010 or “PAC”, a set of measures seeking to (i) create incentives for private
investment; (ii) increase public investment in infrastructure; and (iii) remove bureaucratic, administrative,
normative, legal and legislative obstacles to growth. The measures are grouped under five broad headings:
infrastructure investment, stimulus to credit and financing, improvement to the investment climate, tax
exemptions and improvements in the tax system, and long-term fiscal measures.
Critical accounting policies
Critical accounting policies are those that are important both to the portrayal of the financial condition
and results of operations and that also require management’s most difficult, subjective or complex
judgments.
42
Complex judgment is required to conclude as to the appropriate accounting policy to be followed on
complex transactions or on transactions where there is no specific definitive guidance on the accounting
standards. Complex judgment is also often the result of the need to make estimates about the effect of
matters that are inherently uncertain. As the number of variables and assumptions affecting the possible
future resolution of uncertainties increases, those judgments become even more subjective and complex.
The application of the constant currency method and the combination of financial statements do not
require significant or complex judgement but are relevant to the presentation of the Issuer’s and Guarantors’
financial position and results of operations in the Financial Statements.
To provide an understanding about how management forms its judgments about the most appropriate
accounting policy to be followed the following critical accounting policies are presented:
(i)
Application of the constant currency method;
(ii)
Combination of financial statements;
(iii)
Revaluation, impairment and depreciation of permanent assets;
(iv)
Recognition of deferred taxes;
(v)
Accounting for contingent liabilities, and
(vi)
Accounting for losses on investments.
Application of the constant currency method. The accounting records of the Issuer and the Guarantors
are maintained in accordance with Brazilian corporate and tax legislation. Two methods of inflation
accounting existed in Brazil: (a) the “Corporate Law method” which was required to be applied for purposes
of financial statements presented in order to comply with tax and statutory requirements, and (b) the
“Constant Currency method” formerly required by the Comissão de Valores Mobiliários (the Brazilian
Securities Commission or “CVM”). Financial statements presented under the constant currency methodology
were prepared as a means of depicting more clearly the impacts of inflation on a company’s financial
information. The financial statements presented for the Issuer and on a combined basis for the Issuer and the
Guarantors have been prepared following the Constant Currency Method since such criteria is required in
accordance with the terms of the Indenture of the Existing Notes. The Financial Statements included in this
Offering Memorandum are those prepared following the Constant Currency Method. Under the Constant
Currency Methodology, all financial statement balances, including comparative balances from prior years,
are presented in reais of constant purchasing power using as the basis for restatement the official index
Unidade Fiscal de Referência (the Fiscal Unit of Reference or “UFIR”) up to December 31, 1995 and the
variation of the Índice Geral de Preços - Mercado (the General Market Price Index or “IGP-M”) as from that
date. The reported amounts of non-monetary assets, such as permanent assets, and shareholders accounts
include restatement as from its respective date of origin.
As a result of lower levels of inflation, effective January 1, 1996 inflation accounting was abolished
under the “Corporate Law Method” in financial statements presented for tax and statutory purposes.
Companies presenting their financial statements to the CVM were allowed to present financial statements
adjusted for inflation prepared following the “Constant Currency Method” as additional information on a
voluntary basis.
In 2001, Resolution 900 of the Brazilian Federal Accountancy Council (CFC) established that the
indexation of the accounts under the “Constant Currency Method” should be suspended during periods of
low inflation, i.e., when the cumulative inflation rate in a 36-month period is less than 100%. The Issuer and
the Guarantors have therefore suspended the indexation of their accounts under the Constant Currency
method in their financial statements as from September 30, 2001, and subsequent transactions are recorded
at their historical amounts without indexation. See Note 3 to the Credit Group Financial Statements.
43
Combination of financial statements. Brazilian GAAP does not address the combination of financial
statements. The Credit Group Financial Statements presented in this Offering Memorandum are prepared on
a combined basis, and have been prepared for the purpose of presenting the combined financial position and
related combined results of operations, changes in stockholders’ equity and changes in financial position of
the Issuer and the Guarantors in the preparation of the Combined Financial Statements, all assets, liabilities,
income and expenses of the Issuer and the Guarantors have been added together. As there are no intercompany shareholdings, all capital and reserve accounts have been added together, although all Account
balances, revenues and expenses from transactions among the Issuer and the Guarantors, or among the
Guarantors have been eliminated on combination. See Note 2 to the Credit Group Financial Statements.
Revaluation, impairment and depreciation of permanent assets. Property, plant and equipment are
stated at cost, plus revaluation for certain items including the majority of land, buildings, printing presses
and fittings of Zero Hora and TV Gaúcha, less accumulated depreciation. Depreciation is calculated on the
straight-line method in accordance with the estimated useful lives of assets. Useful lives of the assets that
have been revalued were reviewed upon its revaluation and reestimated with such reviewed useful lives. The
Issuer and the Guarantors assess periodically if operating income is sufficient to absorb the depreciation or
amortization of long-lived assets in order to assess potential asset impairment.
Recognition of deferred taxes. The Issuer and the Guarantors recognize deferred tax assets and
liabilities on temporary differences between the financial statements carrying amounts and the tax basis of
assets and liabilities and deferred tax assets for tax loss carryforwards. The ability to realize deferred tax
assets depends on the Issuer and on each of the Guarantors presenting taxable income in future years. The
decision to recognize deferred tax assets is based on expected levels of future taxable income. Actual future
results may differ from current estimates and affect the amount of deferred tax assets actually realized. If in
future periods management’s assessment indicates that not all the amount of deferred tax assets is realizable,
the Issuer and/or the Guarantors, as the case may be, will need to reduce the amount of deferred tax assets
currently recorded.
Accounting for contingent liabilities. The Issuer and the Guarantors are party to certain legal
proceedings in Brazil arising in the normal course of business (tax, civil and labor). Provisions have been
made for labor, civil and tax contingencies, estimated as probable, provided they can be reasonably
estimated. In connection with some of these proceedings, the Issuer and the Guarantors made deposits
(included in an account called judicial deposits and fiscal incentives) which will only be released to upon a
favorable court ruling. The estimates have been made based on currently available information and on the
advice of legal counsel and are the result of an analysis of potential results. Changes in circumstances may
affect the amount of estimates.
RBS Group financial reprofiling
In 2003, in light of the Brazilian economic environment and trends in the Brazilian media business, the
RBS Group reviewed its strategic objectives with the goal of trying to position the RBS Group as one of the
leading media companies in Brazil, operating at world class standards. To reach that goal, management
decided to concentrate on the media business or businesses directly related to the media industry,
maximizing the value generated by its mature businesses – television, radio and newspapers – and divesting
itself of businesses that no longer fit that profile. To that end, the RBS Group undertook a financial
reprofiling exercise, renegotiating with Brazilian creditors Bradesco, Unibanco, Real/ABN AMRO and
Banrisul to extend the maturities of existing indebtedness to 2006, agreeing to limit cash distributions to
shareholders during 2004 and 2005 and pledging certain flows of receivables. At the same time, RBS-Zero
Hora and RBS Par entered into further swap arrangements to hedge residual exposure on foreign currencydenominated indebtedness to protect against devaluation of the real.
On August 2, 2004, holders of the 11% Guaranteed Notes due 2007 issued by RBS Participações S.A.
(the “RBS Par Notes”) exchanged U.S.$66,845,000 of such notes (of $125,000,000 outstanding) for new
notes issued by the Issuer and jointly and severally guaranteed by the Guarantors. Pursuant to the terms of
the exchange offer, for each U.S.$1,000 principal amount of the RBS Par Notes notes exchanged, the
noteholder received U.S.$150 in cash and U.S.$850 in new 11% RBS-Zero Hora notes with a maturity date
44
of April 1, 2010. The new notes are jointly and severally guaranteed by the Guarantors, and are the subject
of the tender offer being made by the Issuer concurrent with this offer. See “Use of Proceeds”.
45
The Issuer
Results of operations for the years ended December 31, 2006 and 2005
Operating revenues
Advertising. Advertising revenue in 2006 was R$140.2 million, representing a 6.3% increase over
advertising revenue of R$131.9 million in 2005. As a percentage of operating revenues, advertising revenue
was 34.3% in 2006 and 34.1% in 2005.
Advertising revenue of RBS-Zero Hora consists of sales of non-classified newspaper advertising by
both external advertising agencies and RBS-Zero Hora’s own sales force. Classified advertisements are not
included in this item, but are discussed separately below.
The increase in advertising revenue in 2006 versus 2005 is principally the result of an increase in
pricing of newspaper advertising, as well as the addition of revenue from “hagah” and Hora de Santa
Catarina, which were launched in August, 2006.
Classified advertisements. Revenue from classified advertisements relating to RBS-Zero Hora in 2006
was R$87.1 million, representing a 5.8% increase over classified advertisements revenue of R$82.3 million
in 2005. As a percentage of operating revenues, classified advertisements revenue was 21.3% in both 2006
and 2005. Classified advertisements revenue consists of sales of classified newspaper advertisements on
behalf of RBS-Zero Hora by both external advertising agencies/independent agents and RBS-Zero Hora’s
own sales force, primarily in RBS-Zero Hora’s principal newspaper, Zero Hora. Payment for classified
advertisements is generally made in cash prior to the date the advertisement is run. The increase in classified
advertisements revenue between the two years is principally accounted for by increased prices charged for
classified advertisements.
Circulation. Circulation revenue consists of newsstand and street vendor sales of newspapers.
Circulation revenue in 2006 was R$52.9 million, representing a 7.5% increase over circulation revenue of
R$49.2 million in 2005. As a percentage of operating revenues, circulation revenue was 12.9% in 2006 and
12.7% in 2005. The increase in circulation revenue between the two years is principally accounted for by
increased cover prices, plus new income through sales of Hora de Santa Catarina since its launch in August,
2006.
Subscriptions. Subscriptions revenue consists primarily of subscriptions of RBS-Zero Hora’s
newspapers for periods of one, six or twelve months. Payment for subscriptions is generally by monthly
installments, due after the delivery of the editions of the paper for the corresponding month. For
subscriptions of six or twelve months, however, depending on the arrangement with the subscriber, payment
can be completed before the end of the subscription period. Subscriptions revenue in 2006 was R$122.7
million, representing a 7.9% increase over subscriptions revenue of R$113.7 million in 2005. As a
percentage of operating revenues, subscriptions revenue was 30.0% in 2006 and 29.4% in 2005. The
increase in subscriptions revenue between the two years resulted primarily from higher prices charged per
issue, as well as an average increase in total number of subscriptions.
Other. Other operating revenues consist principally of revenue from printing services for third parties,
distribution of printed material for third parties by ViaLOG (as discussed in “Business — The Issuer”) and
special events. Other operating revenues in 2006 were R$22.8 million, representing a 7.7% decrease from
other operating revenues of R$24.7 million in 2005. As a percentage of operating revenues, other operating
revenues were 5.6% in 2006 and 6.4% in 2005. The decrease in other operating revenues between the two
periods is principally accounted for by decreased income from printing services for third parties.
Taxes on revenues. Taxes on revenues were R$16.5 million in 2006, a 7.8% increase over taxes on
revenues of R$15.3 million in 2005. As a percentage of operating revenues, taxes on revenues equaled 4.0%
in each of 2006 and 2005.
46
Total operating revenues. As a result of the foregoing, the Issuer’s total operating revenues increased
5.9% to R$409.2 million in 2006, from total operating revenues of R$386.5 million in 2005.
Operating costs
Raw materials. Raw materials costs in 2006 were R$70.0 million, representing a 4.2% decrease from
raw materials costs of R$73.1 million in 2005. As a percentage of operating revenues, raw materials costs
were 17.1% in 2006 and 18.9% in 2005. This item consists primarily of cost of newsprint and, to a lesser
extent, the cost of ink and plates. The decrease in raw materials costs was principally due to the continued
appreciation of the real against the U.S. dollar, as newsprint prices are linked to the U.S. dollar. The Issuer
also benefitted from the appreciation of the real against the U.S. dollar, as prices for newsprint are generally
linked to the U.S. dollar.
Personnel. Operating personnel costs in 2006 were R$46.6 million, representing a 4.0% increase over
operating personnel costs of R$44.8 million in 2005. As a percentage of operating revenues, operating
personnel costs were 11.4% in 2006 and 11.6% in 2005.
In preparing its financial statements, the RBS Group divides its personnel into (i) operating personnel,
which consists of reporters, anchor persons, camera operators and other news production personnel, (ii) sales
personnel and (iii) administrative personnel, which consists of finance, accounting and other administrative
personnel. Operating personnel costs consist of salary, supplemental compensation and vacation payments
made to operating personnel only. Costs related to sales personnel are recorded as selling expenses and costs
related to administrative personnel as general and administrative expenses, both discussed below.
The increase in operating personnel costs is principally attributable to increased employee salaries
reflecting the terms of the existing collective bargaining agreement.
Promotional events. Promotional events costs were R$9.6 million in 2006, representing a 21.5%
increase over costs of R$7.9 million in 2005. As a percentage of operating revenues, promotional events
costs were 2.3% in 2006 versus 2.0% in 2005. The increase in promotional event costs is principally due to
costs associated with the launch of Zero Hora’s home supplement (Casa & Cia).
Depreciation and amortization. Depreciation and amortization was R$9.7 million in 2006, representing
a 79.6% increase over depreciation and amortization of R$5.4 million in 2005. As a percentage of operating
revenues, depreciation and amortization was 2.4% in 2006 versus 1.4% in 2005. The increase in
depreciation is principally due to the lower depreciation expense in 2005 as described in “Results of
operations for the years ended December 31, 2005 and 2004.”
Royalties. Royalties costs in 2006 were R$8.3 million, representing a 10.8% decrease over royalties
costs of R$9.3 million in 2005. As a percentage of operating revenues, royalties costs were 2.0% in 2006
and 2.4% in 2005. Royalties costs decreased in 2006 as a result of RBS-Zero Hora’s prepayment, on
September 24, 2004, of royalties costs to be incurred from January 1, 2005 through December 31, 2014. The
prepayment was calculated as the net present value of the royalties on the projected net operating revenues
of the Issuer for the period. Royalties equaling 3.5% of net operating revenues are paid to RBS Par, which
since 1996 owns the rights to the RBS trademarks. Net operating revenues produced by the newspapers O
Pioneiro and Jornal de Santa Catarina, however, are not included in the calculation of royalties owed by
RBS-Zero Hora to RBS Par because the trademarks used by such newspapers have not yet been transferred
to RBS Par. It is intended that O Pioneiro’s and Hora de Santa Catarina’s trademarks will be transferred to
RBS Par or licensed to RBS-Zero Hora in the near future. In addition, in September 2004 the Issuer pre-paid
royalties to be incurred from January 2005 through September 2014 and such pre-payment was computed
based on estimated projected revenues discounted to present value. Under the terms of the pre-payment the
amounts pre-paid are final and not subject to recomputation based on actual revenue. The amount pre-paid
has been recognized as a pre-paid asset and is being recognized as expense over the period through
September 2014. As a result, if actual revenue for any given period is different than the one estimated to
make the pre-payment, the ratio of royalty expenses to net operating revenue will be different than 3.5%.
47
Other. Other operating costs in 2006 were R$9.8 million, representing a 2.1% increase over other
operating costs of R$9.6 million in 2005. As a percentage of operating revenues, other operating costs were
2.4% in 2006 and 2.5% in 2005.
Other operating costs consist principally of delivery and travel costs and fuel, telephone, power and
data communication charges relating to operating personnel. In addition, other operating costs consist of
payments for maintenance of production equipment and promotional events by RBS-Zero Hora.
The increase in other operating costs in 2006 is mostly related to costs associated with certain special
events, including the 2006 World Cup soccer tournament in Germany and the 2006 Toyota Cup soccer
tournament in Japan.
Total operating costs. As a result of the factors discussed above, total operating costs increased 2.6%
from R$149.9 million in 2005 to R$153.9 million in 2006.
Gross profit
Gross profit in 2006 was R$255.3 million, representing a 7.9% increase over gross profit of R$236.6
million in 2005. As a percentage of operating revenues, gross profit equaled 62.4% in 2006 and 61.2% in
2005.
Operating income (expenses)
Selling. Selling expenses in 2006 were R$113.7 million, representing a 6.9% increase over selling
expenses of R$106.4 million in 2005. As a percentage of operating revenues, selling expenses equaled
27.8% in 2006 and 27.5% in 2005.
Selling expenses for RBS-Zero Hora consist of (a) payments to advertising agencies, including agency
bonuses that are based upon advertising revenue attributable to each agency, (b) expenditures for promotions
in magazines and other media forms, (c) expenditures on market research, promotional items and
sponsorship of promotional events, (d) salary, supplemental compensation and vacation payments made to
sales personnel, and (e) car rental, telephone, power, data communication, transportation and travel costs and
office expenditures attributable to the sales department. The R$7.3 million increase in selling expenses is
primarily due to increased publicity expenses related to the launch of “hagah” and Hora de Santa Catarina.
In addition, the Issuer had higher distribution costs and paid higher bonuses to its sales staff in 2006.
General and administrative. General and administrative expenses in 2006 were R$70.6 million,
representing a 42.6% increase over general and administrative expenses of R$49.5 million in 2005. As a
percentage of operating revenues, general and administrative expenses equaled 17.3% in 2006 and 12.8% in
2005.
The majority of general and administrative expenses consisted of salary, supplemental compensation
and vacation payments made to administrative personnel. In addition, general and administrative expenses
included car rental, telephone, power, data communication, transportation and travel costs and office
expenditures attributable to administrative personnel, as well as certain property taxes and taxes on financial
transactions.
The R$21.1 million increase in general and administrative expenses is primarily attributable to a
R$12.9 million increase in fees paid to other members of the RBS Group for the use of their administrative
departments, such as legal and human resources, and an increase in payments to employees due to a profits
participation program, as well as higher wages.
Depreciation and amortization. Depreciation and amortization in this case represents depreciation and
amortization related to assets used administratively rather than operationally. In 2006, these expenses were
R$4.1 million, representing a 26.8% decrease compared to depreciation and amortization of R$5.6 million in
2005. The decrease in 2006 was principally due to the termination in 2005 of software depreciation related
to clicRBS. As a percentage of operating revenues, depreciation and amortization related to administrative
assets equaled 1.0% in 2006 and 1.4% in 2005.
48
Financial income. Financial income increased to R$18.4 million in 2006 from R$15.5 million in 2005.
As a percentage of operating revenues, financial income equaled 4.5% in 2006 and 4.0% in 2005. The
increase in financial income resulted primarily from an adjustment in recoverable taxes and increased loans
to other RBS Group companies.
Financial expenses. Financial expenses in 2006 were R$47.5 million, representing a 27.7% decrease
from financial expenses of R$65.7 million in 2005. As a percentage of operating revenues, financial
expenses equaled 11.6% in 2006 and 17.0% in 2005. The decrease in financial expenses is explained
principally by lower market interest rates in 2006 compared to 2005.
Other, net. Other operating income (expenses) in 2006 was R$0.2 million, representing a 44.9%
decrease from other operating income of R$0.3 million in 2005. As a percentage of operating revenues,
other operating income (expenses) equaled 0.0% in 2006 and 0.1% in 2005.
Total operating expenses, net. Total operating expenses in 2006 were R$217.4 million, representing a
2.8% increase over total operating expenses of R$211.4 million in 2005. As a percentage of operating
revenues, total operating expenses equaled 53.1% in 2006 and 54.7% in 2005.
Operating income
Operating income increased to an operating income of R$38.0 million in 2006 from an operating
income of R$25.2 million in 2005. As a percentage of operating revenues, operating income was 9.3% in
2006 while operating income was 6.5% in 2005.
Non-operating income
Equity in the loss of subsidiary. Equity in the loss of subsidiary in 2006 was R$2.2 million, while there
was no equity in the loss of subsidiary in 2005. As a percentage of operating revenues, equity in the loss of
affiliate was 0.5% in 2006. This line item relates to the equity interest of the Issuer in its subsidiary, A
Notícia, S.A., which was acquired in November 2006 and was subsequently merged into the Issuer in
January 2007.
Provision for losses in investments. Reversal of provision for losses in investments in 2006 was R$0.5
million, compared to a provision for losses in investments of R$2.7 million in 2005. The R$2.7 million
provision was established in 2005 in connection with the loss in value of investments in connection with tax
incentive programs, and the R$0.5 million reversal taken in 2006 was in connection with the Issuer’s
investment in Net Serviços sold during the year and for which a provision for impairment was recognized in
prior years. See “Business — The RBS Group — History”.
Non-operating income (loss), net. Non-operating income (loss) decreased to a loss of R$0.6 million in
2006 from a loss of R$0.8 million in 2005. As a percentage of operating revenues, non-operating loss in
2006 was 0.1%, while non-operating loss in 2005 was 0.2%. Non-operating income (loss) in 2006 includes
gains or losses on the sale of permanent assets.
Income before taxes on income
Income before taxes on income increased to income of R$35.6 million in 2006 from income of R$21.7
million in 2005. As a percentage of operating revenues, income before taxes on income equaled 8.7% in
2006 and 5.6% in 2005. See Note 15 to the Issuer Financial Statements.
Taxes on income
Social contribution. Social contribution increased to an expense of R$4.4 million in 2006 from an
expense of R$0.5 million in 2005. Social contribution is essentially a 9% income tax applied to fund social
security and other social services. Social contribution was an expense in both 2006 and 2005 because the
Issuer recorded pre-tax income of R$35.6 million in 2006 and R$21.7 million in 2005.
Income tax. Income tax increased to an expense of R$9.6 million in 2006 from an expense of R$0.9
million in 2005. Income tax is calculated at the standard rate of tax plus supplementary rates (resulting in a
49
rate of 25%) and certain adjustments. Income tax was an expense in both 2006 and 2005 because the Issuer
recorded pre-tax income of R$35.6 million in 2006 and R$21.7 million in 2005.
Net income
Net income for the year increased to R$21.5 million in 2006 compared to R$20.3 million in 2005. As a
percentage of operating revenues, net income equaled 5.3% in 2006 and in 2005.
Results of operations for the years ended December 31, 2005 and 2004
Operating revenues
Advertising. Advertising revenue in 2005 was R$131.9 million, representing an 18.7% increase over
advertising revenue of R$111.1 million in 2004. As a percentage of operating revenue, advertising revenue
was 34.1% in 2005 and 32.9% in 2004.
The R$20.8 million increase in advertising revenue between 2005 and 2004 reflected the ongoing
recovery of the advertising market since 2002, which created a higher demand for advertising in general and
increased prices for color advertising.
Classified advertisements. Classified advertisements revenue in 2005 was R$82.3 million, representing
a 15.8% increase over classified advertisements revenue of R$71.1 million in 2004. As a percentage of
operating revenues, classified advertisement revenue was 21.3% in 2005 and 21.1% in 2004.
The increase in classified advertisements revenue between the two years primarily resulted from
increased prices charged for classified advertisements and an increase in the number of color advertisements,
for which the Issuer charges higher prices.
Circulation. Circulation revenue in 2005 was R$49.2 million, representing an 11.6% increase over
circulation revenue of R$44.1 million in 2004. As a percentage of operating revenues, circulation revenue
was 12.7% in 2005 and 13.1% in 2004. The increase in circulation revenue between the two periods was
principally due to an increase in cover prices and in the total number of issues sold.
Subscriptions. Subscriptions revenue in 2005 was R$113.7 million, representing a 13.8% increase over
subscriptions revenue of R$99.9 million in 2004. As a percentage of operating revenues, subscriptions
revenue was 29.4% in 2005 and 29.6% in 2004. The increase in subscriptions revenue between the two
years principally resulted from higher prices charged for subscriptions and an increase in the total number of
subscriptions.
Other. Other operating revenue in 2005 was R$24.7 million, which was consistent with other operating
revenue of R$24.9 million in 2004. As a percentage of operating revenues, other operating revenue was
6.4% in 2005 and 7.4% in 2004.
Taxes on revenues. Taxes on revenues were R$15.3 million in 2005, a 13.4% increase over taxes on
revenues of R$13.5 million in 2004, which reflected the increase in the Issuer’s revenue.
Total operating revenues. For the reasons set forth above, total operating revenues of R$386.5 million
in 2005 represented a 14.5% increase over total operating revenues of R$337.6 million in 2004.
Operating costs
Raw materials. Raw materials costs in 2005 were R$73.1 million, representing a 2.4% increase over
raw materials costs of R$71.3 million in 2004. As a percentage of operating revenues, raw materials costs
were 18.9% in 2005 and 21.1% in 2004. The increase in raw materials costs was principally due to an
increase in paper consumption due to the growth of the Issuer’s operations. The Issuer also benefitted from
the appreciation of the real against the U.S. dollar, as prices for newsprint are generally linked to the U.S.
dollar.
50
Personnel. Operating personnel costs in 2005 were R$44.8 million, representing a 3.0% increase over
operating personnel costs of R$43.5 million in 2004. As a percentage of operating revenues, operating
personnel costs were 11.6% and 12.9% in 2005 and 2004, respectively.
The increase in operating personnel costs is mostly due to increased employee salaries reflecting the
terms of the existing collective bargaining agreement.
Promotional events. Promotional events costs in 2005 were R$7.9 million, representing a 15.9%
increase over promotional events costs of R$6.8 million in 2004. As a percentage of operating revenues,
promotional events costs were 2.0% in 2005 and 2.0% in 2004. The increase in promotional events costs
was principally due to the launch of Globaltec, a technology event produced in partnership with the state
governments of Rio Grande do Sul and Santa Catarina.
Depreciation and amortization. Depreciation and amortization was R$5.4 million in 2005, representing
a 44.5% decrease over depreciation and amortization of R$9.6 million in 2004. As a percentage of operating
revenues, depreciation and amortization was 1.4% in 2005 and 2.9% in 2004. The decrease in depreciation
and amortization is due principally to the results from a revision in the rate of depreciation for improvements
made to buildings used by the Issuer but belonging to other members of the RBS Group, adjustments to the
depreciation rate and the depreciation of new investments.
Royalties. Royalties costs in 2005 were R$9.3 million, representing a 9.5% decrease over royalties costs
of R$10.2 million in 2004. As a percentage of operating revenues, royalties costs were 2.4% in 2005 and
3.0% in 2004. Royalties costs decreased in 2005 as a result of RBS-Zero Hora’s prepayment on September
24, 2004, of royalties costs to be incurred from January 1, 2005 through December 31, 2014. The
prepayment was calculated as the net present value of the royalties on the projected net operating revenues
of the Issuer for the period.
Other. Other operating costs in 2005 were R$9.6 million, representing a 5.9% increase over other
operating costs of R$9.0 million in 2004. As a percentage of operating revenues, other operating costs were
2.5% in 2005 and 2.7% in 2004. The increase in other operating costs in 2005 is attributable principally to
the launch of Globaltec, a technology event produced in partnership with the state governments of Rio
Grando de Sul and Santa Catarina.
Total operating costs. As a result of the factors discussed above, total operating costs remained
relatively stable at R$149.9 million in 2005, compared to R$150.5 million in 2004.
Gross profit
Gross profit in 2005 was R$236.6 million, representing a 26.5% increase over gross profit of R$187.1
million in 2004. As a percentage of operating revenues, gross profit equaled 61.2% in 2005 and 55.4% in
2004.
Operating expenses
Selling. Selling expenses in 2005 were R$106.4 million, representing a 4.0% increase over selling
expenses of R$102.3 million in 2004. As a percentage of operating revenues, selling expenses equaled
27.5% in 2005 and 30.3% in 2004. The increase in selling expenses was principally due to an increase of
sale rewards and higher costs associated with the increased circulation of the Issuer’s newspapers.
General and administrative. General and administrative expenses in 2005 were R$49.5 million,
representing a 9.0% increase over general and administrative expenses of R$45.4 million in 2004. As a
percentage of operating revenues, general and administrative expenses equaled 12.8% in 2005 and 13.4% in
2004. The increase in general and administrative expenses is mainly related to increased employee salaries
and benefits reflecting the terms of the existing collective bargaining agreement.
Depreciation and amortization. Depreciation and amortization in 2005 were R$5.6 million,
representing a 11.1% decrease over depreciation and amortization of R$6.3 million in 2004. As a percentage
of operating revenues, depreciation and amortization (expense) equaled 1.4% in 2005 and 1.9% in 2004.
51
Financial income. Financial income in 2005 was R$15.5 million, representing a 109.5% increase over
financial income of R$7.4 million in 2004. As a percentage of operating revenues, financial income equaled
4.0% in 2005 and 2.2% in 2004. The increase in financial income is primarily due to an increase in interest
income received from RBS Participações as a result of loans to RBS Participações in 2005 following RBSZero Hora’s exchange in 2004 of Existing Notes for RBS Par Notes.
Financial expenses. Financial expenses in 2005 were R$65.7 million, while financial expenses in 2004
were R$26.5 million. As a percentage of operating revenues, financial expenses equaled 17.0% in 2005 and
7.8% in 2004. The increase in financial expenses is explained principally by RBS-Zero Hora’s incursion of
a full year’s interest expense in 2005 as a result of its exchange of Existing Notes for the RBS Par Notes in
August 2004. See “— RBS Group financial reprofiling”.
Other, net. Other operating income (expenses) decreased to an income of R$0.3 million in 2005 from
an income of R$0.4 million in 2004.
Total operating expenses, net. As a result of the foregoing factors, total operating expenses in 2005
were R$211.4 million, representing a 22.5% increase over total operating expenses of R$172.6 million in
2004. As a percentage of operating revenues, total operating expenses equaled 54.7% in 2005 and 51.1% in
2004.
Operating income
Operating income in 2005 was R$25.2 million while operating income in 2004 was R$14.4 million. As
a percentage of operating revenues, operating income was 6.5% in 2005 and 4.3% in 2004.
Non-operating income (loss)
Provision for losses in investments. Provision for losses in investments in 2005 was R$2.7 million,
while provision for losses in investments in 2004 was R$6.6 million. As a percentage of operating revenues,
provision for losses in investments was 0.7% in 2005 and 2.0% in 2004. Provision for losses in investments
includes provisions for losses in the Issuer’s investment in Net Serviços (See “Business — The RBS Group
— History”) and the devaluation of investments in connection with tax incentive programs.
Non-operating income, net. Non-operating income (loss) decreased to loss of R$0.8 million in 2005
from an income of R$0.3 million in 2004. As a percentage of operating revenues, non-operating loss was
0.2% in 2005 while non-operating income was 0.1% in 2004.
Income before taxes on income
Income before taxes on income in 2005 was R$21.7 million, while income before taxes on income in
2004 was R$8.2 million. As a percentage of operating revenues, income before taxes on income equaled
5.6% in 2005 and 2.4% in 2004.
Taxes on income.
Social contribution. Social contribution in 2005 was an expense of R$0.5 million, a 64.3% decrease
from social contribution expense of R$1.4 million in 2004. As a percentage of operating revenues, social
contribution represented 0.1% in 2005 and 0.4% in 2004.
Income tax. Income tax was an expense of R$0.9 million in 2005 and an expense of R$2.7 million in
2004. As a percentage of operating revenues, income tax expense equaled 0.2% in 2005 and 0.8% in 2004.
The lower income tax expense amount in 2005 was due to tax credits in connection with the
devaluation of the Issuer’s investment in Net Serviços.
Net income for the year
Net income in 2005 was R$20.3 million, a 407.5% increase over net income of R$4.0 million in 2004.
As a percentage of operating revenues, net income equaled 5.3% in 2005 and 1.2% in 2004.
52
Credit Group (Combined Issuer and Guarantors)
Results of operations for the years ended December 31, 2006 and 2005
Operating revenues
Advertising. Advertising revenue in 2006 was R$474.4 million, representing a 10.4% increase over
advertising revenue of R$429.6 million in 2005. As a percentage of operating revenues, advertising revenue
was 64.9% in 2006 and 63.8% in 2005.
The increase in advertising revenue between 2006 and 2005 is principally the result of an increase in
the overall volume of the Credit Group’s advertising sales. Furthermore, in 2006, TV Gaúcha’s and TV
Florianópolis’s advertising revenues included fees paid in connection with the programming assignment
agreements between them and other RBS Network companies.
Advertising revenue of TV Gaúcha and TV Florianópolis is derived from television commercials,
programming sponsorship, and events and special projects. Under the existing contracts with TV Globo,
which expire in 2008 (subject to an automatic extension until 2011), the RBS Group and TV Globo agreed to
split advertising revenue on a percentage basis. The percentages are defined under the contracts, and will be
reviewed, and possibly renegotiated, by the parties in 2008. See “Business — The Guarantors — The Globo
Contracts”.
Advertising revenue of Rádio Gaúcha consists of sales of radio advertising time by external advertising
agencies and Rádio Gaúcha’s own sales force.
Revenues from the line items “classified advertisements”, “circulation”, “subscriptions” and “other”
relate exclusively to the operations of the Issuer, as further discussed above.
Taxes on revenues. Taxes on revenues were R$28.8 million in 2006, an 8.3% increase over taxes on
revenues of R$26.6 million in 2005. As a percentage of operating revenues, taxes on revenues equaled 3.9%
in 2006 and 4.0% in 2005.
Total operating revenues. As a result of the foregoing, total operating revenues increased 8.6% to
R$731.1 million in 2006, from total operating revenues of R$673.0 million in 2005. Of the total operating
revenues of R$731.1 million in 2006, 56.0% were attributable to RBS-Zero Hora, 26.9% to TV Gaúcha,
13.0% to TV Florianópolis and 4.1% to Rádio Gaúcha.
Operating costs
Raw materials. Costs from raw materials relate exclusively to the operations of the Issuer, as discussed
above. Raw materials costs in 2006 were R$70.0 million, representing an 4.2% decrease over raw materials
costs of R$73.1 million in 2005. As a percentage of operating revenues, raw materials costs were 9.6% in
2006 and 10.9% in 2005 (comparatively to the Credit Group).
Promotional events, programming and sales. Promotional events, programming and sales costs in 2006
were R$85.6 million, representing a 7.9% increase over programming and sales costs of R$79.3 million in
2005. As a percentage of operating revenues, programming and sales costs were 11.7% in 2006 versus
11.8% in 2005. Of promotional events, programming and sales costs of R$85.6 million in 2006, 67.0% were
attributable to TV Gaúcha, 20.3% to TV Florianópolis, 11.2% to RBS-Zero Hora and 1.5% to Rádio Gaúcha.
Promotional events consisted of payments by RBS-Zero Hora in connection with Casa & Cia (an
interior design event), Donna Fashion event (a fashion event) and Mostra ZH de Gastronomia (a
gastronomic event). Programming and sales costs primarily consisted of payments by TV Gaúcha and TV
Florianópolis to TV Globo for programming, calculated under the contracts with TV Globo as a percentage
of advertising revenues, plus the costs in connection with Planeta Atlântida (a music event) and Garota
Verão (a beauty pageant). See “Business — The Guarantors — The Globo Contracts”. The increase in
programming and sales costs between the two years principally reflects the increase in the advertising
revenue. Of the combined increase in programming and sales costs, 69.5% is accounted for by TV Gaúcha
19.7% by TV Florianópolis, 10.0% by RBS-Zero Hora and 0.8% by Rádio Gaúcha.
53
Personnel. Operating personnel costs in 2006 were R$79.8 million, representing a 2.3% increase over
operating personnel costs of R$78.0 million in 2005. As a percentage of operating revenues, operating
personnel costs were 10.9% in 2006 and 11.6% in 2005.
Of the increase in operating personnel costs of R$1.8 million, 100.0% is attributable to RBS-Zero Hora,
5.6% to TV Gaúcha, 11.1% to TV Florianópolis and (16.7%) to Rádio Gaúcha. The increase in operating
personnel costs is principally attributable to increased employee salaries reflecting the terms of the existing
collective bargaining agreement.
Depreciation. Depreciation was R$15.1 million in 2006, representing a 32.5% increase over
depreciation of R$11.4 million in 2005. As a percentage of operating revenues, depreciation was 2.1% in
2006 versus 1.7% in 2005. The increase in depreciation is due principally to the lower depreciation expense
in 2005 as described in “Results of operations for the years ended December 31, 2005 and 2004.”
Royalties. Royalties equaling 3.5% of the Issuer’s and each Guarantor’s net operating revenues were
paid to RBS Par, which since 1996 has owned the rights to the RBS trademarks. Royalties costs in 2006
were R$16.3 million, representing a 7.4% decrease over royalties costs of R$17.6 million in 2005. As a
percentage of operating revenues, royalties costs were 2.2% in 2006 and 2.6% in 2005. In 2006, 50.9% of
the R$16.3 million royalties costs were attributable to RBS-Zero Hora, 30.7% to TV Gaúcha, 13.5% to TV
Florianópolis and 4.9% to Rádio Gaúcha. Royalties costs decreased in 2006 as a result of the Credit Group’s
prepayment, on September 24, 2004, of royalties to be incurred from January 1, 2005 through December 31,
2014. The prepayment was calculated as the net present value of the royalties on the projected net operating
revenues of the Credit Group for the period.
Other. Other operating costs in 2006 were R$21.4 million, representing a 15.1% increase over other
operating costs of R$18.6 million in 2005. As a percentage of operating revenues, other operating costs
were 2.9% in 2006 and 2.8% in 2005. In 2006, 45.3% of the R$21.4 million other operating costs were
attributable to RBS-Zero Hora, 36.4% to TV Gaúcha, 8.0% to TV Florianópolis and 10.3% to Rádio Gaúcha.
Other operating costs consisted principally of delivery and travel costs and fuel, telephone, power and
data communication charges relating to operating personnel. In addition, other operating costs consisted of
payments for maintenance of production equipment, for use of the Embratel satellite, through which TV
Gaúcha and TV Florianópolis receive national programming and advertising produced by TV Globo, and for
the organization of promotional events.
Other operating costs increased in 2006, primarily because the costs of companies associated with TV
Gaúcha were no longer absorbed by TV Gaúcha after 2005. Instead, TV Gaúcha (and TV Florianópolis)
began to charge a 30% fee over the net revenue of such associated companies as payment for programming
assignments.
Total operating costs. As a result of the factors discussed above, total operating costs increased 3.7%
from R$277.9 million in 2005 to R$288.2 million in 2006. Of the total operating costs in 2006, 53.4% were
attributable to RBS-Zero Hora, 33.2% to TV Gaúcha, 9.5% to TV Florianópolis and 3.9% to Rádio Gaúcha.
The R$10.3 million increase in total operating costs is accounted for by a R$4.0 million, R$4.8 million, and
R$1.5 million increase in total operating costs for each of RBS-Zero Hora, TV Gaúcha, and Rádio Gaúcha,
respectively.
Gross profit
Gross profit in 2006 was R$442.9 million, representing a 12.1% increase over gross profit of R$395.1
million in 2005. As a percentage of operating revenues, gross profit equaled 60.6% in 2006 and 58.7% in
2005. Of gross profit in 2006, 57.6% is attributable to RBS-Zero Hora, 22.8% to TV Gaúcha, 15.4% to TV
Florianópolis and 4.2% to Rádio Gaúcha.
The R$47.8 million increase in gross profit is accounted for by increases in gross profit of R$18.8
million for RBS-Zero Hora, R$12.6 million for TV Gaúcha, R$15.5 million for TV Florianópolis, and R$0.9
million for Rádio Gaúcha.
54
Operating expenses
Selling. Selling expenses in 2006 were R$137.5 million, representing a 7.4% increase over selling
expenses of R$128.0 million in 2005. As a percentage of operating revenues, selling expenses equaled
18.8% in 2006 and 19.0% in 2005. Of selling expenses of R$137.5 million in 2006, 82.7% is attributable to
RBS-Zero Hora, 9.9% to TV Gaúcha, 4.3% to TV Florianópolis and 3.1% to Rádio Gaúcha.
Selling expenses for RBS Group companies consist of (a) payments to advertising agencies, including
agency bonuses based upon advertising revenue attributable to each agency, (b) expenditures for promotions
in magazines and other media forms, (c) expenditures on market research, promotional items and
sponsorship of promotional events, (d) salary, supplemental compensation and vacation payments made to
sales personnel, and (e) car rental, telephone, power, data communication, transportation and travel costs and
office expenditures attributable to the sales department.
The R$9.5 million increase in selling expenses is accounted for in part by a R$7.3 million increase in
RBS-Zero Hora selling expenses due to increased publicity expenses to launch “hagah” and Hora de Santa
Catarina, higher distribution costs and larger bonuses to its sales staff in 2006. There was also a R$2.2
million increase in selling expenses by TV Florianópolis, Rádio Gaúcha, and TV Gaúcha, collectively.
General and administrative. General and administrative expenses in 2006 were R$108.8 million,
representing a 32.0% increase over general and administrative expenses of R$82.4 million in 2005. As a
percentage of operating revenues, general and administrative expenses equaled 14.9% in 2006 and 12.2% in
2005. Of general and administrative expenses in 2006, 64.9% was attributable to RBS-Zero Hora, 19.0% to
TV Gaúcha, 10.5% to TV Florianópolis and 5.6% to Rádio Gaúcha.
The majority of general and administrative expenses consisted of salary, supplemental compensation
and vacation payments made to administrative personnel. In addition, general and administrative expenses
included car rental, telephone, power, data communication, transportation and travel costs and office
expenditures attributable to administrative personnel, as well as certain property taxes and taxes on financial
transactions.
The R$26.4 million increase in general and administrative expenses was primarily attributable to a
R$21.1 million increase at RBS-Zero Hora, including R$12.9 million increase in fees paid to other members
of the RBS Group for the use of their administrative departments, such as legal and human resources, an
increase in payments to employees due to a profits participation program and higher wages.
Financial income. Financial income increased to R$28.0 million in 2006 from R$17.4 million in 2005.
As a percentage of operating revenues, financial income equaled 3.8% in 2006 and 2.6% in 2005. The
increase in financial income resulted primarily from an adjustment in recoverable taxes and increased loans
to other RBS Group companies, resulting in increased interest income to the Credit Group.
Financial expenses. Financial expenses in 2006 were R$62.3 million, representing an 16.7% decrease
over financial expenses of R$74.8 million in 2005. As a percentage of operating revenues, financial
expenses equaled 8.5% in 2006 and 11.1% in 2005. The decrease in financial expenses was explained
principally by lower market interest rates overall in 2006 compared to 2005.
Other, net. Other operating income (expenses) decreased from R$0.3 million in 2005 to R$0.2 million
in 2006.
Total operating expenses, net. Total operating expenses in 2006 were R$289.0 million, representing a
4.0% increase over total operating expenses of R$278.0 million in 2005. As a percentage of operating
revenues, total operating expenses equaled 39.5% in 2006 and 41.3% in 2005. Of total operating expenses
in 2006, 75.2% are attributable to RBS-Zero Hora, 14.7% to TV Gaúcha, 6.4% to TV Florianópolis and
3.7% to Rádio Gaúcha.
Operating income
Operating income increased to R$153.8 million in 2006 from R$117.1 million in 2005.
percentage of operating revenues, operating income was 21.0% in 2006 and 17.4% in 2005.
55
As a
Non-operating income (loss)
Equity in the profits (losses) of subsidiaries. Equity in the losses of subsidiaries was R$1.7 million in
2006, while equity in the profits of subsidiaries was R$0.5 million in 2005. As a percentage of operating
revenues, equity in the loss of subsidiaries was 0.2% in 2006 and equity in the profit of subsidiaries was
0.1% in 2005.
Provision for losses in investments. Provision for losses in investments relates exclusively to the
operations of the Issuer, as discussed above. Provision for losses in investments of R$0.5 million was
reversed in 2006, while provision for losses in investments of R$2.7 million was established in 2005.
Non-operating income (loss), net. Non-operating income (loss) increased to a loss of R$2.6 million in
2006 from a loss of R$2.1 million in 2005. As a percentage of operating revenues, non-operating loss in
2006 was 0.4% and 0.3% in 2005.
Income before taxes on income
Income before taxes on income increased to an income of R$149.9 million in 2006 from an income of
R$112.8 million in 2005. As a percentage of operating revenues, income before taxes on income equaled
20.5% in 2006 and 16.8% in 2005. Of the 2006 income before taxes on income, 23.7% was attributable to
RBS-Zero Hora, 37.9% to TV Gaúcha, 33.1% to TV Florianópolis and 5.3% to Rádio Gaúcha.
The increase in income before taxes on income resulted from a R$13.9 million increase for RBS-Zero
Hora, a R$10.7 million increase for TV Gaúcha, a R$12.8 million increase for TV Florianópolis, and a
R$0.2 million decrease for Rádio Gaúcha.
Non-operating expenses
Social contribution. Social contribution increased to R$14.7 million in 2006 from R$8.9 million in
2005. Social contribution was an expense in both 2006 and 2005 because the Issuer and the Guarantors
collectively recorded pre-tax income of R$149.9 million in 2006 and R$112.8 million in 2005.
Income tax. Income tax increased to an expense of R$23.3 million in 2006 from an expense of R$15.9
million in 2005. As a percentage of operating revenues, income tax equaled 3.2% in 2006 and 2.4% in 2005.
Net income for the year
Net income increased to a profit of R$111.9 million in 2006 from R$88.0 million in 2005. As a
percentage of operating revenues, net income equaled 15.3% in 2006 and 13.1% in 2005. Of net income of
in 2006, 19.2% is attributable to RBS-Zero Hora, 43.6% to TV Gaúcha, 31.9% to TV Florianópolis and
5.2% to Rádio Gaúcha.
Results of operations for the years ended December 31, 2005 and 2004
Operating revenues
Advertising. Advertising revenue in 2005 was R$429.6 million, representing a 20.5% increase over
advertising revenues of R$356.5 million in 2004. As a percentage of operating revenue, advertising revenue
was 63.8% in 2005 and 62.2% in 2004.
Of the combined increase of R$73.1 million, RBS-Zero Hora accounted for R$20.7 million and Rádio
Gaúcha for R$3.9 million, and TV Florianópolis and TV Gaúcha combined for R$48.5 million.
The increase in advertising revenue between the 2005 and 2004 periods is a direct result of the recovery
of the advertising market that began in 2002, as well as national advertising sold by TV Globo, which
accounted for R$29.4 million of the R$48.5 million increase.
Revenues from the line items “classified advertisements”, “circulation”, “subscriptions” and “other”
relate exclusively to the operations of the Issuer, as discussed above.
56
Taxes on revenues. Taxes on revenues were R$26.6 million in 2005, a 15.7% increase over taxes on
revenues of R$23.0 million in 2004, reflecting revenue growth between 2004 and 2005. As a percentage of
operating revenues, taxes on revenues equaled 3.9% in 2005 and 4.0% in 2004.
Total operating revenues. For the reasons explained above, total operating revenues of R$673.0 million
in 2005 represented a 17.3% increase over total operating revenues of R$573.5 million in 2004. Of total
operating revenues of R$673.0 million in 2005, 57.4% are attributable to RBS-Zero Hora, 26.6% to TV
Gaúcha, 11.9% to TV Florianópolis and 4.1% to Rádio Gaúcha.
Of the combined net increase of R$99.5 million, RBS-Zero Hora accounted for R$48.9 million, Rádio
Gaúcha for R$3.7 million and TV Florianópolis and TV Gaúcha combined for R$46.9 million.
Operating costs
Raw materials. Costs from raw materials relate exclusively to the operations of the Issuer, as discussed
above. Raw materials costs in 2005 were R$73.1 million, representing a 2.4% increase over raw materials
costs of R$71.3 million in 2004. As a percentage of operating revenues, raw materials costs were 10.9% in
2005 and 12.4% in 2004.
Promotional events, programming and sales. Promotional events, programming and sales costs in 2005
were R$79.3 million, representing a 22.5% increase over such costs of R$64.8 million in 2004. As a
percentage of operating revenues, promotional events, programming and sales costs were 11.8% in 2005 and
11.3% in 2004. Of promotional events, programming and sales costs in 2005, 69.5% were attributable to TV
Gaúcha and 19.7% to TV Florianópolis.
The increase in promotional events, programming and sales costs between the two years principally
resulted from the launch of the Globaltec event in 2005. In addition, programming costs of TV Gaúcha and
TV Florianópolis increased in proportion to increases in their revenues.
Personnel. Operating personnel costs in 2005 were R$78.0 million, representing a 2.0% increase over
operating personnel costs of R$76.4 million in 2004. As a percentage of operating revenues, operating
personnel costs were 11.6% in 2005 and 13.3% in 2004. Of operating personnel costs in 2005, 57.4% were
attributable to RBS-Zero Hora, 28.1% to TV Gaúcha, 5.9% to TV Florianópolis and 8.6% to Rádio Gaúcha.
The R$1.6 million increase in operating personnel costs is accounted for primarily by a R$1.3 million
increase in operating personnel costs for RBS-Zero Hora, a R$0.5 million increase for TV Gaúcha and a
R$0.3 million increase for TV Florianópolis. The increase in operating personnel costs is mostly due to
increased employee salaries reflecting the terms of the existing collective bargaining agreement.
Depreciation. Depreciation was R$11.4 million in 2005, representing a 27.8% decrease compared to
depreciation of R$15.8 million in 2004. As a percentage of operating revenues, depreciation was 1.7% in
2005 and 2.8% in 2004. The decrease in depreciation was principally due to the revision in the rate of
depreciation for improvements made to buildings used by members of the Credit Group but belonging to
other members of the RBS Group and adjustments to the depreciation rate. Of the decrease in depreciation,
R$4.2 million is attributable to RBS-Zero Hora, and R$1.3 million is attributable to TV Gaúcha. This
decrease is partially offset by a R$1.2 million increase in depreciation for TV Florianópolis.
Royalties. Royalties costs in 2005 were R$17.6 million, representing a 6.4% decrease over royalties
costs of R$18.8 million in 2004. As a percentage of operating revenues, royalties costs were 2.6% in 2005
and 3.3% in 2004. Of royalties costs in 2005, 52.8% is attributable to RBS-Zero Hora, 29.5% to TV
Gaúcha, 13.1% to TV Florianópolis and 4.6% to Rádio Gaúcha. Royalties costs decreased in 2005 as a
result of the Credit Group’s prepayment, on September 24, 2004, of royalties to be incurred from January 1,
2005 through December 31, 2014. The prepayment was calculated as the net present value of the royalties
on the projected net operating revenues of the Credit Group for the period.
Other. Other operating costs in 2005 were R$18.6 million, a 13.0% increase over other operating costs
of R$16.5 million in 2004. As a percentage of operating revenues, other operating costs were 2.8% in 2005
and 2.9% in 2004. Of other operating costs in 2005, 51.6% is attributable to RBS-Zero Hora, 26.3% to TV
Gaúcha, 14.6% to TV Florianópolis and 7.5% to Rádio Gaúcha.
57
Total operating costs. As a result of the factors discussed above, total operating costs increased 5.5% to
R$277.9 million in 2005 from R$263.5 million in 2004. Of total operating costs in 2005, 53.9% is
attributable to RBS-Zero Hora, 32.7% to TV Gaúcha, 9.9% to TV Florianópolis and 3.5% to Rádio Gaúcha.
The R$14.4 million increase in total operating costs is accounted for by an R$9.0 million increase in
total operating costs for TV Gaúcha, a R$6.2 million increase in total operating costs for TV Florianópolis, a
R$0.6 million decrease in total operating costs for RBS-Zero Hora, and a R$0.2 million decrease in total
operating costs for Rádio Gaúcha.
Gross profit
Gross profit in 2005 was R$395.1 million, representing a 27.5% increase over gross profit of R$310.0
million in 2004. As a percentage of operating revenues, gross profit equaled 58.7% in 2005 and 54.1% in
2004. Of gross profit in 2005, 59.9% was attributable to RBS-Zero Hora, 22.4% to TV Gaúcha, 13.3% to
TV Florianópolis and 4.5% to Rádio Gaúcha.
The R$85.1 million increase in gross profit is accounted for by a R$49.5 million increase in gross profit
at RBS-Zero Hora, a R$3.9 million increase for Rádio Gaúcha, a R$20.8 million increase for TV Gaúcha
and a R$10.9 million increase for TV Florianópolis.
Operating expenses
Selling. Selling expenses in 2005 were R$128.0 million, representing a 3.4% increase over selling
expenses of R$123.8 million in 2004. As a percentage of operating revenues, selling expenses equaled
19.0% in 2005 and 21.6% in 2004. Of selling expenses of R$128.0 million in 2005, 83.2% is attributable to
RBS-Zero Hora, 10.4% to TV Gaúcha, 3.9% to TV Florianópolis and 2.5% to Rádio Gaúcha.
The R$4.2 million increase in selling expenses is accounted for primarily by a R$4.2 million increase in
selling expenses at RBS-Zero Hora. The increase in selling expenses was principally a consequence of an
increase in bonuses paid to sales staff and higher costs associated with the increased circulation of the
Issuer’s newspapers.
General and administrative. General and administrative expenses in 2005 were R$82.4 million,
representing a 12.2% increase over general and administrative expenses of R$73.4 million in 2004. As a
percentage of operating revenues, general and administrative expenses equaled 12.2% in 2005 and 12.8% in
2004. Of general and administrative expenses in 2005, 60.1% is attributable to RBS-Zero Hora, 20.2% to
TV Gaúcha, 12.2% to TV Florianópolis and 7.5% to Rádio Gaúcha.
The R$9.0 million increase in general and administrative expenses is accounted for by a R$4.1 million
increase at RBS-Zero Hora, a R$2.2 million increase in general and administrative expenses at TV
Florianópolis, R$2.5 million increase at TV Gaúcha and R$0.2 million increase at Rádio Gaúcha. The
increase in general and administrative expenses is mainly related to increased employee salaries and benefits
reflecting the terms of the existing collective bargaining agreement.
Financial income. Financial income in 2005 was R$17.4 million, representing a 105.2% increase over
financial income of R$8.5 million in 2004. As a percentage of operating revenues, financial income equaled
2.6% in 2005 and 1.5% in 2004. The increase in financial income is primarily due to an increase in interest
income received from RBS Participações as a result of loans to RBS Participações in 2005 following RBSZero Hora’s exchange of Existing Notes for RBS Par Notes in 2004.
Financial expenses. Financial expenses in 2005 were R$74.8 million, while financial expenses in 2004
were R$27.7 million. As a percentage of operating revenues, financial expenses equaled 11.1% in 2005 and
4.8% in 2004. The increase in financial expenses is explained principally by RBS-Zero Hora’s incursion of
a full year’s interest expense in 2005 as a result of its exchange of Existing Notes for the RBS Par Notes in
August, 2004. See “—RBS Group Financial reprofiling.
Other, net. Other, net represented income of R$0.3 million in 2005.
Total operating expenses, net. Total operating expenses in 2005 were R$278.0 million, representing a
21.5% increase over total operating expenses of R$228.9 million in 2004. As a percentage of operating
58
revenues, total operating expenses equaled 41.3% of operating revenues in 2005 and 39.9% of operating
revenues in 2004. Of total operating expenses of R$278.0 million in 2005, 76.0% were attributable to RBSZero Hora, 15.2% to TV Gaúcha, 5.4% to TV Florianópolis and 3.4% to Rádio Gaúcha.
The increase of R$49.1 million in total operating expenses is accounted for by a R$38.8 million
increase at RBS-Zero Hora, a R$8.2 million increase at TV Gaúcha, and R$2.2 million increase at TV
Florianópolis. The increase in total operating expenses for the four companies on a combined basis is due
principally to the reasons explained above.
Operating income
Operating profit in 2005 was R$117.1 million while operating profit in 2004 was R$81.1 million. As a
percentage of operating revenues, operating profit was 17.4% in 2005 and 14.1% in 2004.
The R$36.0 million increase of operating profit is accounted for by an increase of R$10.7 million at
RBS-Zero Hora, an increase of R$12.5 million at TV Gaúcha, an increase of R$8.7 million at TV
Florianópolis, and an increase of R$4.0 million at Rádio Gaúcha.
Non-operating income (loss)
Equity in the profits of subsidiaries. Equity in the profits of subsidiaries in 2005 was R$0.5 million.
Equity in the profit of subsidiaries was 0.1% of operating revenues in 2005.
Provision for losses in investments. Provision for losses in investments relates exclusively to the
operations of the Issuer, as discussed above. Provision for losses in investments in 2005 was R$2.7 million,
and R$6.6 million in 2004. As a percentage of operating revenues, provision for losses in investments was
0.4% in 2005 and 1.2% in 2004.
Non-operating income (loss), net. Non-operating income (loss) increased to a loss of R$2.1 million in
2005. As a percentage of operating revenues, non-operating income (loss) was 0.3% in 2005.
Income before taxes on income
Profit before taxes on income in 2005 was R$112.8 million, while profit before taxes on income in
2004 was R$74.8 million. As a percentage of operating revenues, profit before taxes on income equaled
16.8% in 2005 and 13.0% in 2004.
The R$38.0 million increase in profit before taxes on income is accounted for by increases in profits
before taxes on income of R$13.5 million at RBS-Zero Hora, R$12.5 million at TV Gaúcha, R$8.1 million
at TV Florianópolis, R$3.8 million at Rádio Gaúcha.
Non-operating expenses
Social contribution. Social contribution in 2005 was an expense of R$8.9 million, while social
contribution in 2004 was an expense of R$7.4 million. As a percentage of operating revenues, social
contribution represented 1.3% in both 2005 and in 2004.
Income tax. Income tax was an expense of R$15.9 million in 2005 and an expense of R$9.4 million in
2004. As a percentage of operating revenues, income tax equaled 2.4% in 2005 and 1.6% in 2004.
Net income for the year
Net profit in 2005 was R$88.0 million, while net income in 2004 was R$57.9 million. As a percentage
of operating revenues, net profit equaled 13.1% in 2005 while net income in 2004 was 10.1%. The net profit
in 2005 is accounted for by a R$36.9 million net profit for TV Gaúcha, R$25.2 million net profit for TV
Florianópolis, R$20.3 million net profit for RBS-Zero Hora, and R$5.5 million net profit for Rádio Gaúcha.
Liquidity and capital resources
The primary source of liquidity for the Issuer and each of the Guarantors is cash provided by operations
of the Issuer or the respective Guarantor, as the case may be.
59
The primary liquidity needs of the Issuer and the Guarantors are working capital, capital expenditures
for new property, plants and equipment, dividends and, to a lesser extent, debt service. Capital expenditures
and investments for the Issuer and the Guarantors on a combined basis were R$83.6 million in 2006, R$22.0
million in 2005 and R$16.3 million in 2004. Capital expenditures and investments in 2006 consisted
principally of the acquisition of A Notícia for R$52.6 million as well as the acquisition of machinery and
equipment. Capital expenditures and investments in 2005 and 2004 consisted principally of the acquisition
of machinery and equipment.
Management of the Issuer and the Guarantors expect that capital expenditures on a combined basis will
be approximately R$65 million in 2007.
The operations of the Issuer and the Guarantors on a combined basis generated financial resources
(defined as working capital, which consists of current assets less current liabilities) of R$207.6 million in
2006, R$172.9 million in 2005 and R$249.7 million in 2004.
During the next few years, RBS-Zero Hora and TV Gaúcha will be required to repay principal and
accrued interest on existing indebtedness as follows (TV Florianópolis and Rádio Gaúcha do not have
material existing indebtedness):
As of December 31, 2006
(in thousands of R$)
2007
2008
2009
2010
RBS-Zero Hora ................................................................70.5
TV Gaúcha................................................................
16.9
24.1
30.1
24.1
30.1
131.5
TV Florianópolis................................................................3.7
12.4
12.4
12.3
66.6
66.6
167.10
1
Total ................................................................
(1)
91.1
23.3
Does not take into account the tender offer for Existing Notes being made concurrently with this offer of Notes.
The shareholders of the RBS Group have entered into certain agreements regarding the payment of
dividends by RBS Par, the Issuer, the Guarantors and the other RBS Group companies. The Issuer and the
Guarantors do not expect to be required by the shareholders to pay dividends if they have liquidity needs. In
addition, the ability of the Issuer and the Guarantors to pay dividends is restricted by the terms of certain
indebtedness of the Issuer and the Guarantors.
Capital Expenditures
The Credit Group’s net principal capital expenditures in the past several years have been mainly to
maintain its current activities by replacing or technologically updating equipment. The following table sets
forth the Credit Group’s capital expenditures for the three years ended December 31, 2006, 2005 and 2004
and the periods ended March 31, 2007 and 2006.
60
Capital Expenditures
Plant and equipment
Information Technology Equipment
Softwares
Vehicles
Assets and fixtures
Fixed assets in progress
Construction in progress
Land
Other
Improvments to third party properties
Towers and Antennas
Total Capital Expenditures
Year Ended December 31,
2006
2005
2004
(in R$ millions)
9.699
12.726
7.735
4.909
4.145
1.703
4.930
3.578
958
2.542
1.301
941
1.433
694
899
2.155
(1.670)
861
1.713
456
587
2.766
55
557
82
676
55
203
137
30
315
31.015
21.870
14.283
(unaudited)
March 31,
2007
2006
2.261
1.875
1.046
405
346
1.012
508
3
568
18
93
8.137
2.483
811
947
880
439
1.338
63
66
292
3
7.322
Source: Prepared by the accounting department of the RBS Group.
The Credit Group currently plans additional capital expenditures of approximately R$57 million
through the end of 2007 and approximately R$91 million in 2008. The main investments in 2007 are
expected to be approximately R$12 million in newspaper facilities and R$12 million related to Digital
Television. Some of these investments, in the amount of approximately R$25 million, are contractually
committed, and the Credit Group has already invested R$8 million during the first quarter of 2007. The
R$26 million increase in the Credit Group’s proposed capital investments in 2008 compared to 2007 results
from its plan to build a new newspaper printing facility in Porto Alegre in 2008.
Indebtedness
See Note 14 to the Credit Group Financial Statements.
Off-Balance Sheet Arrangements
The Credit Group companies have an obligation of R$12 million to RBSPREV – Sociedade
Previdenciária, a non-profit private pension entity that manages pension plans according to the Benefits Plan
Regulation (Regulamento do Plano de Benefícios). Under an agreement executed in January 2002, the Credit
Group companies must pay RBSPREV – Sociedade Previdenciária for past services rendered through
December 31, 2001 by retired employees. Such debt is being amortized in equal and consecutive monthly
installments. The last installment is due in 2017.
The Issuer has no majority-owned subsidiaries that are not included in its financial statements, nor does
it have any interests in, or relationships with, any special purpose entities that are not reflected in its financial
statements.
Under Brazilian GAAP, the Issuer does not record its lease obligations that will become due in the
future in its financial statements. The Issuer currently does not have non-cancellable purchase commitments.
Quantitative and Qualitative Disclosures About Market Risks
The main risks inherent in the Credit Group’s market risk-sensitive instruments and positions are
adverse changes to interest rates and the real/U.S. dollar exchange rate.
Interest rate. The Credit Group’s results are affected by changes in interest rates due to their impact on
interest expense from variable-rate debt instruments and on interest income generated from the Issuer’s cash
and investment balances. As of December 31, 2006, the Credit Group had R$391.6 million of indebtedness,
61
and all of the Issuer’s indebtedness had (or was swapped for) floating interest rates. If interest rates in 2007
change by 10% when compared to 2006, the Credit Group’s financial results would be impacted by
approximately R$7.0 million. These amounts are determined by considering the impact of the hypothetical
interest rates on the Issuer’s variable-rate debt and cash equivalent balances at December 31, 2006.
Foreign Currencies. As of December 31, 2006, the Credit Group had R$156.3 million of indebtedness
denominated in U.S. dollars. The Credit Group has a policy of hedging its U.S. dollar debt exposure. As a
measure of the Credit Group’s market risk with respect to its foreign currency exposure, the Credit Group
would incur an additional R$3.0 million in financial expenses from a hypothetical 10% devaluation of the
real against the U.S. dollar. This variation would have a direct impact in the Credit Group’s cash equivalent
balances.
Recent developments
The Issuer’s operating revenues increased 9.3% from R$94.4 million in the first quarter of 2006 to
R$103.2 million in the first quarter of 2007. The increase is primarily due to increased advertising sales and
subscriptions due to the launch of Hora de Santa Catarina and the acquisition of A Notícia. Operating costs
increased 17.6% from R$34.2 million in the first three-months of 2006 to R$40.2 million for the same period
of 2007, primarily due to higher costs relating to the two newspapers and a new event which took place in
early 2007 in Florianópolis, called Floripa Tem. As a result of these factors, gross profit increased 4.6%,
from R$60.2 million during the first quarter of 2006 to R$62.9 million during the first quarter of 2007.
Operating expenses increased 19.1%, from R$47.9 million in the first three-months of 2006 to R$57.0
million in the first three-months of 2007, primarily due to increased costs relating to the two newspapers. As
a result, the Issuer’s operating income decreased 51.8%, from R$12.3 million in the first quarter of 2006 to
R$5.9 million in the first quarter of 2007, and net income for the period decreased 44.6%, from R$7.0
million in the first three-months of 2006 to R$3.9 million in the first three-months of 2007. As a percentage
of operating revenues, net income during the first quarter of 2006 was 7.4%, compared to 3.8% for the same
period in 2007.
For the combined Credit Group, operating revenues increased 6.7% from R$168.2 million in the first
quarter of 2006 to R$179.5 million in the first quarter of 2007, principally due to increases in advertising
sales and subscriptions due to the launch of Hora de Santa Catarina and the acquisition of A Notícia. In the
same periods, operating costs for the combined Credit Group increased 16.5% from R$65.4 million to
R$76.2 million, primarily due to an increase in the costs relating to the two newspapers, a new event which
took place in early 2007 in Florianópolis called Floripa Tem, and increase in Globo Cost from TV Gaúcha
and TV Florianópolis. As a result of these factors, gross profit increased 0.5%, from R$102.8 million during
the first quarter of 2006 to R$103.4 million during the first quarter of 2007, of which 60.8% is attributable to
the Issuer. Operating expenses for the combined Credit Group increased 14.9%, from R$65.1 million in the
first quarter of 2006 to R$74.8 million in the first quarter of 2007, primarily due to higher costs relating to
the two new newspapers. As a result, operating income for the combined Issuer and Guarantors decreased
from R$37.7 million in the first quarter of 2006 to R$28.6 million in the first quarter of 2007. Net income
for the period for the Credit Group decreased 26.2%, from R$26.3 million in the first quarter of 2006 to
R$19.4 million in the first quarter of 2007, of which 20.0% is attributable to the Issuer.
Capital expenditures and investments for the Credit Group on a combined basis was R$8.2 million
during the first quarter of 2007 (compared to R$7.3 million for the same period in 2006), and consisted
principally of expenditures on plant and equipment and information technology. Net financial resources
provided by operations of the Credit Group on a combined basis was R$28.3 million during the first quarter
of 2007 (compared to R$45.7 million for the same period in 2006).
Combined total assets for the Credit Group increased 21.5%, from R$779.7 million on March 31, 2006
to R$947.6 million on March 31, 2007. As of March 31, 2007, the Issuer and the Guarantors on a combined
basis had R$580.8 million total debt outstanding, compared to R$611.9 million at year-end 2006 and
R$465.8 million on March 31, 2006. The increase in total debt between March 31, 2006 and December 31,
2006 is attributed to a R$100 million loan, executed in November 2006, to TV Gaúcha and TV Florianópolis
which has been used to pay the debt according to its scheduled amortization. The decrease in total debt by
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R$31 million during the three-months ended March 31, 2007 is attributed to the payment of wages, bonuses,
suppliers and other debts in such three-month period.
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OVERVIEW OF THE MEDIA MARKET IN BRAZIL
Newspapers
Daily newspapers play an important role in the Brazilian media market. According to the report
published in 2005 by the World Association of Newspaper, Brazil is the 9th highest-ranked country in the
world in terms of circulation of daily newspapers, with approximately 6,522,000 copies circulated per day in
this year. Advertising in newspapers in 2006 accounted for 16% of all advertising revenues in Brazil as
reported by Projeto Inter-Meios (“Projeto Inter-Meios”), an independent Brazilian media industry group
founded in 1990 that collects information from market participants on a voluntary basis for statistical and
marketing purposes. The newspapers with the highest average paid circulation in Brazil as reported by IVC,
Extra, Folha de São Paulo, O Estado de São Paulo and O Globo, are published in Rio de Janeiro or São
Paulo and are sold principally in their respective states of publication, with a limited amount being sold
nationwide, according to IVC. Folha de São Paulo and O Estado de São Paulo are published by independent
companies, and Extra and O Globo are published by Editora Globo S.A. (“Editora Globo”), a subsidiary of
Globopar and an affiliate of TV Globo.
Broadcast television
The media industry in Brazil is dominated by broadcast television. Brazilian broadcast television has
among the highest prime-time ratings in the world, according to Nielsen reports, a worldwide ratings
company. Based on data collected in 2006 by the Economist Intelligence Unit, the business information unit
of the Economist Group, publisher of “The Economist” (the “EIU”), Brazil had approximately 352 television
sets per 1,000 persons, compared to 854 in the United States, 340 in Argentina, 289 in Mexico and 246 in
Chile. Estimates provided by the EIU for 2003 show Brazil with 372 television sets per 1,000 persons,
compared to 857 in the United States, 338 in Argentina, 300 in Mexico and 255 in Chile. Advertising on
broadcast television programs in 2006 accounted for 59.4% of all advertising revenues in Brazil, including
revenues related to non-media forms of advertising, according to figures published by Projeto Inter-Meios.
Broadcast television in Brazil is dominated by the Globo Network, the network of television stations in
Brazil which carry the broadcast signal provided by TV Globo. The Globo Network has an average
nationwide broadcast television audience share of 50% and an average prime-time audience share of 59%,
40% throughout the morning, 46% in the afternoon and 58% for late-night hours, according to estimates
published by IBOPE in March 2007. The SBT, Record, Bandeirantes and Rede TV networks account for
approximately 15%, 14%, 4% and 3% of the average nationwide broadcast television audience share,
respectively, according to estimates published by IBOPE March 2007. The majority of the remaining 14% is
captured by broadcasts by independent local television stations operating out of single locations.
Radio
Radio is a popular means of mass communication in Brazil with advertising on radio in 2006
accounting for 4% of all advertising revenues in Brazil, based on figures reported by Projeto Inter-Meios. At
December 31, 2006, there were 335 radio stations in Rio Grande do Sul and 194 in Santa Catarina, as
reported by Anatel. The majority of radio stations are independent and are principally focused on musical
programming. However, there are some large radio networks operating throughout Brazil, including
Bandeirantes, Jovem Pan and Rádio Globo, all networks of AM and FM stations, the latter being affiliated
with TV Globo. Such networks produce both music and news programming.
Magazines
Magazines constitute an important element of the media market in Brazil. In 2006, advertising in
magazines accounted for 8.6% of all advertising revenues in Brazil, based on figures reported by Projeto
Inter-Meios. The magazine market is dominated by Editora Abril S.A. (“Editora Abril”), a publishing
company based in São Paulo.
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Subscriber television
Pay-TV and cable modem broadband services are predominantly provided by Net Serviços, a public
company. Net Serviços is the largest pay-TV multi-operator in Brazil. It operates the “NET” brand in some
of Brazil’s major cities, including São Paulo, Rio de Janeiro, Belo Horizonte and Porto Alegre. Net Serviços
has a subscriber base of 1.5 million people and its cable network extends more than 36,000 kilometers,
running through nearly 6.6 million homes. Net Serviços also offers broadband internet services through its
“VÍRTUA” brand name as well as data communication and multimedia services for the corporate network
through “VICOM”.
Televisão Abril S.A. (“TVA”), controlled and operated by Editora Abril, operate a cable system in the
Cities of São Paulo, Rio de Janeiro, Curitiba, Florianópolis and Camboriú, among others. Other additional
operators offer cable and MMDS (Multi-Point, Multi-Channel Distribution Service or “MMDS”) services,
each operating in one or two smaller cities. In addition to the cable and MMDS operators, there are other
companies, such as “Sky” and “DirecTV”, operating satellite DTH (Direct to Home) licenses, which have
national coverage and therefore are strong competitors for Net Serviços.
According to the Agência Nacional de Telecomunicações (the National Telecommunications Agency or
“Anatel”), in 2007 there were 137 pay-TV operators in Brazil, among all technologies. Net Serviços
accounted for 63%.
The media industry in the RBS Group’s Service Territory
The media industry in the States of Rio Grande do Sul and Santa Catarina is focused on broadcast
television and radio, newspapers and subscriber television. The RBS Group believes that the relatively
higher income and educational levels of the inhabitants of the Service Territory result in a more developed
market for the newspapers published by RBS-Zero Hora, and for its news radio stations, including Rádio
Gaúcha. As in the rest of the country, the television market is dominated by programming of TV Globo, and
the RBS Group’s VHF broadcast television companies are the exclusive affiliates of the Globo Network in
the Service Territory, including TV Gaúcha and TV Florianópolis.
Digital television in Brazil
Digital television in Brazil is currently being implemented. Standards have already been established,
and in June, 2006 the various requirements that each Brazilian network has to fulfill were agreed upon and a
timeline was created. The RBS Group is following the same timeline used by the Globo Network. The first
digital television transmissions in Brazil are expected to occur in December 2007.
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BUSINESS
The RBS Group
Introduction
The Issuer and the Guarantors are part of Rede Brasil Sul (Southern Brazil Network, referred to herein
as the RBS Network), one of the largest multimedia networks in Brazil. The RBS Network operates
primarily in southern Brazil, in the States of Rio Grande do Sul and Santa Catarina (collectively, the
“Service Territory”). These two states have a combined population of approximately 16 million people,
representing approximately 9% of the Brazilian population, and its inhabitants are considered to be relatively
more prosperous and well-educated than the rest of the country. See “Business — The RBS Group — The
RBS Network Service Territory”. The RBS Network includes 18 VHF television stations, all transmitting
content provided by the Globo television network (the “Globo Network”), the largest television network in
Brazil and South America. In addition, the RBS Network together includes two community content
channels distributed through UHF (ultra high frequency) and/or pay television and a rural-oriented channel
(Canal Rural) distributed throughout Brazil through DTH (direct to home), cable and open satellite, 21 FM
radio stations, five AM radio stations, eight daily newspapers and an internet portal website that integrates
content from the TV, radio and newspaper businesses of the RBS Network and a content search portal,
“hagah”, that provides local consumer information for the regions it serves.
The RBS Network began with the acquisition in 1957 of an interest in Rádio Gaúcha, an AM news
radio station in the City of Porto Alegre, by Maurício Sirotsky Sobrinho, who was then a radio show host for
the station. Since that time, the Network has expanded beyond the City of Porto Alegre throughout the south
of Brazil, and has become a leader in major media fields in its Service Territory. See “Business — The RBS
Group — History”.
The RBS Network includes companies that are part of the RBS Group as well as certain affiliated
companies associated with TV Gaúcha, TV Florianópolis, Rádio Atlântida FM de Porto Alegre and Rádio
Itapema FM de Florianópolis. The “RBS Group” refers to a group of media companies under common
ownership and management. The term “RBS Network” refers to the companies that are part of the RBS
Group, plus affiliated media companies owned by members of the controlling shareholder families of the
RBS Group (other than those members indirectly controlling RBS Comunicações S.A. and its subsidiaries).
In 2005, the RBS Group was reorganized, and RBS Comunicações S.A. was established for the purpose of
integrating the Group’s main businesses, as a means to create a more efficient management structure. RBS
Comunicações will be the platform through which the RBS Group expects to implement long-term strategic
plans for expansion and development. RBS Comunicações S.A. (“RBS Comunicações”) is jointly owned by
IMAH Participações Ltda. (“IMAH Par”), JAMAH Participações Ltda. (“JAMAH Par”) and FECH
Participações Ltda. (“FECH Par”), holding companies representing the families of Maurício Sirotsky
Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, respectively. Its core businesses are
currently organized under two primary subsidiaries — RBS TV Participações S.A. and RBS Radio
Participações — with the expectation that RBS-Zero Hora, RBS Participações S.A. (“RBS Par”), RBS
Administração e Cobranças (“RBS A&C”) and other RBS Group companies will be integrated into RBS
Comunicações S.A. in the future. Each of RBS TV Participações and RBS Radio Participações functions as
a subsidiary holding company for the Group’s individual television and radio stations while RBS-Zero Hora
holds the RBS Group’s interests in newspapers. Not included within the RBS Group, but a significant part
of the RBS Network, are 14 television stations and 21 radio stations owned by affiliates but which form part
of the RBS Network through programming assignment agreements. See “Management and Ownership
Structure”.
Operationally, the activities of each of the companies of the RBS Group are controlled by the Executive
Committee, which generally meets every week in Porto Alegre. The Executive Committee is appointed by
the Board of Directors to manage the Group’s constituent companies. See “Management and Ownership
Structure”.
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According to RBS Network’s statistics, the network is currently the third-largest media group in Brazil
as measured by revenue and the leading provider of multimedia services in the Service Territory. The RBS
Network’s VHF television stations operating in the Porto Alegre and Florianópolis metropolitan regions, the
largest population centers of the States of Rio Grande do Sul and Santa Catarina, respectively, are the most
watched television stations in their respective metropolitan regions, with average audience shares of
broadcast television viewership of 63% and 64%, respectively, for the period between 6pm and 12am.
Likewise, the RBS Network’s eight newspapers, in aggregate, are the most widely-read newspapers in the
Service Territory (as a percentage of the population) and the second most widely-circulated in Brazil (in
terms of the number of newspapers). The RBS Network’s principal segments of radio broadcasting
operations are news/sports, youth-oriented music, popular music and adult contemporary music
programming. The Network’s AM and FM radio stations operating in the Porto Alegre metropolitan region,
the largest population center of the Service Territory, have aggregate audience shares of 67% and 28%,
respectively, comprising in each case an audience share that is larger than that of any of their competitors.
The RBS Network also includes a multimedia internet portal, clic RBS, an internet services portal, “hagah”,
ViaLOG, a logistics distribution service business unit and a book publishing unit called RBS Publicaçóes.
All of the RBS Network’s 18 VHF television stations broadcast Globo Network programming regularly
and occasionally provide the Globo Network with local news. The RBS Network produces approximately
15% of the programming grid locally, maintaining high “lead-in” ratings for the local news programs.
As of December 31, 2006, the RBS Group had total assets of R$828 million. During 2006, the RBS
Group had net operating revenues of R$811 million and net income of R$142 million.
Prospective investors in the Notes should be aware that the Notes are not guaranteed by, nor do they
constitute obligations of, the RBS Network or the RBS Group generally but constitute obligations of RBSZero Hora, jointly and severally guaranteed by TV Gaúcha, TV Florianópolis and Rádio Gaúcha, the
businesses of which are described below.
The RBS Network Service Territory
The RBS Network’s Service Territory, comprising the southernmost Brazilian States of Rio Grande do
Sul and Santa Catarina, is relatively more prosperous and better educated than much of the rest of Brazil.
Rio Grande do Sul, with a population of 11.1 million, or 5.8% of the population of Brazil, accounts for
8.1% of the Gross Domestic Product (“GDP”) of Brazil, according to figures compiled by the Instituto
Brasileiro de Geografia e Estatística 2004 (the Brazilian Institute of Geography and Statistics or “IBGE”)
and Brasil em Foco 2007 (Target Marketing). The GDP per capita for Rio Grande do Sul is approximately
U.S.$6,453, as compared to approximately U.S.$4,665 for Brazil as a whole, according to figures compiled
by Brasil em Foco. Likewise, the literacy rate for Rio Grande do Sul is 82%, as compared to 78% for Brazil
as a whole, according to statistics published by IBGE in 2004.
Santa Catarina has a population of approximately 6.1 million, or 3.2% of the population of Brazil.
Santa Catarina accounts for 3.0% of the GDP of Brazil, with a GDP per capita of U.S.$5,801, according to
statistics compiled by IBGE for 2004. Likewise, the literacy rate for Santa Catarina is 85%, as estimated by
IBGE in 2004.
Business development strategy
The RBS Group’s primary strategic goal is to be one of the best media groups in Brazil operating at
world class standards. Embedded in the RBS Group’s corporate strategy is a focus on media and contentrelated businesses.
To reach this goal, the RBS Group decided to adopt the following main initiatives:
(i)
Financial performance: Reach and maintain targeted performance ratios and generate
significant cash flow, pursuing world class benchmarks in profitability and leverage;
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(ii)
Product and market: Achieve the highest standards of quality in programming and reporting
vis-à-vis its competitors in each media segment in which the RBS Group operates;
(iii)
Sustained growth: Pursue growth strategy from the core media businesses (newspaper,
television and radio) with new products and in new markets on an opportunistic basis in
Brazil’s southern, southeastern and central western regions, provided that such new
products or new markets contribute from the time of their introduction to the achievement
of the Group’s goals;
(iv)
Leadership position: To defend or protect its leadership in every market segment covered;
and
(v)
Community ties: Be a reference for every local community served, maintaining its strict
ethical principles.
The RBS Group seeks to maintain its leadership position by attracting and retaining the most important
media personalities in its Service Territory, by maintaining close ties with the communities in which it
operates and by encouraging entrepreneurial initiatives among its managerial staff. The RBS Group’s
business strategy is strongly-related to its unique ability to explore multimedia synergies. It believes that its
locally-based multimedia operating model, particularly in the radio and newspaper businesses, can be
successfully replicated in other markets beyond the current Service Territory. Therefore, the RBS Group
believes it can be seen as an attractive partner for Brazilian and foreign investors interested in the Brazilian
media markets.
History
The RBS Group was founded by Maurício Sirotsky Sobrinho, who began his career in the early 1940’s
as a radio announcer in the City of Passo Fundo, and joined Rádio Gaúcha in the City of Porto Alegre in
1950 as a radio show host (Rádio Gaúcha was incorporated on February 8, 1927). In 1957, Mr. Sirotsky
Sobrinho acquired a minority ownership interest in Rádio Gaúcha. On December 29, 1962, TV Gaúcha was
incorporated and began its operations in Porto Alegre, joining the Globo Network in 1965. In 1968, Mr.
Sirotsky Sobrinho, along with his brother Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, assumed
the corporate control of Rádio Gaúcha and TV Gaúcha and began operations under the name Rede Brasil
Sul. Maurício Sirotsky Sobrinho continued to play the central managerial role at the RBS Group until his
death in 1986.
In 1969, the RBS Group began to build its regional television network by opening a VHF television
station in the City of Caxias do Sul. In 1970, the RBS Group purchased the Zero Hora newspaper based in
Porto Alegre (the Issuer, which is the publisher of the Zero Hora newspaper, was incorporated and started its
operations on May 4, 1964) and continued expansion of its television network. In 1973, the RBS Group
established its FM-radio network. In 1979, Zero Hora began its classified advertisements section, and on
May 29, 1980, TV Florianópolis was incorporated and began its operations in the State of Santa Catarina. In
1986, the Group began operating the newspaper Diário Catarinense in the City of Florianópolis.
The RBS Group has expanded into the RBS Network, a network of 18 VHF television stations, two
UHF pay-TV stations focusing on community and rural content, 19 FM radio stations, five AM radio
stations and eight daily newspapers. In addition, in 1995 the RBS Group established a radio news network,
Gaúcha Sat, that broadcasts news programming to stations throughout Brazil. At December 31, 2006, there
were a total of 135 Gaúcha Sat affiliates operating throughout the country.
In 1992, the RBS Group and Globocabo formed a joint-venture to invest in pay-TV companies
operating under the name of “Net Sul”, with licenses to provide pay-TV services to 18 cities in the states of
Rio Grande do Sul and Santa Catarina. Distribution was initially through MMDS and, beginning in 1993,
also through cable. Net Sul expanded within such states and also throughout the state of Paraná and, by the
end of 1999, Net Sul was already operating in 24 cities, with over 300,000 subscribers. In 2000, Net Sul was
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merged into the Globocabo national platform. Globocabo later changed its name to Net Serviços. See “—
RBS A&C —Investments”. The RBS Group has since sold its investment in Net Serviços.
In 1996, the RBS Group ventured into the business of online services, acquiring a controlling interest in
“Nutec”, a regional internet service provider. Nutec quickly expanded and turned into the leading internet
portal in southern Brazil, under the brand name “ZAZ”. In 1999, the RBS Group merged ZAZ into Terra
Networks, the Latin-American interactive arm of Telefónica, the Spanish telecommunications company.
In 2000, the RBS Group formed RBS Interativa S.A., which consisted of a multimedia internet business
which integrated content from the TV, radio and newspaper businesses of the RBS Network with internet
services combined with a direct marketing business, rendering market analysis, consulting services and
precision marketing strategies. RBS Interativa S.A. was later spun-off, with the internet-based business
going to RBS Online and the direct market business to DIRECT. RBS Online was later merged into RBSZero Hora.
In 2001, the RBS Group formed ViaLOG, a division of RBS-Zero Hora, to take advantage of RBSZero Hora’s newspaper distribution network. ViaLOG offers logistics management services focusing on
printed material distribution, express delivery and e-commerce. Also in 2001, the RBS Group launched a
regional music record label, Orbeat, focusing on regional artists.
In 2002, the Group launched Orbeat Music and the newspaper Diario de Santa Maria, while in 2003
and 2004 the Itapema FM radio network was launched and Metro FM of Guaiba was acquired. Also in
2003, the RBS Group undertook a financial reprofiling to extend debt maturities and hedge exposure to
foreign currency liabilities.
In 2005, the RBS Group underwent a corporate shareholding reorganization, incorporating RBS
Comunicações to act as a holding company for the Group’s main operations. Additional consolidation under
RBS Comunicações is planned as conditions permit.
In 2006, the RBS Group launched “hagah”, Hora de Santa Catarina and acquired A Notícia.
Organizational structure
The core businesses of the RBS Network are structured as a group of closely held corporate entities,
with each corporate entity consisting of one television or radio station or one or more newspapers.
Ownership of these various corporate entities is divided among various individuals within the families of
Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa.
The RBS Group Executive Committee is a centralized advisory committee of persons nominated jointly
by the President and the Chief Executive Officer of the RBS Group, and approved by the RBS Group Board
of Directors, that sets policy for and advises the management of all RBS Group companies. See
“Management and Ownership Structure — The RBS Group Executive Committee”.
The RBS Group’s businesses are owned directly or indirectly by IMAH Participações Ltda. (“IMAH
Par”), JAMAH Participações Ltda. (“JAMAH Par”) and FECH Participações Ltda. (“FECH Par”), holding
companies representing the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto
de Souza Corrêa, respectively. The activities of these companies are managed by the RBS Group Executive
Committee. In 2005, the RBS Group incorporated RBS Comunicações with the objective of integrating the
main businesses of the RBS Group under a single holding company. The integration was commenced in
2006, and the RBS Group intends to complete the integration during 2007, including the integration under
RBS Comunicações of RBS-Zero Hora (the Issuer), RBS A&C and RBS Par, and certain other companies.
Operational framework
Generally, the companies that form part of the RBS Network largely exploit the synergies existing
among the different operations. There are numerous transactions between the various RBS Network
companies, many of which involve a free exchange of information or services in the ordinary course of
business. See “Related party transactions”.
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In this context, although each television or radio station is operated by a different closely-held corporate
entity, a substantial amount of support comes from the largest RBS Network television or radio station, as
the case may be, in the particular state, as well as from the centralized management team for the RBS
Network as a whole. For instance, TV Gaúcha, which owns and operates the largest television station in
Porto Alegre, and TV Florianópolis, which owns and operates the largest television station in Florianópolis,
provide the regional programming and advertising for all of the RBS Network’s television stations in the
States of Rio Grande do Sul and Santa Catarina, respectively, with each of the local stations preserving a
limited amount of programming and advertising space to be produced and commercialized through its
respective own staff.
Additionally, the newspaper business, consisting of eight titles, is owned and operated by the Issuer.
The Issuer acts as a news agency, making content available to all the newspapers operated by the Issuer, as
well as to the RBS Network’s television stations and radio news and sports stations, including Rádio
Gaúcha.
The RBS Network believes that its structure as an integrated network of media companies gives it an
operational advantage over many of its competitors. For instance, the sharing of programming and news
information by the RBS Network’s various stations and newspapers, and the provision of news content to the
various RBS Network companies, provides substantial economies of scale. Likewise, as part of its
marketing strategy, RBS Network companies generally allocate unsold advertising time to promote the
events sponsored by the RBS Network such as, e.g., the summer music festival “Planeta Atlântida”, one of
the largest events of its kind in Brazil.
The Issuer
Introduction
RBS-Zero Hora publishes the RBS Network’s eight newspapers, Zero Hora, Diário Gaúcho, O
Pioneiro and Diário de Santa Maria in the State of Rio Grande do Sul, plus Diário Catarinense, Jornal de
Santa Catarina, A Hora de Santa Catarina and A Notícia in the State of Santa Catarina. Together, the eight
newspapers had an aggregate average daily circulation of 493,125 copies in March 2007 which, according to
IVC, made RBS-Zero Hora Editora Jornalística S.A. the second largest newspaper publisher in Brazil by
quantity of copies circulated during the period. Daily circulation includes newspapers sold by subscription,
street vendors and at newsstands.
RBS-Zero Hora also serves as the informational hub for the RBS Network, making information
available to all the newspapers operated by the Issuer, as well as to the RBS Network’s television stations
and radio news and sports stations.
Furthermore, RBS-Zero Hora also operates ViaLOG, a logistics distribution service business unit, a
book publishing unit called RBS Publicações, as well as the internet-based businesses of the RBS Group,
including clicRBS, the multimedia internet portal website for the RBS Group that integrates content from the
TV, radio and newspaper businesses of the RBS Network with internet services, plus the service portal
“hagah” and “Kzuka”, a youth-oriented marketing company in the RBS Group.
Zero Hora. The Zero Hora newspaper is the most widely read newspaper in the state of Rio Grande do
Sul, according to data provided by IBOPE for 2006, as well as the newspaper with the sixth-largest daily
average paid circulation in Brazil for March 2007, according to calculations published by IVC. Zero Hora is
published in the Issuer’s industrial facilities located in the cities of Porto Alegre and Cruz Alta, and is
distributed throughout the State of Rio Grande do Sul and in several other major cities of Brazil and the
southern cone of South America. For March 2007, the circulation of Zero Hora was 162,452 copies on
weekdays and 251,297 copies on Sundays. According to data provided by IBOPE, updated until
November 2006, Zero Hora accounts for 38% of newspaper readership in Rio Grande do Sul, out of which
49% are in the upper social-economic segments of the local market (classes A/B).
Diário Gaúcho. Diário Gaúcho was launched in 2000 to target the middle-low social–economic
segments (classes B/C/D) of the Porto Alegre metropolitan region, which consists of approximately 90% of
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the population in this market. The newspaper was created both to serve a market segment not fully captured
by Zero Hora, thus fostering growth, and to serve as a gatekeeper to enhance competitiveness in the market,
neutralizing Zero Hora’s competitors’ growth opportunities. Diário Gaúcho’s strong identification with its
audience has made it the most widely-read newspaper in the Porto Alegre metropolitan region, with nearly
1,090,021 readers according to IBOPE, and accounts for 26% of newspaper readership in Rio Grande do Sul
(62% in the Porto Alegre Metro Area according to IBOPE). For March 2007, the circulation of Diário
Gaúcho was approximately 157,044 copies on weekdays. Diário Gaúcho is published in the City of Porto
Alegre on the same facility used to publish Zero Hora, and is distributed throughout the State of Rio Grande
do Sul.
O Pioneiro. O Pioneiro’s daily average circulation of approximately 24,370 copies covers 62 cities in
the metropolitan region of Caxias do Sul, the second most affluent region in the State of Rio Grande do Sul.
O Pioneiro newspaper reaches 264,138 readers according to IBOPE, representing 61%, according to IBOPE,
of newspaper readership of such market (data provided for 2006), out of which 39% are in the upper socialeconomic segments (classes A/B). For March 2007, the circulation of O Pioneiro was approximately 24,370
copies on weekdays. O Pioneiro is published at RBS-Zero Hora’s industrial facility located in the City of
Caxias do Sul.
Diário de Santa Maria. Diário de Santa Maria, which RBS-Zero Hora launched in 2002, is published
in Santa Maria, a city located in the central region of the State of Rio Grande do Sul, and covers 34 cities
with a combined population of approximately 700,000 inhabitants. According to data provided by IBOPE,
as of 2006, Diário de Santa Maria accounts for 47% of newspaper readership in the region, out of which
40% are in the upper social-economic segments (classes A/B). For March 2007, the average daily
circulation of Diário de Santa Maria was approximately 15,195 copies.
Diário Catarinense. Diário Catarinense is published in the City of Florianópolis and is the newspaper
with the largest circulation in Florianópolis and in various other cities in the State of Santa Catarina
generally, according to data provided by IVC. It is distributed principally in Florianópolis and throughout
Santa Catarina (classes A/B). For March 2007, the average daily circulation of Diário Catarinense was
approximately 39,945 copies on weekdays and 61,170 copies on Sundays. According to IBOPE (June
2006), Diário Catarinense accounts for 86% of newspaper readership in the Florianópolis metropolitan
region, and 55% of its readers are in the upper social-economic segments (classes A/B).
Jornal de Santa Catarina. Jornal de Santa Catarina newspaper circulates throughout the “Vale do
Itajaí” region, one of the richest areas of the State, and in the northeastern part of the State of Santa Catarina,
covering over 27% of the State’s main cities’ population, including Joinville and Blumenau, where Jornal de
Santa Catarina is published. It circulates Mondays through Saturdays with a joint edition on the weekend,
with an average daily circulation of approximately 18,945 copies. In the region of Blumenau alone, Jornal
de Santa Catarina accounts for 80% of newspaper readership, according to IBOPE (opinion poll institute)
for August 2006.
A Hora de Santa Catarina. A Hora de Santa Catarina was launched by RBS in August 2006 to target
the middle-low social-economic segments (classes C/D) of the Florianópolis metropolitan region, which
consists of approximately 78% of the population in this market. The newspaper was created both to serve a
market segment not fully captured by Jornal de Santa Catarina, thus fostering growth, and to serve as a
gatekeeper to enhance competitiveness in the market, neutralizing Jornal de Santa Catarina’s competitors’
growth opportunities. The Issuer anticipates that A Hora de Santa Catarina’s strong identification with its
audience will make it one of the most widely-read newspapers in the Florianópolis metropolitan region. By
March 2007, the average daily circulation of this newspaper was approximately 31,028 copies. A Hora de
Santa Catarina is published in the city of Florianópolis in the same facility used to publish Diário
Catarinense, and is distributed throughout the “Grande Florianópolis” region.
A Notícia. A Notícia, acquired by RBS in 2006, is a traditional newspaper, with 80 years of history. It
is printed in the City of Joinville and circulated in the State of Santa Catarina. According to data provided
by IBOPE, as of June 2006, 57% of the readers are in the upper social-economic segments (class A/B). It is
the only RBS-Zero Hora newspaper that is published in standard format.
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The newspaper market in Rio Grande do Sul and Santa Catarina; Competition
The newspaper market in Rio Grande do Sul and Santa Catarina is characterized by the existence of
eight newspapers in each state, affiliated with IVC. The RBS Group owns the highest rated newspapers in
these states: Zero Hora, with a market share of 38% of Rio Grande do Sul’s newspaper readership market
and 40% in the metropolitan area of its capital, Porto Alegre, as well as Diário Catarinense, with a 41%
market share in the Santa Catarina market and 86% in the metropolitan area of Florianópolis, the capital of
Santa Catarina State (source: IBOPE July through September 2006).
The two metropolitan regions have high newspaper readership ratings, 56% of the population of the
Florianópolis metropolitan region (source: IBOPE, November 2006) and 75% of the population of the Porto
Alegre metropolitan region (source: Ipsos Marplan, January through March 2007). Porto Alegre has the
highest newspaper reading rating when compared to other Brazilian state capitals like São Paulo and Rio de
Janeiro.
The RBS Group believes that this high level of newspaper readership can be explained by the high
literacy rate and by the higher per-capita income level for Rio Grande do Sul and Santa Catarina compared
to Brazil as a whole.
The Zero Hora newspaper has the highest readership of any newspaper distributed in the State of Rio
Grande do Sul (according to data provided by IBOPE in July through September 2006), which accounts for
approximately 18% of the population of the State. Some important newspapers of national circulation are
distributed in Rio Grande do Sul on a limited basis, including Folha de São Paulo, O Estado de São Paulo
and O Globo, all general-interest newspapers, and Valor Econômico and Gazeta Mercantil, both national
financial and business newspapers. Two important locally-produced newspaper competitors include Jornal
do Comércio, a regional financial and business newspaper the distribution of which is largely limited to the
local business community of the Porto Alegre metropolitan region, with a daily average circulation of
approximately 30,000 copies in 2006, according to information provided by the newspaper’s sales
department (Jornal do Comércio is not associated to IVC) and Correio do Povo, a low-budget newspaper
which is sold by subscription at R$19 per month. Correio do Povo had a daily average circulation of
approximately 155,494 copies in March 2007, according to IVC’s compilation of newspaper circulation
statistics. The average daily circulation for Zero Hora on the same period was 175,144 copies. Although
Correio do Povo is one of the highest circulated newspapers in Rio Grande do Sul, IBOPE estimates that its
level of readership is lower than that of Zero Hora. Zero Hora and Correio do Povo are distributed Statewide.
Diário Gaúcho has the highest readership of any newspaper distributed in the City of Porto Alegre,
which accounts for approximately 13% of the population of the State of Rio Grande do Sul. Correio do
Povo is the main competitor for Diário Gaúcho in the Porto Alegre metropolitan region. IBOPE estimates
that Diário Gaúcho accounts for 62% of newspaper readership in Porto Alegre, while Correio do Povo
accounts for 17% (as measured on July through September 2006). Diário Gaúcho is distributed State-wide.
Diário Catarinense is one of three newspapers produced in the City of Florianópolis, which accounts
for approximately 7% of the population of the State of Santa Catarina. Diário Catarinense, which is
distributed State-wide, is the newspaper with the highest circulation in the State of Santa Catarina according
to data provided by IVC for 2007 (circulation includes newspapers sold by subscription, street vendors or at
newsstands). Zero Hora, Folha de São Paulo, O Estado de São Paulo, O Globo, Valor Econômico and
Gazeta Mercantil are also distributed in the State on a limited basis, but are considered the main competitors
of Diário Catarinense in the State of Santa Catarina because of their national content and because all the
locally-produced newspapers are not distributed State-wide.
Because Zero Hora, Diário Gaúcho and Diário Catarinense are distributed throughout their respective
States (Zero Hora also circulates in the State of Santa Catarina on a limited basis), they compete to a limited
extent with newspapers that are published in other cities, including with other newspapers published by
RBS-Zero Hora. In this context, besides O Pioneiro, Jornal de Santa Maria and Jornal de Santa Catarina,
the other important local competitor in Rio Grande do Sul, besides Correio do Povo and Jornal do Correio
do Povo and Jornal de Comércio, is NH, which is published in the City of Novo Hamburgo (accounting for
72
approximately 2.4% of the population of the State of Rio Grande do Sul) by the Editora Sinos Group, with a
daily average circulation of approximately 33,898 copies in March 2007, according to IVC, while in Santa
Catarina the most important local newspaper competitors is O Estado, published in the City of Florianópolis
by Empresa Editora O Estado Ltda., with a weekday daily average circulation of approximately 15,000
copies in 2006, according to information provided by Anuário de Mídia 2006, an annual publication of
Editora Meio & Mensagem, an independent publishing company specialized in collecting data about the
Brazilian communication, marketing and propaganda sectors (O Estado is not associated to IVC). All of
these papers have a focus that is more local and less national and international than that of Zero Hora and
Diário Catarinense.
O Pioneiro has the highest readership of any local newspaper distributed in the metropolitan region of
Caxias do Sul (as measured by IBOPE for November, 2006), which accounts for approximately 4% of the
population of the State of Rio Grande do Sul.
Diário de Santa Maria has the highest readership among local newspapers distributed in the central
region of the State of Rio Grande do Sul (as measured by IBOPE for November, 2006), which accounts for
approximately 2.5% of the population of the State. Another important local newspaper distributed in this
region is A Razão, which accounts for 24% of newspaper readership on the region according to IBOPE (for
November 2006). As of November 2006, IBOPE estimates that Diário de Santa Maria accounts for 47% of
newspaper readership in the market.
Jornal de Santa Catarina is published in the City of Blumenau and Porto Alegre, which accounts for
approximately 5% of the population of the State of Santa Catarina. Jornal de Santa Catarina, which is
distributed throughout “Vale do Itajaí” region and in the northeastern part of the State of Santa Catarina, is
the local newspaper of highest circulation in the region, and accounts for the highest readership in the City of
Blumenau, according to data provided by IBOPE for August 2006.
A Hora de Santa Catarina was launched in August 2006, and targets the lower socio-economic
segments (class C/D). It is published in Florianópolis and circulated in the State of Santa Catarina.
A Notícia is an 80 years old newspaper from the city of Joinville. It was acquired by RBS at the end of
2006 and 57% of its readers are from classes A and B.
The chart on the following page provides information on the readership and approximate circulation
which (except as noted) have been calculated by IVC for March 2007 for each of the major papers in Rio
Grande do Sul and Santa Catarina.
73
Principal newspapers of the States of Rio Grande do Sul and Santa Catarina
Newspaper
City of
Publication
Format
Approximate
Week-Day
Circulation`
Approximate
Sunday
Circulation1
Subscription1 Newsstand1
Number of
Readers2
Rio Grande do Sul
Zero Hora................................ Porto Alegre
Diário Gaúcho................................
Porto Alegre
Correio do Povo ................................
Porto Alegre
NH ................................................................
N. Hamburgo
Tabloid
Tabloid
Tabloid
Tabloid
162,452
157,044
155,664
33,898
251,297
N/A
154,479
N/A
153,894
N/A
152,276
33,604
21,250
157,044
2,218
294
1,941,7251
1,364,4561
973,6181
263,7772
Jornal do Comércio................................
Porto Alegre
Tabloid
30,000
N/A
28,800
1,200
36,6001
O Pioneiro................................ Caxias do Sul
Tabloid
24,370
N/A
22,147
2,223
264,138
Diário de Santa Maria ................................
Cruz Alta
Tabloid
15,195
N/A
12,789
2,406
144,137
Santa Catarina
Florianópolis
Diário Catarinense ................................
A Notícia................................
Joinville
Tabloid
Standard
39,945
27,858
61,170
31,807
38,371
26,904
4,606
1,518
861,897
308,310
Jornal de Santa Catarina................................
Blumenau
Hora de Santa Catarina
Florianópolis
O Estado ................................ Florianópolis
Tabloid
Tabloid
Standard
18,945
31,028
18,000
N/A
N/A
15,000
17,279
N/A
10,800
1,666
31,028
4,628
197,789
N/A
12,360
(1)
(2)
Source (circulation): IVC March 2007, except for O Estado and Jornal de Comércio, for which the source is
Anuário de Mídia 2006.
Source (reading): Ibope for Santa Catarina - July 2006 and for Rio Grande do Sul - September 2006.
74
RBS-Zero Hora’s products
Newspapers. The principal focus of RBS-Zero Hora is the publication of its daily morning newspapers
Zero Hora, Diário Gaúcho, O Pioneiro, Diário de Santa Maria, Diário Catarinense, Jornal de Santa
Catarina, A Notícia and A Hora de Santa Catarina, which are published in four colors and, except for A
Notícia, in a tabloid format. The RBS Group considers the tabloid format to be preferable to the standard
format for three reasons: it is easier to handle while reading, each advertising page commands the same
advertising revenues as a standard-format page while using considerably less paper, and it is the format
preferred by readers.
The RBS Group believes that one of its more unique newspaper products is the Sunday classified
advertisements section in Zero Hora, which is the largest Sunday classified advertisements publication in
Brazil. The Zero Hora Sunday classified section normally consists of approximately 170 pages, comprising
approximately five separate classified advertisements, and producing approximately R$950,000 of
advertising revenues on a typical Sunday. Advertisers in the Zero Hora classified section have the option of
placing their advertisements directly with RBS-Zero Hora by telephone, internet (through clicRBS) or at
shopping stands and retail stores, among others, or indirectly through advertising agencies or independent
agents working under commission. Approximately 53% of sales revenues from classified advertisements in
2006 were derived from sales of advertisements by advertising agencies, 24% by telephone, 13% by
independent agents and 10% by shopping stands and retail stores.
Other products. RBS-Zero Hora also operates a logistics distribution service business unit, a book
publishing unit, as well as the internet-based businesses of RBS Group, including clicRBS, the multimedia
internet portal website for the RBS Group.
Logistics services. ViaLOG is a division of RBS-Zero Hora that currently operates the logistics
services for the distribution of the eight newspapers published by RBS-Zero Hora. ViaLOG also offers
logistics management services to third parties, focusing mostly on printed material distribution, using the
know-how developed as the logistics division for RBS-Zero Hora, as well as on express and e-commerce
storage and delivery services. ViaLOG’s services cover the Service Territory and the State of Paraná.
Book publishing. RBS Publicações, a division of RBS-Zero Hora, focuses on the publication of books.
The books are usually compilations of a series of connected articles and reports published by the RBS
Group’s newspapers. Some recent examples are a compilation of articles written by a Zero Hora columnist
and a cookbook with recipes for newborns using a series of articles prepared by Zero Hora. These books are
usually offered to subscribers of the RBS Group’s newspapers at a discounted price, or generally to the
public through book stores and newsstands.
Internet. ClicRBS, the main product of the internet-based business of RBS-Zero Hora, integrates
content from multiple sources, including the TV channels, radio stations and newspapers of the RBS Group.
The main products offered through the website are news, entertainment and information. Access is free, so
revenues from this business are derived entirely from advertising on the website. RBS-Zero Hora also
operates “hagah,” a services portal and Kzuka, a youth-oriented marketing unit.
RBS-Zero Hora’s production process
Newspapers. RBS-Zero Hora’s eight newspapers employ 206 reporters and correspondents throughout
Brazil. Of these reporters and correspondents, 113 are located in Rio Grande do Sul, 93 in Santa Catarina
and the remainder in other parts of Brazil. RBS-Zero Hora also benefits from news reports prepared by the
90 reporters of the other RBS Network companies throughout Brazil. In addition, RBS-Zero Hora has
contracted with one independent correspondent on a non-exclusive basis in each of São Paulo, Rio de
Janeiro, Buenos Aires and Paris and on occasion sends its reporters to locations throughout the world as
certain newsworthy events occur, such as the World Cup soccer tournament and other major sporting events.
In addition to its reporters, RBS-Zero Hora has a staff of 37 writers, 18 of which are located in Rio Grande
do Sul and 18 of which are located in Santa Catarina; a staff of four researchers, all located in Rio Grande do
Sul; and a staff of 48 photographers, 29 located in Rio Grande do Sul and 19 located in Santa Catarina.
75
RBS-Zero Hora reporters either send information in to RBS-Zero Hora, or input the information
directly onto the computers located in the respective newspaper newsroom (each RBS-Zero Hora newspaper
has its own newsroom), where they are shaped into stories by the writing staff and then shared with the other
RBS-Zero Hora newspapers. In addition, certain national and international news stories are taken directly
from the on-line news services to which RBS-Zero Hora subscribes, including Reuters, Associated Press,
Tribune Media Service International and Grupo de Diários América (the Newspaper Group of America or
“GDA”). RBS-Zero Hora uses a fully computerized lay-out system.
Logistics services. ViaLOG has a staff of 16 people, distributed among ViaLOG’s Distribution Centers
located in the cities of Porto Alegre, Florianópolis and Curitiba, which are responsible for administrative
activities, storage, loading, unloading, shipping and handling operations. The transport and distribution
activities are carried by a network of approximately 10 outside contractors. Currently ViaLOG operates 28
daily designated routes, exclusively dedicated to ViaLOG’s operations. The logistics management services
rendered to third parties by ViaLOG can be generally described as follows:
(i)
Distribution of printed material: ViaLOG receives from its clients the list of addresses of
the client’s subscribers in order to print the respective labels and establish the distribution
process. The client usually sends the printed material (newspapers, magazines, direct mail,
etc.) to ViaLOG’s Distribution Centers one or two days in advance of distribution.
ViaLOG arranges the delivery process and sends the material for transportation and
distribution through the outside contractors.
(ii)
Express delivery: On a regular basis, ViaLOG (through outside contractors) collects the
material to be delivered (volumes up to 35 kilograms) from its clients, selects and
establishes the delivery routes to be used, issues the respective documents and arranges the
delivery process. Transportation and final delivery is made by outside contractors.
(iii)
Storage and express delivery: mostly used in connection with e-commerce delivery
services. On a regular basis, ViaLOG (through outside contractors) collects the products
from its clients and provides storage for later distribution, as in the case, e.g., of cellular
phones and equipment of a local cellular system operator. Once solicited by the client,
ViaLOG selects and properly accommodates the products in shipping boxes, issues the
respective documentation, establishes the delivery routes to be used and arranges the
delivery process. Transportation and final delivery is made by outside contractors.
Book publishing. Since book publishing involves the utilization of a high-quality paper that requires a
specific printing process, considerably different from the regular newspaper printing process, RBS-Zero
Hora utilizes the industrial facilities of third parties to publish its books. It has a staff of four editors and
employees that compile the news reports and other materials into a book format and then prepare a camera
ready version for publication.
Internet. ClicRBS and “hagah” have a combined staff of 6 employees and 66 web designers that are
responsible for updating and maintaining the site. Most of the website’s content is produced by the TV and
radio stations and by the newspapers of the RBS Group, with a limited amount coming from on-line news
services to which RBS-Zero Hora subscribes. Kzuka has a staff of 22 dedicated to maintaining its website.
Newspapers. Approximately 88% of sales are of Zero Hora, 91% of O Pioneiro, 84% of Diário de
Santa Maria, 89% of Diário Catarinense, 91% of Jornal de Santa Catarina, and 95% of A Notícia, while
the rest are sold at newsstands or by street vendors. Diário Gaúcho and Hora de Santa Catarina is solely
sold at newsstands or by street vendors. Zero Hora’s subscribing customers generally pay approximately
29.40% less on a yearly basis than purchasers of the newspaper from newsstands or street vendors. RBSZero Hora’s newspapers subscription works on a revolving basis, i.e., with monthly payments and no need
for periodic renewals. Subscribers must call RBS-Zero Hora only to cancel subscriptions. Billing is either
through direct bank account debit or credit card. This subscription format significantly reduces churn and
delinquency rates, as well as contributes to a more steady cash inflow and to better working capital
management. Distribution of the newspapers, whether to subscribers or to vendors, are made by independent
76
contractors, while ViaLOG handles distribution between the printing centers and the distribution centers
throughout the States of Rio Grande do Sul and Santa Catarina.
Logistics services. Services rendered to all customers, including to RBS Group companies such as
Orbeat, are charged on a 2-week or monthly basis after the service has been rendered through the issuance of
the respective invoice describing the services rendered.
Book publishing. RBS-Zero Hora generally offers a discount of approximately 30% to subscribers of
RBS-Zero Hora’s newspapers when purchasing books published by RBS Publicações through telephone or
internet. Billing is made together with the next monthly newspaper subscription payment. Regular price is
charged from customers buying books through bookstores and newsstands.
Internet. Advertising on the website is the only source of revenues for this business, and is charged
from advertisers through the same process used to charge advertisers in the RBS-Zero Hora’s eight
newspapers. Occasionally some companies of the RBS Group, such as Orbeat, sell merchandising through
clicRBS as part of the many inter-company relationships which exist among the different RBS Group
entities in the ordinary course of business. See “Related party transactions”. The proceeds from sales
through clicRBS are exclusively retained by the respective seller.
Cost and revenue structure
RBS-Zero Hora’s revenues consist principally of advertising, subscription, classified and newsstand
revenues, revenues from third party printing and logistics services. Its costs consist principally of newsprint
and other raw material costs, personnel costs, third party contractors costs and sales related costs.
Although virtually all of RBS-Zero Hora’s revenues are real-denominated, approximately 28% of its
operating costs, including costs of imported newsprint, ink and subscriptions to international news services,
are denominated in U.S. dollars or other foreign currency. Thus, devaluations of the real against the U.S.
dollar would likely have a negative impact on RBS-Zero Hora’s income.
The cost of imported newsprint, which for 2006 constituted approximately 60% of RBS-Zero Hora’s
raw materials costs, has fluctuated significantly over the past years. Newsprint prices for the Issuer averaged
U.S.$691 per ton in 2006. Increases in newsprint costs for the Issuer could adversely affect operating
revenues, although RBS - Zero Hora historically has passed on to customers the cost increases by increasing
the cover and subscription price of its newspapers. RBS-Zero Hora generally seeks to maintain a target
inventory sufficient for approximately 60 days of newspaper production. Delivery lead time is around 45
days.
Almost all of the imported newsprint comes from Canada. RBS-Zero Hora has a supplier credit of 180
days for each purchase, backed by the Canadian Exim Bank (EDC – Export Development Canada). On
occasion, newsprint purchases can be refinanced through import trade lines, usually readily available at
significantly lower costs than other funding facilities in Brazil.
Advertising
RBS-Zero Hora’s advertising operations are conducted by approximately 32 sales employees, who
principally work with advertising agencies to contract for corporate and classified advertising, and 186
independent agents, who principally arrange for classified advertising sales and who receive a 20%
commission on sales made. In addition, RBS-Zero Hora employs approximately 40 telephone operators to
take classified advertisements by telephone. RBS-Zero Hora is a member of Grupo de Diários América GDA, a marketing and sales organization sponsored by the major daily newspapers in Latin America.
Business development strategy
The RBS Group’s principal business strategy for its newspaper business is to pursue a process of
centralization to capture benefits of scale and extend this strategy to new titles and explore new sources of
revenue complimentary to traditional newspaper sources that have synergies, such as publications and events
(shows, fairs, etc.).
77
RBS-Zero Hora also seeks to continue to increase its market share in the areas where it is currently
operating by either further improving the quality of its newspapers or launching new regional titles. To
achieve this goal, RBS-Zero Hora focuses on attracting, developing and retaining talented personnel and on
capitalizing on the technological innovations and synergies with other RBS Network companies.
The Guarantors
Introduction
The Guarantors of the Notes, TV Gaúcha, TV Florianópolis and Rádio Gaúcha, are among the largest
of the RBS Group companies. As of and for the year ended December 31, 2006, net operating revenues of
the Guarantors represented 40% of the combined net operating revenues for the RBS Group as a whole.
TV Gaúcha and TV Florianópolis serve as the hub for all RBS Network broadcast television operations
in the States of Rio Grande do Sul and Santa Catarina, respectively, and operate VHF television broadcast
stations in the Cities of Porto Alegre and Florianópolis, respectively. Rádio Gaúcha owns and operates an
AM news and sports radio station in Porto Alegre, which is the largest radio station among the radio stations
operated by the RBS Network, and operates Gaúcha Sat, a radio news and sports network that at December
31, 2006 supplied, via satellite, programming to 135 affiliate stations throughout the country. Collectively,
the Guarantors represent the television stations with the largest audiences in the States of Rio Grande do Sul
and Santa Catarina, and radio stations including the largest one by revenue in these states.
TV Gaúcha and TV Florianópolis
Introduction
TV Gaúcha owns and operates the leading VHF television station in Porto Alegre and TV Florianópolis
owns and operates the leading VHF television station in Florianópolis. Most of the television stations of the
RBS Network, including TV Gaúcha and TV Florianópolis, are VHF television broadcast stations. All VHF
television broadcast stations of the RBS Network transmit Globo Network’s content. TV Globo provides
approximately 85% of the programming for TV Gaúcha and TV Florianópolis, as well as for the other VHF
television stations of the RBS Network. Substantially all of the remaining programming broadcast by TV
Gaúcha, TV Florianópolis and other RBS Network VHF television stations is produced by TV Gaúcha or
TV Florianópolis. In addition to producing most of their own programming not provided by TV Globo, TV
Gaúcha and TV Florianópolis occasionally provide their programming to TV Globo, to the extent that such
programming would be of interest nationwide.
The Broadcast television market in Rio Grande do Sul and Santa Catarina
The broadcast television market in Rio Grande do Sul includes the RBS Network’s competitors, which
consist of three regional networks that are affiliated to the national networks SBT, Record and Bandeirantes,
plus a local private standalone station (Guaíba, which was acquired by Record in 2007) and a State-owned
television station (TVE). Altogether, there are 10 VHF stations competing with the RBS Network in the
State of Rio Grande do Sul, and 12 RBS Network stations, which are located throughout the State,
broadcasting Globo Network programming and producing additional local news programming. The
broadcast television market in Santa Catarina consists of six RBS Network stations and 13 VHF television
stations. According to Midia Dados, there were 4.3 million TV households in the Service Territory in 2004.
In areas where the RBS Network offers television broadcast services, its stations generally receive ratings
that are above the sum of all its competitors, mainly because TV Globo programming is exclusively
broadcast through RBS Network VHF television stations.
Both TV Gaúcha and TV Florianópolis continue to be the most watched television stations in their
respective metropolitan regions, with average audience shares of broadcast television viewership of 57.5%
and 58%, respectively (March 2007 time period between 6 a.m. and 12 a.m.), from March 2007 as measured
by IBOPE. Both TV Gaúcha and TV Florianópolis are broadcast affiliates of TV Globo, and TV Gaúcha
has been so affiliated for 40 years. There are six VHF broadcast television stations in the greater Porto
78
Alegre metropolitan region and four broadcast television stations in the greater Florianópolis metropolitan
region. The chart on the following page shows the respective audience shares of the various television
stations in the greater Porto Alegre and Florianópolis metropolitan regions, respectively, from March 2007.
The references in the following table to “SBT”, “Bandeirantes” and “Record” are to the national networks
that operate under those names. For the purposes of this chart, “audience share” is defined as the percentage
of all households with a television set that is turned on and tuned to the network in question between the
hours of 6:00 a.m. and 12:00 midnight.
79
Television network audience shares in Rio Grande do Sul and Santa Catarina
Station
National Affiliation
Audience
Share
Porto Alegre:
RBS TV (TV Gaúcha) ................................................................................................
Globo
TVS................................................................................................................................
SBT
Pampa.............................................................................................................................
Record
Bandeirantes................................................................................................Bandeirantes
Guaíba............................................................................................................................
n/a
Others.............................................................................................................................
n/a
57.5%
15.7%
6.9%
5.8%
1.5%
12.6%
Total...........................................................................................................................
100%
Florianópolis:
RBS TV (TV Florianópolis) ..........................................................................................
Globo
SCC................................................................................................................................
SBT
Record............................................................................................................................
Record
Barriga Verde................................................................................................
Bandeirantes
Others.............................................................................................................................
n/a
58.3%
10.6%
9.9%
5.3%
15.9%
Total...........................................................................................................................
100%
Source: IBOPE TeleReport Light March 2007.
The RBS Network’s other VHF television stations are also the most popular in their respective regions,
generally having even higher market shares than TV Gaúcha and TV Florianópolis given the lower degree of
competition in the less concentrated local markets.
Affiliation of the RBS Network with the Globo Network
TV Gaúcha and TV Florianópolis, as well as the other VHF television stations in the RBS Network, all
transmit Globo Network’s content, a network of television stations throughout Brazil which carry the
broadcast signal provided by TV Globo. TV Gaúcha, TV Florianópolis and the other 16 VHF television
stations that form part of the RBS Network are the sole network affiliates of TV Globo in the States of Rio
Grande do Sul and Santa Catarina. The Globo Network is comprised of 121 television stations throughout
Brazil, out of which 116 are affiliates and the other five are owned directly or indirectly by TV Globo. TV
Globo transmits the national television signal and controls the format and content of its programming, which
is unscrambled and provided free of charge to any person or institution that can receive the signal that is
broadcast by satellite. The RBS Network’s VHF television stations, as a whole, are the largest affiliates of
TV Globo in terms of number of stations, repeaters, transmitters, regional coverage, sales, revenues and
production staff.
The Globo Network is currently the largest single television network in Brazil based on revenues,
audience share and the volume of programs produced. TV Globo broadcasts a broad range of programs 24
hours a day, including entertainment programs, films, sporting events, reality shows, talk shows, telenovelas
(“soap operas” or serial dramas which are broadcast six nights a week for approximately six months),
educational and public service programs and four news broadcasts per day. Most of the programming
provided by TV Globo is produced by TV Globo itself, with the remainder being purchased from third
parties.
The Globo Network, of which TV Gaúcha has formed a part since 1967, is the most popular network in
Brazil, with an average nation-wide broadcast television audience share of 50.48% and an average primetime audience share of 58.65% in March 2007, as measured by IBOPE. The following chart shows the
relative audience shares and prime-time ratings of the Globo Network and the other national networks in
80
Brazil, as measured by IBOPE. For the purposes of this chart, “audience share” has the meaning set forth
above, and “prime time audience share” refers to the audience share between the hours of 8:00 p.m. and
10:00 p.m.
Television network audience shares and ratings in Brazil
Network
Audience Share
Prime-Time
Audience Share
Globo .............................................................................................................................50.48%
58.65%
SBT ................................................................................................................................14.94%
9.29%
Record............................................................................................................................13.54%
15.12%
Bandeirantes................................................................................................
4.31%
3.25%
Rede TV................................................................................................
2.81%
3.68%
Others.............................................................................................................................13.92%
10.01%
Total........................................................................................................................... 100%
100%
Source: IBOPE TeleReport Light PNT March 2007.
Affiliation with a national television network can have significant influence on the revenues of a
regional television station because the audience share drawn by a national network’s programming can
significantly affect the rates at which a regional television station can sell advertising time. National
television networks tend to favor affiliations with television stations which provide programming
commitments and local marketing support and which are able to provide the national network with better
access to a particular market. The RBS Network VHF television stations, in particular, provide TV Globo
with a close connection to the local communities in Rio Grande do Sul and Santa Catarina, by offering local
programming and news in each of the small cities and towns in which the RBS Network maintains a station.
In 2006, the lead-in audience share for the prime-time local news produced by TV Gaúcha and TV
Florianópolis as measured by IBOPE was 69.5% and 75.3%, respectively.
The RBS Network VHF television stations have been transmitting the Globo Network’s content for 40
years. Contracts between the VHF television stations forming part of the RBS Network, including TV
Gaúcha and TV Florianópolis, and TV Globo are valid until 2008, but are subject to an automatic extension
until 2011. See “— The Globo Contracts” below. The RBS Network believes that because of its local
programming capabilities, the strength of its local marketing support and the significantly broader access it
can provide to the Rio Grande do Sul and Santa Catarina markets than any of its competitors, it will continue
to maintain a strong relationship with TV Globo in the future. See “Risk factors — Risks relating to the
RBS Group”.
The Globo Contracts
The relationship between TV Globo and the RBS Network is governed by a contract between TV
Gaúcha and TV Globo, dated March 28, 2002 and effective as of April 1, 2002, and a contract between TV
Florianópolis and TV Globo also dated March 28, 2002 and effective as of April 1, 2002 (collectively, the
“Globo Contracts”), that will expire on March 31, 2008, but are subject to an automatic extension until 2011,
unless they are terminated by any of the parties upon delivery of a 90-day written notice to such effect.
The Globo Contracts require TV Globo to provide TV Gaúcha and TV Florianópolis with TV Globo’s
programming and require TV Gaúcha and TV Florianópolis to broadcast TV Globo’s programs in the RBS
Network’s Service Territory on an exclusive basis. TV Globo programming is transmitted by satellite, and
TV Gaúcha and TV Florianópolis are provided by TV Globo with a receiver antenna. TV Gaúcha and TV
Florianópolis agree in the Globo Contracts to retransmit the programming so received without any
alterations, interruptions or omissions. The programming so provided constitutes approximately 85% of the
programming shown by TV Gaúcha and TV Florianópolis. In addition, and as contemplated by the Globo
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Contracts, TV Gaúcha and TV Florianópolis produce regional and local programming for broadcast on their
respective television stations. TV Gaúcha and TV Florianópolis also assist TV Globo in the preparation of
national news coverage of events occurring in the RBS Group’s Service Territory, as well as occasional
foreign coverage (mostly in Argentina and Uruguay) for logistical reasons.
Although not formally established in the Globo Contracts, the regional and local programming prepared
by TV Gaúcha and TV Florianópolis may be occasionally provided to TV Globo at no cost, upon TV
Globo’s request.
Advertising time on the RBS Network’s television broadcasts is split between national advertising
clients of TV Globo, regional clients of TV Gaúcha and TV Florianópolis and local clients of the various
RBS Network affiliates. Under the Globo Contracts, TV Gaúcha and TV Florianópolis have granted TV
Globo the authority to arrange all advertising of a national nature that is broadcast on TV Gaúcha’s and TV
Florianópolis’s television stations. TV Gaúcha and TV Florianópolis have agreed to reserve at least 50% of
advertising time for such national advertising and are free to use the remaining 50% of advertising time for
local or regional advertising. Each break in programming for advertisements throughout the day is evenly
divided in this way, with the ability for national advertising accounts to use un-sold regional and local
advertising time spots and regional and local advertising accounts to use un-sold national time spots.
Historically, over half of the total advertisements broadcast by the RBS Network VHF television stations has
been for regional and local advertising accounts.
Revenues derived from advertisements placed with TV Globo by national advertising accounts for
national broadcast over the Globo Network, known as “NET” modalities, are invoiced and retained
exclusively by TV Globo. Revenues derived from advertisements negotiated by TV Gaúcha and TV
Florianópolis within the RBS Network’s Service Territory, known as “LOCAL” modalities, are invoiced and
retained by TV Gaúcha and TV Florianópolis, respectively. Revenues derived from advertisements
negotiated by TV Globo and broadcast exclusively by TV Gaúcha and TV Florianópolis, respectively,
known as “SPOT” modalities, are invoiced by TV Gaúcha and TV Florianópolis against TV Globo, which
directly invoices the respective “SPOT” advertisers. Effective transfer of funds under the “SPOT”
modalities occurs after settlement of the revenue split defined under the Globo Contracts as the
programming charges owed to TV Globo.
The operating costs of TV Gaúcha and TV Florianópolis principally consist of salaries for regional
reporters, production and sales staff, maintenance and operational expenses for its production and broadcast
facilities, and programming charges due to TV Globo under the terms of the Globo Contracts, established as
a split of advertising revenues among TV Globo and TV Gaúcha or TV Florianópolis, as the case may be. In
this context, the programming charges are equal to the “SPOT” revenues less the difference between the
contractual percentage of total revenues attributable to the RBS Network’s VHF television stations and the
effective “LOCAL” revenues invoiced and retained by the RBS Network’s VHF television stations,
according to the following formula:
Programming Charges = “SPOT” – (contractual % of total revenues – “LOCAL” revenues).
The terms of the Globo Contracts establish the contractual percentage of total revenues attributable to
the RBS Network for each of TV Gaúcha and TV Florianópolis.
The Globo Contracts may be terminated by either party in the event of non-compliance by the other
party with the terms thereof, provided that the non-complying party shall have received notice of and shall
have had ten days to cure the non-compliance.
RBS Network programming
The VHF television stations comprising the RBS Network produce approximately 15% of the
programming broadcast over the stations, the balance being provided by TV Globo. Programming produced
by TV Gaúcha and TV Florianópolis is broadcast throughout Rio Grande do Sul and Santa Catarina by local
RBS Network VHF television stations. Each station maintains a local news facility which supplements the
State-wide broadcasts with local news which is available for rebroadcast by TV Gaúcha and TV
Florianópolis. All programming produced by the RBS Group television stations is shared among the stations
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and occasionally is made available to TV Globo (upon TV Globo’s request and at no cost) for rebroadcast
through the Globo Network.
RBS Group transmission network
Programming received from the Globo Network through satellite, as well as State and local
programming produced by the television stations of RBS Network, including those produced by TV Gaúcha
and TV Florianópolis, are transmitted among the different RBS Network’s television stations and retransmitters by the most extensive transmission network within the Service Territory. RBS Network’s
transmission network utilizes both digital and analogical microwave technology, as well as UHF.
TV Gaúcha currently owns and operates a digital microwave broadband backbone that connects Porto
Alegre with many of the RBS Network’s television and newspaper operations in the States of Rio Grande do
Sul, Santa Catarina, Paraná and São Paulo. The network has been designed to be able to transmit
simultaneously up to four television broadcasts, four voice lines and data transfer. The principal purpose of
the network is to increase the video transmission capabilities and flexibility among all RBS Network
television stations, to enable Zero Hora and Diário Catarinense to transmit newspaper content for remote
printing and generally to reduce reliance on the Embratel satellite system and the conventional telephone
system. TV Gaúcha currently charges other RBS Network companies for services provided through the
network. Unused capacity is regularly sold mainly to internet service providers and cable operators.
Advertising operations
Advertising accounts are designated as national, regional or local. The designation of an account as
national, regional or local generally depends upon the location of the advertising agency of the customer and
may not necessarily correlate with the breadth of the distribution that the advertisement is expected to
receive. Sales to national advertising accounts are conducted on behalf of TV Gaúcha and TV Florianópolis
by a sales force maintained by TV Globo. National advertising accounts represent either advertisements
intended for simultaneous nationwide distribution (“NET” modalities) or regional advertisements for
customers located outside the Service Territory (“SPOT” modalities).
Sales to regional advertising accounts are conducted directly by TV Gaúcha and TV Florianópolis sales
forces. Regional advertising is generally for the account of customers located in the Service Territory
(“LOCAL” modalities). This category also includes local advertising produced for broadcast in the cities of
Porto Alegre or Florianópolis only.
Sales to local advertising accounts are conducted on behalf of TV Gaúcha and TV Florianópolis and
local RBS Network television stations by sales forces maintained by the local stations. Local advertising
accounts are generally for the account of customers in areas served by RBS Network television stations other
than TV Gaúcha and TV Florianópolis. Nevertheless, any VHF television station’s sales force may originate
sales for any other station as is the case of local advertisers desiring to reach statewide audiences.
Because of their strong viewer market shares, TV Gaúcha and TV Florianópolis generally are able to
charge higher prices per time slot than competitor television stations. However, these prices are generally
the lowest per thousand viewers. Because of TV Gaúcha’s and TV Florianópolis’s strong audience shares
and relatively lower cost of reaching viewers, the RBS Network believes that it attracts more advertising
volume than its competitors. As a result, its revenue share of the television advertising market is even higher
than its viewer market share.
Revenue structure
The revenues of TV Gaúcha and TV Florianópolis are comprised primarily of advertising revenues.
Under the terms of their contracts with TV Globo and under arrangements in place with the other VHF
television stations forming part of the RBS Network, there are three types of advertising revenues: “NET
revenues”, “SPOT revenues” and “LOCAL revenues”. “NET revenues” are not recorded on TV Gaúcha’s or
TV Florianópolis’s books, but are included in the basis for calculation of programming charges to TV Globo.
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TV Gaúcha and TV Florianópolis also receive fees from other TV stations in the RBS Network under
programming assignment agreements.
Business development strategy
The RBS Network has already digitalized almost all of its television generation facilities, where the
digitalization process made economic sense. Once the digital TV standards for the Brazilian TV market are
defined, the RBS Network will consider further investments in the transmission facilities (transmitters and
antennas). There are no estimates of the costs involved in these investments, since technology, market
regulation and economic structure of this new service are still uncertain.
Rádio Gaúcha
Introduction
Rádio Gaúcha is the oldest of the RBS Network companies, having been founded in 1927 and acquired
by the present principal shareholders of the RBS Network in 1957. See “— The RBS Network — History”.
Rádio Gaúcha is an all-news AM station, with 24-hour news, talk shows and sports coverage. During 2006,
Rádio Gaúcha had an audience share of 61% in the Porto Alegre metropolitan area, its center of broadcast
operations. Rádio Gaúcha was the first all-news radio station in Brazil to offer 24-hour news and sports
coverage. As its daytime broadcasts generally cover a 200-kilometer range, and as late-night shortwave
broadcasts under optimal conditions reach into the northern regions of Brazil, Rádio Gaúcha enjoys a high
level of recognition throughout Brazil. The following chart shows the respective average audience shares of
Rádio Gaúcha and its competitor news stations in the greater Porto Alegre metropolitan region for JanuaryMarch 2007, according to IBOPE. For the purposes of this chart, “Audience Share” is defined as the
percentage of households, offices, cars and others with a radio that is turned on and tuned to the radio in
question, as measured 24 hours a day.
AM news radio average audience shares in the Porto Alegre metropolitan area
Audience
Share
Station
Rádio Gaúcha1 ................................................................................................................................
Guaíba1...............................................................................................................................................
Bandeirantes1 ................................................................................................................................
Pampa1 ...............................................................................................................................................
Farroupilha2........................................................................................................................................
Others.................................................................................................................................................
Total...............................................................................................................................................
(1)
(2)
28%
8%
6%
3%
54%
1%
100%
News/sports segment.
Popular segment.
Of these stations, Rádio Gaúcha, Guaíba and Bandeirantes compete on a State-wide basis. According
to IBOPE, Rádio Gaúcha maintains a higher audience share on a State-wide basis than Guaíba and a
substantially higher market share than Bandeirantes. Farroupilha is operated by the RBS Network.
Rádio Gaúcha operates a radio news network, Gaúcha Sat, through which it provides news
programming to about 135 radio stations via satellite. In return, Rádio Gaúcha leverages its audience base
beyond the Porto Alegre metropolitan area and consequently increases the value of advertising capabilities.
In addition, programming provided by Rádio Gaúcha includes advertising of a national or regional nature
sold by Rádio Gaúcha. Rádio Gaúcha is seeking to expand the Gaúcha Sat Network beyond the present 135
radio stations.
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The radio market in Rio Grande do Sul and Santa Catarina
The radio market in Brazil, including Rio Grande do Sul and Santa Catarina, is generally dominated by
FM music radio stations, with an emphasis especially on modern Brazilian popular music. There are 1,427
FM stations and 1,707 AM stations in Brazil and 242 FM stations and 287 AM stations in Rio Grande do Sul
and Santa Catarina, according to data provided by Associação Catarinense de Emissoras de Rádio e
Televisão – ACAERT (The Santa Catarina Radio and Television Networks Association) and Associação
Gaúcha de Emissoras de Rádio e Televisão – AGERT (The Rio Grande do Sul Radio and Television
Networks Association).
The RBS Group believes that Rádio Gaúcha’s 24-hour news format was the first of its kind in Brazil
and continues to be one of the country’s few 24-hour news stations.
Rádio Gaúcha had a news audience share of 58% and a sports audience share of 60% in the Porto
Alegre metropolitan area in January-March 2007, according to IBOPE. On a State-wide level, Rádio
Gaúcha competes with small, locally produced radio stations that operate in smaller cities and towns. Aside
from those local stations, Rádio Gaúcha’s principal competition in Porto Alegre and throughout the State
consists of Central Brasileira de Notícias (“CBN”), an affiliate of Sistema Globo de Rádio (affiliated to TV
Globo) which produces regional and national news broadcasts principally in the central region of Brazil, and
is operated in Porto Alegre and Florianópolis by RBS Network companies under certain operational
agreements with CBN; Bandeirantes, which produces both news and music programming and is strongest in
São Paulo and relatively weaker in Rio Grande do Sul and Santa Catarina; and Jovem Pan, which produces
news and music programming on a national level.
Rádio Gaúcha’s product and production process
Rádio Gaúcha’s 24-hour news programming is divided among “hard” news (averaging approximately
8.6 hours per day), live sports coverage (averaging 6.8 hours per day) and talk shows (averaging 8.6 hours
per day). The content of Rádio Gaúcha’s programs is prepared by a news production staff of 153 employees,
who conduct the necessary research and draft the text of each program’s content. The programming is
delivered by a staff of 69 radio announcers and reporters. In addition, Rádio Gaúcha maintains a sales staff
of 19 persons and a technical assistance staff of 29 people. All production staff and radio announcers are
given access to the on-line news service compiled by RBS-Zero Hora, which includes the reports of all RBS
Network reporters located throughout Brazil.
The production and transmission process for Rádio Gaúcha and most other radio stations is relatively
simple. The critical factor in achieving high audience shares and, thus, high advertising revenues is the
quality of the programming product. Rádio Gaúcha believes that it has attracted and retained as radio
announcers the most popular radio personalities in its region and believes that, as part of the RBS Network,
it has better access to news reports and sports coverage than other stations in the listening area. In addition,
Rádio Gaúcha, like other RBS Network companies, is able to offer its staff full-time multimedia contracts,
an option which most of the RBS Network’s competitors are not able to offer. Due to its permanent office
and studio in the City of Brasília, the federal capital City, Rádio Gaúcha is quickly able to produce and
report governmental and political news.
In Brazil, radio transmission licenses are granted for terms of 10 or 15 years. Rádio Gaúcha’s license
expired in 2003, and an application was presented for renewal, which is currently pending approval by
governmental authorities. Management expects that the company’s license will be renewed, since it is in
compliance with all requirements necessary for this approval. Until a decision is made on the renewal
application, Rádio Gaúcha may continue to use its existing license.
Cost and revenue structure
Rádio Gaúcha’s currently principal source of revenue is advertising. In 2006, Rádio Gaúcha’s
operating revenues consisted solely of advertising revenues. Rádio Gaúcha’s and its company revenues of
principal expenses are salaries of its radio announcers, sales and related personnel, royalties paid for use of
the RBS trademarks and the costs of operating and maintaining the transmission tower and equipment.
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Rádio Gaúcha also receives fees from other radio stations in the RBS Network under programming and
service contracts.
Business development strategy
Rádio Gaúcha is a fairly mature and stable business. Expansion alternatives exist through increasing its
affiliation with the Gaúcha Sat network. Hence, Rádio Gaúcha’s main business strategy is to defend its
leadership through the quality of its content and the broadest possible coverage.
RBS A&C
The business description RBS A&C is set out to provide a complete overview of the RBS Network’s
operations and companies. Prospective purchasers of the Notes should be aware that the Notes are being
issued by RBS-Zero Hora and are not guaranteed by, nor do they constitute obligations of, RBS A&C, but
constitute obligations of RBS-Zero Hora, jointly and severally guaranteed by TV Gaúcha, TV Florianópolis
and Rádio Gaúcha, the businesses of which are described above.
RBS A&C, a company approximately 95% owned by the controlling shareholders of the RBS Group
and approximately 5% owned by RBS Par, performs treasury functions for the RBS Network companies,
including for the Issuer and the Guarantors, centralizing cash management operations. RBS A&C is a
separate legal entity under common control with the Issuer and the Guarantors but is not a guarantor of the
Notes. In addition, RSB A&C owns 45% of the Issuer. Since 1993, cash revenues of any of the RBS
Network companies has been collected and held by RBS A&C, as a “cash management company”, on behalf
of the respective RBS Network company pursuant to a contractual arrangement among the companies. As
each member of the RBS Network requires funds, it withdraws cash on deposit with RBS A&C, issues
payment instructions to RBS A&C or requests a loan from another member of the RBS Network. RBS A&C
and RBS Network companies also may borrow funds from third parties, such as banks or the shareholders of
the RBS Network. Except for the advances for future capital increases and the “balances receivable”
receivables from RBS A&C, which bear no interest, inter-company loans with the Credit Group are done on
an arms-length basis at market rates.
In this context, in recent years RBS A&C has provided financing to the Issuer and Guarantors and, at
December 31, 2006, Issuer and Guarantors owed RBS A&C R$72.1 million and R$107.21 million,
respectively.
At December 31, 2006, RBS A&C had outstanding indebtedness in the amount of R$40.9 million.
RBS-Zero Hora, TV Gaúcha and Radio Gaúcha provide further guarantees to a portion of RBS A&C’s
outstanding indebtedness (principal amount of approximately R$38.6 million). RBS A&C may in the future
guarantee or incur additional indebtedness, which may be guaranteed by other RBS Group companies,
including members of the Credit Group Companies. If an event of default occurs under any of RBS A&C’s
present or future obligations, the creditors of RBS A&C may attempt to attach or foreclose on the assets of
RBS A&C or demand payment under guarantees, and the cash assets of the Issuer and the Guarantors which
are in the possession of RBS A&C in its cash management role. The Issuer and the Guarantors could be
considered unsecured creditors of RBS A&C (because of the funds that RBS A&C holds on their behalf),
ranking pari passu with the claims of the unsecured creditors of RBS A&C and junior to the claims of the
secured creditors of RBS A&C. In the event of a liquidation, insolvency or bankruptcy of RBS A&C, the
Issuer, the Guarantors, and in turn the holders of the Notes may not be entitled to receive the value of the
cash assets of these entities held on their behalf by RBS A&C.
In addition, if an event of default occurs under the Notes or the Guarantees, as the case may be, holders
of these Notes may face difficulties in attaching or foreclosing on the cash assets of the Issuer or the
Guarantors, as the case may be, that are in the possession of RBS A&C.
Furthermore, RBS A&C is a defendant in administrative proceedings with the Brazilian tax authorities.
See “Legal Proceedings”.
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RBS Participações
RBS Participações S.A. (“RBS Par”) is a holding company within the RBS Group, formed to hold the
RBS Group’s investments in areas not regulated by the TV and Radio Broadcasting Law. RBS Par currently
holds certain of the RBS Group’s residual investments. RBS Par also holds the RBS Group’s trademarks,
for which it receives royalties from the RBS Group’s companies. RBS Par had net capital deficiency plus
advances for future capital increase of R$433 million as of March 31, 2007.
Government regulation
Introduction
The activities of the RBS Network are subject to government regulation, and certain companies of the
RBS Network are subject to licensing requirements. Newspaper publishing, television broadcasting and
radio broadcasting companies are subject to restrictions on their ownership of other companies which engage
in the same respective media activities. Concessions for television and radio broadcasting are granted by the
President of the Republic of Brazil.
The following discussion gives a brief overview of the government regulation applicable to both the
present and planned principal activities of the RBS Network.
Ownership
Until May 2002, pursuant to Article 222 of the Brazilian Constitution, corporations or other legal
entities could not hold any of the voting shares and could only hold up to 30% of the total share capital (only
in the form of non-voting shares) of the legal entity which owned and operated a television or radio station
or newspaper, provided all shareholders of such corporations were Brazilian citizens. By a Constitutional
Amendment in May 2002, Brazilian corporations (with at least 70% of the total capital and voting capital
held directly or indirectly by Brazilian-born persons or people who have their Brazilian citizenship for more
than 10 years) were authorized to hold up to 100% of the total share capital (including voting shares) of the
legal entity owning and operating a television or radio station or newspaper business. Nevertheless, no
individual, corporation or other legal entity can own interests in more than two television stations in a given
State (and no more than one per city) or in more than ten television stations in Brazil, only five of which may
be VHF television stations. Likewise, no person or legal entity can hold more than six FM local radio
licenses, two AM medium-wave radio licenses and two short-wave radio licenses for all of Brazil.
Newspaper publishing
Pursuant to the Brazilian Federal Constitution and Law N° 5,250 of February 9, 1967 (the “Press
Law”), the publication and circulation of books, newspapers and periodicals in Brazilian territory is free and
is not subject to any governmental concession or approval. Under Articles 8 and 9 of the Press Law, all
newspapers in Brazil must be registered as a company.
In accordance with Article 222 of the Federal Constitution and Articles 3, 4, and 5 of the Press Law,
only Brazilian-born persons, people who have held their Brazilian citizenship for more than 10 years and
private companies which are incorporated under the laws of and have their headquarters in Brazil, may hold
an interest in a newspaper company. At least 70% of the total capital and voting capital in a newspaper
company must be held, directly or indirectly, by Brazilian-born persons or people who have held their
Brazilian citizenship for more than 10 years.
Television and radio broadcasting
Regulation of the Brazilian television and radio industry is principally governed by the Brazilian
Federal Constitution, the Brazilian Telecommunications Code and the Broadcasting Services Regulation.
These are supplemented by rules issued by the Brazilian Ministry of Communications, which has overall
responsibility for the regulation of the Brazilian television and radio industry.
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Under Brazilian law, only certain entities may broadcast in Brazil. These include the Brazilian
government, Brazilian universities and Brazilian private companies whose shares are held by Brazilian
citizens or by private companies which are incorporated under the laws of and have their headquarters in
Brazil. In either case, at least 70% of the total capital and voting capital of such companies must be held,
directly or indirectly, by Brazilian-born persons or people who have held their Brazilian citizenship for more
than ten years. No individual, corporation or other legal entity may hold an interest in more than ten
television stations in Brazil, only five of which may be VHF television stations. Further, no individual,
corporation or other legal entity can hold an interest in more than two television stations in any single State
(and no more than one per city). Similarly, no person or legal entity can hold more than six local FM radio
licenses, four local AM medium-wave radio licenses, two nationwide AM medium-wave radio licenses or
two nationwide short-wave radio licenses.
Provided that they have complied with all the applicable provisions of Brazilian law and have acted in
line with public interest, a licensee has, by law, an automatic right to the renewal of its license. If the
licensee requests the renewal within the term established by law, such renewal will be considered granted if
the relevant agency fails to give any comments or take any action before the existing license expires. The
transfer of licenses is restricted and requires the prior consent of the Brazilian government and may not be
transferred within the initial five years following its date of issuance. In addition, any amendments to the
statutes or by-laws of a legal entity operating a television or radio station, which involves changes to its
corporate purpose, or its management, or which transfers control of the entity, requires the prior approval of
the relevant Brazilian authority.
Although there are few legal restrictions on the content of broadcasts, there is a legal obligation to
ensure that at least 5% of daily programming is set aside for news broadcasts and five hours a week are
dedicated to educational programming. In addition, advertising must be limited to a maximum of 25% of the
total daily programming. There are no formal censorship laws which apply to the Brazilian television and
radio industry, although a system of self-regulation operates in relation to the broadcast of advertisements.
Other operational aspects of the RBS Group
Employees
At December 31, 2006, the RBS Group had 4,521 employees, of which all were permanent employees.
The following chart shows the number of employees employed by the Issuer and the Guarantors and the
other members of the RBS Group at December 31, 2006.
RBS Group Employees
Management
Other
Employees
Issuer and Guarantors ................................................................................................
Other RBS Group companies.........................................................................................
39
52
2,292
2,138
Total...........................................................................................................................
97
4,521
The RBS Group maintains a policy of training management, technical and operational personnel in all
three of its principal media industries. Thus, certain employees of the RBS Group are periodically rotated
from company to company and from one media industry to another. All of the RBS Group’s employees
(except for certain management staff) are represented by 23 different labor unions, which represent their
members in collective bargaining agreements with members of the RBS Group. Labor relations for RBS
Group employees are governed by 20 separate collective bargaining agreements executed between the
relevant RBS Group company and labor unions, each of which have a term of 1 year(s). The RBS Group has
never experienced work stoppages or strikes. The RBS Group considers its relations with its employees to
be very good. The local unions have never raised major concerns. RBS Group maintains a full time officer
for union relationships.
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The RBS Group estimates that 74% of total employee compensation is in the form of fixed and variable
wages, while 19% is in the form of payments made to the government of Brazil for the governmentsponsored medical, unemployment, severance and pension plans and 7% is in the form of payments made to
health-care medical insurance companies, educational institutions and food and transportation services.
Since 1990, the RBS Group utilizes a compensation mechanism whereby all its employees are entitled
to a supplemental compensation paid in February of each year, subject to the achievement, in the previous
year, of a set of operational and/or financial goals, established for each company separately. This scheme,
named “PPR” or Plano de Participação nos Resultados, serves both as an incentive to collective resultsoriented performance, as well as a means of allowing the Group to pay below market average fixed salaries
without jeopardizing RBS Group’s ability to attract and retain quality personnel.
Within its management staff, RBS Group employs, as of December 31, 2006, ten managers holding
MBAs from top U.S. and European business schools, five of whom were sponsored by the RBS Group.
Additionally, several other managerial staff members are holders of international masters degrees in the
fields of law, engineering and journalism, among others.
RBS Group companies, like many Brazilian companies, are frequently involved in disputes regarding
allegedly overdue back pay for workers and employees who no longer work for RBS Group companies. As
Brazilian law and the Brazilian courts tend to look very favorably at worker claims, such disputes are
generally settled outside the judicial system. The RBS Group believes that the financial effect of such
claims and settlements is not, in the aggregate, material to the results of operations of the Issuer, the
Guarantors or the RBS Group as a whole.
Insurance
The RBS Group Board of Directors has in place a comprehensive insurance plan, which it reviews on
an annual basis to evaluate the RBS Group’s permanent insurance needs and reviews the next year’s
requirements.
The Issuer and the Guarantors maintain fire and natural disaster, transportation, civil liability, vehicle
and general risk insurance, which management believes is adequate. Neither the Issuer nor any Guarantor
maintains business interruption insurance. Business interruption risks are reasonably mitigated through the
integration of redundant facilities, like print shops, broadcasting sites and offices. Neither the Issuer nor any
Guarantor has experienced any material business interruption during the last 30 years.
Legal proceedings
The Issuer, the various Guarantors and certain other members of the RBS Group are involved in certain
legal proceedings arising out of their normal business activities. A large number of these proceedings relate
to labor disputes. None of these proceedings, taken individually or in the aggregate, is material to the results
or the operations of the Issuer, the Guarantors or the RBS Group as a whole.
RBS A&C is currently involved in administrative proceedings with the Brazilian tax authorities. In
August 2001, the Brazilian tax authorities claimed that the transaction structure adopted by RBS A&C to
transfer its controlling interest in Nutec Informática Ltda. to Telefônica Interactiva do Brasil Ltda. in 1999
masked capital gains of approximately R$286 million. The Brazilian tax authorities contended that RBS
A&C owed corporate income taxes (“IRPJ” and “CSLL”) on this amount, computed at a combined rate of
34%. As a result, the tax authorities assessed RBS A&C to charge the uncollected amounts of IRPJ and
CSLL, plus interest calculated in accordance with the SELIC rate and a fine of 150%. In September, 2002,
the Brazilian Internal Revenue Office in Porto Alegre ruled that RBS A&C must pay these taxes, the interest
and the fine. RBS A&C appealed to the Court of Taxpayers, which in October 2003 ruled 6 to 2 that RBS
A&C is not obligated to pay these amounts. Tax authorities have presented a special appeal before the
Higher Administrative Court of Taxpayers against this decision. The timing of the hearing on the appeal is
not known. There can be no assurance that the Higher Administrative Court of Taxpayers will rule in RBS
A&C’s favor. If the Higher Administrative Court of Taxpayers rules against RBS A&C, the security already
provided by RBS A&C against payment of the taxes to the Brazilian government - which includes 45%
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(15% voting and 30% non-voting) of the capital of the Issuer - could be executed after a final judicial
decision. RBS A&C has been advised by its Brazilian tax counsel that its chances of loss in the claim are
“possible”, and as a result, RBS A&C has taken no provision against a possible loss in this matter. The
value of the claim as of March 31, 2007 was R$350 million. A final loss in this matter would have a
material negative effect on RBS A&C; however, it should be noted that the case is still under administrative
proceedings and, a final decision would only be rendered after full judicial proceedings have been
completed. In addition, other members of the RBS Group, including the Issuer and the Guarantors, regularly
guarantee indebtedness of RBS A&C, and any material adverse effect on RBS A&C could lead creditors to
call on those guarantees, which could have a material adverse effect on the Issuer and/or the Guarantors. See
“Business – RBS A&C”.
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MANAGEMENT AND OWNERSHIP STRUCTURE
The core businesses of the RBS Network are structured as a group of closely held corporate entities,
with each corporate entity consisting of one television or radio station or one or more newspapers.
Ownership of these various corporate entities is divided among various individuals within the families of
Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa.
The RBS Group’s businesses are owned directly or indirectly by holding companies representing the
families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa,
respectively. The activities of these companies are managed by the RBS Group Executive Committee. In
2005, the RBS Group incorporated RBS Comunicações with the objective of integrating the main businesses
of the RBS Group under a single holding company. The integration was commenced in 2006, and the RBS
Group intends to complete the integration during 2007, including the integration under RBS Comunicações
of RBS-Zero Hora, RBS A&C and RBS Par, and certain other companies.
The RBS Group has implemented strong corporate governance policies, in an effort to treat
appropriately the distinct and separate interests of the members of the controlling families, the property of
the shareholders, and the RBS Group itself. Management has separated the family as a group from the RBS
Group’s day-to-day business decisions by creating separate bodies -- the Executive Committee, the Board of
Directors, the Family Council and the Shareholders Council. In addition, the RBS Group has a policy of
hiring professional, outside management to form its management team, most notably Pedro Pullen Parente as
Executive Vice President and Chief Operating Officer. Prior to joining the RBS Group, Mr. Parente
occupied several senior positions in the Brazilian government, including Chief of Staff to President
Fernando Henrique Cardoso, Minister of Planning, Budget and Management, and Executive Secretary of the
Finance Ministry, and had previously been a consultant to the International Monetary Fund. In 2006, RBS
Group was recognized by the Brazilian Institute for Corporate Governance (IBGC – Instituto Brasileiro de
Governança Corporativa) for having the best corporate governance by a Brazilian private company.
The RBS Group Board of Directors establishes the general guidelines for each business within the RBS
Group, appoints the principal officer for each of the other companies within the RBS Group and resolves
important matters relating to the RBS Group as a whole. It consists of up to eleven members, up to four of
whom are external and independent members. The Executive Committee oversees the day-to-day
management of the RBS Group and consists of members selected jointly by the President and the Chief
Executive Officer of the RBS Group and approved by the RBS Group Board of Directors. The families that
control the RBS Group also work with a prominent international family business consultant to the RBS
Group as a whole on a permanent basis to align the family’s objectives with the corporate governance
principles.
Neither the Issuer nor the Guarantors are aware of any potential conflict of interest between the duties
to the Issuer of the persons listed in the tables below and their private interests or duties. The business
address for each of the persons listed in the tables below (all directors of RBS Group, the Issuer, TV Gaúcha
and Rádio Gaúcha, and all members of RBS Group Executive Committee, the Issuer’s Executive Committee,
TV Gaúcha’s Executive Committee, TV Florianópolis’s Executive Committee and Rádio Gaúcha’s
Executive Committee) is Avenida Érico Veríssimo, 400 2º andar, Porto Alegre, Brazil, 90160-180.
Risk Management
At the request of the Auditing Committee of the RBS Group Board of Directors, in March 2007 the
RBS Group hired an internationally renowned consulting company to assist in the implementation of risk
management practices to help implement and ensure efficient internal business processes and appropriate
compliance mechanisms with its established internal policies. The RBS Group expects to fully implement
this initiative by the end of 2008.
The chart on the following page sets forth the ownership structure of the RBS Group, including the
Issuer and the Guarantors.
91
Shareholding Structure
Family Holdings (IMA / IMAH, JAMA / JAMAH, FEC / FECH)
H+
H+
RBS Network
RBS Group
RBS
RBS
Participações
Participações
RBS
RBS Comunicações
Comunicações S/A
S/A
95%
5%
RBS
RBS A&C
A&C
92
RBS Rádios
Participações
RBS TV
Participações
RBS Credit Group
Canal
Canal Rural
Rural
55%
RBS - Zero
Hora Editora
TV Gaúcha
TV
Florianópolis
Rádio Gaúcha
TV Caxias
TV Blumenau
Rádio Atlântida
POA
Rádio Metrô
Rádio Itapema
FLN
Rádio SP
• Programming concession agreements
45%
Service agreements
Independent Affiliates (14 TV stations and 21 radio stations)
Others
Others
The RBS Group Shareholder Agreement
The relations among the three families which are shareholders of the RBS Group companies are
governed by a shareholder agreement (the “RBS Group Shareholder Agreement”), among IMAH Par,
JAMAH Par and FECH Par, representing the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and
Fernando Ernesto de Souza Corrêa, respectively. Pursuant to the terms of the RBS Group Shareholder
Agreement, if any shareholder intends to sell its interest in an RBS Group company, the other shareholders
will have a pre-emptive right to purchase the shares of the company to be sold. The RBS Group Shareholder
Agreement also sets forth the relative voting rights of the various shareholders, and establishes that the board
of directors of RBS Comunicações S.A. will serve as the board of directors for the RBS Group (the “RBS
Group Board of Directors”) in order to oversee the general direction of the businesses of the RBS Group.
The RBS Group Board of Directors
The RBS Group Board of Directors establishes the general guidelines for each business within the RBS
Group, appoints the officers of RBS Comunicações and the principal officer for each of the other companies
within the RBS Group and resolves important matters relating to the RBS Group as a whole. The RBS
Group Board of Directors consists of up to nine members (currently 8 members). If the shareholders do not
reach a consensus in the appointment of the members of the Board of Directors, up to five of the members
are appointed by IMAH Par (which represents the family of Maurício Sirotsky Sobrinho), up to three of the
members are appointed by JAMAH Par (which represents the family of Jayme Sirotsky) and up to one of the
members is appointed by FECH Par (which represents the family of Fernando Ernesto de Souza Corrêa).
The Directors are elected for one-year terms and meet formally at least every two months.
In addition, the Issuer and each of the Guarantors (except TV Florianópolis, which has only an
executive committee in place) are governed by their own board of directors, the membership of which
generally overlaps to a considerable extent with the membership of the RBS Group Board of Directors. The
following table sets out the members of the RBS Group Board of Directors, generally all of whom are
citizens and residents of Brazil.
Position
RBS Group Board of Directors
Jayme Sirotsky ...............................................................................................................
Nelson Pacheco Sirotsky................................................................................................
Fernando Ernesto de Souza Corrêa ................................................................................
Carlos Eduardo Schneider Melzer .................................................................................
José Pedro Pacheco Sirotsky..........................................................................................
Chairman
Director
Director
Director
Director
The RBS Group also includes the following three external and independent members of the Board of
Directors, since the years indicated below:
Oscar de Paula Bernandes Neto ...................... 1999
David Casimiro Moreira ................................. 1997
Claudio Sonder................................................ 2005
In addition, the RBS Group Board of Directors has an Auditing Committee whose purpose is to assist
the Board of Directors in supervising the financial and accounting aspects of the RBS Group. The members
of the committee are Claudio Sonder (Coordinator), Oscar de Paula Bernandes Neto, Carlos Eduardo
Schneider Melzer, Pedro Pullen Parente and Eduardo Damasceno Ferreira (Executive Secretary).
The RBS Group Executive Committee
Day-to-day management of the RBS Group companies is overseen by the executive committee of the
RBS Group (the “RBS Group Executive Committee”), which consists of members selected jointly by the
President and the Chief Executive Officer of the RBS Group, and approved by the RBS Group Board of
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Directors and which generally meets every week in Porto Alegre. Meetings of the RBS Group Executive
Committee take place in accordance with a schedule established at the beginning of each year or are called
by the President of the RBS Group Executive Committee. Meetings of the RBS Group Executive
Committee do not require the presence of a minimum number of members, and decisions may be taken by a
majority of such members present at a meeting.
In addition, the Issuer and each of the Guarantors have their own executive committees, the
membership of which generally overlaps to a considerable extent with the membership of the RBS Group
Executive Committee. The members of the RBS Group Executive Committee are as follows:
RBS Group Executive Committee
Position in Management
Nelson Pacheco Sirotsky................................ C.E.O. and Publisher
Chief Operating Officer & Executive Vice
Pedro Pullen Parente ................................................................
President
Afonso Antunes da Motta ................................Managing Director, Television
Geraldo Barbosa Corrêa................................
Managing Director, Newspaper and Radio
Silvia Nora Berno de Jesus ................................
Managing Director, Internet and
Innovation
Antônio Augusto Pinent Tigre ................................
Chief Administrative Officer
Eduardo Damasceno Ferreira ................................
Chief Financial Officer
With RBS
Group Since
1971
2003
1987
1983
2006
1991
2000
The Issuer’s and the Guarantors’ Boards of Directors
As mentioned above, the Issuer and each of the Guarantors (except TV Florianópolis) are governed by
their own board of directors, the membership of which generally overlaps to a considerable extent with the
membership of the RBS Group Board of Directors.
According to the by-laws of each of RBS-Zero Hora, TV Gaúcha and Rádio Gaúcha, each of their
board of directors establish the general guidelines for their respective businesses, appoint the officers and
deal with other relevant matters. The following tables set out the members of each of the Issuer’s, TV
Gaúcha’s and Rádio Gaúcha’s boards of directors, all of whom are citizens and residents of Brazil and are
elected for one-year terms.
Issuer’s Board of Directors
Position
Jayme Sirotsky1 ..............................................................................................................
Nelson Pacheco Sirotsky1 ..............................................................................................
Fernando Ernesto de Souza Corrêa 1 ...............................................................................
Carlos Eduardo Schneider Melzer1 ................................................................................
José Pedro Pacheco Sirotsky..........................................................................................
Chairman
Director
Director
Director
Director
TV Gaúcha’s Board of Directors
Position
Jayme Sirotsky1 ..............................................................................................................
Nelson Pacheco Sirotsky1 ..............................................................................................
José Pedro Pacheco Sirotsky..........................................................................................
Chairman
Director
Director
94
Rádio Gaúcha’s Board of Directors
Position
Jayme Sirotsky1 ..............................................................................................................
Nelson Pacheco Sirotsky1 ..............................................................................................
Fernando Ernesto de Souza Corrêa 1 ...............................................................................
Carlos Eduardo Schneider Melzer1 ................................................................................
José Pedro Pacheco Sirotsky..........................................................................................
Chairman
Director
Director
Director
Director
(3)
Also members of the RBS Group Board of Directors.
The Issuer’s and the Guarantors’ Executive Committees
As mentioned above, the Issuer and each of the Guarantors have their own executive committees, the
membership of which generally overlaps to a considerable extent with the membership of the RBS Group
Executive Committee. Day-to-day management of the Issuer and of each of the Guarantors is overseen by
their respective executive committees. The members of the Issuer’s and of each of the Guarantors’ executive
committees are as follows:
Issuer’s Executive Committee
Position in Management
Nelson Pacheco Sirotsky1 ................................Chief Executive Officer
Pedro Pullen Parente1 ................................................................
Vice President
Afonso Antunes da Motta ................................Vice President
Geraldo Barbosa Corrêa 1 ................................Vice President
Silvia Nora Berno de Jesus ................................
Vice President
1
Antônio Augusto Pinent Tigre ................................
Officer
Eduardo Damasceno Ferreira ................................
Officer
TV Gaúcha’s Executive Committee
Position in Management
Nelson Pacheco Sirotsky1 ................................Chief Executive Officer
Pedro Pullen Parente1 2 ................................ Vice President
Afonso Antunes da Motta1 ................................Officer
Antônio Augusto Pinent Tigre ................................
Officer
TV Florianópolis’s Executive Committee
Position in Management
Nelson Pacheco Sirotsky1 ................................Chief Executive Officer
Pedro Pullen Parente ................................................................
Vice President
Afonso Antunes da Motta ................................Officer
Eduardo Damasceno Ferreira ................................
Officer
Rádio Gaúcha’s Executive Committee
Position in Management
Nelson Pacheco Sirotsky1 ................................Chief Executive Officer
Antônio Augusto Pinent Tigre ................................
Officer
Pedro Pullen Parente1 2 ................................ Vice President
Geraldo Barbosa Corrêa 1 ................................Officer
(1)
(2)
With RBS
Group Since
1971
2003
1983
1991
2000
With RBS
Group Since
1971
2003
1987
1991
With RBS
Group Since
1971]
With RBS
Group Since
1971
2003
1983
Also members of the RBS Group Executive Committee.
Appointed in 2003. To comply with Brazilian laws, will only take office after the approval of the Brazilian
Ministry of Communications. See “Business — Government regulation — Television and radio broadcasting”.
95
The members of the three families which are shareholders of the RBS Group companies formed RBS
Comunicações to implement a centralized corporate and management structure. The new structure will be
established by internal by-laws for the RBS Group (the “Internal By-laws”).
Because the RBS Group is not, in and of itself, an established legal entity and is only a reference to
identify several independent corporate entities that consider themselves part of a network of related
companies, the creation of RBS Comunicações is an effort of the three controlling families to provide a
centralized management structure to the companies of the RBS Group. Notwithstanding, each company of
the RBS Group, including the Guarantors and the Issuer, has its own by-laws, which are registered with the
respective legal authorities having jurisdiction over such companies.
The RBS Group is managed by a “shareholders committee”, a “board of directors” and an “executive
committee”. The shareholders committee consists of eight members from the three holding companies
representing the three families which are shareholders of the RBS Group companies, comprised of four
members from IMAH Par, three members from JAMAH Par and one member from FECH Par. The
shareholders committee is responsible for providing the general guidelines for the RBS Group companies.
The board of directors consists of nine members, comprised of three non-executive shareholders of the RBS
Group companies, i.e., shareholders that are not members of the executive committee, up to two members of
the executive committee and up to four outside directors (not members of the executive committee nor of the
three families). The board of directors is responsible for establishing the general guidelines for each
business within the RBS Group, appointing and dismissing the president of the executive committee, and
monitoring the activities of the executive committee. The executive committee is responsible for overseeing
the day-to-day management of the RBS Group companies.
Most of the current members of the RBS Group Board of Directors are appointed members of the board
of directors. Likewise, most of the current members of the RBS Group Executive Committee are appointed
members of the executive committee to be established according to the Internal By-laws.
Biographies of the members of the RBS Group Board of Directors
Jayme Sirotsky. Mr. Jayme Sirotsky is one of the three founding members of the RBS Group. Mr.
Sirotsky entered the journalism profession in 1962, when he joined Rádio Gaúcha. In 1968, he assisted his
brother Maurício Sirotsky Sobrinho to gain control of and expand the operations of Rádio Gaúcha, thus
forming the RBS Group.
Mr. Sirotsky is currently Chairman of the Board of RBS Group, of the Issuer’s Board of Directors and
of the Board of Directors of Fundação Maurício Sirotsky Sobrinho (Maurício Sirotsky Sobrinho
Foundation), a public interest foundation supported by the RBS Group, among others. In addition, Mr.
Sirotsky serves on the Board of Directors and on the Executive Committee of the Inter American Press
Association (“IAPA”), and as member of Associação Brasileira de Emissoras de Rádio e Televisão (the
Brazilian Association of Radio and Television Stations or “ABERT”). He is also founder and current
member of Conselho Nacional de Autoregulamentação Publicitária (“CONAR”), a self-regulatory ethics
counsel of advertisers. Additionally, Mr. Sirotsky is a Board member of a Non-Governmental Organization
called “Voluntary Partners” and of the Junior Achievement of Rio Grande do Sul. He was Executive Vice
President of the RBS Group until 1986, and President and Chief Executive Officer from 1986 to 1991. He
has also served as President and Chairman of the Advisory Council for the World Association of
Newspapers and as President of Associação Nacional de Jornais (the National Newspaper Association or
“ANJ”).
Nelson Pacheco Sirotsky. Mr. Nelson Pacheco Sirotsky, who is the son of the late Maurício Sirotsky
Sobrinho, holds a degree in business and public administration from the Federal University of Rio Grande do
Sul (“UFRGS”), received in 1974. In 1979 he completed post-graduate coursework in executive
management at the University of Southern California. He began his career at Rádio Gaúcha in 1971 and
served as manager of Rádio Gaúcha before becoming regional director for the RBS Group in the State of
Santa Catarina. He has also served as Vice President and President of the Issuer, and is presently Chief
Executive Officer of the Issuer as well as a member of the RBS Group Board of Directors and of the Issuer
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Board of Directors, among others. In addition, Mr. Nelson Pacheco Sirotsky is the President and Publisher
of the RBS Group and a member of the RBS Group Executive Committee. He is also President of Fundação
Maurício Sirotsky Sobrinho, member of the IBM Advisory Council to Latin America and of the Brazilian
Council to the Institut European d’Administration des Affaires (the European Institute of Business
Administration or “INSEAD”), and the President of the Associação Nacional de Jornais (The National
Newspaper Association or “ANJ”) as well as Board member of the National Newspaper Association - ANJ
and of the Brazilian Association of Radio and Television Stations - ABERT.
Fernando Ernesto de Souza Corrêa. Mr. Corrêa is a lawyer, business administrator, journalist and
professor who received both his law and business administration degrees from the UFRGS in 1959 and 1972,
respectively. He joined Rádio Gaúcha as an in-house counsel in August 1963. He is one of the three
founding members of the RBS Group. Currently, he serves as Deputy Chairman of the RBS Group Board of
Directors and of the Issuer Board of Directors, among others.
Mr. Corrêa has served as President of Sindicato das Empresas de Radiofusão do Estado do Rio Grande
do Sul (the Broadcasting Companies Union of the State of Rio Grande do Sul), President of Sindicato das
Empresas Proprietárias de Jornais e Revistas do Estado do Rio Grande do Sul (the Newspaper and
Magazine Owners Union of the State of Rio Grande do Sul), President of Associação Gaúcha de Emissoras
de Rádio e Televisão (the Association of Radio and Television Stations of Rio Grande do Sul or “AGERT”),
Vice President of the Brazilian Association of Radio and Television Stations - ABERT and officer of the
Legal Committee for the National Newspaper Association - ANJ, among others. He is currently a member
of the Consulting Council of ABERT, of the Television Committee for the International Association of
Broadcasting Companies (“AIR”), of the Free Expression Committee of ANJ, as well as founding partner of
FESC Consultoria e Participações S/C Ltda., a local law firm.
Carlos Eduardo Schneider Melzer. Mr. Melzer received his law degree from the UFRGS in 1970. He
also completed advanced executive coursework in business administration at the University of Southern
California in 1980 and at INSEAD in 1995. Mr. Melzer joined the RBS Group in 1971 as manager of
television operations in Rio Grande do Sul and became Vice President and Director of the RBS Group in
1991. Currently, Mr. Melzer serves as a member of the RBS Group Board of Directors and of the Issuer
Board of Directors, among others, as well as Vice President of the Issuer and Chief Executive Officer of
Maiojama Participações Ltda., a leading real estate company owned by members of the Sirotsky family,
among others.
Oscar de Paula Bernardes Neto. Mr. Bernardes Neto presently is a senior partner and Chairman of
LID (Latin American Internet Development) Group, a member of the audit committee of Delphi
Corporation’s Board of Directors, and has been a member of the RBS Group Board of Directors since 1999,
among other directorships. He was Chief Executive Officer of Bunge International from 1996 to 1999.
Before joining Bunge, Mr. Bernardes Neto was a senior partner at Booz Allen & Hamilton. Additionally,
he had managing roles at Alcoa Alumínio S.A., Gerdau S.A., Seara Alimentos, Johnson Electric Holdings
Ltd. and at Companhia Suzano de Papel e Celulose, among others.
David Casimiro Moreira. Mr. Moreira received his engineering degree in 1968 from the University of
São Paulo and, in 1976, completed post-graduate coursework in executive management at Fundação Getúlio
Vargas. Mr. Moreira is a business consultant specializing in privatization and business restructuring
processes, and has been a member of the RBS Group Board of Directors since 1997. Mr. Moreira has
served as Secretary for the Privatization Council of the Brazilian federal government from 1986 to 1988, as
President of the Brazilian Association of Capital Market Analysts, as member of the Board of Directors of
Banco do Brasil S.A. and Máquinas Piratininga S.A., as well as had many managing roles at several entities,
such as in Gradiente Eletrônica S.A., Banco Real S.A. (current ABN-AMRO Bank S.A.) and São Paulo
Alpargatas S.A. Further, Mr. Moreira currently serves as a member of the Board of Directors of Banco
Nossa Caixa S.A., a State-owned bank of the State of São Paulo, and is a member of the Consulting Council
for Booz Allen Hamilton in São Paulo.
Claudio Sonder. Mr. Sonder received his chemical engineering degree and his economics degree from
Instituto Presbiteriano Mackenzie, both in 1966. He also received a degree in Management Development
from Harvard University in Boston. As an expert in refocusing and streamlining global businesses, he has
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held numerous corporate management positions. He began his career in 1966 at Hoechst do Brasil as a
Chemicals Sales Manager, and then as Head of Corporate Staff. In 1974 he joined the Corporate Staff of
Hoechst AG Frankfurt for Regional Coordination - Latin America, and he has served as a Member of the
Board of Management there since 1996. Mr. Sonder also currently serves as Chairman of the Board of
Management of Celanese AG in Kronberg and as Chairman of the Strategy Committee for both Suzano
Petroquimica S.A. and Companhia Suzano de Papel e Celulose S.A. He is a Member of the Supervisory
Board of Sociedade Cultura Artistica and a Member of the Board of Hospital Albert Einstein, both in São
Paulo. In 2004, Mr. Sonder joined Panorama Consult, in São Paulo, as Managing Partner.
Biographies of the members of the RBS Group Executive Committee
Pedro Pullen Parente. Mr. Parente received his BSc. in electrical engineering from University of
Brasília in 1976. As an expert in public finance, Mr. Parente held numerous positions in governmental
economic areas throughout his career. Among others, he is former Minister of State and Chief of
Presidential Staff (from 1999 to 2002), Minister of Planning, Budget and Administration (from April to July
1999) and Deputy Minister of Finance (from 1995 to 1999) of the Federative Republic of Brazil. Mr.
Parente has also been appointed, among several other roles in public administration, as Coordinator of the
negotiations with Brazilian States aimed at restructuring their indebtedness with the Brazilian government
and President of the Energy Crisis Committee, coordinating Brazilian government efforts to overcome the
2001/2002 energy shortage. He has also been a Consultant of the International Monetary Fund in 1993 and
1994. He currently holds the position of Chief Executive Officer of RBS Group and of Officer of the
Issuer’s Executive Committee, among others. He has also served as Board member of large State-owned
companies, such as Banco do Brasil S.A., Caixa Econômica Federal, Itaipu Binacional and Petrobrás S.A.
He currently holds positions as a board member of ALL - América Latina Logística, SUZANO
Petroquímica S.A., Wilson Sons Limited and TAM Linhas Aéreas S.A.
Afonso Antunes da Motta. Mr. Motta received his law degree from the UFRGS in 1972, as well as
holds post-graduate degrees in business administration from INSEAD (1994) and J.L. Kellogg School of
Management (1996). Mr. Motta joined the RBS Group in 1987 as General Counsel and became Chief
Operating Officer for the RBS Group television segment in 2002. He also served as President of the
Association of Radio and Television Stations of Rio Grande do Sul - AGERT and has served in several
committees at the National Newspaper Association - ANJ and at the Brazilian Association of Radio and
Television Stations - ABERT.
Geraldo Barbosa Corrêa. Mr. Barbosa Corrêa received his law degree from PUC-RS in 1984, and his
LL.M. degree from the London School of Economics and Political Science in 1987. He also holds a postgraduate degree in business administration from the UFRGS, granted in 1989, and completed advanced
executive coursework in business administration at Harvard Business School, University of Michigan
Business School and at J.L. Kellogg School of Management. Mr. Barbosa Corrêa joined the RBS Group in
1983 as an in-house counsel and became Chief Operating Officer for the Broadcast Division in 1995. He is
currently Chief Operating Officer for the Newspaper segment (since 2000) and, most recently, also for the
Radio and Online segments, among others. He also serves as Officer in the Issuer’s Executive Committee,
as Vice President of the Newspaper and Magazine Owners Union of Rio Grande do Sul and is a founding
member of the Human Resources Group at the National Newspaper Association - ANJ. He has also served
as Vice President of the Association of Radio and Television Stations of Rio Grande do Sul - AGERT for a
4-year period.
Sílvia Nora Berno de Jesus received her chemical engineering (1977) as well as her business
administration degree (1984) from the UFRGS. She also attended the Fundação Dom Cabral and
Northwestern University’s Kellogg School of Management in Chicago for a business administration
specialization degree. Mrs. de Jesus is the Vice-President for internet and innovation at RBS Group. One of
the pioneers of the internet in Brazil, she led the implementation of ZAZ, one of Brazil’s first web portals
and internet service providers, in 1996. Mrs. de Jesus was also CEO of Terra (a web portal and internet
service provider) for Latin America, where she was responsible for the portal’s administration and results for
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14 countries, including Brazil, Argentina, Chile, Colombia, Mexico, Peru and Venezuela, as well as Central
America and Hispanic market in the United States.
Antônio Augusto Pinent Tigre. Mr. Tigre received his MBA degree from the University of Southern
California in 1998. He also holds a specialization degree in finance, received in 1990, and a degree in
Business Administration (B.A.), received in 1989, both from PUC-RS. He joined the RBS Group in 1991
and since then has served as manager in different business segments. He was designated Corporate Financial
Officer in 1998, and in 2000 he was further appointed as general manager of RBS Online. In 2002, he
became the general manager of the radio business, and in 2003 he was appointed Chief Administrative
Officer. He also serves as Officer in the Issuer’s Executive Committee. Among his current responsibilities
are the strategic planning, human resources, legal, corporate marketing and information technology areas.
Mr. Tigre currently serves as Vice-President of Federação das Associações Comerciais e de Serviços do Rio
Grande do Sul, FEDERASUL (the Rio Grande do Sul’s Commercial Associations Federation or
“FEDERASUL”).
Eduardo Damasceno Ferreira. Mr. Damasceno is RBS Group’s Chief Financial Officer since March
2000. He holds an MBA degree from INSEAD, received in 1994, and earned his BSc. degree in electrical
engineering in 1985 and a degree in business administration in 1992 from UFRGS. Mr. Damasceno started
his professional career in Stuttgart, Germany as a trainee engineer at Herion Werke KG and later as project
engineer at Fraunhofer-IPA (Institut für Produktionstechnik und Automatisierung). Between 1989 and 1993,
Mr. Damasceno worked as technology manager for Zivi-Hercules, a Brazilian cutlery manufacturer. After
finishing his MBA in 1994, he joined Deutsche Bank AG as an investment banker. He first joined RBS
Group in August 1996 as corporate planning manager, shortly thereafter being appointed managing officer at
the TV and radio broadcasting divisions. In early 1999 he left to assume the position of Chief Financial
Officer of Rio Grande Energia S.A., an energy utility company, returning to the RBS Group in March 2000
to assume his current position of Chief Financial Officer.
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RELATED PARTY TRANSACTIONS WITH RBS GROUP COMPANIES
The companies which form part of the RBS Group, including the Issuer and the Guarantors, are largely
operated as an integrated network similar to divisions of a single corporation. There are numerous
transactions between these various RBS Group companies, many of which involve a free exchange of
information or services in the ordinary course of business. In addition to these free exchanges of information
and services, numerous transactions occur and numerous relationships exist between the various RBS Group
companies. These transactions and relationships are described elsewhere in this Offering Memorandum and
in the financial statements, including the footnotes related thereto, or summarized below.
RBS A&C, a company approximately 95% owned by the controlling shareholders of the RBS Group
and approximately 5% owned by RBS Par, performs treasury functions for the RBS Group companies,
including for the Issuer and the Guarantors, centralizing cash management operations. Since 1993, cash
revenues of any of the RBS Group companies has been collected and held by RBS A&C, as a “cash
management company”, on behalf of the respective RBS Group company pursuant to a contractual
arrangement among the companies. As each member of the RBS Group requires funds, it withdraws cash on
deposit with RBS A&C, issues payment instructions to RBS A&C or requests a loan from another member
of the RBS Group. RBS A&C and RBS Group companies also may borrow funds from third parties, such as
banks or the shareholders of the RBS Group. Except for the advances for future capital increases and the
“balances receivable” receivable from RBS A&C, which bear no interest, intra-company loans with the
Credit Group are generally done on an arms-length basis at market rates.
Transactions with related parties are reflected in the Issuer Financial Statements but, in the case of the
balances and transactions between the Issuer and each of the three Guarantors or among the Guarantors, are
eliminated in the Credit Group Financial Statements. At December 31, 2006 RBS Par had recorded a long
term liability of R$164.5 million for amounts payable to the Credit Group companies, including R$104.6
million to RBS-Zero Hora, R$45.9 million to TV Gaúcha, R$11.6 million to RBS TV Florianópolis and
R$2.4 million to Rádio Gaúcha. At such date, RBS A&C had recorded a current liability of R$179.2 million
for amounts payable to the Credit Group, including R$72.1 million to RBS-Zero Hora, R$71.8 million to TV
Gaúcha, R$30.3 million to TV Florianópolis and R$5 million to Rádio Gaúcha.
TV Gaúcha and TV Florianópolis have arrangements in effect with the other television stations in the
RBS Network regarding the sharing of advertising revenues and programming, which are described under
“Business — The Guarantors — TV Gaúcha and TV Florianópolis — RBS Group programming”, “Business
— The Guarantors — TV Gaúcha and TV Florianópolis — Advertising operations” and “Business — The
Guarantors — TV Gaúcha and TV Florianópolis — Revenue structure”. These arrangements are generally
beneficial to TV Gaúcha and TV Florianópolis because they are able to exploit the synergies existing among
the different television stations, providing an operational advantage over many of their competitors and
generating substantial economies of scale. Although the RBS Network currently has no plans to change these
relationships, there can be no assurance that the RBS Network will not make any such changes in these
relationships in the future which would have a material adverse effect on the financial results of TV Gaúcha
and TV Florianópolis.
As described herein under “Business”, the various companies comprising the RBS Group offer each
other services and support of various types. For instance, RBS-Zero Hora provides news free of charge to
other RBS Group members in return for whatever news reports (generally of a local nature) these other
member companies produce. Likewise, as part of the RBS Group’s marketing strategy, spare advertising
space in RBS-Zero Hora’s newspapers, including Zero Hora and Diário Catarinense, is used to print
advertisements free of charge of RBS Group television and radio stations, as well as of events and shows
promoted by the Group, and free air time on TV Gaúcha, TV Florianópolis and Rádio Gaúcha is used for
free advertisements for RBS Group newspapers or other services, as well as events and shows promoted by
the Group.
The RBS Group is managed by a single management team, as further described in “Management and
Ownership Structure — The RBS Group Executive Committee”. Notwithstanding, the RBS Group’s
newspaper, radio and broadcast television operations are generally conducted in separate facilities and with
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separate programming and separate advertising sales staff. Though most of the facilities, content production
and sales forces operate separately, permanent functional committees, such as sales and marketing, editorial
and technical, bring together cross-unit expertise, foster synergies and assure that the decision-making
process remains consistent throughout the RBS Group.
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DESCRIPTION OF THE NOTES
The Notes and the Guarantees will be issued pursuant to an Indenture to be dated as of the Settlement
Date (the “Indenture”) between the Issuer, the Guarantors and The Bank of New York as trustee (the
“Trustee”, which term shall include any successor trustee or trustees under the Indenture) for the Holders of
the Notes in a transaction not subject to the registration requirements of the Securities Act. The Notes are
subject to the terms of the Indenture and prospective noteholders are referred to the Indenture for a statement
of such terms. Definitions of certain capitalized terms used in the Indenture and in the following summary
are set forth below under “— Certain Definitions”. Noteholders are entitled to the benefit of, are bound by,
and are deemed to have notice of, all the provisions of the Indenture, including the Guarantees of the
Guarantors set forth therein.
The following summary of certain provisions of the Indenture does not purport to be complete and is
qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used
below. The Indenture will not be qualified under the U.S. Trust Indenture Act of 1939, as amended.
Consequently, the Holders (as defined below) of Notes generally would not be entitled to the protections
under such Act to holders of debt securities issued under a qualified indenture.
For purposes of these terms and conditions, references to “Notes” shall, as the context may require, be
deemed to be references to the Global Notes or, as the case may be, the Definitive Registered Notes.
General
The Notes will constitute direct, unconditional and unsecured obligations of the Issuer and shall at all
times rank pari passu, without any preference among themselves, with all present and future unsecured and
unsubordinated obligations of the Issuer.
The Notes will bear interest from the Issue Date at the rate of 11.25% per annum, payable semiannually in arrears on June 15 and December 15, commencing on December 15, 2007. Interest will be
calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an
incomplete month, on the basis of the actual number of days elapsed. The determination by the Paying Agent
of amounts of interest shall, in the absence of manifest error, be final and binding on all parties. Unless
previously redeemed or purchased and cancelled, the Notes shall be redeemed at their principal amount on
June 15, 2017.
All payments of principal, interest or otherwise made in respect of the Notes shall be made in U.S.
dollars, as set forth in the Indenture and as further described herein.
The Guarantees
The Notes will have the benefit of Guarantees by which each Guarantor, jointly and severally with the
other Guarantors, guarantees, pari passu with all other existing and future unsecured and unsubordinated
obligations of such Guarantor, the due and punctual payment of the principal, premium (if any), interest and
Additional Amounts (if any) on the Notes, when and as the same become due and payable, whether at stated
maturity, upon redemption or repayment, upon declaration of acceleration or otherwise (the “Guarantees”).
The Indenture will provide that the obligations of the Guarantors under their respective Guarantees will be
limited so as not to constitute a fraudulent conveyance under applicable law.
Form, denomination and registration
The Notes will be denominated in Brazilian reais (“BRL”). Notes offered and sold in reliance on
Regulation S, which will be sold outside the United States to Persons other than U.S. persons (as defined in
Regulation S), will initially be represented by a single, permanent Global Note in certificated, fully
registered form without interest coupons (a “Regulation S Global Note”) which will be registered in the
name of a nominee of DTC and deposited on behalf of the holders of the Notes represented thereby with the
Trustee as custodian for DTC for credit to the respective accounts of the holders (or to such other accounts as
they may direct) at a DTC Participant, including Euroclear or Clearstream, Luxembourg.
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Certain of the Notes are to be offered and sold within the United States to qualified institutional buyers
(as defined in Rule 144A) in reliance on an exemption from registration under the Securities Act. Such Notes
will be represented by a single, permanent Global Note in certificated, fully registered form without interest
coupons (a “Restricted Global Note” and together with the Regulation S Global Note, the “Global Notes”)
which will be registered in the name of a nominee of DTC and deposited on behalf of the purchasers of the
Notes represented thereby with the Trustee as custodian for DTC. Restricted Global Notes will be subject to
certain restrictions on transfer set forth in the Indenture and will bear a legend regarding such restrictions.
Owners of beneficial interests in Global Notes will be entitled or required, as the case may be, under
certain limited circumstances described in the Indenture to receive physical delivery of certificated Notes in
fully registered definitive form (“Definitive Registered Notes”). The Notes are not issuable in bearer form.
The Issuer will appoint The Bank of New York to serve as Registrar and Trustee, The Bank of New
York as the Paying and Transfer Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd. as Principal Paying Agent,
of the Notes, each at its offices specified in the Indenture. The Trustee, Registrar and Principal Paying
Agent, will be responsible for, among other things, (i) maintaining a record of the registration of ownership,
exchange and transfer of the Notes and accepting Notes for exchange and transfer, (ii) ensuring that
payments of the principal and interest received from the Issuer or any Guarantor in respect of the Notes are
duly paid to the registered holders thereof, (iii) transmitting to the Issuer and the Guarantors any notices or
other communications from Noteholders and (iv) transmitting to the Noteholders notice of the occurrence of
any Event of Default as soon as practicable after obtaining knowledge thereof.
The Issuer will appoint The Bank of New York to serve as Calculation Agent at its office specified in
the Indenture. The Calculation Agent will be responsible for performing the duties set forth in the Indenture
in respect of calculating U.S. dollar amounts of payments to be made from time to time in respect of the
Notes, as further described herein.
The Notes will be issued in minimum denominations of BRL200,000 (and integral multiples of
BRL1,000 in excess thereof).
Global notes
So long as the depositary for a Global Note, or its nominee, is the registered holder of such Global
Note, such depositary or such nominee, as the case may be, will be considered the absolute owner or holder
of the Notes represented by such Global Note for all purposes under the Indenture and the Notes and
members of, or participants in, the depositary as well as any other persons on whose behalf participants may
act (including Euroclear and Clearstream, Luxembourg and accountholders and participants therein) will
have no rights under the Indenture or under a Global Note.
Owners of beneficial interests in a Global Note will not be considered to be the owners or holders of
any Note under the Indenture or the Notes. In addition, no beneficial owner of an interest in a Global Note
will be able to exchange or transfer that interest, except in accordance with the applicable procedures of the
depositary, Euroclear and Clearstream, Luxembourg, in each case to the extent applicable (the “Applicable
Procedures”).
Investors may hold their interests in the Regulation S Global Note directly through Clearstream,
Luxembourg or Euroclear, if they are participants in such systems, or indirectly through organizations which
are accountholders in such systems. Clearstream, Luxembourg and Euroclear will hold interests in the
Regulation S Global Note on behalf of their accountholders through customers’ securities accounts in their
respective names on the books of their respective depositaries, which in turn will hold such interests in the
Regulation S Global Note in customers’ securities accounts in the depositaries’ names on the books of DTC.
Investors that are qualified institutional buyers may hold their interests in the Restricted Global Note directly
through DTC if they are participants in such system, or indirectly through organizations that are participants
in such system.
Payments of the principal of, and interest and Additional Amounts on, individual Notes represented by
a Global Note registered in the name of a depositary or its nominee will be made to the depositary or its
nominee, as the case may be, as the registered owner of the Global Note representing such Notes. None of
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the Issuer, the Guarantors, the Trustee, the Registrar, any Paying Agent or the Calculation Agent will have
any responsibility or liability for any aspect of the records relating to or payments made on account of
beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
The Issuer expects that the depositary for the Global Notes or its nominee, upon receipt of any payment
of principal or interest in respect of a Global Note representing any Notes held by such depositary or its
nominee, will immediately credit the accounts of its participants with payments in amounts proportionate to
their respective beneficial interests in the principal amount of such Global Note as shown on the records of
the depositary or its nominee. The Issuer also expects that payments by participants to owners of beneficial
interests in such Global Note held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of customers registered in the
name of nominees for such customers. Such payments will be the responsibility of such participants.
Definitive registered notes
Interests in the Regulation S Global Note and the Restricted Global Note will be exchangeable or
transferable, as the case may be, for Definitive Registered Notes if (i) DTC notifies the Issuer that it is
unwilling or unable to continue as depositary for such Global Note, or DTC ceases to be a “clearing agency”
registered under the Exchange Act, and a successor depository is not appointed by the Issuer within 90 days
or (ii) an Event of Default (as defined below) has occurred and is continuing with respect to such Notes.
Upon the occurrence of any of the events described in the preceding sentence, the Issuer will cause the
appropriate Definitive Registered Notes to be delivered. In the case of such Definitive Registered Notes
issued in exchange for the Restricted Global Note, such Definitive Registered Notes shall bear the legend set
forth on the Restricted Global Note. Upon the transfer, exchange or replacement of Notes bearing such
legend, or upon specific request for removal of the legend on a Note, the Issuer shall deliver only Notes that
bear such legend, or shall refuse to remove such legend, as the case may be, unless there is delivered to the
Issuer satisfactory evidence as may reasonably be required by the Issuer, which may include an opinion of
U.S. counsel, that neither the legend nor the restrictions on transfer set forth therein are required to ensure
compliance with the provisions of the Securities Act. Definitive Registered Notes will be exchangeable or
transferable for interests in other Definitive Registered Notes as described in the Indenture.
Transfer and exchange
Before the 40th day after the later of commencement of the offering and the date of the delivery of the
Notes, transfers by a holder of a beneficial interest in the Regulation S Global Note to a transferee who takes
delivery of such interest through the Restricted Global Note will be made only in accordance with the
Applicable Procedures and upon receipt by the Registrar of a written certification from the transferor of the
beneficial interest in the form provided in the Indenture to the effect that such transfer is being made to a
person whom the transferor reasonably believes is a qualified institutional buyer in a transaction meeting the
requirements of Rule 144A and in accordance with any applicable securities laws of any State of the United
States or any other jurisdiction. After such 40th day, such certification requirement will no longer apply to
such transfers.
Transfers by a holder of a beneficial interest in the Restricted Global Note to a transferee who takes
delivery of such interest through the Regulation S Global Note will be made only upon receipt by the Trustee
of a written certification from the transferor in the form provided in the Indenture to the effect that such
transfer is being made in accordance with Regulation S, or, if available, that the interest in the Note being
transferred is not a “restricted security” within the meaning of Rule 144 under the Securities Act.
Transfers between participants in DTC will be effected in the ordinary way in accordance with the
Applicable Procedures and will be settled in same-day funds. Transfers between participants in Euroclear
and Clearstream, Luxembourg will be effected in the ordinary way in accordance with their respective rules
and operating procedures.
Definitive Registered Notes may be exchanged or transferred in whole or in part in the principal
amount of authorized denominations by surrendering such Definitive Registered Notes at the office of the
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Registrar or the Transfer Agent with a written instrument of transfer, the form of which is provided in the
Indenture.
The costs and expenses of effecting any exchange or registration of transfer pursuant to the foregoing
provisions, except for the expense of delivery by other than regular mail (if any) and except for the payment
of a sum sufficient to cover any tax or other governmental charges or insurance charges that may be imposed
in relation hereto, will be borne by the Issuer.
All Definitive Registered Notes issued upon any exchange or registration of transfer of securities shall
be valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits, as the Notes
surrendered upon exchange or registration of transfer. Such Definitive Registered Notes shall be obtainable
at the offices of the Registrar and the Transfer Agent.
The Registrar will effect transfers of Global Notes and, along with the Transfer Agent, will effect
exchanges and transfers of Definitive Registered Notes. In addition, the Registrar will keep books (the
“Register”) for the ownership, exchange and transfer of any Notes in definitive form.
The laws of some jurisdictions require that certain persons take physical delivery of securities in
definitive form. Consequently, any transfer of beneficial interests in a Global Note to such persons may
require that such interests in a Global Note be exchanged for Definitive Registered Notes. Because DTC can
only act on behalf of its direct participants, which in turn act on behalf of indirect participants and certain
banks, the ability of a person having a beneficial interest in a Global Note to pledge such interest to persons
or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest,
may require that such interest in a Global Note be exchanged for Definitive Registered Notes. Interests in a
Global Note will be exchangeable for Definitive Registered Notes only in the limited circumstances
described under “— Definitive registered notes” above.
Subject to compliance with the transfer restrictions applicable to the Notes described above, crossmarket transfers between DTC, on the one hand, and directly or indirectly through Euroclear or Clearstream,
Luxembourg accountholders, on the other, will be effected in DTC in accordance with DTC rules on behalf
of Euroclear or Clearstream, Luxembourg, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or Clearstream, Luxembourg, as
the case may be, by the counterparty in such system in accordance with its rules and procedures and within
its established deadlines (Brussels time). Euroclear or Clearstream, Luxembourg, as the case may be, will if
the transaction meets its settlement requirements, deliver instructions to its respective depositary to take
action to effect final settlement on its behalf by delivering or receiving interests in the Regulation S Global
Note in DTC and making or receiving payment in accordance with normal procedures for same-day funds
settlement applicable to DTC. Clearstream, Luxembourg accountholders and Euroclear accountholders may
not deliver instructions directly to the depositaries of Clearstream, Luxembourg or Euroclear.
Because of time zone differences, the securities account of a Euroclear or Clearstream, Luxembourg
accountholder purchasing an interest in the Restricted Global Note from a DTC participant will be credited
during the securities settlement processing day immediately following the DTC settlement date and such
credit of any transactions in interests in the Restricted Global Note settled during such processing will be
reported to the relevant Euroclear or Clearstream, Luxembourg accountholder on such business day. Cash
received in Euroclear or Clearstream, Luxembourg as a result of sales of interests in a Regulation S Global
Note by or through a Euroclear or Clearstream, Luxembourg accountholder to a DTC participant will be
received with value on the DTC settlement date but will be available in the relevant Euroclear or
Clearstream, Luxembourg cash account only as of the business day following settlement in DTC.
Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the foregoing procedures in
order to facilitate transfers of interests in a Regulation S Global Note among participants and accountholders
of DTC, Clearstream, Luxembourg and Euroclear, they are under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time. Neither the Issuer nor the
Trustee will have any responsibility for the performance by DTC, Clearstream, Luxembourg or Euroclear or
their respective direct or indirect participants or accountholders of their res pective obligations under the rules
and procedures governing their operations.
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Title to Notes passes by registration in the register which is kept by the Registrar. The holder of any
Note will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or
not it is overdue and regardless of any notice of ownership, trust or any interest in it, any writing on it, or its
theft or loss) and no person shall be liable for so treating the holder. The depository with whom a Global
Note is deposited, and not the owners of beneficial interests therein, will be treated as the Holder thereof
except in the limited circumstances specified in the Indenture.
Provision of Information
For so long as any of the Notes bearing a restrictive legend remain outstanding and are “restricted
securities” within the meaning of Rule 144(a)(3), the Issuer and each of the Guarantors covenants and agrees
that it shall, during any period in which it is not subject to Section 13 or 15(d) under the United States
Securities Exchange Act of 1934, as amended, nor exempt from reporting pursuant to Rule 12g3-2(b) under
such Act, make available to any holder of any such Note in connection with any sale thereof and to any
prospective purchaser of any such Note from such holder, in each case upon request, the information
specified in, and meeting the requirements of Rule 144A(d)(4) under the Securities Act.
Status and Ranking
The Notes constitute direct, unconditional and unsecured obligations of the Issuer and shall at all times
rank pari passu, without any preference among themselves, with all present and future unsecured and
unsubordinated obligations of the Issuer.
Interest
The Notes shall bear interest from their date of issue at the rate of 11.25% per annum (the “Rate of
Interest”) payable semi-annually in arrears on each June 15, and December 15 (each, an “Interest Payment
Date”), commencing December 15, 2007. Interest will be paid on each Interest Payment Date on each Note
in an amount equal to the outstanding principal amount of such Note, multiplied by the Rate of Interest, with
the interest amount to be converted into U.S. dollars by the Calculation Agent on the relevant Fixing Date
using the FX Rate. Such interest will be calculated on the basis of a 360-day year consisting of 12 months of
30 days each and, in the case of an incomplete month, on the basis of the actual number of days elapsed.
The determination by the Paying Agent of amounts of interest for the purposes of the Indenture shall, in
the absence of manifest error, be final and binding on all parties.
Redemption
Unless previously redeemed or purchased and cancelled and destroyed, the Notes shall be redeemed on
June 15, 2017 (the “Maturity Date”) at their principal amount, divided by the FX Rate in respect of the
Maturity Date.
The Notes may be redeemed at the option of the Issuer prior to maturity if (A) there is any change in or
amendment to the Treaty to Avoid Double Taxation entered into between Brazil and Japan, approved by
Legislative Decree No. 43 dated November 23, 1967 and enacted in Brazil by Decree No. 61,899 dated
December 14, 1967, as amended by Decree No. 81,194 dated January 9, 1978, which has the effect of
increasing the rate of tax applicable under such treaty to a rate exceeding 12.5%; or (B)(i) as the result of any
change in or amendment to the laws or regulations of Brazil or of any political subdivision or authority
thereof or therein having power to tax or any change in the application or official interpretation of such laws
or regulations, which shall become effective after the date of the issuance of the Notes, the Issuer or any
Guarantor has or will become obligated to pay, or (ii) any act is taken by a taxing authority of Brazil after the
date of issuance of the Notes (whether or not such act is taken with respect to the Issuer, any Guarantor or
any Affiliate thereof) that results in a substantial probability that the Issuer or any Guarantor will be required
to pay. Additional Amounts with respect to payments of principal of, and interest on, the Notes as provided
or referred to under “— Additional Amounts” below (excluding interest and penalties) in excess of the
Additional Amounts that the Issuer or any Guarantor would be obligated to pay if Brazilian Taxes (as
defined below) (excluding interest and penalties) were payable with respect to such payments at a rate of
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15% and such obligation cannot be avoided by the Issuer or such Guarantor, as the case may be, taking
reasonable measures available to it, then the Issuer may, at its option, redeem or cause the redemption of the
Notes as a whole (but not in part), upon not more than 60 nor less than 30 days’ notice to the holders of such
Notes (with copies to the Trustee and the Paying Agent) at 100% of their principal amount, together with
accrued interest to (but excluding) the date fixed for redemption, plus any such Additional Amounts payable
with respect to such principal amount and interest as provided in the Indenture, divided by the FX Rate in
respect of such date fixed for payment.
Prior to the giving of notice of redemption of the Notes as described herein and as a condition to any
such redemption, the Issuer will deliver to the Trustee a certificate (together with a copy of an Opinion of
Counsel to the effect that the applicable rate has so increased, or the Issuer or any Guarantor has or will
become so obligated, or that an act taken by a taxing authority in Brazil has resulted in a substantial
probability that the Issuer or any Guarantor will become so obligated to pay Additional Amounts as a result
of such change, amendment, interpretation or act), stating that the Issuer is entitled to effect such redemption
and setting forth in reasonable detail a statement of facts relating thereto. No notice of redemption shall be
given earlier than 60 days prior to the earliest date on which the Issuer or any Guarantor would be obligated
or there is a substantial probability that the Issuer or any Guarantor would be obligated to pay such
Additional Amounts were a payment in respect of the Notes then due and, at the time such notice of
redemption is given, such obligation to pay, or such substantial probability that the Issuer will be required to
pay, such Additional Amounts remains in effect. The Issuer shall not have the right to redeem the Notes as
described in clause (B) above if it becomes obligated to pay Additional Amounts that are less than the
Additional Amounts payable at such 15% rate (excluding interest and penalties).
Purchases by the Issuer
The Issuer or any of its Subsidiaries or Affiliates (as defined below) may at any time purchase Notes in
the open market or otherwise at any price in accordance with applicable legal and regulatory requirements.
Any purchase by tender of Notes shall be made available to all Noteholders alike subject to applicable legal
and regulatory requirements. The Notes so purchased, while held by or on behalf of the Issuer or such
Subsidiary or Affiliate, shall not entitle the holder to vote at any meetings of the Noteholders and shall not be
deemed to be outstanding for the purposes of calculating quorums at meetings of the Noteholders.
Payments
Payments of amounts due (whether in respect of principal, interest or otherwise) in respect of any Note
will be made by check or transfer in U.S. dollars drawn on a bank in New York City.
Payments of amounts (including accrued interest) due on the final redemption of Notes will be made
against presentation and, except in the case of partial redemption by reason of insufficiency of funds,
surrender of the relevant Notes at the specified office of the Registrar or the Transfer Agent. If the due date
for payment of the final redemption amount of Notes is not a Business Day, the holders thereof will not be
entitled to payment thereof until the Business Day next following such due date and no further interest or
other payment shall be due in respect of such delay except in the event that there is a subsequent failure to
pay in accordance with these terms and conditions.
Payment of amounts (whether principal, interest or otherwise) due (other than in respect of the final
redemption amount of Notes) in respect of the Notes will be paid to the holders thereof as appearing in the
register kept by the Registrar at the opening of business (New York time) on the fifteenth Business Day
before the due date for such payment (the “Record Date”).
Payments of principal, interest or otherwise due other than in respect of a final redemption of the Notes
will be made by a check drawn on a bank in New York City and mailed to the address (as recorded in the
register held by the Registrar) of the holder thereof unless the Holder thereof has applied to the Registrar at
least fifteen days prior to the relevant payment date for payment to be made to a designated account and the
Registrar has acknowledged such application.
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All payments are subject in all cases to any applicable fiscal or other laws and regulations. No
commissions or expenses shall be charged to the Noteholders in respect of such payments.
The initial Principal Paying Agent, Paying Agent, Transfer Agent and Registrar and their initial
specified offices are listed at the back of this Offering Memorandum and in the Indenture. The Issuer
reserves the right at any time to vary or terminate the appointment of any Principal Paying Agent, Paying
Agent, Transfer Agent or Registrar and appoint additional or other Principal Paying Agent, Paying Agents,
Transfer Agents or Registrars; provided that it will maintain (i) a Registrar having a specified office in New
York City and (ii) a Paying Agent and a Transfer Agent having a specified office in Ireland, so long as any
Notes are listed on the Irish Stock Exchange Ltd. (Alternative Securities Market) and the rules of such
exchange so require. The Principal Paying Agent, Paying Agents, the Transfer Agent and the Registrar
reserve the right at any time to change their respective specified offices to some other specified offices in the
same city. Notice of any change in the Principal Paying Agent, Paying Agents, the Transfer Agents or the
Registrar or their specified offices will promptly be given to the Noteholders. All moneys paid by or on
behalf of the Issuer to a Paying Agent for the payment of principal of, or interest on, any Note which remains
unclaimed at the end of the Prescription Period (as defined below) in relation to such moneys will be repaid
to the Issuer upon the Issuer’s written request therefor and the holder of such Note will thereafter look only
to the Issuer for payment. Upon such payment all liability of the Registrar or any Paying Agent with respect
thereto shall thereupon cease, without, however, limiting in any way the obligation of the Issuer in respect of
the amount so repaid.
Payments in respect of the Notes shall be made in U.S. dollars. In the event that on any payment date in
respect of the Notes any restrictions or prohibition of access to the Brazilian foreign exchange market exists,
the Issuer agrees to pay all amounts payable under the Notes in U.S. dollars by means of any legal procedure
existing in Brazil (except commencing legal proceedings against the Central Bank), on any due date for
payment under the Notes, for the purchase of U.S. dollars. All costs and taxes payable in connection with
these procedures shall be borne by the Issuer.
Any payment to be made in respect of the Notes by the Issuer to or to the order of a Paying Agent shall
be in satisfaction pro tanto of the obligations of the Issuer under the Notes. The Issuer will indemnify the
holders against any failure on the part of any Paying Agent to pay any sum due in respect of the Notes and
will pay such sum to the Trustee on demand. This indemnity constitutes a separate and independent
obligation from the other obligations of the Issuer hereunder, will give rise to a separate and independent
cause of action, will apply irrespective of any waiver granted by the Trustee and/or any holder and will
continue in full force and effect despite any judgment, order, claim, or proof for a liquidated amount in
respect of any sum due under the Indenture, the Notes or any judgment or order.
Payment of Additional Amounts
All payments by the Issuer or the Guarantors in respect of the Notes shall be made without withholding
or deduction for or on account of any present or future taxes, duties, assessments or other governmental
charges of whatsoever nature imposed or levied by or on behalf of Brazil or any political subdivision or
authority thereof or therein having power to tax (“Brazilian Taxes”), unless the Issuer or any Guarantor, as
the case may be, is compelled by law to deduct or withhold such taxes, duties, assessments or governmental
charges. In such event, the Issuer or any Guarantor, as the case may be, shall make such withholding, make
payment of the amount so withheld to the appropriate governmental authority and forthwith pay such
additional amounts (the “Additional Amounts”) as may be necessary to ensure that the net amounts
receivable by the holders of the Notes after such withholding or deduction shall equal the respective amounts
of principal and interest which would have been receivable in respect of the Notes in the absence of such
withholding or deduction. No such Additional Amounts shall be payable with respect to the Notes:
(i)
to, or to a third party on behalf of, a holder who is liable for such taxes, duties, assessments
or governmental charges in respect of such Note by reason of such holder’s having some
connection with Brazil other than the mere holding of the Note;
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(ii)
to, or to a third party on behalf of, a holder who would be able to avoid such withholding or
deduction by making a declaration of non-residence or similar claim for exemption but fails
to do so;
(iii)
to, or to a third party on behalf of, a holder who presents a Note for payment on a date more
than fifteen days after the date on which such payment became provided for or, whichever
occurs later; or
(iv)
where such Additional Amount is imposed on a payment to an individual and is required to
be made pursuant to European Union Directive 2003/48/EC or any other European Union
Directive implementing the conclusions of the ECOFIN Council meeting of November 2627, 2000 on the taxation of savings income or any law implementing or complying with, or
introduced in order to conform to, such Directive;
nor will Additional Amounts be paid with respect to any payment of principal or interest on a Note to any
holder that is a fiduciary or partnership or other than the sole beneficial owner of any such payment to the
extent that a beneficiary or settlor with respect to such fiduciary, a member of such partnership or the
beneficial owner would not have been entitled to the Additional Amounts had such beneficiary, settlor,
member or beneficial owner been the holder of such Note. The obligation to pay taxes, duties, assessments
and governmental charges shall not apply to (a) any estate, inheritance, gift, sales, transfer, personal property
or any similar tax, assessment or other governmental charge or (b) any tax, assessment or other
governmental charge which is payable otherwise than by deduction or withholding from payments of
principal or interest on the Notes.
For purposes of the provisions described in this section, the term “holder” of any Note means the direct
nominee of any beneficial owner of such Note, which holds such beneficial owner’s interest in such Note.
Affirmative covenants
The Issuer has covenanted in the Indenture that, among other things, so long as any Note remains
outstanding:
Corporate existence
The Issuer and the Guarantors (each, a “Credit Group Company” and, together, the “Credit Group
Companies”) will preserve and keep in force and effect their corporate existence and all licenses and permits
necessary for the proper conduct of their businesses; provided, however, that nothing herein or in the
Indenture shall restrict the ability of the Credit Group Companies from entering into any merger or
consolidation or sale of assets in accordance with the “Limitation on mergers, consolidations and asset sales
of the Credit Group Companies” covenant.
Maintenance of properties and of insurance
The Credit Group Companies will maintain, preserve and keep their properties and equipment in good
repair, working order and condition and will from time to time make all repairs, replacements, additions and
improvements, as needed, so that the efficiency thereof shall be fully preserved and maintained. The Credit
Group Companies will maintain insurance coverage by reputable insurance companies or associations, in
such forms and amounts and against such hazards as are customary for companies engaged in similar
businesses and owning and operating similar properties; provided the Credit Group Companies may maintain
a system or systems of self-insurance in accordance with good business practice.
Payment of taxes and other claims
The Credit Group Companies will promptly pay or discharge all taxes, assessments, governmental
charges, and claims for labor, materials, and supplies, except those being contested in good faith.
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Reporting of financial information
The Credit Group Companies will provide the Trustee and each Holder of Notes (i) within 120 days
after the last day of each fiscal year of the Issuer, (a) the audited consolidated financial statements of the
Issuer prepared in accordance with Brazilian GAAP, (b) the audited consolidated financial statements of
each Guarantor and its consolidated subsidiaries prepared in accordance with Brazilian GAAP, and (c) the
pro forma Credit Group Financial Statements of the Issuer on a consolidated basis and the Guarantors on a
consolidated basis as a combined entity prepared in accordance with Brazilian GAAP; (ii) within 60 days
after the last day of each of the first three fiscal quarters of the Issuer, (a) the unaudited consolidated
quarterly financial statements of the Issuer prepared in accordance with Brazilian GAAP, (b) the unaudited
consolidated quarterly financial statements of each of the Guarantors prepared in accordance with Brazilian
GAAP, and (c) the pro forma combined quarterly financial statements of the Issuer on a consolidated basis
and the Guarantors on a consolidated basis as a combined entity prepared in accordance with Brazilian
GAAP; (iii) without duplication, copies of such other reports and notices, if any, as may be filed by the
Credit Group Companies with the CVM, the Luxembourg Stock Exchange or the Irish Stock Exchange Ltd.
(Alternative Securities Market); (iv) simultaneously with the delivery of each set of financial statements
referred to in clauses (i) and (ii), a certificate of the chief financial officer (or such other officer as may be
appropriate) of each Credit Group Company, stating whether, to the knowledge of such officer, after due
inquiry, a Default or an Event of Default exists on the date of such certificate and, if such certificate shall
state that to the knowledge of such officer, after due inquiry, a Default or an Event of Default exists, setting
forth the details thereof and the action which the Issuer or the Guarantor, as the case may be, is taking or
proposes to take with respect thereto; and (v) promptly upon any officer of the Issuer or any Guarantor
becoming aware of the existence of a Default or an Event of Default, a certificate of the chief financial
officer (or such other officer as may be appropriate) of the Issuer or the Guarantor, as the case may be,
setting forth the details thereof and the action that the Issuer or the Guarantor, as the case may be, is taking
or proposes to take with respect thereto. Delivery to the Trustee of the information in clauses (i), (ii) and (iii)
is for informational purposes only and the Trustee’s receipt of such reports shall not constitute constructive
notice of any information contained therein or determinable from information contained therein, including
compliance with any of the covenants under the Indenture.
Negative covenants
Limitation on combined debt
The Credit Group Companies shall not, and shall not permit any Subsidiary of any Credit Group
Company to, Incur any Funded Debt or issue any Disqualified Stock unless the Combined Annualized Debt
to Operating Cash Flow Ratio for the four full fiscal quarters next preceding the Incurrence of such Funded
Debt for which financial statements are available, determined on a pro forma basis as if any such Funded
Debt had been Incurred or any such Disqualified Stock had been issued and the proceeds thereof had been
applied at the beginning of such four fiscal quarters, would be less than 4.0 to 1.
Notwithstanding the foregoing paragraph, the Credit Group Companies may Incur or issue the
following:
(i)
Debt evidenced by the Notes and the Guarantees;
(ii)
Debt owed by any Credit Group Company to any other Credit Group Company or to any
Wholly-Owned Subsidiary of a Credit Group Company (provided that such Debt is at all
times held by a Person which is a Credit Group Company or a Wholly-Owned Subsidiary
of a Credit Group Company); provided, however, that upon either (x) the transfer or other
disposition by such a Credit Group Company or a Wholly-Owned Subsidiary of any Debt
or Disqualified Stock so permitted to a Person other than a Credit Group Company or a
Wholly-Owned Subsidiary of a Credit Group Company or (y) the issuance (other than
directors’ qualifying shares), sale, lease, transfer or other disposition of shares of Capital
Stock (including by consolidation or merger) of a Credit Group Company or WhollyOwned Subsidiary of a Credit Group Company to a Person other than a Credit Group
Company or a Wholly-Owned Subsidiary of a Credit Group Company, the provisions of
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this Clause shall no longer be applicable to such Debt or Disqualified Stock and such Debt
shall be deemed to have been Incurred at the time of such transfer, other disposition or
issuance;
(iii)
Debt Incurred to renew, extend, refinance or refund the Notes or any Debt; provided,
however, that such Debt does not exceed the principal amount of such Debt so renewed,
extended, refinanced or refunded; and provided further that Debt the proceeds of which are
used to refinance or refund Debt which is pari passu to the Notes or Debt which is
subordinate in right of payment to the Notes shall only be permitted if (I) in the case of any
refinancing or refunding of Debt which is pari passu to the Notes, the refinancing or
refunding Debt is made pari passu to the Notes or subordinated to the Notes, and, in the
case of any refinancing or refunding of Debt which is subordinated to the Notes, the
refinancing or refunding Debt is also subordinate in right of payment to the Notes and (II)
in either case, the refinancing or refunding Debt by its terms, or by the terms of any
agreement or instrument pursuant to which such Debt is issued, (x) does not provide for
payments of principal of such Debt at the stated maturity thereof or by way of a sinking
fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or
repurchase thereof by the Issuer (including any redemption, retirement or repurchase which
is contingent upon events or circumstances, but excluding any retirement required by virtue
of acceleration of such Debt upon an event of default thereunder), in each case prior to the
final stated maturity of the Debt being refinanced and (y) does not permit redemption or
other retirement (including pursuant to an offer to purchase made by the Issuer) of such
Debt at the option of the holder thereof prior to the final stated maturity of the Notes other
than pursuant to a redemption resulting from a change in or amendment to Brazilian laws or
regulations or interpretations thereof requiring the payment by any Credit Group Company
of withholding or related tax on such Debt.
Limitation on restricted payments
The Credit Group Companies (i) shall not, directly or indirectly, declare or pay any dividend, or make
any distribution, of any kind or character (whether in cash, property or securities) in respect of any class of
their Capital Stock or to the holders of any class of their Capital Stock, excluding any dividends or
distributions payable solely in shares of their Capital Stock (other than Disqualified Stock) or in options,
warrants or other rights to acquire their Capital Stock (other than Disqualified Stock), (ii) shall not, and shall
not permit any Subsidiary of any Credit Group Company, directly or indirectly, to purchase, redeem or
otherwise acquire or retire for value (a) any Capital Stock of any of the Credit Group Companies or any
Subsidiary of any Credit Group Company or (b) any options, warrants or rights to purchase or acquire
shares of Capital Stock of any of the Credit Group Companies or any Subsidiary of any Credit Group
Company, (iii) shall not make, or permit any Subsidiary of a Credit Group Company to make, any
Investment in, or incur a guarantee of any obligation of, any Affiliate or any Related Person, other than a
Credit Group Company or a Wholly-Owned Subsidiary of a Credit Group Company which is a WhollyOwned Subsidiary prior to such Investment, and (iv) shall not, and shall not permit any Subsidiary of a
Credit Group Company to, redeem, defease (including, but not limited to, legal or covenant defeasance),
repurchase, retire or otherwise acquire or retire for value pri or to any scheduled maturity, repayment or
sinking fund payment. Debt of a Credit Group Company (other than the Notes and other than Debt owed by
one Credit Group Company to another Credit Group Company) which is pari passu with or subordinate in
right of payment to the Notes or the Guarantees, as the case may be (the transactions described in Clauses (i)
through (iv) being referred to herein as “Restricted Payments”), if at the time thereof:
(x) a Default or an Event of Default shall have occurred and is continuing, or
(y) upon giving effect to such Restricted Payment, the Credit Group Companies could not incur at
least U.S.$1.00 of additional Funded Debt pursuant to the first paragraph of the “Limitation on
combined debt” covenant above.
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The foregoing provision shall not be violated by reason of (1) the payment of any dividend within 60 days
after declaration thereof if at the declaration date such payment would have complied with the foregoing
provision; (2) any refinancing or refunding of any Debt otherwise permitted under clause (c) of the
“Limitation on combined debt” covenant above; (3) the payment of dividends by the Issuer with respect to
the Issuer’s Common Stock following an initial public offering thereof in an amount of up to 10 percent per
annum of net proceeds obtained by the Issuer in such public offering; (4) the Investment in a Related
Business which as a result of such Investment becomes a Wholly-Owned Subsidiary of a Credit Group
Company; (5) the declaration and payment of dividends and making of loans to shareholders in the aggregate
not exceeding 50% of the cumulative Combined Net Income of the Credit Group Companies for each fiscal
quarter since the date of the Indenture (or, if the cumulative Combined Net Income of the Credit Group
Companies is negative for any fiscal quarter, less 100% of such deficit); or (6) the declaration of dividends
payable to shareholders provided that such shareholders waive the right to receive payment therefor and such
Credit Group Company records such waiver as a capital or cash contribution (directly or indirectly) from
such shareholders.
Limitation on liens
The Credit Group Companies shall not, and shall not permit any Subsidiary of any Credit Group
Company to, Incur any Lien upon any of their respective property or assets, now owned or hereinafter
acquired, without making, or causing such Subsidiary to make, effective provision for securing the Notes (x)
equally and ratably with such Debt as to such property for so long as such Debt shall be so secured or (y) in
the event such Debt is subordinate in right of payment to the Notes, on a basis senior to such Debt as to such
property for so long as such Debt shall be so secured.
The foregoing restrictions will not apply to Liens in respect of Debt existing at the date of this
Indenture or to:
(i)
Liens securing only the Notes;
(ii)
Liens in favor of a Credit Group Company;
(iii)
Liens on property of a Person existing at the time such Person is merged into or
consolidated with a Credit Group Company or any Subsidiary of a Credit Group
Company;
(iv)
Liens on property existing immediately prior to the time of acquisition thereof (and not in
anticipation of the financing of such acquisition);
(v)
Liens to secure Debt Incurred for the purpose of financing all or any part of the purchase
price or the cost of construction or improvement of the property subject to such Liens;
provided, however, that (a) the principal amount of any Debt secured by such a Lien does
not exceed 120% of such purchase price or cost, (b) such Lien does not extend to or cover
any other property other than such item of property and any improvements on such item
and (c) the incurrence of such Debt is permitted by the “Limitation on combined debt”
covenant above;
(vi)
Liens to secure the performance of statutory obligations, surety or appeal bonds,
performance bonds or other obligations of a like nature incurred in the ordinary course of
business;
(vii)
Liens for taxes, assessments or governmental charges or claims that are not yet delinquent
or that are being contested in good faith by appropriate proceedings;
(viii)
Liens imposed by law, such as mechanics’, carriers’, warehousemen’s, materialmen’s and
vendors’ Liens, incurred in good faith in the ordinary course of business;
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(ix)
judgment Liens and other Liens for purposes of judicial and extra judicial claims; and
(x)
Liens incurred in the ordinary course of business with respect to obligations that do not
exceed 10% of total assets of the Credit Group Companies on a combined basis (after
eliminating the effect of inter-company transactions) determined as of the date of the most
recent fiscal quarter-end for which financial statements are available.
Limitation on transactions with affiliates and related persons
The Credit Group Companies shall not, and shall not permit any Subsidiary of any Credit Group
Company to, directly or indirectly, enter into any transaction or series of related transactions (including,
without limitation, the purchase, sale, lease or exchange of property, or the making of any loan or advance,
but excluding transactions between (a) Credit Group Companies, (b) a Credit Group Company and WhollyOwned Subsidiaries of any Credit Group Company, and (c) Wholly-Owned Subsidiaries of Credit Group
Companies) with any Affiliate or Related Person of any Credit Group Company (or with a relative of an
Affiliate or Related Person of any Credit Group Company), unless such transaction or series of related
transactions is on terms no less favorable to the Credit Group Company or such Subsidiary than those that
could be obtained in a comparable arm’s length transaction with an entity that is not an Affiliate or a Related
Person and: (i) with respect to transactions with a fair value in excess of U.S.$5,000,000, an Officer’s
Certificate to the effect that the terms of such transaction or series of related transactions are in the best
interests of such Credit Group Company or such Subsidiary and on terms no less favorable to the Credit
Group Company or Subsidiary than those that could be obtained in a comparable arms’ length transaction
with an entity that is not an Affiliate or a Related Person is furnished to the Trustee; (ii) with respect to
transactions with a fair value in excess of U.S.$10,000,000, a majority of the disinterested members of the
Board of Directors shall determine in its good faith judgment and evidenced by a Board Resolution that the
terms of such transaction or series of related transactions are in the best interests of such Credit Group
Company or such Subsidiary and on terms no less favorable to the Credit Group Company or Subsidiary
than those that could be obtained in a comparable arms’ length transaction with an entity that is not an
Affiliate or a Related Person is furnished to the Trustee or (iii) with respect to transactions with a fair value
in excess of U.S.$25,000,000, a written opinion of an independent nationally recognized Brazilian or
international investment banking firm stating that the terms of such transaction or series of transactions are
fair to such Credit Group Company or Subsidiary from a financial point of view, is furnished to the Trustee.
Notwithstanding the above limitations, the Credit Group Companies may engage in transactions which
involve the free exchange of information or services substantially in the manner engaged in at the date of the
Indenture. Without limiting the generality of the foregoing, the Issuer may provide on-line news services to
Affiliates and Related Persons at no charge; Credit Group Companies and their Subsidiaries may provide
free or reduced price unsold advertising, time or space to Affiliates and Related Persons; and Credit Group
Companies and their Subsidiaries may provide administrative services and office space to Affiliates or
Related Persons.
Limitation on mergers, consolidations and asset sales of the Credit Group Companies
The Credit Group Company(ies) will not be a party to any merger or consolidation or sale of
substantially all of its assets except for:
(i)
any merger, consolidation or transfer of substantially all of the assets in which the
properties and assets of any Credit Group Company are transferred to or combined with,
substantially as an entirety any one person, so long as (a) there shall not otherwise exist any
Default of Event of Default under the Indenture, (b) upon giving effect to such merger,
consolidation or transfer, the Credit Group Companies could incur at least U.S.$1.00 of
additional Funded Debt pursuant to the first paragraph of the “Limitation on combined
debt” covenant above, and (c) the Credit Group Company(ies) or the surviving corporation
assumes all obligations of such Credit Group Company(ies) under the Notes; or
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(ii)
any merger, consolidation, or sale of substantially all of the assets among or between the
Credit Group Company(ies), or one or more Wholly-Owned Subsidiaries of the Credit
Group Companies or RBS Participações S.A.
Defeasance and covenant defeasance
The Issuer may at its option, at any time upon the satisfaction of certain conditions described below,
elect to be discharged from its obligations with respect to (x) the entire indebtedness of the Notes
(“defeasance”) or (y) certain restrictive covenants with respect to the Notes (“covenant defeasance”), in each
case upon compliance with certain conditions set forth in the Indenture. For this purpose, defeasance means
that The Issuer and the Guarantors shall be deemed to have paid and discharged the entire indebtedness
represented by the Notes and the Guarantees and to have satisfied all their other obligations under such
Notes, the Guarantees and the Indenture insofar as such Notes and the Guarantees are concerned, except for
the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of
Holders of Notes to receive, solely from the trust fund established for such purpose as described below,
payments in respect of the principal amount and any Additional Amounts on such Notes when such
payments are due, (ii) The Issuer’s obligations with respect to ownership, registration and transfer of the
Notes, (iii) the obligation to pay Additional Amounts (as to which the Trustee will have no responsibility and
The Issuer will be solely responsible for the payment of such Additional Amounts); and (iv) certain
provisions relating to the rights, powers, trusts, duties and immunities of the Trustee. The Issuer may
exercise its defeasance option notwithstanding the prior exercise of its covenant defeasance option as
described below.
Upon the Issuer’s exercise of the covenant defeasance option and upon satisfaction of the conditions set
forth in the Indenture, The Issuer and the Guarantors may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any covenant described below, the remainder of the
Indenture and such Notes being unaffected thereby. Following such covenant defeasance, the occurrence of
an Event of Default under the Indenture and certain other events (not including non-payment or bankruptcy
and insolvency events) described in the Indenture will not constitute Events of Default.
Following the satisfaction of the conditions set forth in the Indenture and the exercise of the covenant
defeasance option, the Issuer and the Guarantors will no longer be required to comply with the following
covenants: “Corporate existence”; “Maintenance of properties and of insurance”; “Payment of taxes and
other claims”; “Reporting of financial information”; “Limitation on combined debt”; “Limitation on
restricted payments”; “Limitation on Liens”; “Limitation on transactions with affiliates and related persons”;
and “Limitations on mergers, consolidations and asset sales of the Credit Group Companies”.
In order to cause a defeasance or covenant defeasance with respect to the Notes, RBS-Zero Hora will be
required to satisfy the following conditions:
(i)
RBS-Zero Hora shall irrevocably have deposited or caused to be deposited with the Trustee
as trust funds in trust for the purpose of making the following payments, specifically
pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes,
(x) money in an amount, or (y) U.S. Government Obligations which through the scheduled
payment of principal and interest in respect thereof in accordance with their terms will
provide, not later than one day before the due date of any payment, money in an amount, or
(z) a combination thereof, sufficient, in the opinion of an internationally recognized
accounting firm expressed in a written certification thereof delivered to the Trustee, to pay
and discharge, and which shall be applied by the Trustee to pay and discharge, the principal
of, premium, if any, and each installment of interest on the Notes on the maturity of such
principal or installment of interest on the day on which such payments are due and payable
in accordance with the terms of the Indenture and of the Notes. For this purpose, “U.S.
Government Obligations” means securities that are (x) direct obligations of the United
States of America for the payment of which its full faith and credit is pledged or (y)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is unconditionally
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guaranteed as a full faith and credit obligation by the United States of America, which, in
either case, are not callable or redeemable at the option of RBS-Zero Hora thereof, and
shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the
Securities Act) as custodian with respect to any such U.S. Government Obligation or a
specific payment of principal of or interest on any such U.S. Government Obligation held
by such custodian for the account of the Holder of such depository receipt, provided that
(except as required by law) such custodian is not authorized to make any deduction from
the amount payable to the Holder of such depository receipt from any amount received by
the custodian in respect of the U.S. Government Obligation or the specific payment of
principal of or interest on the U.S. Government Obligation evidenced by such depository
receipt;
(ii)
No Event of Default or event which with notice or lapse of time or both would become an
Event of Default shall have occurred and be continuing on the date of such deposit;
(iii)
Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting
interest for purposes of the U.S. Trust Indenture Act of 1939, as amended, with respect to
any securities of RBS-Zero Hora;
(iv)
Such defeasance or covenant defeasance shall not result in a breach or violation of, or
constitute a default under, the Indenture or any other agreement or instrument to which
RBS-Zero Hora or any Guarantor is a party or by which it is bound;
(v)
RBS-Zero Hora shall have delivered to the Trustee an Officers’ Certificate and an Opinion
of Counsel, each stating that all conditions precedent provided for relating to either
defeasance or the covenant defeasance (as the case may be) have been complied with;
(vi)
In the case of a defeasance, RBS-Zero Hora shall have delivered to the Trustee an Opinion
of Counsel stating that (x) RBS-Zero Hora has received from, or there has been published
by, the U.S. Internal Revenue Service a ruling, or (y) since the date of the Indenture there
has been a change in the applicable U.S. federal income tax law, in either case to the effect
that, and based thereon such opinion shall confirm that, the Holders of the Notes will not
recognize income, gain or loss for U.S. federal income tax purposes as a result of such
deposit, defeasance and discharge and will be subject to U.S. federal income tax on the
same amounts, in the same manner and at the same times as would have been the case if
such deposit, defeasance and discharge had not occurred;
(vii)
In the case of a covenant defeasance, RBS-Zero Hora shall have delivered to the Trustee an
Opinion of Counsel to the effect that the holders of the Notes will not recognize income,
gain or loss for U.S. federal income tax purposes as a result of such deposit and covenant
defeasance and will be subject to U.S. federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant defeasance had
not occurred;
(viii)
RBS-Zero Hora shall have delivered to the Trustee an Opinion of Counsel to the effect that
such deposit and defeasance or covenant defeasance shall not result in the trust arising from
such deposit constituting an investment company as defined in the United States Investment
Company Act of 1940, as amended, or such trust shall be qualified under such Act or
exempt from regulation thereunder; and
(ix)
At the time of such deposit: (i) no default in the payment of all or a portion of principal of
(or premium, if any) or interest on any Funded Debt Incurred by the Credit Group
Companies shall have occurred and be continuing, and no event of default with respect to
any Funded Debt so Incurred shall have occurred and be continuing and shall have resulted
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in such Funded Debt becoming or being declared due and payable prior to the date on
which it would otherwise have become due and payable and (ii) no other event of default
with respect to any such Funded Debt shall have occurred and be continuing permitting
(after notice or the lapse of time, or both) the holders of such Funded Debt (or a trustee on
behalf of the holders thereof) to declare such Funded Debt due and payable prior to the date
on which it would otherwise have become due and payable, or, in the case of either Clause
(i) or Clause (ii) above, each such default or event of default shall have been cured or
waived or shall have ceased to exist.
Events of default
If one or more of the following events (herein referred to as “Events of Default”) shall have occurred
and be continuing:
(i)
the Issuer shall fail to pay the principal of any of the Notes when due;
(ii)
the Issuer shall fail to pay any interest on any of the Notes on the date when due and such
failure shall continue for a period of 30 days;
(iii)
the Issuer or any Guarantor shall fail duly to perform or observe any other covenant in the
Indenture relating to the Notes and such failure shall continue for a period of 90 days after
the Issuer or any Guarantor has received written notice thereof from the Trustee or the
holders of not less than 25% in aggregate principal amount of the Notes then outstanding
specifying such failure and requiring the Issuer or the Guarantor to remedy the same;
(iv)
payment defaults on indebtedness of the Issuer or any
U.S.$25,000,000;
(v)
acceleration on non-payment defaults on indebtedness of the Issuer or any Guarantor in
excess of U.S.$25,000,000;
(vi)
any proceeding is initiated against the Issuer or any Guarantor in a court of competent
jurisdiction in an involuntary case under applicable bankruptcy, reorganization, insolvency
or other similar law now or hereafter in effect, and, within 90 days from the date the Issuer
or any Guarantor, as the case may be, is served in connection thereof, (i) the Issuer or any
Guarantor shall not have obtained a decision enacted by a competent court recognizing a
relevant reason of law for any of the Issuer or any Guarantor not having performed the
obligation that prompted such proceeding, or (ii) such proceeding shall not have been
vacated, discharged or stayed or bonded pending appeal;
(vii)
a court of competent jurisdiction shall appoint a receiver, liquidator, assignee, custodian,
trustee or sequestrator (or similar official) of the Issuer or any Guarantor or for all or
substantially all of the Issuer’s or any Guarantor’s property or shall order the winding-up
or liquidation of the Issuer’s or any Guarantor’s affairs; or a resolution is passed for the
winding-up or dissolution of the Issuer or any Guarantor or all or substantially all of the
property of the Issuer or any Guarantor;
(viii)
the Issuer or any Guarantor shall commence a voluntary case under any applicable
bankruptcy, reorganization, insolvency or other similar law now or hereafter in effect or
consent to the entry of an order for relief in an involuntary case under any such law, or
consent to the appointment of or taking possession by a recover, liquidator, assignee,
custodian, trustee or sequestrator (or similar official) of the Issuer or any Guarantor or for
all or substantially all of its property, or make any general assignment for the benefit of
creditors; or
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Guarantor in excess of
(ix)
any final judgment or judgments for the payment of money aggregating more that
U.S.$25,000,000 (net of insurance proceeds) is or are entered against the Issuer or any
Guarantor and such judgment or judgments is or are not discharged or dismissed or stayed
pending appeal within 90 days after the Issuer or Guarantor, as applicable, has been notified
in writing that such judgment has been entered.
then (i) the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may
declare the outstanding principal of, premium (if any) and interest accrued on, all of the Notes then
outstanding to be due and payable immediately at their outstanding principal amount plus interest accrued
thereon to the date of payment, including any Additional Amounts, by written notice to the Trustee. Any
such declaration of acceleration may be rescinded by the holders of a majority in aggregate principal amount
of the Notes then outstanding in the manner set forth in the Indenture. Upon any such declaration of
acceleration as aforesaid, and unless all such Defaults shall have been cured by the Issuer or waived as
described above, the outstanding principal of such Notes then outstanding and the interest accrued thereon
shall become and be immediately due and payable. Notwithstanding the foregoing, if an Event of Default
specified in Clause (i), (vi), (vii) or (viii) above occurs with respect to the Issuer or any Guarantor, the
outstanding principal, premium (if any) and accrued interest on the Notes then outstanding shall ipso facto
become and be immediately due and payable without any declaration or other act on the part of the Trustee
or any holder.
Prescription
Claims in respect of principal and interest in respect of the Notes will become prescribed unless made
within a period (the “Prescription Period”) of three years from the appropriate due date.
Replacement and exchange
If any Note shall become mutilated or defaced or be destroyed, lost or stolen, the Trustee or its designee
shall authenticate and deliver a new Note at the offices of the Trustee or such designee, on such terms as the
Issuer and the Trustee may require, in exchange and substitution for the mutilated or defaced Note or in lieu
of and in substitution for the destroyed, lost or stolen Note. In every case of mutilation or defacement or
destruction, loss or theft, the applicant for a substitute Note shall furnish to the Issuer and the Trustee such
indemnity as the Issuer and the Trustee may require and evidence to their satisfaction of the destruction, loss
or theft of such Note and of the ownership thereof. In every case of mutilation or defacement of a Note, the
holder shall surrender to the Trustee or its designee the Note so mutilated or defaced. In addition, prior to the
issuance of any substitute Note, the Issuer may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation thereto and any other expenses (including the
fees and expenses of the Trustee) connected therewith. If any Note which has matured or is about to mature
shall become mutilated or defaced or be apparently destroyed, lost or stolen, the Issuer may pay or authorize
payment of the same without issuing a substitute Note.
The costs and expenses of effecting any exchange pursuant to the foregoing provisions, except for the
expenses of delivery by other than regular mail (if any) and except, if the Issuer shall so require, the payment
of a sum sufficient to cover any tax or other governmental charge or insurance charges that may be imposed
in relation thereto, or, in connection with this provision, the fees and expenses of the Trustee will be borne
by the Issuer.
Modifications, amendments and waivers
The Indenture and the Notes (including the terms and conditions) may be modified or amended without
the consent of the holder of any Note for the purpose of curing any ambiguity or of curing, correcting or
supplementing any defective or inconsistent provisions contained therein or herein or in any manner that the
parties thereto may deem mutually necessary or desirable and that will not adversely affect the interests of
the holders of the Notes.
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Modifications and amendments to the Indenture and the Notes (including the terms and conditions),
may also be made, and future compliance therewith or past default by the Issuer may be waived, either with
the consent of the holders of at least a majority in aggregate principal amount of the Notes at the time
outstanding or by the adoption of a resolution at a meeting of the Noteholders held in accordance with the
provisions of the Indenture; provided, however, that no such modification or amendment and no such waiver
may, without the written consent or the affirmative vote of the holder of each such Note affected thereby, (i)
change the stated maturity of the principal of or any installment of interest on any such Note; (ii) reduce the
principal amount of or interest on any such Note; (iii) change the obligation of the Issuer to pay Additional
Amounts; (iv) change the currency of payment of principal of or interest on any such Note; (v) impair the
right to institute suit for the enforcement of any such payment on or with respect to any such Note; (vi)
reduce the above-stated percentage of the principal amount of the Notes at the time outstanding necessary to
modify or amend the Indenture or the Notes or to waive any future compliance or past default or reduce the
percentage of the Notes required for the taking of action or the quorum required at any such meeting of
holders of the Notes at which a resolution is adopted; or (vii) modify the Issuer’s obligation to maintain
offices or agencies. Any such modifications, amendments or waivers will be conclusive and binding on all
holders of the Notes, whether or not they have given such consent or were present at such meeting, and on
all future holders of the Notes, whether or not notation of such modifications, amendments or waivers is
made upon the Notes. Any instrument given by or on behalf of any Holder of a Note in connection with any
consent to any such modifications, amendments or waivers will be irrevocable once given and will be
conclusive and binding on all subsequent holders of such Note.
Limitations on Suits by Noteholders
Except as provided in the Indenture with respect to the right to institute suit for the enforcement of any
payment of the principal of and interest on such Note (including any Additional Amounts) on or after the
respective due dates thereof, no holder of any Note shall have any right by virtue or by availing itself of any
provision of the Indenture or of the Notes to institute any action or proceeding at law or in equity or in
bankruptcy or otherwise upon or under or with respect to the Indenture, or for the appointment of a trustee,
receiver, liquidator, custodian or other similar official or for any other remedy under the Indenture or under
the Notes, unless such holder previously shall have given to the Trustee written notice of default and of the
continuance thereof, as provided in the Indenture, and unless also the holders of not less than 25% in
aggregate principal amount of the Notes then Outstanding shall have made written request upon the Trustee
to institute such action or proceedings in its own name as trustee under the Indenture and shall have offered
to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be
incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of
indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such
written request shall have been given to the Trustee pursuant to the Indenture. Under the terms of the
Indenture, no one or more Holders of Notes shall have any right in any manner whatever by virtue or by
availing itself of any provision of the Indenture to affect, disturb or prejudice the rights of any other holder
of Notes, or to obtain or seek to obtain priority over or preference to any other holder or to enforce any right
under the Indenture or under the Notes, except in the manner provided in the Indenture and for the equal,
ratable and common benefit of all holders of Notes.
Notices
To Holders of Notes
Notices to holders of Notes will be deemed to be validly given if (i) sent by first-class mail to them (or,
in the case of joint holders, to the first-named in the register kept by the Registrar) at their respective
addresses as recorded in the register kept by the Registrar, and will be deemed to have been validly given on
the fourth Business Day after the date of such mailing, (ii) published as may be required by applicable law
and (iii) so long as the Notes are listed on the Irish Stock Exchange Ltd. (Alternative Securities Market) and
the rules of that exchange so require, by publication on the website of the Irish Stock Exchange Ltd.
(Alternative Securities Market) designated for such purposes pursuant to the rules of the Irish Stock
Exchange Ltd. (Alternative Securities Market).
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To the Trustee
Notice of any meeting called by the Issuer or by the Holders shall be given to the Trustee sufficiently in
advance to allow the Trustee to give the notices described above, and in any case at least 14 days prior to the
proposed date of the meeting. Any notice by the Issuer or any Holder to or upon the Trustee shall be deemed
to have been sufficiently given or made, for all purposes, if given or made at the Corporate Trust Office of
the Trustee.
Governing law and jurisdiction
The Notes, the Guarantees and the Indenture shall be governed by the laws of the State of New York.
The Issuer and each of the Guarantors has irrevocably submitted to the nonexclusive jurisdiction of any
New York State or United States Federal court sitting in the City and County of New York over any suit,
action or proceeding arising out of or relating to the Indenture or any Note. As long as any Note is
outstanding, the Issuer has agreed to maintain an office or appoint an agent in New York City where or upon
whom process may be served in any such suit, action or proceeding. Initially, service of process may be
made on the Issuer by delivery to the office of CT Corporation System, 111 Eighth Avenue, New York, New
York 10011, as agent of the Issuer in New York City upon whom such process may be served. Notice of any
change in such office or of any further or other appointment of an agent for service of process shall be given
as provided in the Indenture.
Judgment currency
If a judgment or order given or made by any court for the payment of any amount in respect of any
Note is expressed in a currency (the “Judgment Currency”) other than U.S. dollars, the Issuer and each of the
Guarantors agrees to jointly and severally indemnify the relevant Noteholder against any deficiency arising
or resulting from any variation in rates of exchange between the date as of which the amount in U.S. dollars
is notionally converted into the amount in the Judgment Currency for the purpose of such judgment or order
and the date of actual payment thereof. This indemnity will constitute a separate and independent obligation
from the other obligations contained in the terms and conditions of the Notes, will give rise to a separate and
independent cause of action, will apply irrespective of any indulgence granted from time to time and will
continue in full force and effect notwithstanding any judgment or order for a liquidated sum or sums in
respect of amounts due in respect of the relevant Note or under any such judgment or order.
Certain definitions
“Affiliate” of any Person means any other Person directly or indirectly controlling or controlled by or
under direct or indirect common control with such Person. For the purposes of this definition, “control”
when used with respect to any Person means the power to direct the management and policies of such
Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise;
and the terms “controlling” and “controlled” have meanings correlative to the foregoing. Notwithstanding
the foregoing, any entity which is a joint venture partner or a co-investor in a business with the Issuer or a
Subsidiary of the Issuer shall not be deemed to be an Affiliate of any Subsidiary of the Issuer or an Affiliate
of any entity in which the Issuer owns, directly or indirectly, an equity interest, solely by reason of such joint
venture or business relationship.
“Attributable Debt” means at any date of determination, the product of (i) the net proceeds from any
sale-leaseback transaction and (ii) a fraction, the numerator of which is the number of full years of the term
of the lease relating to the property involved in such sale-leaseback transaction (without regard to any
options to renew or extend such term) remaining at the date of the making of such computation and the
denominator of which is the number of full years of the term of such lease (without regard to any options to
renew or extend such term) measured from the first day of such term.
“Brazilian Business Day” means a day on which commercial banks and foreign exchange markets settle
payments and are open for general business (including dealings in foreign exchange and foreign currency
deposits) in any of São Paulo or Rio de Janeiro, Brazil, and New York and London.
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“Brazilian GAAP” means generally accepted accounting principles in Brazil, including the Correção
Monetária Integral; provided, however, that for all full periods starting the earlier of (i) Apri1 1, 2010 and
(ii) the date on which the Issuer and Guarantors are no longer required under any covenants related to
financial indebtedness to produce financial statements adjusted for the Correção Monetária Integral,
“Brazilian GAAP” shall mean “generally accepted accounting principles in Brazil, in conformity with the
Corporate Law Method”.
“Business Day” means a day (x) which is a day on which commercial banks are open and foreign
exchange markets settle payments in U.S. dollars in New York City, (y) in relation to payments due upon
presentation and/or surrender of any Notes, which is a day on which commercial banks are open and foreign
exchange markets settle payments in the relevant currency in the place of presentation and/or surrender and
(z) which is a day on which Clearstream, Luxembourg and Euroclear and, in the case of Restricted Global
Notes, DTC are in operation.
“Capital Stock” of any Person means any and all shares, interests, participation or other equivalents
(however designated) of corporate stock of such Person.
“Capitalized Lease” means, as applied to any Person, any lease of any property (whether real, personal
or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in
conformity with Brazilian GAAP, is required to be capitalized on the balance sheet of such Person.
“Capitalized Lease Obligation” means the discounted present value of the rental obligations under a
Capitalized Lease.
“Combined Annualized Debt to Operating Cash Flow Ratio” means the ratio of (i) the combined
principal amount of Funded Debt of the Issuer on a consolidated basis and of the Guarantors on a
consolidated basis outstanding as of the date of most recent available quarterly or annual balance sheet after
giving pro forma effect to any Debt incurred since such balance sheet date to (ii) the Combined Operating
Cash Flow of the Credit Group Companies (after eliminating the effect of inter-company transactions);
provided, however, that Funded Debt shall not include principal amounts outstanding under (a) the 11%
Guaranteed Notes due 2010, (b) Debt instruments with no maturity date (perpetual bonds), (c) Debt
instruments convertible into shares of the Issuer or any Guarantor or (d) Debt with a right of payment
subordinate to the Notes, in each case outstanding as of such date.
“Combined Income Tax Expense” of the Credit Group Companies means for any period the combined
provision for income taxes of the Guarantors for such period calculated on a consolidated basis in
accordance with Brazilian GAAP and of the Issuer for such period calculated on a consolidated basis.
“Combined Interest Expense” means for any period the combined interest expense included in a
consolidated income statement (without deduction of interest income) of the Guarantors for such period
calculated on a consolidated basis in accordance with Brazilian GAAP and included in a consolidated
income statement (without deduction of interest income) of the Issuer for such period calculated on a
consolidated basis, including without limitation or duplication (or, to the extent not so included, with the
addition of), (i) the amortization of Debt discounts; (ii) any payments or fees with respect to letters of credit,
bankers’ acceptances or similar facilities; (iii) fees with respect to interest rate swap or similar agreements or
foreign currency hedge, exchange or similar agreements; (iv) Preferred Stock dividends of such Person
(other than with respect to Redeemable Stock) declared and paid or payable; (v) accrued Disqualified Stock
dividends of such Person and all Subsidiaries of such Person, whether or not declared or paid; (vi) interest on
Debt guaranteed by such Person; (vii) the portion of any rental obligation allocable to interest expense, and
(viii) one third of such Person’s rental expenses allocable to sale and leaseback transactions.
“Combined Net Income” means for any period the consolidated net income (or loss) of the Guarantors
for such period determined on a consolidated basis in accordance with Brazilian GAAP and the net income
of the Issuer for such period determined on a consolidated basis; provided that there shall be excluded
therefrom (a) the net income (or loss) of any Person acquired by Guarantor or a Subsidiary of a Guarantor
in a pooling-of-interests transaction for any period prior to the date of such transaction, (b) the net income
(but not net loss) of any Subsidiary of a Guarantor which is subject to restrictions which prevent the
payment of dividends or the making of distributions to such Guarantor to the extent of such restrictions, (c)
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the net income (or loss) of any Person that is not a Subsidiary of a Guarantor except to the extent of the
amount of dividends or other distributions actually paid to a Guarantor by such other Person during such
period, (d) gains or losses on asset dispositions by any Credit Group Company or its Subsidiaries, (e) all
extraordinary gains and extraordinary losses, (f) the cumulative effect of changes in accounting principles in
the year of adoption of such changes, and (g) the tax effect of any of the items described in Clauses (a)
through (f) above.
“Combined Operating Cash Flow” of the Credit Group Companies means for any period the Combined
Net Income for such period increased by the sum of (i) Combined Interest Expense for such period, plus (ii)
Combined Income Tax Expense for such period, plus (iii) the combined depreciation and amortization
expense (including the amortization of goodwill) included in the income statements of the Issuer and the
Guarantors (all on a consolidated basis) for such period, plus (iv) non-operational non-cash charges of the
Credit Group Companies for such period, plus (v) royalties expenses paid by Credit Group Companies to
RBS Participações S.A., minus (vi) equity in earnings of subsidiaries.
“Debt” means (without duplication), with respect to any Person, whether recourse is to all or a portion
of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money
borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations Incurred in connection with the acquisition of property, assets or
businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers’
acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person
issued or assumed as the deferred purchase price of property or services (but excluding trade accounts
payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are
being contested in good faith), (v) every Capital Lease Obligation of such Person, (vi) the maximum fixed
redemption or repurchase price of Disqualified Stock of such Person at the time of determination, (vii) every
obligation under interest rate swap or similar agreements or foreign currency hedge, exchange or similar
agreements of such Person, (viii) all Attributable Debt of such Person and (ix) every obligation of the type
referred to in Clauses (i) through (viii) of another Person and all dividends of another Person the payment of
which, in either case, such Person has guaranteed or is responsible or liable, directly or indirectly, as obligor,
Guarantor or otherwise.
“Default” means any event that is, or after notice or passage of time or both would be, an Event of
Default.
“Disqualified Stock” of any Person means any Capital Stock of such Person which, by its terms (or by
the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is
redeemable at the option of the holder thereof, in whole or in part, on or prior to the final stated maturity of
the Notes.
“EU Transparency Directive” means the Proposal for a Directive of the European Parliament and of the
Council on the harmonization of transparency requirements with regard to information about issuers whose
securities are admitted to trading on a regulated market and amending EU Directive 2001/34/EC.
“Fixing Date” means three Brazilian Business Days immediately prior to the Interest Payment Date,
Maturity Date or earlier date specified for redemption of the Notes.
“Funded Debt” means, with respect to any Person, the sum of (i) all Debt of such Person which
matures, or in such Person’s good faith opinion may mature, more than one year after the date as of which
the computation is made, (ii) Capitalized Lease Obligations maturing more than one year after the date as of
which the computation is made, and (iii) guarantees of Funded Debt that may be called in a period of no less
than one year (as such term is used in (i) and (ii) above to describe long term Debt or Capitalized Lease
Obligations) of Subsidiaries or other Persons.
“FX Rate” shall mean, for any Fixing Date, the BRL/U.S.$ spot offer rate (i.e., the rate at which banks
buy BRL and sell U.S.$ (“BRL/U.S.$ Rate”)) expressed as the amount of BRL per one U.S.$ reported by the
Banco Central do Brasil on SISBACEN Data System under transaction code PTAX-800 (“Consultas de
Câmbio” or “Exchange Rate Inquiry”), Option 5 (“Cotações para Contabilidade” or “Rates for Accounting
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Purposes”) (the “PTAX Rate”) at or about 6:00 p.m. São Paulo time on the Fixing Date, as determined by
the Calculation Agent, subject to the FX Rate Fallback Provisions set forth below.
“FX Rate Fallback Provisions” shall apply in the event that the PTAX Rate scheduled to be reported on
the Fixing Date is not reported by the Banco Central do Brasil on the Fixing Date, in which case the FX Rate
for such Fixing Date will be the settlement rate, if available, used for such Fixing Date pursuant to the
procedures used by Bolsa de Mercadorias e Futuros (the “BM&F”) to cash settle open positions in
accordance with item 6.4 of the Swap Contracts (Especificações dos Contratos a Termo de Troca de
Rentabilidade) that, as of the Issue Date of the Notes, are referenced to the PTAX Rate, or any successor
regulations (the “BM&F FX Rate”). In the event that such BM&F FX Rate is not available on the Fixing
Date, the FX Rate for such Fixing Date will be the settlement rate for such Fixing Date used by the Câmara
de Custódia e Liquidação (the “CETIP”) to cash settle derivatives contracts in the over-the counter market
(the “CETIP FX Rate”), that, as of the Issue Date of the Notes, are referenced to the PTAX Rate, as
determined in item 2 of the Comunicado SPR n. 002/94, dated as of January 28, 1994, or any successor
regulations. In the event that none of the PTAX Rate, the BM&F FX Rate and the CETIP FX Rate are
available on the Fixing Date, the Calculation Agent shall determine the FX Rate by reference to the
quotations received from the Reference Banks on the Fixing Date as described herein. If five or four
quotations are provided, the FX Rate will be the arithmetic mean (rounded to the nearest five decimal places,
which 0.000005 being rounded upwards) of the remaining three or two such quotations, as the case may be,
for such rate provided by the Reference Banks after disregarding the highest such quotation and the lowest
such quotation; provided, that if two or more such quotations are the highest such quotations, then only one
of such quotations shall be disregarded, and if two or more such quotations are the lowest quotations, then
only one of such lowest quotations shall be disregarded. If three or two quotations are provided, the FX Rate
will then be the average of the BRL/U.S.$ rates obtained. The Calculation Agent will not be required to
independently verify the accuracy of the information provided by the Reference Banks in this respect. If only
one or no such quotations are obtained from the Reference Banks, if the Calculation Agent determines in its
absolute discretion that there are one or two other suitable replacement banks active in the BRL/U.S.$
currency and foreign exchange market that could provide quotations of the BRL/U.S.$ rate (for a total of at
least two banks), the Calculation Agent shall ask such banks to provide such quotations as of 4:00 p.m. São
Paulo time on the Fixing Date and shall use such quotations it receives to determine the FX Rate (taking an
average rate, as set forth above). If, after complying with all of the FX Rate Fallback Provisions above, the
Calculation Agent determines in its absolute discretion that there are no other means to obtain the relevant
quotation of the BRL/U.S.$ Rate in a timely manner on the Fixing Date, the Calculation Agent will
determine the FX Rate in consultation with the Issuer using such objective criteria as are reasonably
available at the time.
“guarantee” by any Person means any obligation, contingent or otherwise, of such Person guaranteeing
or having the economic effect of guaranteeing, any Debt of any other Person (the “primary obligor”) in any
manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to
advance or supply funds for the purchase of) any security for the payment of such Debt, (ii) to purchase
property, securities or services for the purpose of assuring the holder of such Debt of the payment of such
Debt, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of
the primary obligor so as to enable the primary obligor to pay such Debt (and “guaranteed”, “guaranteeing”
and “guarantor” shall have meanings correlative to the foregoing); provided, however, that the guarantee by
any Person shall not include endorsements by such Person for collection or deposit, in either case, in the
ordinary course of business.
“IASB” means the International Accounting Standards Board.
“IFRS” means International Financial Reporting Standards (formerly International Accounting
Standards) issued by the IASB and interpretations issued by the International Financial Reporting
Interpretations Committee of the IASB (as amended, supplemented or re-issued from time to time).
“Incur” means, with respect to any Debt or other obligation of any person, to create, issue, incur (by
conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Debt or
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other obligation or the recording, as required pursuant to Brazilian GAAP or otherwise, in the case of the
Issuer and the Guarantors on a consolidated basis, of any such Debt or other obligation on the balance sheet
of such Person (and “Incurrence”, “Incurred”, “Incurrable” and “Incurring” shall have meanings correlative
to the foregoing); provided, however, that a change in Brazilian GAAP that results in an obligation of such
Person that exists at such time becoming Debt shall not be deemed an Incurrence of Debt.
“Investment” by any Person means any direct or indirect loan, advance or other extension of credit or
capital contribution (by means of transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds,
notes, debentures or other securities or evidence of Debt issued by, any other Person.
“Lien” means, with respect to any property or assets, any mortgage or deed of trust, pledge,
hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any
easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other
security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such
property or assets (including, without limitation, any conditional sale or other title retention agreement
having substantially the same economic effect as any of the foregoing).
“Opinion of Counsel” means an opinion in writing signed by legal counsel who may be an employee of
or counsel to the Issuer or a Guarantor (or other counsel reasonably satisfactory to the Trustee).
“pari passu”, when used with respect to the ranking of any Debt of any Person in relation to other Debt
of such Person, means that each such Debt (a) either (i) is not subordinated in right of payment to the same
Debt of such Person or (ii) is subordinate in right of payment to the same Debt of such Person as is the other
and is so subordinate to the same extent and (b) is not subordinate in right of payment to the other or to any
Debt of such Person as to which the other is not so subordinate.
“Person” means an individual, partnership, corporation (including a business trust), limited liability
company, joint stock company, trust, unincorporated association, joint venture or other entity, or a
government or any political subdivision or agency thereof.
“Preferred Stock” of any Person means Capital Stock of such Person of any class or classes (however
designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any
voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of
any other class of such Person.
“Reference Banks” means Banco do Brasil S.A., Banco Itaú S.A., Banco Bradesco S.A., Citibank S.A.,
and Banco ABN Amro S.A.
“Related Business” means any business whose primary business is (a) operating or owning a newspaper
or newspapers, (b) radio or television broadcasting, or (c) internet (online) services.
“Related Person” of any Person means, without limitation, any other Person owning (a) 5% or more of
the outstanding Common Stock of such Person or (b) 5% or more of the Voting Stock of such Person.
Notwithstanding the foregoing, any entity which is a joint venture partner or a co-investor in a business with
the Issuer or a Subsidiary of the Issuer shall not be deemed to be a Related Person of any Subsidiary of the
Issuer or a Related Person of any entity in which the Issuer owns, directly or indirectly, an equity interest,
solely by reason of such joint venture or business relationship.
“Subsidiary” of any Person means (i) a corporation more than 50% of the combined voting power of
the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more
other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other
Person (other than a corporation) in which such Person, or one or more other Subsidiaries thereof, directly or
in directly, has at least a majority ownership and power to direct the policies, management and affairs
thereof.
“Voting Stock” of any Person means Capital Stock of such Person which ordinarily has voting power
for the election of directors (or persons performing similar functions) of such Person, whether at all times or
only so long as no senior class of securities has such voting power by reason of any contingency.
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“Wholly-Owned Subsidiary” of any Person means a Subsidiary of such Person all of the outstanding
Capital Stock or other ownership interest of which (other than directors’ qualifying shares) shall at the time
be owned by such Person or by one or more Wholly-Owned Subsidiaries of such Person or by such Person
and one or more Wholly-Owned Subsidiaries of such Person.
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FORM, DENOMINATION AND TRANSFER
The Notes will be initially issued in the form of one or more global securities registered in the name of
Cede & Co., as nominee for DTC.
Upon the issuance of a global security, DTC or its nominee will credit the accounts of Persons (which
means any individual, corporation, company, association, partnership, joint venture, trust, unincorporated
organization, government or any agency or political subdivision thereof or any other entity) holding through
it with the respective principal amounts of the Notes represented by such global security purchased by such
Persons in the offering of the Notes. Such accounts shall be initially designated by the initial purchaser.
Ownership of beneficial interests in a global security will be limited to Persons that have accounts with DTC
(“Participants”) or Persons that may hold interest through Participants. Any Person acquiring an interest in a
global security through an offshore transaction in reliance on Regulation S of the Securities Act may hold
such interest through Euroclear or Clearstream. Ownership of beneficial interests in a global security will be
shown on, and the transfer of that ownership interest will be effected only through, records maintained by
DTC (with respect to Participants’ interests) and such Participants (with respect to the owners of beneficial
interests in such global security other than Participants). The laws of some jurisdictions require that certain
purchasers of securities take physical delivery of such securities in definitive form. Such limits and such
laws may impair the ability to transfer beneficial interests in a global security.
Payment of principal of and Interest on Notes represented by a global security will be made in
immediately available funds to DTC or its nominee, as the case may be, as the sole registered owner and the
sole holder of the Notes represented thereby for all purposes under the Indenture. Issuer has been advised by
DTC that upon receipt of any payment of principal of or Interest on any global security, DTC will
immediately credit, on its book-entry registration and transfer system, the accounts of Participants with
payments in amounts proportionate to their respective beneficial interests in the principal or face amount of
such global security as shown on the records of DTC. Payments by Participants to owners of beneficial
interests in a global security held through such Participants will be governed by standing instructions and
customary practices as is now the case with securities held for customer accounts registered in “street name”
and will be the sole responsibility of such Participants.
A global security may not be transferred except as a whole by DTC or a nominee of DTC to a nominee
of DTC or to DTC. A global security is exchangeable for definitive Notes only if:
(i)
DTC notifies us that it is unwilling or unable to continue as a depositary for such global
security or if at any time DTC ceases to be a clearing agency registered under the Exchange
Act;
(ii)
Issuer in its discretion at any time determine not to have all the Notes represented by such
global security;
(iii)
there shall have occurred and be continuing a Payment Default with respect to the Notes
represented by such global security; or
(iv)
upon its winding-up, insolvency, dissolution or liquidation.
Any global security that is exchangeable for definitive Notes pursuant to the preceding sentence will be
exchanged for definitive Notes in authorized denominations and registered in such names as DTC or any
successor depositary holding such global security may direct. Subject to the foregoing, a global security is
not exchangeable, except for a global security of like denomination to be registered in the name of Cede &
Co., as nominee for DTC or any successor depositary or its nominee. In the event that a global security
becomes exchangeable for definitive Notes,
(i)
definitive Notes will be issued only in fully registered form in denominations of R$200,000
and integral multiples R$1,000;
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(ii)
payment of principal of, and premium, if any, and Interest on, the definitive Notes will be
payable, and the transfer of the definitive Notes will be registerable, at its office or agency
maintained for those purposes; and
(iii)
no service charge will be made for any registration of transfer or exchange of the definitive
Notes, although Issuer may require payment of a sum sufficient to cover any tax or
governmental charge imposed in connection therewith.
So long as DTC or any successor depositary for a global security, or any nominee, is the registered
owner of such global security, DTC or such successor depositary or nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such global security for all purposes under
the Indenture and the Notes. Except as set forth above, owners of beneficial interests in a global security
will not be entitled to have the Notes represented by such global security registered in their names, will not
receive or be entitled to receive physical delivery of definitive Notes and will not be considered to be the
owners or holders of any Notes under such global security. Accordingly, each Person owning a beneficial
interest in a global security must rely on the procedures of DTC or any successor depositary, and, if such
Person is not a Participant, on the procedures of the Participant through which such Person owns its interest,
to exercise any rights of a holder under the Indenture. Issuer understands that under existing industry
practices, in the event that Issuer requests any action of holders or that under existing industry practices, in
the event that Issuer requests any action of holders or that an owner of a beneficial interest in a global
security desires to give or take any action which a holder is entitled to give or take under the Indenture, DTC
or any successor depositary would authorize the Participants holding the relevant beneficial interest to give
or take such action and such Participants would authorize beneficial owners owning through such
Participants to give or take such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised us that DTC is a limited-purpose trust company organized under the Banking Law of
the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the
meaning of the New York Uniform Commercial Code and a “clearing agency” registered under the
Exchange Act. DTC was created to hold the securities of its Participants and to facilitate the clearance and
settlement of securities transactions among its Participants in such securities through electronic book-entry
changes in accounts of the Participants, thereby eliminating the need for physical movement of securities
certificates. DTC’s Participants include securities brokers and dealers (which may include the initial
purchaser), banks, trust companies, clearing corporations and certain other organizations some of whom (or
their representatives) own DTC. Access to DTC’s book-entry system is also available to others, such as
banks, brokers, dealers and trust companies, that clear through or maintain a custodial relationship with a
participant, either directly or indirectly.
Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in
global securities among Participants of DTC, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. None of us, the Trustee or the initial
purchaser will have any responsibility for the performance by DTC or its Participants or indirect participants
of their respective obligations under the rules and procedures governing their operations.
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TAXATION
Brazilian Tax Considerations
The following is a general summary of the Brazilian tax considerations relating to an investment in the
Notes by a non-Brazilian resident. It is based on the tax laws of Brazil as in effect on the date hereof, is
subject to any change in Brazilian law that may come into effect after such date, and is applicable to us. The
information set forth below is intended to be a general description only and does not address all possible tax
consequences relating to an investment in the Notes.
Prospective investors are advised to consult their own tax advisers as to the consequences of
purchasing the Notes, including, without limitation, the consequences of the receipt of the interest and the
sale, redemption or repayment of the Notes.
Individuals domiciled in Brazil and Brazilian companies are taxed on the basis of their world wide
income (which includes earnings of Brazilian companies' foreign subsidiaries, branches and affiliates). The
earnings of branches of foreign companies and non Brazilian residents in general are taxed in Brazil only
when derived from Brazilian sources.
Interest, fees, commissions (including any original issue discount) and any other income payable by a
Brazilian obligor to an individual, company, entity, trust or organization domiciled outside Brazil in respect
of debt obligations such as the Notes are currently subject to income tax withheld at source. The rate of
withholding tax with respect to debt obligations is generally 15% as provided for in Section 10 of the
Normative Act No. 252 of December 3, 2002 (“Normative Act No. 252/02”). According to Normative Act
252/02, in the event that the beneficiary of such payments is domiciled in a tax haven jurisdiction (as defined
by Brazilian tax laws from time to time), such payments of interest, fees, commissions (including any
original issue discount) and any other income are also subject to withholding in respect of Brazilian income
tax at the general rate of 15 %. However, it is important to mention that pursuant to article 8 of Law No.
9779 of January 19, 1999, if the relevant average term of the Notes is of less than 96 months, the rate
applicable to the beneficiary domiciled in a tax haven jurisdiction is 25 % (article 691, IX of Decree No.
3,000 of March 26, 1999 and article 1, IX of Law No. 9,481 of August 13, 1997). Accordingly, there is a risk
that the tax authorities may change the understanding above and apply the rate of 25% in the event that the
beneficiary is domiciled in a tax haven jurisdiction. Please note that, at this point, a lower rate may be
applicable where there is a tax treaty between Brazil and the country where the recipient of the payment has
its domicile.
In this regard, Brazil and Japan are signatories to a treaty (the “Japan Treaty”) for the avoidance of
double taxation. Under the Japan Treaty, payments of interest to entities incorporated in Japan (or a branch
thereof) or other type of income deemed similar to income from borrowed funds under Brazilian tax law will
be subject to a Brazilian withholding tax rate of 12.5%. As long as such payments are made by the Issuer to
the Paying Agent pursuant to the terms and conditions of the Notes and provided further that such Paying
Agent is a tax resident of Japan and is qualified for the treaty benefits under the Notes, they will be subject to
the 12.5 % Brazilian withholding tax rate. If the Issuer is not able to rely on a treaty to make the payments,
and the payments are not made by the Issuer to the Principal Paying Agent, any such payments will be
subject to Brazilian withholding tax at the rates indicated in the previous paragraph.
Generally, any capital gains generated outside Brazil as a result of a transaction between two non
Brazilian residents with assets not located in Brazil are not subject to taxation in Brazil. However, Article 26
of Law No. 10,833, of December 29, 2003, which came into force on February 1, 2004, established that
capital gains realized on the disposition of assets located in Brazil by non-residents, whether to other nonresidents or Brazilian residents and whether made outside or within Brazil, is subject to taxation in Brazil at
a tax rate of 15.0%, or 25.0% if such non-Brazilian resident is located in a tax haven jurisdiction. We are
unable to predict whether the Notes would be deemed as assets located in Brazil for the purposes of Law No.
10,833 and, because no judicial guidance as to application of this law yet exists, we are unable to predict if
such interpretation will ultimately prevail.
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Most fund transfers in connection with financial transactions in Brazil are subject to the Tax on
Financial Transaction (CPMF). The CPMF tax is collected on debits of reais from bank accounts (with
certain limited exceptions). Financial institutions are exempted from the CPMF on financial transactions
entered into in the course of their business. Transactions carried out in the Stock Exchange Market are also
exempt from the CPMF. The CPMF rate can be modified at any time by the Federal Government, but cannot
exceed 0.38 percent.
On July 13, 2004, the Federal Government enacted Law No 10.892, pursuant to which, as from October
1, 2004, debits of reais from deposit bank accounts exclusively opened for financial investments (such as
investment funds, fixed and variable income financial assets) (“conta corrente de depósito para
investimento” or simply “conta investimento”) will not be subject to the CPMF assessment.
Additionally, pursuant to Decree no. 4,494/02, the Tax on Financial Transactions (IOF) tax may be
imposed on foreign exchange, credit, issuance of bonds or securities and insurance transactions.
The conversion into reais of proceeds received in foreign currency by a Brazilian entity, as well as the
conversion into foreign currency of proceeds received in reais, is subject to the IOF levied on foreign
exchange transactions (“IOF/Câmbio”). Currently, except in limited cases, the rate of the IOF/Câmbio is
reduced to zero, although the Brazilian government is authorized to increase such rate up to 25.0%, without
congressional approval. Any such increase, although immediately applicable, would not be retroactive.
Generally, there are no stamp, transfer or other similar taxes in Brazil with respect to the transfer,
assignment or sale of the notes outsider Brazil, nor any inheritance, gift or succession tax applicable to the
ownership, transfer or disposition of the notes, except for gift and inheritance taxes imposed in some states
of Brazil on gifts and bequests by individuals or entities not domiciled or residing in Brazil to individuals or
entities domiciled or residing within such Brazilian states.
United States Federal Income and Estate Taxation
IRS Circular 230 Notice: To ensure compliance with Internal Revenue Service Circular 230,
prospective purchasers of the Notes are hereby notified that: (a) any discussion of U.S. federal tax issues
contained or referred to in this Offering Memorandum or any document referred to herein is not intended or
written to be used, and cannot be used by Noteholders for the purpose of avoiding penalties that may be
imposed on them under the Code (as defined below); (b) such discussion is written for use in connection
with the promotion or marketing of the Notes by the Issuer and Standard Bank Plc; and (c) each prospective
purchaser of a Note should seek advice based on its particular circumstances from an independent tax
advisor.
The following is a summary of certain United States federal income and estate tax considerations
that may be relevant to a beneficial owner of a Note who purchases the Note in the offering at the offering
price. The summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative
history, existing and proposed regulations thereunder, published rulings and court decisions, all as in effect
on the date of this Offering Memorandum. All of these laws and authorities are subject to change at any
time, perhaps with retroactive effect. No assurances can be given that any changes in these laws or
authorities will not affect the accuracy of the discussions set forth in this summary.
This summary deals only with beneficial owners that hold the Notes as capital assets as defined in
the United States federal tax laws. This summary does not address tax considerations applicable to special
classes of holders, such as:
•
dealers in securities or currencies, certain securities traders, banks, tax-exempt organizations
and life insurance companies;
•
traders in securities that elect to mark to market;
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•
persons that hold Notes as part of a hedging transaction or a position in a straddle or conversion
transaction; and
•
United States Holders (as defined below) whose functional currency is not the U.S. dollar.
Prospective purchasers of Notes should consult their own tax advisors concerning the consequences, in
their particular circumstances, under the Code and the laws of any other taxing jurisdiction, of the
ownership of Notes.
Definition of United States Holder
A “United States Holder” is a beneficial owner of a Note who or that is:
•
a citizen or resident of the United States;
•
a domestic corporation;
•
an estate the income of which is subject to United States federal income tax without regard to
its source; or
•
a trust if a court within the United States is able to exercise primary supervision over the
administration of that trust and one or more United States persons have the authority to
control all substantial decisions of the trust.
United States Holders
The following discussion applies to you if you are a United States Holder.
Payments of Interest
Stated interest on a Note will be taxable to a United States Holder as ordinary income at the time it
is received or accrued, depending on the United States Holder’s method of accounting for tax purposes. A
United States Holder who uses the cash method of tax accounting will realize an amount of interest income
equal to the U.S. dollar payment of interest received. A United States Holder who uses the accrual method
of tax accounting will realize an amount of interest income based on the average exchange rate in effect
during the interest accrual period (or with respect to an interest accrual period that spans two taxable years,
at the average exchange rate for the portion of the period within the taxable year). Alternatively, an accrual
method United States Holder may elect to translate all interest income on the Notes at the spot rate in effect
on the last day of the accrual period in the taxable year or on the date the interest payment is received if that
date is within five business days of the end of the accrual period. If made, this election must be applied
consistently to all debt instruments held at the beginning of the first taxable year to which the election
applies and to all debt instruments subsequently acquired. The election cannot be changed without the
consent of the Internal Revenue Service. A United States Holder using the accrual method of accounting for
tax purposes will recognize foreign currency gain or loss on the receipt of an interest payment if the amount
actually received differs from the amount of interest income accrued, to the extent that the difference is
attributable to differences between the exchange rate used to accrue that income and the exchange rate used
to compute the U.S. dollar amount of the interest payment. This foreign currency gain or loss will be treated
as ordinary income or loss, but generally will not be treated as an adjustment to interest income received on a
Note.
Interest paid by the Issuer on the Notes will constitute income from sources outside the United
States.
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Effect of Brazilian Withholding Taxes. As discussed in “Taxation–Brazilian Tax Considerations”, under
current law payments of interest on the Notes to foreign investors are subject to Brazilian withholding taxes.
For U.S. federal income tax purposes, United States Holders will be treated as having received the amount of
Brazilian taxes withheld by the Issuer with respect to a Note, and as then having paid over the withheld taxes
to the Brazilian taxing authorities. As a result of this rule, the amount of interest income included in gross
income for U.S. federal income tax purposes by a United States Holder with respect to a payment of interest
may be greater than the amount of cash actually received (or receivable) by the United States Holder from
the Issuer with respect to the payment.
Subject to certain limitations, a United States Holder will generally be entitled to a credit against its
U.S. federal income tax liability, or a deduction in computing its U.S. federal taxable income, for Brazilian
income taxes withheld by the Issuer. For purposes of the foreign tax credit limitation, foreign source income
is classified in one of several “baskets”, and the credit for foreign taxes on income in any basket is limited to
U.S. federal income tax allocable to that income. In taxable years beginning before 2007, interest on the
Notes generally will constitute foreign source income in the “high withholding tax interest” basket if the
Notes are subject to Brazilian withholding tax at a rate of 5 percent or higher. If the Notes are not subject to
such a withholding tax, or in any case in taxable years beginning after 2006, interest generally will be in the
“passive income” basket. In certain circumstances a United States Holder may be unable to claim foreign tax
credits (and may instead be allowed deductions) for Brazilian taxes imposed on a payment of interest if the
United States Holder has not held the Notes for at least 16 days during the 31-day period beginning on the
date that is 15 days before the date on which the right to receive the payment arises. Prospective purchasers
should consult their tax advisers concerning the foreign tax credit implications of the payment of these
Brazilian taxes.
Original Issue Discount
Because the issue price of the Notes has not yet been determined, potential investors should be
aware that the Notes may be issued with original issue discount (“OID”) for U.S. federal income tax
purposes. A Note will be treated as issued with OID (a “Discount Note”) if the excess of the Note’s “stated
redemption price at maturity” over its issue price is equal to or more than a de minimis amount (0.25 percent
of the Note’s stated redemption price at maturity multiplied by the number of complete years to its maturity).
Generally, the issue price of a Note will be the first price at which a substantial amount of Notes included in
the issue of which the Note is a part is sold to persons other than bond houses, brokers, or similar persons or
organizations acting in the capacity of underwriters, placement agents, or wholesalers. The stated
redemption price at maturity of a Note is the total of all payments provided by the Note that are not
payments of “qualified stated interest.” Interest payable on the Notes at a single fixed rate will generally be
qualified stated interest.
United States Holders of Discount Notes must include OID in income calculated on a constant-yield
method before the receipt of cash attributable to the income, and generally will have to include in income
increasingly greater amounts of OID over the life of the Discount Notes. The amount of OID includible in
income by a United States Holder of a Discount Note is the sum of the daily portions of OID with respect to
the Discount Note for each day during the taxable year or portion of the taxable year on which the United
States Holder holds the Discount Note (“accrued OID”). The daily portion is determined by allocating to
each day in any “accrual period” a pro rata portion of the OID allocable to that accrual period. Accrual
periods with respect to a Note may be of any length selected by the United States Holder and may vary in
length over the term of the Note as long as (i) no accrual period is longer than one year and (ii) each
scheduled payment of interest or principal on the Note occurs on either the final or first day of an accrual
period. The amount of OID allocable to an accrual period equals the excess of (a) the product of the
Discount Note’s adjusted issue price at the beginning of the accrual period and the Discount Note’s yield to
maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted
for the length of the accrual period) over (b) the sum of the payments of qualified stated interest on the Note
allocable to the accrual period. The “adjusted issue price” of a Discount Note at the beginning of any
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accrual period is the issue price of the Note increased by (x) the amount of accrued OID for each prior
accrual period and decreased by (y) the amount of any payments previously made on the Note that were not
qualified stated interest payments.
Although not entirely clear, the Issuer intends to take the position that for purposes of calculating
OID the issue price of a Note should be the Brazilian real value of the U.S. dollar purchase price on the date
of purchase, calculated at the exchange rate in effect on that date, which may differ from the Brazilian real
issue price listed elsewhere in this Offering Memorandum.
OID for each accrual period on a Discount Note will be determined in Brazilian reais and then
translated into U.S. dollars in the same manner as stated interest accrued by an accrual basis United States
Holder, as described above. Upon receipt of an amount attributable to OID (whether in connection with a
payment on the Note or a sale of the Note), a United States Holder may recognize U.S. source exchange gain
or loss (taxable as ordinary income or loss) equal to the difference between the amount received and the
amount previously accrued.
OID accrued by the Issuer on the Notes will constitute income from sources outside the United
States. Under the foreign tax credit rules, OID accrued in taxable years beginning before January 1, 2007,
with certain exceptions, will be “passive” or “financial services” income, while OID accrued in taxable years
beginning after December 31, 2006 will, depending on the holder’s circumstances, be “passive” or “general”
income, which, in either case, is treated separately from other types of income for purposes of computing the
foreign tax credit allowable to a United States Holder under the United States federal income tax laws.
Purchase, Sale, Redemption and Retirement of the Notes
A United States Holder’s adjusted tax basis in a Note generally will be its cost, adjusted upward to
reflect accrued OID and downward to reflect payments other than any payments of stated interest to the date
of disposition. A United States Holder generally will recognize gain or loss on the sale, redemption or
retirement of a Note equal to the difference between the amount realized (not including any amounts
attributable to accrued but unpaid interest) on the sale, redemption or retirement and the holder’s adjusted tax
basis in the Note. Subject to the discussion of foreign currency gain or loss, below, that gain or loss will be
capital, and will be long-term capital gain or loss if the Note was held for more than one year. Under current
law, net capital gains of individuals may be taxed at lower rates than items of ordinary income. The ability
of a United States Holder to offset capital losses against ordinary income is limited. Any capital gain or loss
recognized by a United States Holder on the sale, redemption or retirement of a Note generally will be
treated as income or loss from sources within the United States for foreign tax credit limitation purposes.
A United States Holder must treat any portion of the gain or loss recognized on the sale or
disposition of a Note as ordinary income to the extent that gain or loss is attributable to changes in the U.S.
dollar - Brazilian real exchange rate. Such gain or loss, however, will be taken into account only to the
extent of the total gain or loss realized on the sale or disposition.
Non-United States Holders
The following discussion applies to you if you are not a United States person for United States
federal income tax purposes (a “Non-United States Holder”).
Interest on the Notes
Subject to the discussion of backup withholding below, a Non-United States Holder will not be
subject to United States federal income tax, including withholding tax, on payments of interest or the accrual
of OID unless that holder:
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•
is an insurance company carrying on a U.S. insurance business to which the interest is
attributable within the meaning of the United States federal tax laws; or
•
has an office or other fixed place of business in the United States to which the interest is
attributable and the interest is derived in the active conduct of a banking, financing or similar
business within the United States.
Disposition of the Notes
Subject to the discussion of backup withholding below, a Non-United States Holder will not be
subject to United States federal income tax on any capital gain realized on the sale or exchange of the Notes
unless:
•
that gain or income is effectively connected with the conduct by that Non-United States
Holder of a trade or business within the United States; or
•
in the case of a Non-United States Holder who is an individual, that Non-United States
Holder is present in the United States for a total of 183 days or more during the taxable year
in which that gain or income is realized, and either:
•
that gain is attributable to an office or fixed place of business maintained in the United
States by that Non-United States Holder; or
•
that Non-United States Holder has a tax home in the United States.
Treasury Regulations Requiring Disclosure of Reportable Transactions
Treasury regulations require United States taxpayers to report certain transactions that give rise to a
loss in excess of certain thresholds (a “Reportable Transaction”). Under these regulations, a United States
Holder (or a United States alien that holds the Notes in connection with a U.S. trade or business) that
recognizes a loss with respect to the Notes that is characterized as an ordinary loss due to changes in
currency exchange rates (under any of the rules discussed above) would be required to report the loss on
Internal Revenue Service Form 8886 (Reportable Transaction Statement) if the loss exceeds the thresholds
set forth in the regulations. For individuals and trusts, this loss threshold is $50,000 in any single taxable
year. For other types of taxpayers and other types of losses, the thresholds are higher. All holders should
consult with their own tax advisor regarding any tax filing and reporting obligations that may apply in
connection with acquiring, owning and disposing of Notes.
Estate Tax
The Notes will be treated as situated outside the United States for purposes of the United States
federal estate tax. Thus, for purposes of that tax, the Notes will not be included in the gross estate of an
individual in the case of a nonresident of the United States who was not a citizen of the United States at the
time of death if income on the Notes would not have been effectively connected with a United States trade or
business at the time of the individual’s death.
Backup Withholding and Information Reporting
In general, information reporting requirements will apply to payments of principal of and interest on
the Notes to non-corporate United States Holders if those payments are made within the United States or by
or through a custodian or nominee that is a United States Controlled Person, as defined below. Backup
withholding will apply to those payments if such a United States Holder fails to provide an accurate taxpayer
identification number or, in the case of interest payments, fails to certify that it is not subject to backup
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withholding or is notified by the Internal Revenue Service that it has failed to report all interest and
dividends required to be shown on its United States federal income tax returns. Payments of principal and
interest to beneficial owners who are Non-United States Holders generally will not be subject to information
reporting and backup withholding, but those holders may be required to establish their exemption from
information reporting and backup withholding by certifying their status on United States Internal Revenue
Service Forms W-8BEN.
The payment of proceeds of a sale or redemption of Notes effected at the U.S. office of a broker will
generally be subject to the information reporting and backup withholding rules described above. In addition,
the information reporting rules will apply to payments or proceeds of a sale or redemption effected at a
foreign office of a broker that is a United States Controlled Person, unless the broker has documentary
evidence that the holder or beneficial owner is not a United States Holder (and has no actual knowledge or
reason to know to the contrary) or the holder or beneficial owner otherwise establishes an exemption.
A payment to a foreign partnership is treated, with some exceptions, for backup withholding
purposes as a payment directly to the partners, so that the partners are required to provide any required
certifications. If you hold a Note through a partnership or other pass-through entity, you should consult your
own tax advisors regarding the application of these rules to your situation.
A “United States Controlled Person” is:
•
a United States person (as defined in the United States Treasury regulations);
•
a controlled foreign corporation for United States federal income tax purposes;
•
a foreign person 50% or more of whose gross income is derived for tax purposes from a
U.S. trade or business for a specified three-year period; or
•
a foreign partnership in which United States persons hold more than 50% of the income or
capital interests or which is engaged in a U.S. trade or business.
Any amounts withheld under the backup withholding rules from a payment to a holder of a Note generally
will be allowed as a refund or a credit against the holder’s United States federal income tax liability as long
as the holder provides the required information to the Internal Revenue Service.
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PLAN OF DISTRIBUTION
Subject to the terms and conditions contained in the Purchase Agreement dated June 15, 2007 (the
“Purchase Agreement”), among the Issuer, the Guarantors and the Initial Purchaser, the Initial Purchaser has
agreed to purchase from the Issuer, and the Issuer has agreed to sell to the Initial Purchaser, R$300,000,000
principal amount of the Notes.
The Purchase Agreement provides that the obligation of the Initial Purchaser to pay for and accept
delivery of the Notes is subject to the conditions specified in the Purchase Agreement, including the delivery
of legal opinions by its counsel. Subject to the terms and conditions of the Purchase Agreement, the Initial
Purchaser is obligated to take and pay for all of the Notes offered hereby if any of the Notes are taken by the
Initial Purchaser. The Issuer has been advised by the Initial Purchaser that it proposes to offer and sell the
Notes initially to investors at the offering price set forth on the cover page of this Offering Memorandum and
that after the initial offering, the price to investors may be changed.
The Purchase Agreement provides that the Issuer will indemnify the Initial Purchaser against certain
liabilities, including liabilities under the Securities Act, and will contribute to payments the Initial Purchaser
may be required to make in respect thereof.
The Notes have not been and will not be registered under the Securities Act or any state securities laws
and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons (other
than distributors) unless they are registered under the Securities Act or an exemption from the registration
requirements of the Securities Act is available. See “Transfer Restrictions”.
The Issuer has been advised by the Initial Purchaser that it proposes to resell the Notes initially to
qualified institutional buyers (as defined in Rule 144A under the Securities Act) in reliance on the exemption
from the registration requirements of the Securities Act provided by Rule 144A and to non U.S. Persons in
reliance on the exemption from the registration requirements of the Securities Act provided by Regulation S
under the Securities Act.
The Initial Purchaser has agreed that, except as permitted by the Purchase Agreement, it will not offer,
sell or deliver the Notes (i) as part of its distribution at any time or (ii) otherwise until 40 days after the later
of the commencement of this offering and the original issuance date of the Notes, within the United States or
to, or for the account or benefit of, U.S. persons, other than in accordance with Rule 144A, and it will send to
each distributor, dealer or other person receiving a selling concession or similar fee to which it sells Notes in
reliance on Regulation S during such 40 day period, a confirmation or other notice detailing the restrictions
on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons.
In addition, until the expiration of the 40 day restricted period referred to above, an offer or sale of Notes
within the United States by a dealer (whether or not it is participating in this offering) may violate the
registration requirements of the Securities Act if such offer or sale is made otherwise than pursuant to Rule
144A or pursuant to another exemption from registration under the Securities Act. Terms used in this
paragraph have the meanings given to them by Regulation S.
Application will be made to list the Notes on the Alternative Securities Market of the Irish Stock
Exchange Ltd. Notes sold to qualified institutional buyers in the United States pursuant to Rule 144A are
expected to be eligible for trading in The PORTAL Market, NASD’s screen-based automated market for
trading of securities eligible for resale under Rule 144A.
Prior to this offering, there has been no established market for the Notes. The Issuer has been advised
by the Initial Purchaser that it currently intends to make a market in the Notes as permitted by applicable
laws and regulations. The Initial Purchaser is not obligated, however, to make a market in the Notes and any
such market making may be discontinued at any time at the sole discretion of the Initial Purchaser. In
addition, such market making activity will be subject to the limits imposed by the Securities Act and the U.S.
Securities Exchange Act of 1934. Accordingly, the Issuer cannot assure you as to the liquidity of, or the
development or continuation of trading markets for, the Notes.
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In connection with this offering, the Initial Purchaser may engage in transactions that stabilize, maintain
or otherwise affect the price of the Notes. Specifically, the Initial Purchaser may bid for and purchase Notes
in the open market for the purpose of pegging, fixing or maintaining the price of the Notes. In addition, if
the Initial Purchaser creates a short position in the Notes in connection with the offering by selling more
Notes than are listed on the cover page of this Offering Memorandum, then the Initial Purchaser may reduce
that short position by purchasing Notes in the open market. The Initial Purchaser may also impose penalty
bids, which would permit the Initial Purchaser to reclaim a selling concession from a dealer when the Notes
originally sold by that dealer are purchased in a covering transaction to cover short positions. In general,
purchases of a security for the purpose of stabilizing or reducing a short position could cause the price of that
security to be higher than it might otherwise have been in the absence of those purchases.
Neither the Issuer nor the Initial Purchaser make any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the price of the Notes. In
addition, neither the Issuer nor the Initial Purchaser make any representation that the Initial Purchaser will
engage in these transactions or that these transactions, if they are commenced, will not be discontinued
without notice.
Purchasers of the Notes may be required to pay stamp taxes and other charges in accordance with the
laws and practices of the country of purchase in addition to the offering price set forth on the cover page of
this Offering Memorandum.
The Initial Purchaser has from time to time in the past provided, and may in the future provide,
investment banking, financial advisory and other services to the Issuer and the Issuer’s affiliates for which it
has received or expects to receive customary fees.
Selling Restrictions
No action has been or will be taken in any country or jurisdiction by the Issuer, the Guarantors or the
Initial Purchaser that would, or is intended to, permit a public offering of the Notes, or the possession or
distribution of the Offering Memorandum or any other offering material, in any country or jurisdiction
where action for that purpose is required. Persons into whose hands this Offering Memorandum comes are
required by the Issuer, the Guarantors and the Initial Purchaser to comply with all applicable laws and
regulations in each country or jurisdiction in or from which they purchase, offer, sell or deliver Notes or
have in their possession or distribute such offering material, in all cases at their own expense.
Brazil
The Notes have not been and will not be issued nor placed, distributed, offered or negotiated in the
Brazilian capital markets. The Notes have not been and will not be registered with the CVM. The Initial
Purchaser has represented, warranted and agreed that it has not offered or sold, and will not offer or sell, the
Notes Brazil, except in circumstances which do not constitute a public offering, placement, distribution or
negotiation of securities in the Brazilian capital markets regulated by Brazilian legislation.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the
Prospectus Directive (each, a “Relevant Member State”), the Initial Purchaser has represented and agreed
that with effect from and including the date on which the Prospectus Directive is implemented in that
Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of
Notes to the public in that Relevant Member State except that it may, with effect from and including the
Relevant Implementation Date, make an offer of Notes to the public in that Relevant Member State: (a) in
(or in Germany, where the offer starts within) the period beginning on the date of publication of the Offering
Memorandum in relation to those Notes which have been approved by the competent authority in that
Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to
the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive and
ending on the date which is 12 months after the date of such publication; (b) at any time to legal entities
which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated,
whose corporate purpose is solely to invest in securities; (c) at any time to any legal entity which has two or
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more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of
more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual
or consolidated accounts; or (d) at any time in any other circumstances which do not require the publication
by the Issuer of the Offering Memorandum pursuant to Article 3 of the Prospectus Directive. For the
purposes of this paragraph, the expression an “offer of Notes to the public” in relation to any Notes in any
Relevant Member State means the communication in any form and by any means of sufficient information
on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or
subscribe the Notes, as the same may be varied in that Member State by any measure implementing the
Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive
2003/71/EC and includes any relevant implementing measure in each Relevant Member State.
United Kingdom
The Initial Purchaser has represented and agreed that:
(a)
it has only communicated or caused to be communicated and will only communicate or
cause to be communicated an invitation or inducement to engage in investment activity (within the meaning
of Section 21 of the FSMA) received by it in connection with the issue or sale of the Notes in circumstances
in which Section 21(1) of the FSMA does not apply to the Issuer; and
(b)
it has complied and will comply with all applicable provisions of the FSMA with respect to
anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
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TRANSFER RESTRICTIONS
The following information relates to the form and transfer of the Notes. Because of the following
restrictions, holders in the United States are advised to consult legal counsel prior to making any offer,
resale, pledge or transfer of the Notes.
The Notes and the Guarantees have not been and will not be registered under the Securities Act and
may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons, except in
accordance with an applicable exemption from the registration requirements of the Securities Act.
Accordingly, the Notes are being offered and sold only (i) to “qualified institutional buyers” (as defined in
Rule 144A), or QIBs, in compliance with Rule 144A or (ii) outside the United States to persons other than
U.S. persons, which term shall include dealers or other professional fiduciaries in the United States acting on
a discretionary basis for foreign beneficial owners (other than an estate or trust), in reliance upon Regulation
S under the Securities Act. As used in this section, the terms “United States”, “U.S. person” and “offshore
transactions” have the meanings given to them in Regulation S.
Each purchaser of the Notes, by its acceptance thereof, will be deemed to have acknowledged,
represented to and agreed with the Issuer, Guarantors and the Initial Purchaser as follows:
a.
It is:
•
a qualified institutional buyer, is aware that the sale of the Notes to it is being made in
reliance on Rule 144A and is acquiring the Notes for its own account or for the account of a
qualified institutional buyer; or
•
not a U.S. person and is purchasing the Notes outside the United States in compliance with
Regulation S.
b.
It understands that the Notes and the Guarantees are being offered in a transaction not involving
any public offering in the United States within the meaning of the Securities Act and that the
Notes and the Guarantees have not been, and will not be, registered under the Securities Act and
may not be offered or sold within the United States or to, or for the account or benefit of, U.S.
persons except as set forth below.
c.
If it is acquiring the Notes in a sale made in reliance upon Rule 144A, it will not offer, resell,
pledge or otherwise transfer the Notes prior to the date that is two years after the later of the
original issue date of the Notes and the last date on which the Issuer or any of its affiliates was
the owner of that Note (or any predecessor of that Note ) except:
•
to the Issuer;
•
inside the United States to a qualified institutional buyer in compliance with Rule 144A;
•
outside the United States to non-U.S. persons in offshore transactions in accordance with
Rule 903 or Rule 904 of Regulation S;
•
in a transaction complying with Rule 144 under the Securities Act (if available); or
•
pursuant to an effective registration statement under the Securities Act,
in each case in accordance with any applicable securities laws of any state of the United States
and other jurisdictions. In addition, it will, and each subsequent holder is required to, notify any
subsequent purchaser of those Notes from it of the resale restrictions referred to above.
d.
If it is acquiring the Notes pursuant to an exemption from registration under the Securities Act:
(1)
It is (a) not an affiliate (as defined in Rule 144 under the Securities Act) of the Issuer or
a person acting on behalf of such an affiliate, (b) a QIB, (c) acquiring such Notes for its
own account or for the account of a QIB and (d) aware, and each beneficial owner of
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such Notes has been advised, that the sale of such Notes to it is being made in reliance
on an exemption from registration under the Securities Act.
(2)
It understands that such Notes, unless otherwise agreed between the Issuer and the
Trustee in accordance with applicable law, will bear a legend to the following effect:
THIS NOTE AND THE GUARANTEES HAVE NOT BEEN AND WILL NOT BE
REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED
(THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND MAY
NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED
EXCEPT AS PERMITTED BY THE FOLLOWING SENTENCES. THE SALE,
PLEDGE OR TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN
CONDITIONS AND RESTRICTIONS, INCLUDING THOSE SET FORTH IN THE
INDENTURE TO BE DATED AS OF THE SETTLEMENT DATE, PURSUANT TO
WHICH THIS NOTE WAS ISSUED (THE “INDENTURE”). THE HOLDER
HEREOF, BY ITS ACCEPTANCE OF THIS NOTE, REPRESENTS,
ACKNOWLEDGES AND AGREES THAT (a)(i) IT AND ANY ACCOUNT FOR
WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN
THE MEANING OF RULE 144A) AND THAT IT EXERCISES SOLE
INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, OR
(ii) IT IS NOT A U.S. PERSON (WITHIN THE MEANING OF REGULATION S),
AND (b) THIS NOTE IS A “RESTRICTED SECURITY” THAT HAS NOT BEEN
REGISTERED UNDER THE SECURITIES ACT AND THAT IT WILL NOT
REOFFER, RESELL, PLEDGE OR OTHERWISE TRANSFER THIS NOTE
EXCEPT (i) TO THE ISSUER OR AN AFFILIATE OF THE ISSUER (UPON
REDEMPTION OF THE NOTES OR OTHERWISE); (ii) IN COMPLIANCE WITH
RULE 144A UNDER THE SECURITIES ACT, TO A PERSON WHOM THE
SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER
(AS DEFINED IN RULE 144A) PURCHASING FOR ITS OWN ACCOUNT OR
FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, WHOM THE
SELLER HAS INFORMED, IN EACH CASE, THAT THE OFFER, SALE, PLEDGE
OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A; (iii)
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE);
(iv) IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 903 OR
904 OF REGULATION S UNDER THE SECURITIES ACT OR (iv) PURSUANT TO
A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE
UNDER THE SECURITIES ACT; IN EACH CASE IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAW OF ANY STATE OF THE UNITED STATES
AND ANY OTHER JURISDICTION. TERMS USED IN THIS LEGEND HAVE
THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE
SECURITIES ACT.
(3)
It understands that the Notes offered in reliance on an exemption from registration
under the Securities Act will be represented by the Restricted Global Note, and before
any interest in the Restricted Global Note may be offered, sold, pledged or otherwise
transferred to a person who takes delivery in the form of an interest in the Regulation S
Global Note, it will be required to provide the Registrar with a written certification (in
the form provided in the Indenture) as to compliance with applicable securities laws.
Prospective purchasers are hereby notified that sellers of the Notes may be relying
on the exemption from the provisions of Section 5 of the Securities Act.
e.
If it is acquiring the Notes pursuant to Regulation S and prior to the expiration of the distribution
compliance period:
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(1) It is, or at the time the Notes are purchased will be, the beneficial owner of such Notes and
(a) it is not a U.S. person and it is located outside the United States (within the meaning of
Regulation S) and (b) it is not an affiliate of the Issuer or a person acting on behalf of such an
affiliate.
(2) It understands that the Notes offered in reliance on Regulation S will be represented by the
Regulation S Global Note. Prior to the expiration of the distribution compliance period,
before any interest in the Regulation S Global Note may be offered, sold, pledged or
otherwise transferred to a person who takes delivery in the form of an interest in the
Restricted Global Note, it will be required to provide the Registrar with a written certification
(in the form provided in the Indenture) as to compliance with applicable securities laws.
f.
It acknowledges that the Issuer, the Guarantors, the Initial Purchaser and others will rely upon the
truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees
that, if any of the acknowledgments, representations or warranties deemed to have been made by
its purchase of Notes is no longer accurate, it shall promptly notify the Issuer, the Guarantors and
the Initial Purchaser. If it is acquiring any Notes as a fiduciary or agent for one or more investor
accounts, it represents that it has sole investment discretion with respect to each such account and
that it has full power to make the foregoing acknowledgments, representations and agreements on
behalf of each such account.
g.
It acknowledges that the foregoing restrictions apply to holders of beneficial interests in the
Notes as well as to registered holders of the Notes.
h.
If it is a purchaser in a sale that occurs outside the United States within the meaning of
Regulation S, it agrees that until the expiration of a 40-day “distribution compliance period”
within the meaning of Rule 903 of Regulation S under the Securities Act, no offer or sale of the
Securities shall be made by it to a U.S. person or for the account or benefit of a U.S. person
within the meaning of Rule 902(o) of the Securities Act except to a qualified institutional buyer
and in compliance with the applicable restrictions set forth in paragraph (d) above.
i.
It will be deemed to have represented and agreed either that: (i) it is not and for so long as it
holds Notes will not be (and is not acquiring the Notes directly or indirectly with the assets of a
person who is or while the Notes are held will be) an ERISA Plan or other Plan, an entity whose
underlying assets include the assets of any such ERISA Plan or other Plan, or a governmental or
other employee benefit plan which is subject to any U.S. federal, State or local law, or foreign
law, that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the
Code, or (ii) its purchase and holding of the Notes will not result in a prohibited transaction under
Section 406 of ERISA or Section 4975 of the Code as a result of the applicability to such
purchase and holding of a prohibited transaction class exemption issued by the U.S. Department
of Labor (or, in the case of such a governmental or other employee benefit plan, in the violation
of any such substantially similar U.S. federal, State or local law, or foreign law). Similarly, each
transferee of any Notes, by virtue of the transfer of such Notes to such transferee, will be deemed
to have represented and agreed either that: (i) it is not and for so long as it holds Notes will not be
(and is not acquiring the Notes directly or indirectly with the assets of a person who is or while
the Notes are held will be) an ERISA Plan or other Plan, an entity whose underlying assets
include the assets of any such ERISA Plan or other Plan, or a governmental or other employee
benefit plan which is subject to any U.S. federal, State or local law, or foreign law, that is
substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code, or
(ii) its purchase and holding of the Notes will not result in a prohibited transaction under Section
406 of ERISA or Section 4975 of the Code as a result of the applicability to such purchase and
holding of a prohibited transaction class exemption issued by the U.S. Department of Labor (or,
in the case of such a governmental or other employee benefit plan, in the violation of any such
substantially similar federal, State or local law, or foreign law).
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SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING
PRINCIPLES GENERALLY ACCEPTED IN BRAZIL, U.S. GAAP AND IFRS
The financial statements of the Issuer, of each of the three Guarantors and the special purpose combined
financial statements of the Issuer and the Guarantors were prepared in accordance with the Accounting
Principles Generally Accepted in Brazil. Such principles are based upon the Brazilian Corporate Law (Law
No. 6,404/76, as amended), complemented by standards issued by the Conselho Federal de Contabilidade
(or CFC) and the Instituto dos Auditores Independentes do Brasil (or Brazilian Institute of Independent
Auditors or IBRACON), the Brazilian professional accounting body. The financial statements reflect the
impacts of inflation on the companies’ financial information following the Constant Currency Methodology.
Certain differences exist between Brazilian GAAP, U.S. GAAP and IFRS (which incorporates all
existing International Financial Reporting Standards, or IFRS, International Accounting Standards, or IAS,
as well as interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and
SIC (the Standing Interpretations Committee of the International Accounting Standards Committee) which
might be material to the financial information presented herein. The matters described below summarize
certain of those differences that may be material. The Issuer is responsible for preparing the Summary below.
Neither the Issuer nor the Guarantors have prepared a complete reconciliation of its consolidated financial
statements and related footnote disclosures between Brazilian GAAP, U.S. GAAP and IFRS; accordingly no
assurance is provided that this summary is complete. In making an investment decision, prospective
investors must rely upon their own examination of the Company, the terms of the offering and the financial
information. Potential investors unfamiliar with Brazilian GAAP should consult their own professional
advisors for an understanding of the differences between Brazilian GAAP, U.S. GAAP and IFRS and how
those differences might impact the financial information presented herein. This summary is subject and
qualified in its entirety by reference to the respective pronouncements of the respective Brazilian and United
States professional accounting bodies and those of the International Accounting Standards Board and the
International Financial Reporting Interpretations Committee.
In reading this summary, prospective investors should also have regard to the considerations that:
future differences between Brazilian GAAP, U.S. GAAP and IFRS resulting from future changes in
accounting standards or from transactions or events that may occur in the future have not been taken into
account in this summary and no attempt has been made to identify any future events, ongoing work and
decisions of the regulatory bodies that promulgate Brazilian GAAP, U.S. GAAP and IFRS that could affect
future comparisons between Brazilian GAAP, U.S. GAAP and IFRS. Unlike U.S. GAAP and IFRS, under
business combinations, financial instruments, accounting and reporting for research and development costs,
amongst others.
Unlike U.S. GAAP and IFRS, under Brazilian GAAP there are no specific principles or detailed
guidance relating to certain matters such as business combinations, financial instruments, accounting and
reporting for research and development costs.
Inflation Accounting
Until December 31, 1995, publicly traded companies were required to prepare financial statements
under two methods: (i) the Corporate Law Method (which complies with the accounting practices arising
from the Brazilian Corporate Law), valid for statutory and tax purposes; and (ii) the Constant Currency
Method (which complies with Brazilian GAAP) prepared as price-level adjusted financial statements. On
January 1, 1996, new legislation eliminated the requirement to adjust the financial statements under
Brazilian Corporate Law for inflation. Companies are still allowed under Brazilian GAAP to present
financial statements prepared under the Constant Currency Method.
The Corporate Law Method through December 31, 1995
The Corporate Law Method, for all periods through December 31, 1995, provided for a simplified
method of accounting for the effects of inflation. It consisted of restating permanent assets (property, plant
and equipment, investments and deferred charges) and shareholders’ equity accounts using the indices
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mandated by the Brazilian Government. The net effect represented the inflationary gain or loss credited or
charged to income in a single account in the income statement. This system did not provide for restatement
of individual line items in the income statement. Moreover, this system did not require restatement of
previous years’ financial statements.
The Constant Currency Method
Under the Constant Currency Method, all amounts in the financial statements are expressed in constant
purchasing power at the current balance sheet date. This method requires that all transactions and balances
be updated to reflect the changes in a general price index from the date they occurred or were generated to
the current balance sheet date. Accordingly, all relevant non-monetary assets and liabilities, shareholders’
equity accounts, and all components of the statements of income, changes in shareholders’ equity and
changes in financial position are updated to reflect the changes in the inflation indices to the current balance
sheet date.
In 2001, Resolution 900 of the Brazilian Federal Accountancy Council (CFC) established that the
indexation of the accounts under the “Constant Currency Method” should be suspended during periods of
low inflation, i.e., when the cumulative inflation rate in a 36-month period is less than 100%. As a result in
financial statements presented under the Constant Currency Method indexation required to be suspended at
such time and subsequent transactions are recorded at their historical amounts without indexation.
Under U.S. GAAP, in most cases, the price level restatement of financial statements is not permitted.
Account balances and transactions are generally stated in the units of currency of the period/year when the
transactions originated. This accounting model is commonly known as the historical cost basis of
accounting. However, the Constant Currency Method described in the preceding paragraphs is substantially
similar to the methodology prescribed by Accounting Principles Board Statement (“APB”) No. 3, “Financial
Statements restated for General Price-Level Changes” for companies operating in hyper-inflationary
environments in which inflation has exceeded 100% over the last three years and which report in local
currency. As from a date between July 1, 1997 and December 31, 1997, the Brazilian economy is no longer
considered highly-inflationary as the increase in general price index has been measured at less than 100%
over the last three years. As a result, for U.S. GAAP purposes financial statements would have been required
to be adjusted for the effects of inflation until the date on which Brazil is no longer considered highlyinflationary, usually a date between July 1, 1997 and December 31, 1997.
Under IFRS, inflation accounting following the methodology prescribed by standard IAS 29 (Financial
Reporting in Hyperinflationary Economies) is required for companies which operate in hyper-inflationary
economies in which cumulative inflation has exceeded 100% over the preceding three years. However, other
indicators prescribed by IAS 29 should take in conjunction with the 100% three year inflation indicator to
define whether the economy is hyper-inflationary. As a result, considering this quantitative indicator for
IFRS purposes, financial statements should be adjusted for the effects of inflation up to the date on which the
Brazilian economy was no longer deemed to be hyper-inflationary, which was July 1, 1997.
Cash and Cash Equivalents
Under U.S. GAAP and IFRS, cash equivalents are defined as short term (less than 3 months), highly
liquid investments that are readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value. Generally, only investments with original maturities of three-months
or less qualify under that definition. Under Brazilian GAAP, cash equivalents are not defined or presented in
the same context as IFRS or U.S. GAAP.
Consolidation and Proportional Consolidation
Under Brazilian GAAP, as per CVM Instruction No. 247 of March 27, 1996, as amended, the financial
statements of publicly listed companies should consolidate the following entities: (a) entities in which the
company has voting rights that provide it with the ability to have the majority on social decisions and to elect
the majority of the members of both the Administrative Council and the Board; (b) overseas branches; and (c)
companies under common control or controlled by shareholders' agreements irrespective of the participation
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in voting stock joint ventures (including investees in which the company exerts significant influence through
its participation in a shareholders' agreement in which such group controls the investee) are to be accounted
for under the proportional consolidation method. Non public companies are not required to present
consolidated financial statements.
Under U.S. GAAP, except as noted in the section “Consolidation of Special Purposes Entities” below,
the usual condition for consolidation is the ownership of a majority voting interest. Therefore, as a general
rule, the condition for consolidation is the ownership by one company, directly or indirectly, of over 50% of
the outstanding voting shares of another company. Joint ventures are usually accounted for following the
equity method of accounting. Proportional consolidation is generally not allowed under U.S. GAAP.
Under IFRS, IAS 27 focuses on the concept of control, which is the power to govern the financial and
operating policies of a subsidiary to obtain benefits. When a parent controls a subsidiary, except in very
limited circumstances, it needs to consolidate such an investee. Control is usually presumed to exist when
the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of the entity.
However, control may exist through means other than ownership of more than half of the voting power.
Under IAS 31, joint control is the contractually agreed sharing of control over an economic activity,
and exists only when the strategic financial and operating decisions regarding the activities require
unanimous consent of the venturers. Joint ventures are either carried at the equity method or proportionate
consolidated.
Special rules apply for consolidation of special purpose entities as described in the section below for
Brazilian GAAP, U.S. GAAP and IFRS.
Consolidation of Special Purpose Entities
Under Brazilian GAAP, CVM’s Instruction 408, effective as from fiscal years ending December 31,
2005, determines that special purpose entities (SPE's) must be consolidated by public companies when the
essence of its relationship with the company indicates that activities of the SPE are directly or indirectly
controlled by the company.
An SPE is considered to be controlled by a company when its activities are conducted in the name of
the company or substantially for the company's specific operational support when, directly or indirectly: (i)
the company has the ability for decision making or has the rights to obtain the majority of rewards of the
SPE's operations, or (ii) the company is subject to substantive risks of ownership of SPE.
When applicable, the following information must be disclosed in the notes to the financial statements: (i)
the nature, purpose, size, and activities of the SPE; (ii) the nature of its involvement with the SPE and
potential exposure to losses; (iii) the type of exposure to losses due to the relationship with the SPE; and (iv)
any guarantees given in favour of the SPE.
Additionally, when a company has relevant rights or is exposed to relevant risks related to its
relationship with the SPE, but it is not required to consolidate the SPE, the following information must be
disclosed: (i) the nature, purpose, size, and activities of the SPE; (ii) the nature of its involvement with the
SPE; (iii) the type of exposure to losses due to the relationship with the SPE; and (iv) potential
indemnification by the Company as result of the activities of the SPE.
CVM Instruction 408 is applicable only to public listed companies.
Under U.S. GAAP, an SPE was required to be consolidated when it did not meet the criteria for a
Qualifying Special Purpose Entity, as defined in SFAS No. 140 and in accordance with Emerging Issues
Task Force Topic D-14. General factors to be considered in making this determination included whether the
majority owner (or owners) of the SPE was (were) independent, had made a substantive capital investment in
the SPE, had control of the SPE, or possessed the substantive risks and rewards of ownership of the SPE.
In January 2003, the Financial Accounting Standard Board (“FASB”) issued FASB Interpretation No.
46 “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51”.
FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a
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company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in
consolidated financial statements. Variable interest entities are entities with the following characteristics: (a)
the equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated
financial support from other parties; and (b) the equity investors lack one or more of the following essential
characteristics of a controlling financial interest: (i) the direct or indirect ability to make decisions about the
entity’s activities through voting rights or similar rights; (ii) the obligation to absorb the expected losses of
the entity if they ocurr, which makes it possible for the entity to finance its activities, or (iii) the right to
receive the expected residual returns of the entity if they occur, which is the compensation for the risk of
absorbing the expected losses.
In December 2003, FIN 46 was substantially revised and a new interpretation, FIN 46R (revised), was
issued. The key differences between FIN 46R and its predecessor FIN 46 include:
(i)
FIN 46R now scopes out many – but not all – businesses, as that term is defined in the
interpretation. A business – assuming it is scoped out in FIN 46R – should be consolidated
with its accounting parent (if it has one) only when required by longstanding, conventional
consolidation guidance.
(ii)
FIN 46R improves the definition of a variable interest and provides more understandable
illustrations than those originally provided in FIN 46.
(iii)
Under FIN 46, decision maker fees and certain guarantee fees were treated as unique types
of variable interests in a VIE. The special treatment increased the odds that decision makers
and providers of certain guarantees would end up as a VIE’s primary beneficiary. FIN 46R
eliminates the bias, putting these fees on an equal footing with other variable interests.
Under IFRS specific guidance is provided with respect to consolidation of SPEs. An SPE may be
created to accomplish a narrow and well-defined objective. Such a special purpose entity may take the form
of a corporation, trust, partnership or unincorporated entity and are often created with legal arrangements
that impose strict and sometimes permanent limits on the decision-making powers of their governing board,
trustee or management.
The sponsor frequently transfers assets to the SPE, obtains rights to use assets held by the SPE or
performs services for the SPE, while other parties may provide funding. An entity that engages in
transactions with the SPE (frequently creator or sponsor) may in substance control the SPE. SPEs shall be
consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is
controlled by that entity.
Special Purpose Combined Financial Statements
Brazilian GAAP and IFRS do not have specific accounting standards or guidance addressing the
preparation of special purpose combined financial statements.
Under U.S. GAAP, ARB No 51 determines that, when combined statements are prepared for a group of
related companies, such as a group of commonly controlled companies, inter-company transactions and
profits or losses should be eliminated. Accounting for these matters, as well as for any minority interests,
foreign operations, or income taxes should follow the general guidance used for the preparation of
consolidated financial statements.
Equity Method of Accounting
Under Brazilian GAAP, in applying the equity method of accounting, a company is required to record
an original investment in the equity of another entity at cost, which is thereafter periodically adjusted to
recognize the investor's share of the investee's earnings, losses and dividend payments after the date of
original investment. A Brazilian parent company is required to use the equity method of accounting to record
investments on its stand-alone financial statements for both its subsidiaries (companies that are controlled by
the parent company) and its affiliates (companies in which the parent company owns at least 10% of the
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issued share capital without controlling it, over whose management it exerts influence, or in which it owns
20% or more of the capital, if the aggregate book value of all such investments is equal to or greater than
15% of the net worth of the parent company or if the book value of an investment in any single subsidiary or
affiliate is equal to or greater than 10% of the net worth of the parent company. Publicly listed companies
should consolidate all subsidiaries, except those for which there are serious going concern issues or clear
evidence of sale in the near future.
Under U.S. GAAP, the equity method of accounting is used for investments, based on U.S. GAAP
underlying financial statements, in which the company has a 20 per cent to 50 per cent ownership interest or
has otherwise significant influence over the operations of the investee and in joint ventures in which neither
party has control. Investments under 20 per cent which are not marketable securities are carried at amortised
cost while investments under 20 per cent in marketable securities are recorded or fair value under SFAS No.
115, “Accounting for Certain Investments in Debt and Equity Securities”.
Under U.S. GAAP, if any of the investments described above, including those accounted for by the
equity method of accounting or those following the provisions of SFAS No. 115, experience an other than
temporary decline in their fair value that exceeds their carrying amounts, such investments should be
reduced to their estimated fair value amount and an impairment loss recognised in earnings. The new
reduced amount becomes the historical basis for such investments.
Under IFRS, IAS 28 determines that the equity method of accounting is applicable to those investments
in which the investor has significant influence. Significant influence is the power to participate in the
financial and operating policies of the investee but is not control, or joint control. Significant influence is
presumed to exist when the investor has 20% or more of the voting power of the investee. However,
significant influence may exist through other means.
Business Combinations, Purchase Accounting and Goodwill
Under Brazilian GAAP, business combinations are not specifically addressed by detailed accounting
pronouncements. The accounting practices derived from Corporation Law and CVM rules prescribe the
application of the purchase method based on book values of the net assets acquired. Shares issued in
exchange for shares of other companies in connection with a business acquisition are accounted for at their
net asset value per share. Goodwill or negative goodwill recorded on the acquisition of a company is
calculated as the difference between the cost of acquisition and the net book value of assets and liabilities
acquired and is attributed to one of the following reasons: step up basis of the assets due to differences in the
carrying and fair values of the assets, future profitability or other reasons. Such goodwill should be
amortized as follows depending on its nature:
(i)
Step up basis of the assets: Goodwill or negative goodwill should be included as part of the
value of the corresponding assets of the acquiree and amortized proportionally over their
remaining estimated useful lives;
(ii)
Future profitability: Goodwill should be amortized during the time when the respective
results are expected to be achieved. In this case, the amortization period should not exceed
ten years;
(iii)
Other reasons: Goodwill should be expensed immediately. Negative goodwill should not be
amortized to income until the related investment is sold or written off.
Under U.S. GAAP, APB No. 16, determines that most business combinations are treated as the
acquisition of one company by another and accounted for by the purchase method. In June 2001, the
Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141
which amends APB No. 16 and which requires, among other things, that all business combinations, except
those involving entities under common control be accounted for by a single method — the purchase method.
The combination of entities under common control are accounted for in a manner similar to a pooling of
interest. Under this method, the recorded assets and liabilities of the separate enterprises generally become
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the recorded assets and liabilities of the combined enterprise. Additionally, the combined enterprise records
as capital the capital stock and capital in excess of par or stated value of outstanding stock of the separate
enterprises. Similarly, retained earnings or deficits of the separate enterprises are combined and recognised
as retained earnings or deficits of the combined enterprise. Any assets or liabilities exchanged to effect the
transfer are accounted for as a capital dividend to, or capital contribution by, the transferor. Under the
pooling of interest method, the financial statements of the combined enterprise for periods prior to the
combination are restated to present the previously separate enterprises as if they had always been combined.
The purchase method is applicable for a business combination in which one company acquires an
unrelated company. The acquiring company records assets acquired and liabilities assumed at its fair value,
including identified intangible assets. Under SFAS No.141 and SFAS No. 142 “Goodwill and Other
Intangible Assets”, goodwill and other intangible assets with indefinite useful lives are not amortised. The
amount of goodwill is evaluated periodically, and in the case of impairment, its value is adjusted accordingly.
Negative goodwill will is recognised as an extraordinary gain in the statement of operations. Under the
purchase method, the financial statements of the acquiring company for periods prior to the acquisition are
not restated. SFAS No. 141 requires the presentation of pro forma results of operations for the current and
comparative periods of business combinations accounted for as purchases.
Under IFRS, the International Accounting Standards Board (or IASB) issued IFRS 3 (Business
Combination), which is applicable for business combinations for which the agreement date is on or after 31
March 2004, and requires, among other things, that all business combinations under its scope be accounted
for under the purchase method. Under this method, the acquiring entity records identifiable assets, liabilities
and contingent liabilities, acquired and assumed, at their fair values, including intangible assets that may not
have been previously recognised by the acquired entity. The shares issued in exchange for shares of other
companies are accounted for at fair value based on the market price.
Under IFRS 3 and IAS 38, (Intangible Assets), goodwill and other intangible assets with indefinite lives
are not amortized, but tested for impairment at least annually. In the case of impairment, the asset’s carrying
amount is reduced to its recoverable amount, determined to be the higher of its fair value less cost to sell and
its value in used, calculated based on discounted cash flows. Impairment adjustments are recognised directly
in income statement. Negative goodwill is recognized as a gain in the statement of operations.
Finite-lived intangible assets are generally amortized on a straight-line basis over its useful life, being
the period over which the entity expects to obtain economic benefits from the asset.
Transfer of Financial Assets
No specific pronouncement addresses the accounting for transfers of financial assets under Brazilian
GAAP.
Under U.S. GAAP, SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” provides a consistent application of a financial-components approach that
focuses on control to account for transfers of financial assets. Under that approach, after a transfer of
financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has
incurred, but does not recognize financial assets when control has been surrendered and does not recognize
liabilities when extinguished. SFAS No. 140 provides standards for distinguishing transfers of financial
assets that are sales from transfers that are secured borrowings from an accounting perspective.
A transfer of financial assets in which the transferor surrenders control over those assets is accounted
for as a sale to the extent that consideration is received in exchange. Under SFAS No. 140, it is considered
that the transferor has surrendered control over transferred assets if and only i f all of the following conditions
are met:
(i)
the transferred assets have been isolated from the transferor — put presumptively beyond the
reach of the transferor and its creditors, even in bankruptcy or other receivership;
(ii)
each transferee (or, if the transferee is a qualifying special-purpose entity, or SPE, each
holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial
interests) it received, and no condition both constrains the transferee (or holder) from taking
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advantage of its right to pledge or exchange and provides more than a trivial benefit to the
transferor; and
(iii)
the transferor does not maintain effective control over the transferred assets through either (1)
an agreement that both entitles and obligates the transferor to repurchase or redeem them
before their maturity or (2) the ability to unilaterally cause the holder to return specific assets,
other than through a clean-up call.
Under SFAS No. 140, liabilities and derivatives incurred or obtained by transferors as part of a transfer
of financial assets are initially measured at fair value, if practicable. It also requires that servicing assets and
other retained interests in the transferred assets be measured by allocating the previous carrying amount
between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of
the transfer.
Under IFRS, financial assets can be derecognized in full or partially but only when the necessary
conditions are met. Derecognition conditions depend on the following factors:
(a)
the rights to the asset’s cash flows and substantially all risks and rewards of ownership are
transferred out,
(b)
an obligation to transfer the asset’s cash flows is assumed,
(c)
substantially all risks and rewards are transferred out and the following conditions are met:
- no obligation to pay cash flows unless equivalent cash flows from the transferred asset
collected,
- prohibition from selling or pledging the asset other than as security to the eventual
recipients for the obligation to pass through cash flows,
- obligation to remit any cash flows without material delay; or
(d)
substantially all the risks and rewards are neither transferred nor retained but control of the
asset is transferred.
Property, Plant and Equipment
Under Brazilian GAAP, companies may opt to carry property, plant and equipment (PP&E) at cost,
restated for inflation as discussed elsewhere in this session, or at appraised values, in which case the
revaluations must be performed a least every four years and should not result in an amount higher than the
value expected to be recovered through future operations. The difference between the carrying amount and
the appraised value of the assets would be recorded, if positive, as an increase of property, plant and
equipment with counter entry directly in shareholders equity. Decreases in the appraised value set-off prior
increases recorded. Any excess decrease is recognized as impairment loss in the statement of operations.
Unless it is held for sale, revaluation of land is not subject to deferred income tax. Gains and losses
from the sale or disposal of assets are recorded as non-operating expenses.
Under IFRS, companies may use either the historical cost or revalued amounts (based on fair value) as
the accounting basis for PP&E. When the revaluation model is used, revaluations should be made with
sufficient regularity. If an item of PP&E is revalued, the entire class of PP&E to which the asset belongs is
required to be revalued. All revalued assets, including land, are subject, at the effective income tax rate from
the sale of the asset, to deferred income tax. Gains and losses from the sale or disposal of assets are recorded
as operating expenses.
Under U.S. GAAP, PP&E are reported at their historical cost less accumulated depreciation subject to
impairment as further described under “Impairment of Long-Lived Assets”. Revaluations are not permitted.
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Impairment of Long-lived Assets
Under Brazilian GAAP, whenever events or circumstances indicate that the carrying values of fixed
assets are higher than their recoverable amounts, an impairment loss should be recognised to reduce the
value of the assets to their recoverable amounts. Accounting standards mandatory for the financial year
ended December 31, 2006 do not provide detailed guidance on the calculation of impairment. New
accounting rules under NPC 16 (not yet effective) are expected to be consistent with IFRS.
In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of LongLived Assets,” which establishes the basic provisions for (a) recognition/measurement of impairment of
long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. In
accordance with this standard whenever events or changes in circumstances indicate that the carrying value
of long-lived assets might not be recoverable, calculations of undiscounted cash flows expected to be derived
from assets in service should be performed to determine whether impairment had occurred. Analysis of
impairment should be made by grouping assets at the lowest level for which cash flows are largely
independent from cash flows of other assets. In the event such undiscounted cash flows are not expected to
be sufficient to recover the recorded value of the assets, such assets should be written down to their
estimated fair values based on discounted cash flow analyses.
SFAS No. 144 also superseded the accounting and reporting provisions of APB Opinion No. 30 (APB
No. 30), “Reporting the Results of Operations” for segments of a business to be disposed of, but retained the
requirement of APB No. 30 to report discontinued operations separately from continuing operations, and
extended that reporting to a component of an entity that either has been disposed of or is classified as held
for sale. SFAS No. 144 became effective for fiscal years beginning after December 15, 2001 and interim
periods within those years.
Under IFRS, in accordance with IAS 36, the entity analyses at each balance sheet date (including
interim periods) indications of possible asset impairment. If impairment is indicated, the respective asset (or
the smallest group of assets to which it belongs and generates separate cash flows) should be tested for
impairment. In addition, goodwill and intangible assets with indefinite useful lives are not amortised but
tested for impairment at least annually, and whenever impairment indications exist. If impairment adjustment
is determined, a loss must taken to the income statement, as a result of reducing the asset’s carrying amount
to its recoverable amount. The recoverable amount of an asset is defined as the higher of its fair value less
cost to sell and its value in use, based on discounted cash flows. Reversals of previously recorded losses are
permitted in certain circumstances (except for impairment in goodwill which is never reversed) as long as
there have been changes in the circumstances that resulted in impairment. Impairment is recorded as an
operating expense in the income statement for the year.
Capitalization of Software Developed for Internal Use
Under Brazilian GAAP, computer development costs are generally capitalized at cost and amortized at
annual rates of 20%.
Under U.S. GAAP costs incurred after the preliminary project stage and for upgrades and
enhancements, including direct costs of materials and services, costs of employees directly associated with
project and interest costs incurred for the project are required to be capitalized. Capitalized costs should be
amortized over the expected period to be benefited.
Under IFRS, IAS 38, “Intangible assets”, which includes software, requires classification of the costs
associated with the creation of intangible assets as “research” or “development”. Costs in the research phase
of producing an intangible asset must always be expensed. Costs in the development phase of producing the
asset are expensed, unless the entity can demonstrate all of the following:
(i)
the technical feasibility of completing the intangible asset;
(ii)
the intention to complete the intangible asset;
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(iii)
the ability to use or sell it;
(iv)
how the intangible asset will generate future economic benefits – the entity must
demonstrate the existence of a market or, if for internal use, the usefulness of the intangible
asset;
(v)
the availability of adequate resources to complete the development; and
(vi)
the ability to measure reliably the expenditure attributable to the intangible asset during its
development.
Development costs initially recognised as an expense cannot be capitalised in a subsequent period.
Income Taxes
Under Brazilian GAAP, deferred income tax assets should be recorded whenever it is probable that
they will be recovered. Deferred income taxes are presented as gross rather than being netted. Pursuant to
CVM Deliberation No. 273 of August 20, 1998 and Instruction No. 371 of June 27, 2002, management is
required to present its best estimate of the expected realization of tax assets arising from the carrying forward
of income tax and social contribution tax losses based on a discounted cash flow model approved by a
meeting of the board of directors and there is a limit to the recognition of the tax assets that will be realized
within a ten-year period. Instruction 371 introduced more stringent criteria for the recognition of deferred tax
assets than those previously established by Deliberation 273. Instruction 371 does not allow companies to
recognize deferred tax assets for amounts higher than the amounts recognized following Deliberation 273
until all conditions established in Instruction 371 are met.
Under U.S. GAAP, the liability method is used to calculate the income tax provision, as specified in
SFAS No. 109, “Accounting for Income Taxes”. Under the liability method, deferred tax assets or liabilities
are recognised with a corresponding charge or credit to income (or in certain cases to other comprehensive
income within stockholders’ equity) for differences between the financial and tax basis of assets and
liabilities to each year/period end. The deferred tax assets and liabilities are being measured using rates
enacted by law. Net operating loss carry forwards arising from tax losses are recognised as assets and
valuation allowances are established to the extent it is not more likely than not such assets will be recovered.
Under U.S. GAAP consideration of projected taxable income in future years generally is not appropriate
when a company has presented cumulative taxable losses in recent years.
Under IFRS, the liability method is used to calculate deferred income taxes, as specified in IAS 12,
(Income Taxes). Under the liability method, deferred tax assets or liabilities are recognized with a
corresponding charge or credit to income for differences between the accounting and tax basis of assets and
liabilities to each year/period end. The deferred tax asset, including net operating losses carry forwards, shall
be recognized to the extent that it is probable that future taxable profit will realize such deferred tax asset.
Treasury Stock
Under Brazilian GAAP, the acquisition of treasury stock is accounted for by reducing capital by its
nominal amount and both the excess or the shortfall compared to par is taken against reserves.
Under U.S. GAAP, both the cost method and par value method of accounting for treasury stock are
acceptable. Under the cost method, each acquisition is accounted for at cost. Under the par value method, the
treasury stock account is increased by only the par value of each share, with any excess being offset firstly
against any additional paid capital that arose on the issue of the shares, with any remaining excess being setoff against reserves. Any excess of par value over purchase price paid in is credited to paid in capital from
treasury stock. When treasury stock is acquired with the intent of retiring the stock, the excess of the price
paid for the stock over its par value may be allocated between paid in capital and retained earnings.
Under IFRS, when an entity’s own shares are repurchased, the shares are shown as a deduction from
shareholders’ equity. Any profit or loss on the subsequent sale of the shares is shown as a change in equity
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Guarantees Granted
Under Brazilian GAAP, a provision for losses for guarantees granted should be recorded when it is
probable that a loss exist and it can be reasonably estimated.
Under U.S. GAAP FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”).
This interpretation requires certain disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to
recognise, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing
the guarantee.
Under IFRS, IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) a guarantee shall be
recognized when: (i) a present obligation (legal or constructive) exists a result of a past event; (ii) it is
probable that the outflow of resources embodying the economic benefits will be required to settle the
obligation; and (iii) a reliable estimate can be made of the amount of the obligations.
However, if the guarantee is a financial instrument within IAS 39 or an insurance contract specific rules
apply.
Employee Benefits
Under Brazilian GAAP employee pension costs and other benefits were or expensed as they fall due
until the issuance by IBRACON of Normas e Procedimentos de Contabilidade (or NPC) Statement 26. As
from the fiscal years beginning on or after December 31, 2002, with prior application encouraged, NPC 26
(approved by the CVM) should be applied by plan sponsors that are public companies to account for
employee benefits including pension costs and other post-employment benefits. Under the standard, an
actuarial method is used for determining defined benefit pension costs and other post-employment benefits
and provides for the deferral of actuarial gains and losses (in excess of a specific band). Defined contribution
pension plans and other post employment benefits require the recognition as an expense of contributions
when they fall due.
Under U.S. GAAP, employee pension costs are recognized in accordance with SFAS No. 87,
“Employers’ Accounting for Pensions.” SFAS No. 87 requires the use of an actuarial method for
determining defined benefit pension costs and provides for the deferral of actuarial gains and losses (in
excess of a specific corridor) that result from changes in assumptions or actual experience differing from that
assumed. SFAS No. 87 also provides for the prospective amortization of costs related to changes in the
benefit plan, as well as the obligation resulting from transition, and requires disclosure of the components of
periodic pension costs and the funded status of pension plans. U.S. GAAP, SFAS No. 106, applies to all
post-retirement benefits related to life insurance provided outside a pension plan or to other post-retirement
health care and welfare benefits expected to be provided by an employer to current and former employees.
SFAS No. 106 is similar to SFAS No. 87 in that the cost of a post-retirement benefits plan should be
recognized over the employees’ service periods and that actuarial assumptions are used to project the cost of
health care benefits and the present value thereof. Under SFAS No. 106, a company is required to describe
the plan, employee groups covered, type of benefits provided, funding policy, types of assets held, and any
matter affecting comparability, among other disclosures. U.S. GAAP, SFAS No. 112, “Employers’
Accounting for Post- Employment Benefits,” establishes accounting standards for employers who provide
benefits to former or inactive employees after employment but before retirement. Post-employment benefits
include, but are not limited to, salary continuation, severance benefits, disability, and counselling and
continuation of benefits such as health care benefits and life insurance coverage. SFAS No. 112 requires
employers to recognize the obligation to provide post-employment benefits in accordance with SFAS No. 43,
“Accounting for Compensated Absences,” if the obligation is attributable to employees’ services already
rendered, employees’ rights to those benefits are accumulated or vested, if payment of the benefits is
probable, and if the amount of the benefit can be reasonably estimated. If those four conditions are not met,
the employer should account for post-employment benefits when it is probable that a liability has been
incurred and the amount can be reasonably estimated in accordance with SFAS No. 5, “Accounting for
Contingencies.”
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Under IFRS employee pension costs are recognized in accordance with IAS 19 (Employee Benefits).
This standard requires the cost of providing these benefits to be recognised on a systematic and rational basis
over the period during which employees provide services to the entity. It also separate pension plans into
defined contribution plans and defined benefit plans.
Defined contribution plans are post-employment benefit plans that require the entity to pay fixed
contributions into a fund. The entity is under no legal or constructive obligation to make further
contributions to the fund even if losses are sustained. Under these plans it is the employee who is exposed to
the risk attributable to the plan assets. Pension cost is to be measured as the contribution payable to the fund
on a periodic basis.
A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined
benefit plans define an amount of pension benefit that an employee will receive on retirement, usually
dependent on one or more factors such as age, years of service and compensation.
The liability to be recognised in the balance sheet in respect of defined benefit pension plans is the
present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets,
together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined
benefit obligation is calculated annually by independent actuaries using the projected unit credit method.
Option to Prepay Debt/Classification
Under Brazilian GAAP, debts are classified according to their final maturity regardless of the existence
of rights to prior redemption.
Under U.S. GAAP and IFRS , debts subject to redemption prior to maturity at the option of the holders
thereof must be classified according to the date the redemption right is exercisable.
Accounting Changes
Under Brazilian GAAP, the cumulative effect of changes in accounting principles is generally applied
as an adjustment to the current year's opening equity balance. However, certain changes may be applied
prospectively. In certain instances, changes in estimates may be accounted for as changes in accounting
principles.
Under U.S. GAAP, the cumulative effect of changes in accounting principles is generally disclosed as a
cumulative adjustment to earnings in the year of the change, along with pro forma disclosure of the effects of
such change on prior years' financial statements. The effects of changes in accounting estimates are generally
reflected prospectively. Under SFAS No 154 “Accounting Changes and Error Corrections a replacement of
APB Opinion No. 20 and FASB Statement No. 3” applicable for fiscal years beginning after December 15,
2005, retrospective application to prior periods’ financial statements of changes in accounting principle is
required, unless it is impracticable to determine either the period-specific effects or the cumulative effect of
the change. When it is impracticable to determine the period-specific effects of an accounting change on one
or more individual prior periods presented, SFAS 154 requires that the new accounting principle be applied
to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective
application is practicable and that a corresponding adjustment be made to the opening balance of retained
earnings (or other appropriate components of equity or net assets in the statement of financial position) for
that period rather than being reported in an income statement. When it is impracticable to determine the
cumulative effect of applying a change in accounting principle to all prior periods, SFAS 154 requires that
the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable.
Under IFRS, changes in accounting policy should be accounted for retrospectively, with comparative
information restated and the amount of the adjustment relating to prior periods adjusted against the opening
balance of retained earnings of the earliest year presented. An exemption applies when it is impracticable to
change comparative information.
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Policy changes made on the adoption of a new standard must be accounted for in accordance with that
standard’s transition provisions. If transition provisions are not specified, the method described above must
be used.
Prior Period Adjustments – Correction of Errors
Under Brazilian GAAP, prior period adjustments encompass corrections of errors in previously issued
financial statements and the effects of changes in accounting principles. Under Brazilian GAAP prior period
adjustments are generally recorded as an adjustment to retained earnings of the year when the error has been
identified.
Under U.S. GAAP, prior period adjustments are effectively limited to corrections of errors which are
effected by adjusting current and prior periods' financial statements and appropriate footnote disclosure
regarding the effects of the errors on current and prior periods.
Under IFRS, IAS 8 requires to correct material prior period errors retrospectively in the first set of
financial statements authorized for issue after their discovery by restating the comparative amounts for the
prior period(s) presented in which the error occurred.
Dividends and Interest Attributable to Stockholders' Equity
Under Brazilian GAAP, at each balance sheet date, the directors are required to propose a dividend
distribution from earnings, subject to ratification by the shareholders' meeting, and accrue for this in the
financial statements.
Under Brazilian GAAP, companies are permitted to distribute or capitalize an amount of interest,
subject to certain limitations, calculated based on a government interest rate, on stockholders' equity. Such
amounts are deductible for tax purposes and are presented as a deduction from stockholders' equity.
Under U.S. GAAP and IFRS, since proposed dividends may be ratified or modified at the annual
Shareholders' Meeting, such dividends would not be considered as declared at the balance sheet date and
would therefore not be accrued. However, interim dividends paid or interest credited to shareholders as
capital remuneration under Brazilian legislation would be considered as declared for U.S. GAAP and IFRS
purposes.
Statement of Cash Flows
Under Brazilian GAAP, a statement of cash flows is not required and may be presented as supplemental
information. Instead, under Brazilian GAAP, a statement of changes in financial position is provided which
demonstrates the source and application of working capital.
Under U.S. GAAP and IFRS, a statement of cash flows is required and cash receipts and payments are
classified by investing, financing and operating activities.
Extraordinary Items
Under Brazilian GAAP, extraordinary items may be disclosed separately in the income statement, but
normally gross of the income tax effect.
Under U.S. GAAP, extraordinary items (i.e., items of unusual nature and infrequent occurrence) are
disclosed separately in the income statement, net of the income tax effect, if applicable. Extraordinary items
are defined under U.S.GAAP very narrowly.
Under IFRS, the presentation of extraordinary items is prohibited.
Segment Information
Under Brazilian GAAP, there is no requirement for financial reporting for segments.
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Under U.S. GAAP, SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information” requires public companies to report both financial and descriptive information about its
reportable operating segments. Reportable operating segments are defined as those about which separate
financial information is available and is regularly evaluated by the chief decision maker. Generally, financial
information to be reported will be on the basis used internally for evaluating segment performance. Financial
information to be disclosed includes segment profit or loss, certain specific revenue and expense items and
segment assets as well as a reconciliation of total segment revenues, profit or loss and assets to the
corresponding amounts in the financial statements.
IFRS requires public entities to report primary and secondary segments, business and geographic
regions, based on risks and returns and internal reporting structure. The information must be prepared
according to the group accounting polices.
All entities with listed equity or debt securities or that are in the process of obtaining a listing are
required to disclose segment information. A two-tier approach to segment reporting is required, and an entity
should determine its primary and secondary segment reporting formats (i.e., business or geographical, but
not a mixture) based on the dominant source of the entity’s business risks and returns.
Reportable segments are determined by identifying separate profiles of risks and returns and then using
a threshold test. The majority of the segment revenue must account for 10% or more of either total revenue,
total profit or loss, or total assets. Additional segments must be reported (even if they do not meet the
threshold test) until at least 75% of consolidated revenue is included in reportable segments.
The disclosures concentrate mainly on the segments in the primary reporting format, with only limited
information being presented on the secondary segment. Disclosures for reportable segments in the primary
reporting format include, by segment: revenue, result, assets, liabilities, capital expenditure, depreciation and
amortization, the total amount of significant non-cash expenses and impairment losses. Disclosures for
reportable segments in the secondary segment include segment revenue, assets and capital expenditure.
Segment result is not required to be shown for secondary segments.
Reconciliation should be provided between the information disclosed for reportable segments and the
totals shown in the financial statements.
Earnings Per Share
Under Brazilian GAAP, disclosure of earnings per share is normally calculated based on the number of
shares outstanding at the end of the year, although a weighted-average basis is acceptable.
Under U.S. GAAP, SFAS No. 128 “Earnings per Share” requires publicly held companies to present
earnings per share, including earnings per share from continuing operations and net income per share on the
face of the income statement, and the per share effect of changes in accounting principles, discontinued
operations and extraordinary items either on the face of the income statement or in a note.
SFAS No. 128 also requires a dual presentation of earnings per share, basic and diluted. Companies
should base computations of basic and diluted earnings per share on the weighted average number of
common shares outstanding during each period presented. Diluted earnings per share is calculated on the
same basis except that effect is given to all outstanding dilutive potential common shares.
In accordance with SFAS 128 earnings per share data has to be adjusted for all periods presented in the
financial statement to reflect new number of shares that will result from the reverse stock split.
On March 31, 2004, the EITF issue a EITF Issue 03-6, “Participating Securities and the Two-Class
Method” under SFAS 128. Typically, a participating security is entitled to share in a company’s earnings,
often via a formula tied to dividends on the company’s common stock. The issue clarifies what is meant by
the term “participating security”, as used in SFAS 128. When an instrument is deemed to be a participating
security, it has the potential to significantly reduce basic earnings per common share because the two-class
method must be used to compute the instrument’s effect on earnings per share. The consensus also covers
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other instruments whose terms include a participation feature. The consensus also addresses the allocation of
losses. If undistributed earnings must be allocated to participating securities under the two-class method,
losses should also be allocated. However, EITF 03-6 limits this allocation only to situations when the
security has (1) the right to participate in the earnings of the company, and (2) an objectively determinable
contractual obligation to share in net losses of the company.
Under IFRS, in accordance with IAS 33 (Earnings per Share or EPS), the presentation of basic and
diluted earnings per share must be disclosed on the face of the income statement of enterprises with publicly
traded ordinary shares (as defined) or potential ordinary shares (as defined), or those in the process of issuing
such instruments. The EPS data given is basic EPS and diluted EPS for each class of ordinary share. EPS
based on alternative measures of earnings also may be given if required. Computations of basic and diluted
earnings per share data should be based on the weighted average number of common shares outstanding
during the period and all potentially dilutive common shares outstanding during each period presented,
respectively.
Derivative Financial Instruments
Under Brazilian GAAP, there is no clearly designated set of defined accounting practices to address the
valuation of derivative financial instruments other than for financial institutions.
Under U.S. GAAP, SFAS No. 133, as amended, establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in other contracts, (collectively
referred to as derivatives), and for hedging activities.
SFAS No. 133, as amended, requires that a company recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those instruments at fair value. If certain
conditions are met, a derivative may be specifically designated as:
(i)
a hedge of the exposure to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment;
(ii)
a hedge of the exposure to the variable cash flows of a forecasted transaction; or
(iii)
a hedge of the foreign currency exposure of a net investment in a foreign operation.
The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. Derivatives that are not designated as part of a
hedging relationship must be adjusted to fair value through income. Certain robust conditions must be met
in order to designate a derivative as a hedge. If the derivative is a hedge, depending on the nature of the
hedge, the effective portion of the hedge’s change in fair value is either (1) offset against the change in fair
value of the hedged asset, liability or firm commitment through income or (2) held in equity until the hedged
item is recognized in income. If the hedge criteria are no longer met, the derivative instrument would then
be accounted for as a trading instrument. If a derivative instrument designated as a hedge is terminated, the
gain or loss is deferred and amortized over the shorter of the remaining contractual life of the terminated risk
management instrument or the maturity of the designated asset or liability.
IAS 39 (Financial Instruments: Recognition and Measurement) requires that a company recognize all
derivatives as either assets or liabilities in the statement of financial position and measures those instruments
at fair value.
The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the
intended use of the derivative and the resulting designation. Derivatives that are not designated as part of a
hedging relationship must be adjusted to fair value through income.
Certain robust conditions including specified documentation requirements must be met in order to
designate a derivative as a hedge. If the derivative is a hedge, depending on the nature of the hedge, the
effective portion of the hedge's change in fair value is either: (i) offset against the change in fair value of the
hedged asset, liability or firm commitment through income; or (ii) held in equity until the hedged item is
153
disposed of or the hedged relationship is not longer effective, when its recognized in income. The ineffective
portion of a hedge's change in fair value is immediately recognized in income.
154
LEGAL MATTERS
The validity of the Notes will be passed upon for the Issuer by Arnold & Porter LLP, its U.S. counsel,
and for the Initial Purchaser by Linklaters LLP, U.S. counsel to the Initial Purchaser.
Matters of Brazilian law will be passed upon for the Issuer by Tozzini Freire Teixeira & Silva
Advogados, its Brazilian counsel, and for the Initial Purchaser by Lefosse Advogados, Brazilian counsel to
the Initial Purchaser.
155
ENFORCEABILITY OF CIVIL LIABILITIES
The Issuer and the Guarantors are corporations organized under the laws of Brazil. All of the RBS
Group’s directors and executive officers and certain advisors named herein reside in Brazil or elsewhere
outside the United States, and all or a significant portion of the assets of such persons may be, and
substantially all of the Issuer’s and Guarantors’ assets are, located outside the United States. As a result, it
may not be possible for investors to effect service of process within the United States or other jurisdictions
outside Brazil upon such persons or to enforce against them or against the Issuer or any of the Guarantors
any judgments obtained in such courts, including judgments predicated upon the civil liability provisions of
the U.S. federal securities laws or predicated upon the laws of such other jurisdictions outside Brazil. The
Issuer and the Guarantors (i) have agreed that the New York State or United States Federal court sitting in
the City and County of New York shall have jurisdiction over any suit, action or proceeding arising out of or
relating to the Indenture or any Note and, for such purposes, irrevocably submit to the jurisdiction of such
courts and (ii) have named an agent for service of process in the City and County of New York. See
“Description of the Notes”.
The Issuer and the Guarantors have been advised by Tozzini Freire Teixeira & Silva Advogados, their
Brazilian counsel, that judgments of non-Brazilian courts for civil liabilities predicated upon the securities
laws of such countries, including the securities laws of the United States, subject to certain requirements
described below, may be enforced in Brazil. A judgment against either the Issuer, the Guarantors or any
other person described above obtained outside Brazil would be enforceable in Brazil against the Issuer, the
Guarantors or any such person without reconsideration of the merits, upon confirmation of that judgment by
the Brazilian Superior Court of Justice. That confirmation, generally, will occur if the foreign judgment:
(i)
fulfills all formalities required for its enforceability under the laws of the country where the
foreign judgment is granted;
(ii)
contemplates an order to pay a determined sum of money;
(iii)
is issued by a competent court after proper service of process is made, in accordance with
Brazilian legislation;
(iv)
is not subject to appeal;
(v)
is authenticated by a Brazilian consular office in the country where the foreign judgment is
issued and is accompanied by a sworn translation by a certified translator into Portuguese;
and
(vi)
is not contrary to Brazilian national sovereignty, public policy or public morality (as set
forth in Brazilian law).
Notwithstanding the foregoing, no assurance can be given that confirmation will be obtained, that the
process described above can be conducted in a timely manner or that a Brazilian court would enforce a
monetary judgment for violation of the securities laws of countries other than Brazil with respect to the
Notes. The Issuer and the Guarantors understand that original actions predicated on the securities laws of
countries other than Brazil may be brought in Brazilian courts and that, subject to Brazilian public policy,
public morality and national sovereignty, Brazilian courts may enforce civil liabilities in such actions against
the Issuer, the Guarantors, their respective directors, certain of their officers and the advisors named herein.
Pursuant to Article 835 of the Brazilian Code of Civil Procedures, a plaintiff (whether Brazilian or nonBrazilian) who resides outside or leaves Brazil during the course of litigation in Brazil must provide a bond
to guarantee court costs and legal fees if the plaintiff owns no real property in Brazil that may ensure such
payment. This bond must have a value sufficient to satisfy the payment of court fees and defendant’s
attorneys’ fees, as determined by the Brazilian judge. This requirement does not apply to enforcement of
foreign judgments which have been duly confirmed by the Brazilian Superior Court of Justice, nor to the
156
exceptions set forth in certain limited circumstances (enforcement of trade bills and counterclaims) under
Article 836 of such Code.
157
INDEPENDENT ACCOUNTANTS
The financial statements of the Issuer as of and for the years ended December 31, 2006, 2005 and 2004
and the special purpose combined financial statements of the Issuer and the Guarantors as of and for the
years ended December 31, 2006, 2005 and 2004, included in this Offering Memorandum have been audited
by PricewaterhouseCoopers Auditores Independentes, Porto Alegre, Brazil, independent accountants, as
stated in their reports appearing herein. PricewaterhouseCoopers Auditores Independentes is registered with
the Conselho Regional de Contabilidade of the State of Rio Grande do Sul.
With respect to the unaudited interim financial statements of the Issuer and the unaudited interim
combined financial statements of the Issuer and the Guarantors, as of and for the three-month periods ended
March 31, 2007 and 2006 included in this Offering Memorandum, PricewaterhouseCoopers Auditores
Independentes reported that they have applied limited procedures in accordance with Brazilian standards for
a review of such information. However, their reports appearing herein state that they did not audit and they
do not express an opinion on the unaudited interim financial statements. Accordingly, the degree of reliance
on their reports on such information should be restricted in light of the nature of the review procedures
applied.
158
GENERAL INFORMATION
(A) Each of the Issuer and the Guarantors is a corporation organized and operating under the laws of
Brazil. Their registered office and principal place of business is Av. Érico Veríssimo, 400 2º andar, Porto
Alegre, Brazil 90160-180. Their telephone number is +55 51 3218 6000. For the life of this Offering
Memorandum, the following documents (or copies thereof) may be inspected by physical means at such
office: (a) the memorandum and articles of association of each of the Issuer and the Guarantors; (b) all
reports, letters and other documents, historical financial information, valuations and statements prepared by
any expert at the Issuer’s or a Guarantors’ request, any part of which is included or referred to in this
Offering Memorandum; and (c) the historical financial information of the Issuer and the Guarantors’
undertakings for each of the two financial years preceding the publication of this Offering Memorandum.
(B) Application has been made to the Irish Stock Exchange for the Notes represented by the
Regulation S Global Note to be admitted to the Official List and traded on its regulated market. The total
expenses related to the admission to trading the Notes are estimated to be €4,440. The ISIN for the Notes
sold in reliance on Rule 144A is US74927RAC97, and the ISIN for the Notes sold in reliance on Regulation
S is USP7993HAB52. The CUSIP number for the Notes sold in reliance on Rule 144A is 74927R AC9, and
the CUSIP number for the Notes sold in reliance on Regulation S is P7993H AB5. The SEDOL number and
the Common Code for the Notes will be contained in a supplement to the Offering Memorandum. In
addition, application will be made with respect to the Notes to be accepted for trading in book-entry form by
DTC. Application will also be made to have the Notes accepted for trading in The PORTAL Market.
(C) The Notes were authorized by resolutions (i) of each of the Issuer’s, TV Gaúcha’s and Rádio
Gaúcha’s Boards of Directors, passed on May 25, 2007, and (ii) of TV Florianópolis’s General Assembly,
also passed on May 25, 2007. All consents, approvals, authorizations and other orders of all regulatory
authorities under the laws of the Federative Republic of Brazil have been given for the issue of the Notes and
the execution of the Indenture and are in full force and effect except for (i) the registration of the relevant
financial terms and conditions of the Notes with the Central Bank under the module Registro de Operação
Financeira (the Registry of Financial Transactions or “ROF”) of the Central Bank Data System (ii) the
registration under the ROF of the Esquema de Pagamento (the Schedule of Payment) relating to the Notes
after its disbursement which will enable the Issuer and the Guarantors to make remittances from Brazil in the
relevant currency of the principal of and interest on the Notes, as well as costs, fees and expenses in relation
thereto, and (iii) the approval of the Central Bank for the Issuer and the Guarantors to make any payment in
U.S. dollars not set forth in the relevant ROF or to make any payment provided for therein earlier than the
due date therefor or on a date after the 120 th day from scheduled maturity date therefor provided in such
ROF.
(D) The Issuer’s corporate objectives are, among others, to exploit the journalism business by
providing news and information through the publication of newspapers, books and magazines; to exploit
commercial advertising and the production of artistic and promotional shows; and to perform logistics
services, storage and ground transportation of commercial products. (Article 3 of the Issuer’s by-laws. The
Issuer’s by-laws are registered before the Commercial Registry of the State of Rio Grande do Sul –
JUCERGS under number 1164852.) The Guarantors’ corporate objective are, in general, to exploit the
broadcasting business, observing the provisions of any applicable legislation. (Article 3 of TV Gaúcha’s and
Rádio Gaúcha’s by-laws, or Article 2 of TV Florianópolis’s by-laws. TV Gaúcha’s and Rádio Gaúcha’s bylaws are registered before JUCERGS under numbers 1216763 and 1216766, respectively. TV Florianópolis
by-laws are registered before the Commercial Registry of the State of Santa Catarina under number
4230002100).
(E) Neither the Issuer nor the Guarantors nor any subsidiary of any of the Issuer or the Guarantors is
involved in any litigation, arbitration or governmental proceedings which are material in the context of the
issue of the Notes, and so far as the Issuer or any Guarantor is aware, are any such litigation, arbitration or
governmental proceedings pending or threatened.
(F) There has been no significant change in the financial or trading position of the Issuer or the
Guarantors since December 31, 2006, the date of the Issuer’s and the Guarantors’ most recently audited
159
financial statements or (if later) the date of the last interim report incorporated in, and forming part of, this
Offering Memorandum, nor has there been any material adverse change in the financial position or prospects
of the Issuer or the Guarantors since December 31, 2006, the date of each of their most recently audited
financial statements.
(G) Copies in English of the latest audited financial statements and consolidated accounts of the Issuer
and the Guarantors, the latest interim quarterly consolidated and non-consolidated accounts of the Issuer and
the Guarantors, in each case being incorporated in and forming part of this Offering Memorandum, may be
obtained free of charge, and copies of the Indenture will be available for inspection, at the specified offices
of each of the Trustee and the Paying Agent in Ireland during normal business hours, so long as any of the
Notes are outstanding. Copies of this Offering Memorandum and of the Indenture will be available for
inspection at the registered office of the Issuer at the office of the Paying Agent in Ireland.
(H) The Issuer and the Guarantors have agreed that, for so long as any Notes are “restricted securities”
within the meaning of Rule 144(a)(3) under the Securities Act, the Issuer and the Guarantors will, during any
period in which it is neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting
pursuant to Rule 12g3-2(b) thereunder, provide to any holder or beneficial owner of such restricted securities
or to any prospective purchaser of such restricted securities designated by such holder or beneficial owner
upon the request of such holder, beneficial owner or prospective purchaser, the information required to be
provided by Rule 144A(d)(4) under the Securities Act.
(I) The EU has adopted EU Council Directive 2003/48/EC on the taxation of savings income.
Member States are required to provide to the tax authorities of other Member States details of payments of
interest and other similar income paid by a person to an individual in another Member State, except that
Austria, Belgium and Luxembourg will instead impose a withholding system for a transitional period unless
during such period they elect otherwise.
(J) Save for the fees payable to the Initial Purchaser described in the “Plan of Distribution”, so far as
the Issuer is aware, no person involved in the issue of the Notes has any interest material to the issue.
160
INDEX TO FINANCIAL STATEMENTS
RBS - Zero Hora Editora Jornalística S.A.
at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006
Page
Report of Independent Accountants ............................................................................................................ F-3
Balance Sheet .............................................................................................................................................. F-5
Statement of Operations .............................................................................................................................. F-6
Statement of Changes in Stockholders’ Equity ........................................................................................... F-7
Statement of Changes in Financial Position................................................................................................ F-8
Notes to the Financial Statements ............................................................................................................... F-9
Rede Brasil Sul - RBS - Credit Group (previously named Rede Brasil Sul - RBS - Guarantors)
at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006
Page
Report of Independent Accountants .......................................................................................................... F-35
Special-Purpose Combined Balance Sheets .............................................................................................. F-37
Special-Purpose Combined Statements of Operations .............................................................................. F-38
Special-Purpose Combined Statement of Changes in Stockholders’ Equity............................................. F-39
Special-Purpose Combined Statement of Changes in Financial Position ................................................. F-41
Notes to the Special-Purpose Credit Group Financial Statements ............................................................ F-42
Televisão Gaúcha S.A.
at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006
Page
Report of Independent Accountants .......................................................................................................... F-76
Balance Sheet ............................................................................................................................................ F-78
Statement of Operations ............................................................................................................................ F-79
Statement of Changes in Stockholders’ Equity ......................................................................................... F-80
Statement of Changes in Financial Position.............................................................................................. F-81
Notes to the Financial Statements ............................................................................................................. F-82
RBS TV de Florianópolis S.A.
at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006
Page
Report of Independent Accountants ........................................................................................................ F-103
Balance Sheet .......................................................................................................................................... F-105
Statement of Operations .......................................................................................................................... F-106
Statement of Changes in Stockholders’ Equity ....................................................................................... F-107
Statement of Changes in Financial Position............................................................................................ F-108
Notes to the Financial Statements ........................................................................................................... F-109
Rádio Gaúcha S.A.
at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006
Page
Report of Independent Accountants ........................................................................................................ F-128
Balance Sheet .......................................................................................................................................... F-130
Statement of Operations .......................................................................................................................... F-131
Statement of Changes in Stockholders’ Equity ....................................................................................... F-132
Statement of Changes in Financial Position............................................................................................ F-133
Notes to the Financial Statements .......................................................................................................... F-134
F-1
- Zero
Jornalistica
Financial
Statements
Hora
Editora
S.A.
at
December
31, 2006, 2005 and 2004
and March 31, 2007 and 2006
and Report of Independent
Accountants
F-2
s
PlicewaterhouseCoopers
Rua Mostardeiro,
Caixa
Postal
800 8" e 9'
2178
90430-000 Po~to Alegre, RS - Brasil
Telefone
Report of Independent Accountants
(51) 3378-1700
Fax
(51)
3328-1609
To the Board of Directors and Stockholders
RES - Zero Hora Editora Jornalistica S.A.
1
Wehaveauditedtheaccompanying
balancesheetsofRES- ZeroHoraEditora
Jornalistica
S.A. (previouslynamed Zero Hora - Editora Jornalistica S.A.) as of December 31, 2006, 2005
and 2004,
andtherelatedstatements
ofoperations,
ofchangesinstockholders'
equityandof
changesinfinancial
position
fortheyearsthenended.Thesefinancial
statements
arethe
responsibility
ofthecompany's
management.
Ourresponsibility
istoexpressanopinion
on
these financial statements.
2
We conducted our audits in accordance with approved Brazilian auditing standards which
require that we perform the audit to obtain reasonable assurance about whether the financial
statements are fairly presented in all material respects. Accordingly,our work included,
among other procedures: (a) planning
ourauditstakingintoconsideration
the significance
of
balances,
the volume of
transactionsand the accountingand internalcontrolsystemsof the
company,
(b)examining,
ona testbasis,evidence
andrecordssupporting
theamounts
and
disclosures in the financialstatements, and (c) assessing the accounting principles used and
significant
estimates
madebymanagement,
aswellas evaluating
theoverall
presentation
of
the financial statements.
3
In our opinion, the financial
statementsauditedby us presentfairly,in all materialrespects,
thefinancial
position
ofRES- ZeroHoraEditora
Jornalistica
S.A.at December
31,2006,
2005 and 2004, and the results of its
operations,the changes in stockholders'equityand the
changes in its financialposition fortheyearsthenended,inconformity
withaccounting
principles generally accepted in Brazil.
4
We have also reviewed the accompanying financial statements of RES - Zero Hora Editora
Jornalistica
S.A~
as of and for the quartersended March31, 2007 and 2006.These financial
statementsare the responsibility
ofthe company's
management.
F-3
I
RES - Zero Hora Editora Jornalistica S.A.
5
Weconducted
ourreviews
inaccordance
withstandards
approved
bytheInstitute
of
Independent
Auditors of
Brazil(IBRACON).
A reviewconsists,pn'ncipally,
ofapplying
analytical
procedures
tofinancial
dataandmaking
inquiries
ofpersonsresponsible
for
financial
andaccounting
mattersregarding
thecriteria
usedtopreparethefinancial
statements.
Areview
doesnotrepresent
anauditconducted
inaccordance
withapproved
Brazilianauditingstandards,the objectiveof whichis the expression of an opinion regarding
the financial statements taken as a whole. Accordingly,we do not express such an opinion.
6
Based on our reviews,we
are not aware of any material modificationsthat should be made to
the financial statements mentioned in paragraph 4 for them to be in conformitywith
accounting principlesgenerally accepted in Brazil.
Porto Alegre, May 25, 2007
P ricewaterhouseCoopers
Auditores Independentes
CRC 2SP000160/0-5 "F" RS
Carfos Biedernann
Contador CRC 1RS029321/0-4
(Copyof the originalmanuallysigned)
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- Zero Hora Editora Jornalistica
S.A.
Statement of Operations
Inthousands
ofBrazilian
reals,exceptper-share
data
Years ended
December
31
Note
Operating
2007
(Unaudited)
ended
March 31
2006
2005
2004
2006
(Unaudited)
140.224
87,072
52.903
122,715
22,778
131.883
82.333
49.238
113.696
24,663
111,147
71,073
44.106
99,900
24.851
409.231
386.479
337.557
103.163
(69.980)
(46.630)
(9.576)
(9.680)
(73,057)
(44.808)
(7.869)
(5.351)
(71.321)
(43.487)
(6.790)
(9.635)
(17.232)
(13.331)
(2,959)
(2.380)
(9.043)
(2,504)
(2,229)
(150.498)
(40.216)
(34.187)
255.343 236.562 187,059
62.947
60.165
(113.722) (106.436) (102266)
(32,637)
(25,598)
(45.429)
(17.012)
(15.071)
7.437
4.461
revenues
Advertising
Classified
advertisements
Circulation
Subsc~p~ons
Other
Taxesonrevenues
Operating
Quarters
(16.461)
(15,334)
(13,520)
34.509
20.591
13.237
34.099
4.928
(4.201)
30,368
19,718
13.582
29.093
5.355
(3,764)
94,352
costs
Rawmaten'als
Personnel
Promotional
events
Depreciation
andamortization
Royalties
Other
(8.290)
(9,732)
(153.888)
Grossprofit
(9.254)
(9.n8)
(149.917)
(10,222)
(1.810)
(15,402)
(10.440)
(1.647)
(2,424)
(2,045)
Operating income (expenses)
Selling
General and
administrative (net of
reimbursement)
Depreciation
andamortization
Financial
income
~ae:cial
expenses
7
C/o.599)
14
18.392
15.510
188
341
(4.122)
14
Equityin losses ofsubsidiary
lossesoninvestments
Non-operating
loss,net
(1,249)
(1.240)
6,203
433
(387)
40
(217.385)
(211.367)
(172.610)
(57.024)
(47.865)
37,958
25,195
14,449
5.923
12.300
452
(2,704)
(6.593)
302
135
35,577
(4.148)
21,702
(8.563)
8.158
(6.279)
6.042
(2.464)
-12.546
(698)
(584)
15
15
Netincome
fortheyearlquarter
in circulation
(6.293)
(2.249)
Reversal (establishment) of provision for
Shares
(5.568)
(47.522) (65.680) (26,492) (10,200) (12.199)
Operating
profit
Income
beforetaxesonincome
Current
income
taxes
Deferredincometaxes
(49.534)
(789)
(16)
452
(206)
(9.896)
7.156
2.125
307
(4.830)
21.533
20,295
4.004
3.885
7.018
98.577
_
98.577
98.577
98.577
98.577
0.22
0.21
0.04
0.04
0.07
at the end of the
year\quarter
tinthousands)
Net income per share atthe
13
end of the
yearlquarter-R$
The accompanying notes are an integral part of these financialstatements.
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F-7
P,
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F
co
m
- ZeroNoraEditoraJornalisticaS.A.
Statement
In thousands
ofChanges
in FinancialPosition
of
Brazilian
reals
Years ended
Quarters
------~I~l
2006
(Reclassified)
_
2005
2004
2007
(Unaudited)
Financial resources were provided by:
Net income for the year/quarter
Expenses
notaffecting
working
capital:
Deferred(income)
income taxes
Provision
forcontingendes
Provision
forlossesonfiscal
incentives
Depreciationand amortization
NetbookvalueofPermanent
assetdisposals
3.885
(2,125)
(307)
Increase
inlong-term
liabilities
(3,051)
567
2.704
13,802
10.919
75,928
230
95
50.410
Accounts
payable
relating
toinvestment
acquired
Transferofdeferred
(1.215)
634
(188)
Decrease in long-termreceivables
assets
4,004
(7.156)
2.249
Amortization
ofnegative
goodwill
current
20.295
9,896
277
Equity
inlossesofsubsidiary
6.593
(341)
(433)
26,003
21.011
25.411
161.127
Stock subscriptionrightssold
4
16
279
3,629
_
7.365
1.263
910
3,664
(40)
2.050
17.805
3,412
1.500
1.963
Total funds provided
----
---
183.638
Financialresourceswereused for:
Decrease
inadvancesforfuturecapitalincrease
Decrease in long-termliabilities
Increase in long-termreceivables
Investments
35.570
5.572
Property,plantandequipment
52,628
Deferredcharges
4.830
967
2.874
Negative
goodwill
onacquisition
ofRESOnLineLtda.
Transfer
fromInvestments
tomarketable
secun~ties
7.018
4
138
13,872
income taxes from long-term to
2006
(Unaudited)
21,533
16
Provision
forlosseson invesbnents
ended
March91
1.963
9,595·
23.180
40.667
17.517
TransferfromInvestments
to liabilities
Mergerwithsubsidiary
12.458
81
9.689
108
120,545
6.465
14,233
118
3.469
349
558
734
4.706
538
Long-term receivables
Investments
Property,
plant
andequipment
82
Deferred
charges
Long-term
liabilities
8.388
3.149
Total funds used
Increase(decrease)
inworking
capital
Current
1~~87
4.010
(11.504)
--~
----~2~
179,645 28.359 5.998
3,993
assets
(18.764)
17,182
At the end of the year/quarter
Atthe beginning
oftheyear/quarter
Current liabilities
Attfie end of the year/quarter
Atthebeginning
oftheyear/quarter
!~,5'4_9! 132.485
93.927
~-2
----1~5
~8
194.125
75~0~Z~
Increase(decrease)
inworking
capital
93.927
134.876 150.949
59 033
165.497
34.894
118.945
110.375
110.375
79 474
(30.621) 18,464
182,268
194.125
120.227
118.945
30.901 (11.857) 1,282
3.993
The
accompanying
notes
areanintegral
part
ofthese
financial
statements
F-8
132.485
(18.764) 17182
- Zero Hora Editora Jornalistica
S.A.
Notes to the Financial Statements at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
1
of Brazilian reals, unless othennrise stated
Business
The companyis ownedby three familygroupsand is operated,togetherwithRES
Comunica~besS.A.,its subsidiariesand futuresubsidiarieslas definedbelow),as one
integratedunit,the RESGroup.The companyis locatedin PortoAlegre,in the State of Rio
Grandedo Sul,Brazil,andis engagedinpublishing
anddistribution
ofnewspapers(ZeroHora
and Di~irioGa(jcho in Porto Alegre, Pioneiro in Caxias do Sul and Di~riode Santa Maria in
SantaMaria,allinthe StateofRioGrandedo Sul;Di~rioCatarinense
inFlorian6polis,
Jomal
de Santa Catarinain Blumenauand A Noticiain Joinvillelas fromNovember2006 - Note9
(c)), all in the State of Santa Catarina).
RESComunicaCbes
S.A.wasestablishedin2005withthe objective
to integratethe main
businesses that are ownedby the three familygroups.The shareholdersof RES
ComunicaCbes
S.A.startedto implementthis integrationin January2006 and intendto
completeit during2007 throughthe acquisitionfromthe familygroupsof the directand
indirectcontrolofthe mainoperational
companies("future
subsidiaries").
Mostofthe RES
Groupcompaniesare locatedinthe StatesofRioGrandedo Suland SantaCatarina,Brazil,
andoperateprincipally
infourareasofthe mediabusiness(radioandtelevision
broadcasting,
internet and newspaper publishing).
OnApril15,2004,theshareholders
decidedto changethe company'snamefromZeroHoraEditora Jornalistica S.A. to RES - Zero Nora Editora Jornalistica S.A.
TheBrazilian
FederalConstitution
establishesthat,as fromApril2002,foreignshareholders
mayowna maximumof 30%of the capitalof newspaperpublishingcompanies.
2
Presentation
of the Financial Statements
Theaccounting
recordsofthe companyare maintained
inaccordancewithBrazilian
corporate
and taxlegislation,
andthefinancial
statementshavebeenpreparedtherefrom,
including
certainadjustments
to conform
withaccounting
principles
generally
acceptedinBrazil
("Brazilian
GAAP"),whichoriginallyrequiredthe presentationof financialstatementsunderthe
constant
currency
methodology,
as a meansofdepicting
moreclearly
theimpacts
ofinflation
on a company's
financial information.
F-9
- Zero
Hora
Editora
Jornalistica
S.A.
Notes to the Financial Statements
at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
othennrise
stated
Under the constant currency methodology, all financial statement balances, including
comparative balances from prior years, are presented in reals of constant purchasing power
using as the basis for restatement the official index Unidade Fiscal de Refer~ncia - UFIR
(Fiscal Unitof Reference) up to December 31, 1995 and the variation of the indice Geral de
PreGos - Mercado - IGP-NI(General Market Price Index) as from that date and up to
September 30, 2001. Thereafter, the company suspended the price-level restatement of its
financial statements, since the cumulative inflation rate over the preceding 36-month period
was less than 100%. The reported amounts of non-monetary assets, such as inventories and
permanent assets, and stockholders' equity include price-level restatement as from the date of
origin up to September 30, 2001.
The price-level restatement of financial statements for both statutory and tax purposes was
abolished as from January i, 1996, by Law 9249. Although the company's statutory
accounting records as from January 1, 1996 do not reflect any price-level restatements of
permanent assets and stockholders' equity accounts, pro forma adjustments have been made
to the financial statements to reflect these restatements through the constant currency
methodology. These restatements
no longer have any tax effects, but pro forma tax
adjustments have been made to the financial statements to assure consistency with prior
periods as well as to reflect future deferred tax effects, as explained in the following
paragraph.
As from January i, 1996, the full tax effect of the net restatement effect taken to income was
recognized as a credit to income at the current tax rates, in order to maintain comparability
with the prior periods. The deferred tax liability on the price-level restatement of permanent
assets has been shown as a long-term liability and is reversed to income as the restatement is
realized through the disposal of investments and the depreciation or disposal of property, plant
and equipment. On the other hand, the tax credit/debit arising from the price-level restatement
of stockholders' equity accounts is reversed and charged to retained earnings since this
amount does not represent an actual tax benefit (cost).
(4)
Reclassification
of liabilities
On March 31, 2007 the company reclassified part of the balance of accounts payable relating
to investment acquired, amounting to R$ 14,207, from current to long-term liabilities in
connection with management's
intention to pay this balance only upon final maturity. The prior
period has been reclassified accordingly. The reclassification for December 31, 2006
amounted
to R$ 13,872.
F-10
- Zero
Hora Editora
Jornalistica
Notes to the Financial Statements
S.A.
at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian reals, unless otherwise
stated
3
Significant Accounting Policies
(a)
Determinationof results of operations and current and long-term assets and liabilities
Resultsof operationsare determinedon the accrualbasis and includegains and losses on
monetary items and, where applicable,the effects of adjustments of assets to market or net
realizable values. Net exchange gains and losses on foreign currency liabilitiesare recorded
in financial expenses. Shares classified as marketable securities are recorded at market
value.
Revenuesfromadvertisingand classifiedadvertisementsare recordedwhen published.
Revenuefromcirculationrelatesto sales of newspapersat newsstandsand street vendors
and is recorded at the time the newspapers are sold to consumers.
Subscription
revenuerelatesto salesofnewspapersbysubscription.
Deferredsubscription
revenue,whichrepresentsamountsbilledto customersin advanceof newspaperdeliveries,is
appropriated to revenues over the term of the subscription.
Non-cashexchangesof advertisingfor servicesor goodsare recordedat marketvalue in both
revenues
(b)
and expenses.
Inventories
Inventories are stated at the average purchase cost, which is lower than net realizable
value.
(c)
Permanent
assets
Theinvestment
inA Noticia
S.A.EmpresaJomalistica
wasaccounted
forontheequitymethodup
to itsmergerintothe company,including
goodwill
basedon expectedprofitability.
The
investmentsin othercompaniesshownin Note9 are stated at cost, less a provisionfoi losses.
Property,
plantandequipment
are statedat costplusthe effectsofrevaluations
ofprinting
presses and accessories.Depreciationof property,plantand equipmentis computedon the
straight-linemethod, at the rates shown in Note 10, which take into consideration the
estimated
useful lives of the assets.
F-ll
- Zero
Notes
Hora
Editora
to the Financial
Jornalistica
Statements
S,A.
at December
31, 2006,
2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
(d)
Income
of Brazilian
reals,
unless
otherwise
stated
taxes
Income tax is calculated at the standard rate plus supplementary rates totaling 25%. Social
contribution tax is calculated at the current rate of 9% applied to adjusted income before
income tax. Deferred income taxes are calculated
on temporary
differences
and tax loss
carryfonnrards.Tax losses do not expire but may be used to offset only up to 30% of future
taxable income in any year.
(e)
Swap receivables
and payables
The assetslliabilities are recorded at cost plus accrued rate differences up to the balance
sheet date (accrual basis).
4
Trade
accounts
receivable
December
2006
Subscriptions
Advertising
Classified advertisements
others
Checks
in collection
Promissory notes
Endorsed securities
Allowancefordoubtfulaccounts
5
31
2005
2004
March
31
2007
2006
(Unaudited)
(Unaudned)
12.248
21.826
9.883
17.169
8.793
15.755
15,294
20.987
9.978
15.682
9.235
3.440
8.774
3.836
7.572
3.977
9.979
3.087
9,404
3.580
700
760
718
670
712
488
367
339
680
299
1.883
1,162
1.133
1.786
1.444
(s,ses)
(2.978)
(2776)
(2.914)
(2.948)
46.994
38.931
35.463
49.611
38.139
inventories
December
2006
Newsprint
Maintenance materials
Fascides
(inserts),
video-cassette
7.490
7.339
tapes
2005
13,233
6,894
31
2004
March
2007
(Unaudited)
31
2006
(Unaodited)
7.471
6.387
7.843
7.754
8.181
6.976
2.796
(960)
8.941
3.303
(546)
6.618
3,552
(546)
5,980
and
compact discs (CD)
Provision for losses
Imports in transit (newsprint)
4.561
(546)
9,201
28,045
F-12
3,272
(546)
101
22,954
24,635
24.972
24.143
- Zero
Hora
Editora
Notes to the Financial
Jornalistica
Statements
S.A.
at December
31, 2006, 2005
and 2004 and March jl, 2007 and 2006 (Unaudited)
In thousands
6
Taxes
of Brazilian
reals,
unless
otherwise
stated
recoverable
December
2006
Excise tax (IPI)
Withholding
income
1.669
investments (IRRF)
2,133
22
party transactions
Assets
(liabilities)
- Related
- Related
72.141
S.A. Empresa
Jomalistica
- ComBrcio
Marcas
e Licenciamento
104.588
5,411
187
155
48
2.320
1.455
4,183
54
2.936
2005
Assets
31
2004
Assets
(liabilities)
(liabilities)
March
31
2007
2006
(UnaudYed)
(Unaudited)
Assets
Assets
(liabilities)
(liabilities)
54.447
18,522
10
(10.608)
(66)
95.050
5.411
85.422
5.411
38,908
66.720
11
1
5
107,117
5.411
97,350
5.411
de
Ltda.
Ag~nciaRES de Noticias Ltda.
Other related companies
150
136
124
153
139
878
15
878
28
878
(10)
878
25
878
23
113.549
Current
577
2.507
RES ParticipaCi~s S.A.
RES Marketinge Jniormllca Ltda.
RES
1,387
companies
RES Administra~o e Cobrancas Ltda.
Televis~o Gabcha S.A.
RES TV de Flon'an6polis S.A.
A Noticia
26
companies
RES Administra~o e CobranCas Ltda.
assets
2,305
and balances
2006
Long-term
2006
(Unaudited)
827
December
assets
2007
(Unaudited)
1.921
784
3.084
Current
31
1.274
609
Other
Related
2004
March
tax on financial
Social conbibutions (PIS and COFINS)
7
2005
31
liabilities - Related
101.513
81.151
113.596
103,806
companies
Televis~o Gai~chaS.A.
Other related companies
(185)
(56)
_(241)
Long-term liabilities - Advance
capital increase
(64)
(26)
(66)
(55)
~8)
(45)
(90)
(121)
(53)
(63)
(63)
for future
Stockholders
(63)
F-13
(631
(63)
-Zero
Notes
Hora
Editora
to the Financial
Jornalistica
Statements
S.A.
at December
31, 2000,
2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
otheMllse
stated
December
2006
2005
31
2004
March
2007
(Unaudited)
Income
Income
(expenses)
General and administrative (reimbursement)
TelevisPo Gadcha S.A.
RES TV de Flon~an6polis S.A.
Rgdio Gadcha S.A.
Ott~ergroupcompanies
(16,918)
(489)
(1.252)
27
(17.732)_
Financial
S.A.
e ticenciamento
1~,501)
(3.342)_
(1.331)
(1.046)
Income
(expenses)
(4.107)
(143)
(347)
7
(3.374)
(32)
(219)
_(4,590)
(3.619)
11.922
10,834
473
3,162
2.874
3,168
2,878
de
Ltda.
17
Other related companies
14
192
11.939
(a)
(3,342)
(expenses)
income
RES Participa~es
RES - Com~cio
Marcas
Income
(expenses)
(4.set)
2006
(Unaudited)
expenses
RES Administra~io e CobranFas Ltda.
Financial
Income
(expenses)
31
11.040
14
167
654
RES AdministraC~o e Cobran~as Ltda. is a related company which functions as a treasury
department, carrying out all collections and making all payments on behalf of the companies of
the RES Group. Except as described in the next sentence, the balances with this company bear
no interest and are shown in current assets because the funds held by this company on behalf
of the group companies
are readily available. At December
31, 2004, there is an additional
liabilitybalance of R$ 10,608 shown as a reduction of long-term assets which bears interest
calculated
(b)
at market
rates.
Loans to and from other related companies bear interest calculated at market rates. Advances
for future capital increase bear no interest. Loans to RES Marketing e Informstica Ltda. and
AgQncia RES de Noticias Ltda. bear no interest.
(c)
The company, together with the other three main media companies of the RES Group (RBS
TV Floriani~polis S.A., Televis~o GaQcha S.A. and RBdio GaQcha S.A.), has guaranteed the
first and second tranches, amounting to US$ 50,000 thousand ani~ US$ 125,000 thousand,
respectively, of a US$ 200,000 thousand Global Medium-Term Notes Program issued by RES
ParticipaCBes S.A. in December 1995 and in March 1997, with final maturity in December
2003 and April i, 2007. The first and second tranches were fully paid in December 2003 and
March 2007, respectively.
F-14
- Zero Hora Editora
Jornalistica
S.A.
Notes to the Financial Statements at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
Inthousandsof Brazilianreals,unlessothenrvise
stated
On November25, 2005,RESParticipa~desS.A.contractedan interestrate.swapin the
notionalamountof R$ 129,744(equivalentto US$58,155thousandon that date) exchanging
the U.S.dollarexchangevariationforthe interbankcertificateof deposit(CDI)interestrate
less 5.0%p.a. Thiscontractwas terminatedin March2007and was guaranteedby the
companyand the otherthree mainmediacompaniesof the RESGroup.
Withthe objective
ofreducingthe refinancing
riskto whichthe RESGroupwasexposedin
2007,onAugust2, 2004,RESParticipa~bes
S.A.andthecompanysuccessfully
completed
an ExchangeOfferProgramunderwhichsomeofthe holdersofthe secondtrancheofNotes
issuedbyRESParticipa~bes
S.A.exchangedthosenotesfornewonesissuedbythe
company.Inaccordancewiththe termsoftheExchangeOffer,foreachUS$1,000principal
amount,the noteholderreceivedUS$ 150in cash and US$850 in notes issued by the
company,
withfinalmaturity
inApril2010and interestof 11%p.a. payableinApriland
Octoberofeachyear.Thenewnotes(the"2010Notes")arejointlyand severally
guaranteed
byTelevisBo
GalichaS.A.,RESTVde Florianbpolis
S.A.andRgdioGalichaS.A.Overall,
notes withan aggregateface valueof US$66,845thousandwere exchangedunderthe terms
of the Exchange Offer (See Note 12).
(d)
OnNovember
25,2005,Televis~o
GaQchaS.A.contractedloansinthe notionalamountof
R$ 40,815withfinalmaturityin May2010and bearinginterestof 108%of the interbank
certificate
ofdeposit(CDI)interestrate.Thiscontractis guaranteedbythe company,RESTV
de Florian6polis S.A. and Rgdio Ga6cha S.A.
(e)
Thecompanyhas guaranteeda loanamounting
to R$8,000,equivalent
to US$3,575
thousand,receivedby RESAdministra~Bo
e Cobran~asLtda.in November2005 and
terminated
(f)
in May 2006.
Thecompanyhas guaranteedlocalcurrencyloansamounting
to R$ 15,000and R$ 10,000
receivedbyRESAdministra~~o
e CobranCas
Ltda.in March2006andApril2006withmaturity
in March 2008 and April 2007, respectively.
(0)
The company,togetherwithTelevisBoGa6chaS.A.,has guaranteedlocalcurrencyloans
amountingto R$ 15,000receivedby RESAdministra~go
e Cobran~asLtda.in May2006with
final maturity in May 2008.
(h)
The companyhas guaranteedlocalcurrencyloansamountingto R$ 60,000and R$ 40,000
receivedby Televido GalichaS.A.and RESTV Florian6polis
S.A.,respectively,in
November 2006 with final maturities in November 2010 and bearing interest of 110% of the
interbank certificate deposit (CDI) interest rate.
F-15
- Zero Hora Editora Jornalistica S.A.
Notes to the Financial
and 2004 and March
Statementsat December31 2006,2005
31,2007and 2006(Unaudited)
InthousandsofBrazilian
reals,unlessotherwise
stated
(i)
Incomeand expenses on transactions
amongtherelatedcompanies
areallocated
amongthe
companies that benefit from or
incurthe
income
andexpenses
usingbasesthatmaynot
necessarily be the same as those that would
have been appliedifthe transactionshad been
made with unrelated parties.
(j)
On December26, 1996,
thecompany
transferred
allofitstrademarks
registered
withthe
InstituteNacionalde PropriedadeIndustrialINPI
(National
Industrial
Patents
Institute)
to
anotherRESGroupcompany,
S.A. was entitled to collect
calculated
at 3.5%.
RESParticipaF~es
S.A.,
freeofchargeRESParticipaFdes
royalties
onthemajority
ofthecompany's
netoperating
revenues,
On September 24, 2004,
the ten years from
Participa~ges S.A.
thecompany
settled
inadvance
theroyalties
tobeincurred
during
January
2005throughout
December
2014.Thispayment
toRES
wascalculated
asthenetpresent
value
oftheroyalties
ontheprojected
netoperating
revenuesofthecompany
fortheperiod.
(k)
Some of the other RES
Group
companies
arereimbursed
bythecompany
foradministrative
and generalexpensesincurredbythemon behalfofthecompany.
AsfromJanuary2006,the
amounts reimbursed by the
mentioned
8
in Note 1.
company
reflectthechangesintheshareholding
structure
Judicialdepositsandfiscalincentives
2006
Fiscal
------------~
2005
2004
(Unaudited)
incentives
1.388
JP~i~P~~~iqtssses
On
sscal
incentives
(1.388)
Current
assets
7.570
---~I-0
1,388
7~481~
F-16
(543)
~q
(89)
Long-term receivables
1,388
(1.111)
6.891
--~
6.227
7,072
March
31
2006
2007
(Unaudited)
1.388
(1.388)
9,145
9.145
1,388
(1.388)
6.863
6.863
/89)
7.oZZ 9.058
6.863
- Zero Hora Editora Jornalistica
S.A.
Notes to the FinancialStatements at December31, 2006,2005
and 2004and March31, 2007and 2006(Unaudited)
In thousands
9
of Brazilian reals, unless othennrise stated
Investments
December3i
2006
2005
2004
March3i
2007
(Unaudited)
NetServicos
de Comunica~o
S.A.
Provision
forlosses
A NoticiaS.A.EmpresaJomalistica
31.006
(27.070)
31.835
(27,070)
(538)
2.704
956
(726)
2,704
957
(1.067)
2.704
957
(3,338)
(2.704)
(13,900)
Goodwill on acquisition ofA Noticia s.A
Empresa Jornalistica
2006
(Unaudited)
64,279
Negative goodwill on acquisition of RES
Online
Ltda.
Fiscal
incentives
Otherinvestments
Provision for losses on fiscal incentives and
other
investments
50,163 _
_4.167
(3,354)
7.359
(686)
2.704
2.770
906
957
(2,704)
322
271
(a) Theinvestment
inNetServices
deComunicaF~o
S.A.(formerly
known
as Globe
CaboS.A.)
consistedof3,757,947preferredshareson December
31,2005(December
31,2004-
3.665.417
preferred
shares),representing
approximately
0.1%oftheinvestee's
totalcapital,
3.548,152ofwhichwereacquiredbythecompanyonAugust24,2001fromRES
Participa~bes S.A. for R$ 31,753.
NetServiFos
deComunica~lo
S.A.(NET)
isa holding
company
forseveralsubsidiary
companieswhichoperatecable and microwaveTVsystemsin the mainBraziliancities.
Duringthe quarter ended March 31, 2006, the company sold 1,883,825 NET preferred shares.
As a result of these transactions,
the companyrecordeda gainof R$ 353 as non-operating
Income.The remaining1,874,122NETpreferredshares were reclassifiedfromInvestmentsto
Marketable
Securitiesdueto management's
plansto sellthemintheshortterm.Theseshares
weretransferredat theircarryingvalueofR$1,963andthe unrealized
gainofR$452was
recorded in reversal of provision for losses on investments.
Duringthe quarter ended June 30, 2006,the
company sold the remaining NET preferred
shares.Asa resultofthesetransactions,
thecompany
recorded
a gainofR$244as non-
operating
income.
F-17
- Zero
Hora
to the
Financial
Notes
Editora
Jornalistica
Statements
S.A.
at December
31, 2006,
2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
(b)
of Brazilian
reals,
unless
otherwise
stated
On January 17, 2004, the company acquired a 100% interest in RES Online Ltda. from
Televis~o Ga6cha S.A. and other related parties for R$ 1,987. As a result of this transaction,
the company recorded negative goodwill of R$ 1.500 from the difference between the cost of
the investment and the quotaholders' equity of RES Online Ltda., which will be amortized in
approximately 7 years. On the same date, RES Online Ltda. was merged into the company. In
March, 2007, the negative goodwill balance amounting to R$ 538 was transferred to current
liabilities.
(c)
On November 6, 2006, the company acquired a 99.08% interest in A Noticia S.A. Empresa
Jornalistica, a newspaper publisher in the area of Joinville, state of Santa Catarina, for the
amount of R$ 52,628, of which R$ 27,743 remains unpaid at December 31, 2006. Because
this company's net worth was negative R$ 11,651, goodwill of R$ 64,279 was recorded on the
acquisition. The unpaid balance bears interest of 80% of CDI and has a final maturity in
August 2008.
On December
31, 2006, the investment
in A Noticia S.A. Empresa
Jornalistica
is accounted
for on the equity method, including goodwill based on expected profitability, as presented
below:
A Noticia
Empresa
S.A.
Jornalistica
Activity
Net worth on acquisition date
(11,651)
Goodwill on acquisition
64,279
Equityin losses
(2,249)
At December
31, 2006
50,379
F-18
- Zero
Hora
Editora
Jornalistica
S.A.
Notes to the Financial Statements
at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless othennrise stated
In January, 2007, the company acquired the remaining 0.92% interest in A Noticia S.A.
Empresa Jornalistica for the amount of R$ 118. In the same month, the stockholders of the
company and of A Noticia S. A. Empresa Jornalistica (A Noticia), decided to unify the
operations by merging A Noticia into the company. The merger was based on an appraisal of
statutory book value at December
31, 2006, as presented
Assets
Liabilities
Current
below (Unaudited):
and net capital
deficiency
Current
Cash and cash equivalents
Trade accounts receivable
Inventories
Taxes recoverable
114
5.742
259
76
Others
54
6,245
Accounts payable
Salaries and social security contributions
Other taxes payable
Commissions and bonuses payable
903
1.643
720
645
Loans
104
Provision for contingencies
Advances from customers
7.198
4.319
others
714
Non-Current
Long-term receivables
Deferredincometaxes
Judicial
others
deposits
16.246
2447
and fiscal incentives
939
51
3.437
Non-Current
Long-term
liabilities
special tax payment installments-PAES
8.956
Advance
2.507
for future capital
increase
Loans
Permanent
investments
Property.
41
assets
28
plant and equipment
11.504
4.010
Net capital
4.038
deficiency
Capital
Capital reserves
Revenue
2.000
64
reserves
861
Accumulated losses
(16.955)
(14.030)
Total assets
13.720
Total liabilities and net capital deficiency
13.720
On January, 2007, goodwill of R$ 64,279 was transferred to deferred charges and will be
amortized in approximately 10 years, based on expected profitability, according
appraisal carried out by an independent expert on November 20, 2006.
F-19
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F-20
13
a~e
e
- Zero Hora Editora Jornalistica
S.A.
Notes to the Financial Statements at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilianreals, unless otherwisestated
(a)
OnDecember
31,1994,thecompany
decided
torevalue
themajoritemsofmachinery
and
equipmentbasedon an appraisalcarriedoutbyindependent
experts.Deferredtaxeffectson
the revaluation increment are recorded upon realization of the reserve.
(b)
OnDecember31,2003,the companydecidedto revaluetheprinting
pressesand accessories
based on an appraisalcarriedout by independentexperts.Deferredtax effectson the
revaluation increment are recorded upon realization of the reserve.
On March31, 2007,R$ 8,669of property,plantand equipmentare pledgedin guaranteeof
legal cases.
11
Trade accounts
payable
Tradeaccountspayableat December31, 2006includeR$ 22,521(December31, 2005 R$ 21,186;December31, 2004- R$ 21,643;March31, 2007- R$ 19.034;March31, 2006R$ 15,508) payable to foreign suppliers and indexed to the U.S. dollar.
F-21
- Zero
i-lore Editora
Jornalistica
Notes to the Financial Statements
S.A.
at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
Inthousandsof Brazilianreals,unlessothennrise
stated
12
Loans
December31
Interest
Marc~
2006
2005
2004
2007
2006
21,099
3.573
2.841
11.240
12.257
155.507
116.500
123.432
9,671
9.771
2,782
(46)
(Unaudited) (Unaudited)
Foreign currency
US$ 9,869 thousand
(December
31, 2005 US$1,526
thousand;
December
31,
2004
-
US$1,070thousand,
March31,2007-
US$ 5,482 thousand,
March 31, 2006US$ 5.642 thousand)
(i)
LIBOR plus 0.2% to
1.8% p.a. plus
commission of
0.9%p.a.to4.4%
p.a.
LIBOR plus 0.2% p.a.
plus commission of
December 31, 2005 -
US$ 3.190 thousand
(ii)
1.55% p.a.
7.467
US$ 58,585 thousand
(Global Medium-Term
Notes)(March31,2007
and
2006-
US$
56.818
thousand)
(iii)
11%0.a.
125.253
US84.498thousand) (iv)
4.8%p.a.
9,969
US$ 4.663 thousand
(March31.2007US$ 4.717 thousand,
March31,2006-
Interestrateswaps
(v)
3,884
Localcurrency
(vi)
CDIplus3%p.a.
(vii)
108%ofMeCDI
82,267
(viii)
105%oftheCDI
7.516
Localcurrency-Others
137,128
(4,681) ~ 26.615
11.230
145
25.828
84.364
150
150
7.514
76,283
84,405
5.010
10.025
556
254
250.133
239.231
210.941
222,042
247.612
Currentliabilities
(70.528)
(24,056)
(21,177)
(53.405)
(32.995)
Long-term
liabilities
11_9.605__215.175
189.764
168.637
214,617
CDI - Interbank certificate of deposit rate
LIBOR - London
Interbank
Offered
Rate
F-22
-ZeroHoraEditoraJornalisticaS.A.
Notes to the Financial
Statements
at December
31,2006,2005
31,
2007
and
2006
(Unaudited)
Inthousands
ofBrazilian
reals,unlessotherwise
stated
and 2004 and March
Long-termloansfalldue as follows:
--- - -
2006
2006
2005
2007
12,331
2008
24.053
131499
2010
~
(ii)
179605
2007
2006
24,075
24.053
120509
24.053
(Unaudited)
(Unaudited)
24.053
24,053
2009
(i)
2004
March31
-
24,053
24.053
143016
177433
-----L111=
-·-~··- 175
215
189.764 168637
Theseloansarebackedbysureties
33,057
24,053
133,454
214
---~-··
617
f'om
RES
AdministraFpo
e Cobran~as
Ltda.
OnMarch
31,
2007,partofthebalance
(R$2,671)
isguaranteed
by Televis8o Ga~ichaS.A.
Loans paid in 2006.
(iii) OnAugust
2,2004,
thecompany Global
Medium-Term
Notesintheamount
of
US$56,818thousand,withfinal issued
matun'ty
in
April
2010
and
bearing
interest
of
11%
per
year,
withsemiannual
payments.
These
Notesoriginated
fromtheExchange
Offer
Program
mentioned
inNote7 (c)andarejointly
and
severally
guaranteed
byTelevisSio
GaOcha
S.A.,
RES n/ de Florian6polis
S.A.and RBdioGaQcha
S.A.
(iv) OnMarch
29,2006thecompany
contracted
foreign
currency
loansintheamount
ofR$10,000
~ee9cu~ent
Of
US$
4,497
thousand)
with
final
maturity
inMay
2007.
These
loans
are
not
(v)
OnAugust20~2004,
thecompany
contracted
aninterest
rateswap
inthenotional
amount
of
R$ 169,148 (equivalent
56,818
thousand
onthatdate,
matching
theamount
ofthe
Global Medium-Term toUS$
mentioned
(iii)
above)
exchanging
theU.S.
dollar
exchangevariation
forNotes
the CDI
interestinitem
eitherpartyis requiredto settle
rateless2.30%
p.a.Under
thetermsoftheswap,
onpreestablished
27,August27andDecember
27
ofeachyear)theexcessoftheaggregate
fair dates(April
value
of
the
company's
and
RES
Participa~Bes
S.A.'sswapsovera preestablished
limit
ofUS$26.000
thousand
(equivalent
toR$62,735
on
August
29,2005).Thisswapcontract
was
loss was recorded in
terminated
25,2005,
andtheresulting
financial
expenses(R$
85,364).onNovember
F-23
- Zero
Hora
Editora
Jornalistica
S.A.
Notes to the Financial Statements
at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian reals, unless otherwise
stated
On the same date, the company contracted a new interest rate swap in the notional amount of
R$ 126,762 (March27, 2007 - R$ 117,273) (equivalent to US$ 56,818 thousand on that date)
exchanging the U.S. dollarexchange variationfor the CDI interest rate less 5.04% p.a.
(March 27, 2007 - 5.77% p.a.) The due date of the contract is March 30, 2010. Under the
terms of this swap, either party is required to settle on preestablished dates (March27, July 27
and November 27 of each year) the excess of the aggregate fair value of the swaps.
Accordingly,the company completed its settlements on the preestablished dates and the
resulting loss was recorded in financialexpenses during the year ended December 31, 2006
totaling R$ 15,053 (quarter ended March 31, 2007 - R$ 9,015).
These contracts are guaranteed by Televis~o GaOcha S.A., RES TV de FlorianbpolisS.A. and
Rgdio
Gai~cha
S.A.
December
2006
Interest
rate swaps
2005
31
2004
March
31
2007
2006
(Unaudited)
(Unaudited)
- liabilities (assets)
Bookvalue
Fair value
2.663
2,304
(4,681)
(3.564)
26,615
42,821
890
656
(294)
572
On March 29, 2006, the company contracted a swap in the notional amount of R$ 10.000
(equivalent to US$ 4.497 thousand on that date) in connection with the contract mentioned in
item (iv)above, exchanging the U.S. dollar exchange variation plus 4.8% p.a. for the 110% of
the CDI, with final maturity in May 2007. On December 31, 2006, the book value of this swap
was R$ 1,221 (loss) (March31, 2007 - R$ 1,892 (loss); March 31, 2006 - R$ 248 (loss)).
(vi)
The loans were paid in 2006.
(vii) On November25, 2005,the companycontractedlocalcurrencyloans in the notionalamountof
R$ 84,185 with final maturityin May2010 and monthlypayments as from December 2006.
These contracts are guaranteed by TelevisBoGalicha S.A., RES n/ de Florian6polisS.A. and
Rgdio
Galicha
S.A.
(viii) On March 27, 2006, the company contracted local currency loans in the notional amount of
R$ 10,000 with final maturity in September 2007 and monthly payments as from October 2006.
These
loans
are
not
secured.
In connection with the above loans, the company and certain other RES Group companies,
mainly those engaged in n/ and radio broadcasting activities,are required to observe certain
negative covenants. All of these covenants are being observed.
F-24
- Zero
Hora
Editora
Jornalistica
S.A.
Notes to the Financial Statements
at December 31, 2006, 2005
and 2004 and Anarch 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
13
Stockholders'
(a)
Capital comprises
Common
Preferred
reals,
unless
othe~wise
stated
equity
common and preferred
shares without par value:
shares
shares
69,003,649
29,572,993
98,576,642
The stockholders are entitled to an annual dividend of not less than 25% of net income per the
statutory financial statements, after appropriation to the legal reserve of an amount equivalent
to 5% of the annual net income, up to the limit of 20% of capital, also per the statutory financial
statements.
In accordance with the company's by-laws, a statutory reserve for investments and working
capital should be established
based on appropriations
of 10% of net income after
appropriations to the legal reserve and the minimum annual dividend. The total of the legal and
statutory reserves cannot exceed the amount of the company's capital. At December 31, 2006,
2005 and 2004, the board of directors decided not to make the appropriation related to the
statutory reserve. The respective Annual General Stockholders Meetings confirmed these
decisions.
Also, in December 2006, 2005 and 2004, no dividends were proposed by the company's board
of directors, decisions which were subsequently approved at the respective Annual General
Meetings. In 2006, 2005 and 2004, no earnings were distributed.
(b)
Law 9249 introduced as from 1996 an option for companies to calculate a nominal interest
charge on capital invested and utilized in operations for the period (defined as total
stockholders' equity less revaluation reserves) calculated on a pro rata basis based on the
Taxa de Juros de Lengo Prate - TJLP (long-term interest rate). This charge, limited to 50% of
the net income for the period or of retained earnings, is deductible for income tax purposes
and social contribution, but is subject to 15% withholding tax; such interest amounts may be
used to increase capital or be paid directly to stockholders either as interest or as prepayment
of·the minimum statutory dividend.
The company did not pay any interest to its stockholders in 2006, 2005 and 2004.
F-25
- Zero Here Editora Jornalistica
S.A.
Notes to the Financial Statements at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
stated
In thousands of Brazilianreals, unless otherwise
(c)
-
Thebalanceofaccumulated
deficit
inthecompany's
statutory
financial
statements
is
reconciled to the balance in these financial statements as follows:
DecemberJ~
2006
2005
March31
2004
2007
2006
(Unaudited) (Unaudited)
Balances
perstatutory
financial
statements
(49,044) (75.367) (95,391) (44,457) (66,013)
Adjustmentsarisingfromthe constantcurrency
accounting
methodology
203
Further adjustments to conform the financial
statements to accounting principles
generally
accepted
inBrazil
Balances
inthesefinancial
statements
14
Financial
income
1,010
2.546
4.645
5.820
1.166
4.830~
(44,196) (68.537) (91.679) (39.609) (60.817)
and expenses
December
Financial
804
18
31
2006
2005
2004
34
4.042
3
3.218
1
5.667
March
2007
(Unaudited)
31
2006
(Unaudited)
income
Eamingson financialinvestments
Exchangevariationson assets
Interestonrelatedcompanies
(Note7)
Interest on taxes
11,040
1.452
1.617
18.392
15.510
925
Otherfinancialincome
Financial
11,939
expenses
Interestandchargesonloansandfinancing
Exchange variations on loans and linandng
and lossfrominterestrateswap,net
Interest on related companies (Note 7)
Intereston taxes
2.842
3.168
37
2.878
42
1.040
323
441
4.461
6.203
75
7,437
(30.708)
(22.971)
(13.330)
(6.697)
(7.952)
(12,989)
(36.456)
(8.219)
(1.942)
(3.393)
(1.331)
(1.046)
(900)
Otherfinancial
expenses
(368)
933
654
(2.925)
(3.160)
(2.333)
(434)
(330)
(1.762)
(1.564)
(1.127)
(524)
(47,522) (65.680) (26,492) (10.200) (12199)
F-26
- Zero
Notes
Hora
Editora
to the Financial
Jornalistica
Statements
S.A.
at December
31, 2006,
2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
15
Social
contribution
(0)
Reconciliation
reals,
and
of social
unless
income
otherwise
stated
tax
contribution
and income
tax
Years
ended
Quarters
December31
2006
2005
2005
2007
2006
(Unaudited)
(I)
(Unaudited)
Social contribution
Income
before
taxes
on income
35.577
Rate-%
Effects
of permanent
21,702
8.158
9
9
9
(3.202)
(1,953)
(734)
(544)
(1,129)
(253)
(711)
(122)
44
145
income
(87)
1
in
1.073
Other
(1.218)
601
Expense for the year
(4.420)
(488)
Current
Deferred
(1.482)
(2.938)
(2.3461
1.858
(4,420)
(488)
(105)
(79)
(425)
(1.405)
(745)
(1.640)
(1,891)
486
(790)
45
(275)
(1,365)
(1.405)
(745)
(1.640)
tax
Income before taxes on income
Rate-%
Effects
12,546
9
differences:
Effect of provision for losses on Me investment
Net Servicos de Comunica~es
S.A.
Income
6.042
9
Non-deductible expenses
Non-taxable
(II)
ended
March3i
of permanent
35,577
21.702
8.158
6.042
12,546
25
25
25
25
25
(8.894)
~5.425)
(2.040)
(1.511)
(3.136)
309
(704)
(1.979)
(12)
83
differences:
Non-deductible expenses
Non-taxable
income
Effect of provision for losses on he investment
Net ServiCos de ComunicaCdes
S.A.
5
123
403
3
in
2.976
Other
(1.044)
Expenseforthe year
_(9,624)_
2.111
_
(919j~
867
111
(2.749)
(1.412)
Current
(2.666)
(6.217)
(4,388)
(1.674)
Deferred
(6.958)
5,298
1.639
262
(2.749)
(1,412)
(9.624)
F-27
(919)
(3.888)
(423)
(3.888)
-Zero
Notes
Hora
Editora
to the Financial
Jornalistica
Statements
S.A.
at December
31, 2006,
2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
(b)
of Brazilian
reals,
unless
otherwise
stated
Nature of balances
December
2006
(I)
Prepaid
income
taxes
2005
Social conb~ibution
Provision
for income
2005
taxes
771
353
15
60
786
413
92
2006
(Unaudited)
357
357
654
92
Deferred
income
2.464
162
162
taxes
contn'bution
Tax loss carryforwards
12.153
Temporarydifferences
Income
2007
(Unaudited)
1.810
Social contribution
Social
31
- current
Incometax
(III)
larch
- current
Income tax
(II)
31
14.OY8
i 1.873
1,238
12.641
3.401
544
2.276
'i2.560
2.427
13.391
16.042
14.640
14,149
14.987
32.522
3.605
33.833
9.753
37.844
1.551
31.744
6,491
33.608
7,051
36.127
43,586
39,395
38.235
40.659
49.518
59.628
54,035
52.384
55.646
(4.137)
(3.412)
48,247
52,234
tax
Tax loss canyforwards
Temporarydifferences
Current assets
(2.874)
Long-term receivables
46.644
F-28
_
59.628 _
54.035 _
- Zero Hora Editora
Jornalistica
S.A,
Notes to the Financial Statements
at December 31, 2006, 2005
and 2904 and March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
otherwise
stated
DecemberJ~
Long-term
Social
MarchS~
2006
2005
2004
2007
(Unaudited)
2006
(Unaudited)
1.948
2.286
2.672
1.897
2.202
518
633
595
268
774
159
501
766
575
598
3.099
3.149
3.605
3.164
3.375
5.544
6.508
7.422
5.270
6.266
1,438
1.760
1,653
745
2.150
441
1,391
2.128
1.598
1664
8.742
8.906
10.013
8.789
9.528
liabilities
contribution
Deferred
social contribution
on revaluation
reserve
Indexation
of permanentassets
Temporarydifferences
Income
tax
Deferred
income
taxes
on revaluation
reseNe
Indexationof permanentassets
Temporarydifferences
_ 11.841
12.055
13.618 _ 11.953
12.903
As of March31, 2007,the Companyexpectsto offsetthe deferredincometax assets against
future taxable income according to the following schedule:
December
31,
2006
March 31,
2007
(Unaudited)
2007
2008
2,874
4,741
3,399
4,601
2009
2010
2011
2012
2013
5,793
9,029
10,603
11,286
5,192
5,390
8,340
9,580
10,387
10,687
49.518
52,384
Current assets
(2,874)
(4,137)
Long-termreceivables
4_6.644
48,247
Considering that taxable income encompasses not only the accounting profitthat can be
generated, but also the existence of non-taxable income and non-deductibleexpense, tax
credits and other differences, there is no direct relationshipbetween the accounting profitand
the taxable income. As a result, the company's expected timing to offset deferred income tax
assets
should not be taken as an indicator of future profits of the company.
F-29
- Zero Hora Editora
Jornalistica
Notes to the Financial Statements
S.A.
at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
Inthousandsof Brazilianreals,unlessothemisestated
16
Contingencies
(a)
Thecompanyis partyto variouscivillawsuitsthathaveariseninthe ordinarycourseof its
business, includingactions for libel.Provisionsfor estimated probable losses from
contingencies
havebeenrecordedbasedontheopinions
ofexternalandin-houselegal
advisors.Duringthe yearendedDecember
31,2006,the companypaid,eitheras a resultof
unfavorablejudicialdecisionsor settlement,the amountof R$ 2,073(December31, 2005 R$ 1,709; December 31, 2004 - R$ 1,868; quarter ended March 31, 2007 - R$ 81, quarter
ended March 31, 2006 - R$ 378).
(b)
Thecompanyis the defendantincertainlaborandtaxsuits.Provisions
forestimatedprobable
losses fromcontingencieshave been recordedbased on the opinionsofexternaland in-house
legal advisors.
Provision
for probable
losses
December31
2006
2005
Nlarch3i
2004
2007
jiinaudiiedj
2006
jiinaudiiedi
Tax matters
1.600
1.600
1.600
1.600
1.600
Laborand socialmatters
7.204
5,762
5.992
11,217
5.813
Civilmatters
3.892
3.588
2.473
6.854
3.630
12,696
19,671
11.043
Currentliabilities
Long-term
liabilities
10,950
10.065
(19.692)
(8.962)
(6,862)
(17.663)
(9.051)
2,004
1,988
3.203
2.008
1.992
The activityin the provisionforprobablelosses in 2006and 2007was as follows:
December 31,
2006
March 31,
2007
(Unaudited)
Atthe beginningof the year/quarter
10,950
Increase
14,218
Amounts
paid
(2,073)
Reversal
Atthe end of the year/quarter
F-30
12,696
10,514
(si)
.(10,399)
(3,458)
12,696
19,671
- Zero Hora Editora
Jornalistica
S.A,
Notes to the Financial Statements
at December 31, 2006, 2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
Possible
of Brazilian
reals,
unless
othennilse
stated
losses
The company is the defendant in certain civiland labor suits which are estimated as possible
.losses based on the opinionof external and in-house advisors. For these suits no provisions
have been recorded by the company, and the respective amounts at December 31, 2006 and
March 31, 2007 are presented
below:
December
31,
2006
March 31,
2007
(Unaudited)
Civil matters
Labor and social matters
17
Pension
3,035
3,542
3.003
4,269
6,577
7,272
fund
The company, together with RES Comunica~BesS.A. and other associated companies (the
"Sponsors"), have formed RES Prev-Sociedade PrevidenciBria,a private pension fund (the
"Fund"),to provide employees with supplementary pension and disabilitybenefits, in addition
to those paid by the NationalSocial Security System. The Fund was approved by the Ministry
of Social Security in October 1996 and was implemented as from January 1997.
The Fund is a defined contributionplan, with contributionsfrom Sponsors and participants
calculated based on variable amounts and percentages at the option of each participant. The
normal contributionsof the Sponsors are based on the basic contributionof the participants at
rates of up to 300% depending on the participant's age. These contributionswillautomatically
cease when the participantterminates employmentfor any reason, reaches retirement age,
dies or becomes
disabled.
Past service benefits will be funded by the Sponsors
over twenty
years throughmonthlypaymentsadjustedby the indiceNacionalde PreFosao ConsumidorINPC (National Consumer
Price Index).
Furthermore, the Sponsors may opt to make additionalcontributionsat any time, and the
normal and additionalcontributionsmay be revised by the Sponsors in February of each year.
The Sponsors may also temporarilyreduce or suspend their contributions,maintainingonly
those necessary to cover the minimumbenefits mentioned below, the payments related to the
past service benefits and the Fund's administrative costs.
F-31
- Zero
Hora
to the
Financial
Notes
Editora
Jornalistica
Statements
S.A,
at December
31, 2006,
2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless otherwise stated
The plan grants all the participantsa minimumone-time retirement benefit equal to a maximum
of 3 times the participant's monthly salary for participants with 30 years of service upon
retirement. Participants with less than 30 years of service are entitled to a proportional amount,
based on their years of service. Except for this minimum benefit, the Sponsors do not have any
responsibility to guarantee the minimum level of the benefits to the participants when they
terminate
their employment.
The company's contributions in the year ended December 31, 2006 amounted to R$ 2,291
(December 31, 2005 - R$ 2,299; December 31, 2004 - R$ 2,308; quarter ended March 31,
2007 - R$ 648; quarter ended March 31,2006 - R$ 548).
The Fund's financial statements
at December
31, 2004, 2005 and 2006 were examined
by
independent auditors, and the actuarial reserves were determined by an actuary. The
independent auditors issued an unqualified opinion on those financial statements.
18
Financial
instruments
The company has financial assets and liabilities recorded in the balance sheet which are
characterized
as financial instruments.
Except for the interest rate swaps mentioned
in
Note 12, the investment in NET mentioned in Note 9 (a), and the accounts receivable from
related companies bearing no interest (Notes 7 (a) and (b)), the balances of other financial
assets
and liabilities are stated based on their contractual
the respective
19
market
conditions,
which are equivalent
to
values.
Insurance
The company's policy of insurance risk management seeks coverage'compatible with its
responsibilities and its operations. The insurance was contracted for amounts which were
considered sufficient for the company to cover eventual losses, considering the nature of its
activity, the risks involved in its operations and its insurance consultants' recommendations.
F-32
- Zero
Notes
Hora
Editora
to the Financial
Jornalistica
Statements
S.A.
at December
31, 2006,
2005
and 2004 and March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
othemise
stated
On March 31, 2007, the company had the following principal insurance
parties:
policies with third
Insured
Type
amount
(Unaudited)
Fire damage to property, plant and equipment
Civil liability
Diverse risks
20
Tax Recovery
Program
218,016
3,250
1,185
(PAES)
A Noticia S.A. Empresa Jornalistica, which was merged into the company in January 2007,
joined the PAES program tin July 2003) for payment of its federal tax debts in the amount of
R$ 6,874, to be paid in 180 monthly installments plus interest based on the TJLP (long-term
interest rate). On March 31, 2007 the balance was R$ 9,499, R$ 1,594 classified in Other
taxes payable - current liabilities and R$ 7,904 in Special tax payment installments - PAES Ivlly-~II~l
Property,
IlaUlllll~b·
plant and equipment
are pledged in guarantee
of R$ 1,925.
F-33
of this fiscal program, in the amount
Brasil
Sul
- RES
-
Credit Group (previously
namedRedeBrasil
Sul-RBS-Guarantors)
Special-Purpose
Financial
Statements
Combined
at
December
31, 2006, 2005 and 2004
and March 31, 2007 and 2006
and Report of Independent
Accountants
F-34
O
PricewaterhouseCoopers
Rua Mostardeiro,
Caixa
Postal
800 8~ e 9"
2178
90430-000 Porto Alegre. RS - Brar;il
Telefone
Report of Independent Accountants
To the Board
of Directors
(51) 3378-1700
i Fax(51)
3328-1609
and Stockholders
Rede BrasilSul - RES - Credit Group (previouslynamed Rede BrasilSul - RES - Guarantors)
1
We have audited the accompanyingspecial-purpose combined balance sheets of Rede Brasil
Sul - RES - Credit Group (previouslynamed Rede Brasil Sul - RES - Guarantors) las defined
in Note 1) as of December 31, 2006, 2005 and 2004, and the related special-purpose
combined statements of operations, of changes in stockholders' equity and of changes in
financialposition for the years then ended. These special-purpose combined financial
statements are the responsibilityof the company's management. Our responsibilityis to
express
2
an opinion on these special-purpose
combined financial statements.
We conducted our audits in accordance with approved Brazilianauditing standards which
require that we perform the audit to obtain reasonable assurance about whether the financial
statements are fairlypresented in all material respects. Accordingly,our work included,
among other procedures: (a) planningour audits taking into consideration the significance of
balances, the volume of transactions and the accounting and internal control systems of the
companies, (b) examining,on a test basis, evidence and records supporting the amounts and
disclosuresin the special-purposecombinedfinancialstatements,and (c) assessing the
accounting principles used and significantestimates made by management, as well as
evaluating the overall presentation of the special-purpose combined financial statements.
3
Inour opinion,the special-purposecombinedfinancialstatementsauditedby us present
fairly,in all material respects, the combined financialpositionof Rede Brasil Sul - RES Credit Group at December 31, 2006, 2005 and 2004, and the combined results of their
operations, the combined changes in stockholders' equity and the combined changes in their
financial position for the years then ended, prepared for the purposes described in Note 2, in
conformitywith accounting principlesgenerally accepted in Brazil.
F-35
b
Rede Brasil Sul - RES - Credit Group (previouslynamed Rede Brasil Sul - RES - Guarantors)
4
We have also reviewed the accompanying special-purpose combined financialstatements of
Rede Brasil Sul - RES - Credit Group as of and for the quarters ended March 31, 2007 and
2006. These special-purpose combined financialstatements are the responsibilityof the
companies'
5
management.
We conductedour reviewsin accordancewithstandardsapprovedby the Instituteof
IndependentAuditorsof Brazil(IBRACON).
A reviewconsists,principally,
of applying
analytical procedures to financialdata and making inquiriesof persons responsible for
financial and accounting matters regarding the criteria used to prepare the financial
statements. A review does not represent an audit conducted in accordance with approved
Brazilianauditingstandards,the objectiveofwhichis the expressionof an opinionregarding
the financialstatementstaken as a whole.Accordingly,
we do not express such an opinion.
6
Based on our reviews, we are not aware of any material modificationsthat should be made to
the special-purpose combined financialstatements mentioned in paragraph 4 for them to be
fairlystated in conformity
withaccountingprinciplesgenerallyaccepted in Brazil.
Porto Alegre, May 25, 2007
PricewateihouseCoopers
Auditores Independentes
CRC 2SP000160/0-5
"F" RS
Carlos
Contador
Biedermann
CRC
1RS029321/0-4
(Copy of the originalmanuallysigned)
F-36
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Brasil
Sul - RES - Credit
Group
Special-Purpose CombinedStatements of Operations
In thousands of Brazilianreals
Years ended
Quarters
DecemberS1
Note
2006
Operatingrevenues
Advertising
Classified
advertisements
Circulation
474.431
87.072
52.903
Subscriptions
Other
Taxesonrevenues
2005
429.621
82.333
49.238
ended
MarchS~
2004
2007
2006
(Unaudited)
(Unaudited)
356.513
71,073
44.106
114.216
107,111
20.591
19.718
13.237
13,582
29,093
5.355
122,715 113.696
22,778
24,663
(28.794) (26,550)
99,900
24.851
(22,981)
731.105
673,001
573.462
179,521
168.229
Rawmaterials
(69,980)
(73.057)
(71,321)
(17.232)
(15.402)
Promotional
events,
programming
andselling
(85.615) (79,300) (64.760) (23.572) (18.332)
Operating
costs
Personnel
(79.793)
Depreciation and amortization (net of
reili~bursement
in2005and2004)
(15,142)
Royalties
Other
(16,347)
(21,358)
(77.966)
(11,376)
(76.422)
(15,753)
~17.603) (18.799)
(18.598) (16.454)
34.099
4,928
(7.550)
(21.597)
Operating
income
(3,742)
(3,487)
(6.424)
(3.799)
(expenses)
Depreciation
andamortization
Financial
income
Financial
expenses
16
(65,389)
(establishment)
of provision for
lossesoninvestments
Incomebeforetaxes on income
Currentincometaxes
Deferred
income
taxes
17
17
(8.604)
(10,617)
(12.828)
(2.372)
(62.285)
(74.785)
(27.711)
(15,007)
17,425
341
8,492
433
7,815
(387)
9.613
(16,598)
40
(289,040) (278.021) (228.873) (74,764)
(65.121)
153,830 117,080
(1.744)
511
(2.704)
(2,137)
81.080
296
28.593
185
37.719
122
(6.593)
(27)
(16)
228
452
(208)
149.894
112,750
74,756
28.990
38.085
(28.686)
(30.663)
(19.435)
(10.262)
(8.213)
111,870
87,953
57.893
19.393·
26.270
(9.338)
Netincomefortheyearlquarter
(24.955)
(2.413)
(123.818)
(73.441)
452
(2.644)
loss, net
(30.808)
(26,036)
(127,970)
(82.415)
188
Operating
profit
Equity
inearnings
(losses)
onsubsidiaries
(38,777)
(137.547)
(108.801)
28,009
16
Other,net
Non-operating
(6.016)
442,870 395,101 309.953) 103,357 10?,840
Selling
Generaland administrative
Reversal
(18.098)
(3.852)
(288,235) (277,900) (263.509) (76.164)
Grossprofit
(6.630)
5,866
2.572
665
(3,602)
Theaccompanying
notesarean integral
partofthesespecial-purpose
combined
financial
statements.
F-38
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rIF-40
Brasil Sul - RES - Credit Group
Special-Purpose
Changes
Combined Statement of
in Financial
In thousands
of Brazilian
Position
reais
Years ended
December 3!
2006
Financial resources were provided by:
Net income for the yearlquarter
Expenses (income) not affectingworkingcapital:
Deferred
income
taxes
Provision
forcontingencies
57,893
19.393
9.338
(5,866)
(2.572)
(665)
633
Depreciation
andamortization
Amortization
ofnegative
goodwill
23.746
(188)
Netbookvalueofpermanent
assetdisposals
5,460
152.906
in long-term receivables
Netincreaseinlong-termliabilities
58.767
Stocksubscription
rightsold
Transferofdeferredincometaxes fromlong-termto
assets
(1.430)
(511)
596
4.224
23,016
(341)
395
108.036
63,856
910
(3,810)
(296)
6.593
29,657
~433)
1.318
88.350
159.875
7.800
Transfer
frominvestments
tomarketable
securities
1,963
Negative goodwillon acquisitionof RES Online Ltda
Total
funds
provided
612
42,339
148.420
52.628
81
2.035
31.015
Deferred charges
Transfer from investments to liabilities
21,870
14.283
108
349
Mergerwithsubsidiary
5
(185)
(122)
279
16
6,224
6.155
(40)
568
2.082
25.357
1.318
38.231
16
1.605
5.493
28.280
45.703
24.888
118
3.517
8.137
7,322
3.437
Property,
plantandequipment
Deferred
charges
82
8.388
Long-termliabilities
3.149
Decreaseinadvancesforfuturecapitalincrease
40.667
Interest on capital
Dividends
used
Increa~e
(decrease)
invo*ing
capital
14.058
4.010
(11,504)
3.247
1,954
52.000
33.500
20.210
136,255
101.145
239.537
s5.lsl
71.857 10.188 (15~402)
43.682
10.839
34.864
assets
Attheendoftheyear/quarter
425.487 267,739
Atthebeginning
oftheye'ar/quarter
Current
3.602
6
538
Long-term receivable
Inves~nents
Current
26.270
1,963
221,436 172.802 249.725
Property, plant and equipment
funds
2006
1.500
Financial resources were used for:
Net increase in long-term receivables
Net decrease in long-term liabilities
Investments
Total
2007
(Unaudited) ~Unaudited)
87.953
1.744
277
Provision
forlossesoninvestments
current
2004
111.870
26
Equity
inloss
(eamings)
ofsubsidiaries
Provision
forlossesonfiscalincentives
Net decrease
2005
Reclassified
auarters ended
March 31
267.739
liabilities
Attheendoftheyear/quarter
Atthe beginningof the year/quarter
159.490
392.194
289.833
108,905
425.487
267,739
157.748
108.249
274.465
201,898
165.306
256.574
189.128
165.306
124.909
274.465
201,898
(17.891)
(12.770)
201.898
Increase
(dRrease)
inuualing
capital
159.490
50.585
(33.293)
22.094
72.567
36.592
40,397
ss,lsl_
71.85/
10.188 (15,4021 34.864
Theaccompanying
notesare an integralpartofthesespecial-purpose
combined
financial
statements.
F-41
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Group
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
1
of Brazilian
reals,
unless
othemise
stated
Business
The followingcompanies (CreditGroup) are included in these special-purpose combined
financial statements. The Credit Group is under the common control of three family groups.
Televisso Ga6cha S.A., RES TV de Floriani~polis S.A. and Rgdio Galicha S.A. are indirectly
owned by RES Comunica~BesS.A. (untilDecember 2005, ownership of the companies was
held directly by the three family groups), a holding company ultimately owned by the three
familygroups which also control RES - Zero Hora EditoraJornalistica S.A. The Credit Group is
operated, together with RES ComunicaG~esS.A., its subsidiaries and future subsidiaries, as
one integrated unit, the RES Group. The Credit Group is located in the states of Rio Grande do
Sul and Santa Catarina, Brazil, and is engaged in three areas of the media business:
Newspaper
RES
publishing
- Zero
Television
Televisso
i-lora
Editora
Jornalistica
S.A.
broadcasting
Galicha
S.A.
RES n/ de Florian6polis
S.A.
Radio broadcasting
Rgdio
Galicha
S.A.
RES ComunicaCbesS.A. was established in 2005 withthe objective to integrate the main
businesses that are owned by the three family groups. The stockholders of RES
Comunica~bes S.A. started to performthis integrationin January 2006 and intend to complete
it during 2007 through the acquisitionfrom the familygroups of direct and indirectcontrol over
the main operational companies ("futuresubsidiaries").The RES Group also includes other
companies which do not form part of these special-purpose combined financialstatements.
Most of the RES Group companies are located in the states of Rio Grande do Sul and Santa
Catarina, Brazil, and operate principally in four areas of the media business (radio and
television broadcasting, internet and newspaper publishing).
On April 15, 2004, the shareholders decided to change the company's name from Zero Hora Editora
Jornalistica
S.A. to RES - Zero Mora Editora
Jornalistica
S.A.
Duringthe quarter ended March 31, 2007, the management decided to change the name of
the combined group from Rede Brasil Sul - RES - Guarantors to Rede BrasilSul - RES - Credit
Group.
F-42
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian reals, unless othennrise stated
The BrazilianFederalConstitutionestablishesthat, as fromApril2002,foreignstockholders
may own a maximumof 30% of the capital of newspaper publishingand television and radio
broadcasting companies.
TheFederallicensesrequiredforthetelevision
andradiobroadcasting
activities
are granted
by governmentauthoritiesand are approvedby the FederalCongress.Moreover,television
and radio broadcasting licenses are granted separately by location. The licenses are non-
exclusive,expireaftera predeterminedtime-limit
(fifteenyears fortelevisionand ten years for
radio)and are renewableuponapplicationfora similarperiod.The CreditGroup'scurrent
licensesexpireon differentdates: RgdioGalichaS.A.in 2003 (expired),and Televis~o
GaOchaS.A.and RESn/ de Florian6polis
S.A.in 2007. RgdioGaQchaS.A.has appliedfor
renewalof its license,whichis pendingapprovalbythe governmentauthorities.Management
expects that RgdioGalichaS.A.'slicensewillbe renewed,since it is in compliancewithall
requirements necessary for this approval. Until a decision is made on Rgdio Galicha S.A.'s
renewal application, it may continue to use the license. Televis~o GaQcha S.A. and RES n/ de
FlorianC~polis
S.A.have appliedfor renewalof theirlicenses.Managementexpectsthe
companies'
licenses
will be renewed.
Throughoperatingagreements,
thetelevision
broadcasting
companiesformpartofthe largest
Braziliannationaln/ network,the Globenetwork.Althoughthe networkagreementshave
limitedterms,such agreementsare renewable,and each companyhas maintainedits network
relationshipcontinuouslyformorethan thirty-five
years.
Televis%o
GalichaS.A.andRESn/ de Florian6polis
S.A.maintainoperatingagreementswith
other televisioncompaniesin the states of RioGrandedo Sul and Santa Catarina,
respectively. These independent affiliatedstations are required to broadcast the national and
regional network programs and advertisements and are entitled to the revenues from local
advertisements
soldbythem.Inexchangeforthe nationalandregionalprogramming,
the
affiliated
companiesare chargeda programming
fee basedon theirnetrevenue(until
December2005,the programming
feewascalculated
as a reimbursement
of programming
costs, proportionalto each affiliate'snet revenue).
F-43
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Group
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
2
of Brazilian
Special-Purpose
reals,
unless
othenrvise
stated
Combined Financial Statements
Accountingprinciplesgenerally accepted in Brazildo not address the combination of financial
statements. These special-purpose combined financialstatements have been prepared solely
for the purpose of presenting the combined financialposition and related combined results of
operations, changes in stockholders' equity and changes in financial position of the group of
companies which are guarantors under the Global Medium-TermNotes Program of RES
Participa~bes S.A., a holdingcompany withinthe RES Group with investments in subscriber
television companies and in the telecommunications area. As there are no intercompany
shareholdings, all capital and reserve accounts are added together, although all account
balances, revenues and expenses from transactions among the Credit Group have been
eliminated
on combination.
The four companies included in the special-purpose combined financial statements are the
main media companies
3
Presentation
of the RES Group.
of the Combined
Financial
Statements
The accounting records of each of the Credit Group companies are maintained in accordance
with Braziliancorporate and tax legislation,and the financial statements have been prepared
therefrom, includingcertain adjustments to conformwith accounting principles generally
accepted in Brazil("BrazilianGAAP"),which originallyrequired the presentation of financial
statements under the constant currency methodology,as a means of depicting more clearly
the impacts of inflation on a company's financial information.
Under the constant currency methodology,all financialstatement balances, including
comparative balances from prioryears, are presented in reals of constant purchasing power
using as the basis for restatement the officialindex Unidade Fiscal de Refe~ncia - UFIR
(FiscalUnitof Reference)up to December31, 1995and the variationof the jndiceGeralde
Pre~os - Mercado - IGP-M(General MarketPrice Index) as from that date and up to
September 30, 2001. Thereafter, the Credit Group suspended the price-level restatement of
their financial statements, since the cumulative inflation rate over the preceding 36-month
period was less than 100%. The reported amounts of non-monetary assets, such as
inventories and permanent assets, and stockholders' equity include price-level restatement as
from the date of origin up to September 30, 2001.
F-44
Brasil
Sul - RES - Credit
Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
Inthousandsof Brazilianreals,unlessotherwisestated
The price-levelrestatementof financialstatementsfor bothstatutoryand tax purposeswas
abolishedas fromJanuary1, 1996,by Law9249.Althoughthe CreditGroup'sstatutory
accounting
recordsas fromJanuary1, 1996do notreflectanyprice-level
restatements
of
permanentassetsandstockholders'
equityaccounts,proformaadjustments
havebeenmade
to the financial statements to reflect these restatements through the constant currency
methodology.These restatementsno longerhave any tax effects,but pro formatax
adjustments
havebeenmadeto thefinancial
statementsto assureconsistency
withprior
periodsas wellas to reflectfuturedeferredtaxeffects,as explainedinthe following
paragraph.
AsfromJanuary1, 1996,thefulltaxeffectofthe net resultofthe restatementswastakento
incomethrougha charge/creditto incomeat the currenttax rates, in order to maintain
comparability
withthe priorperiods.Thedeferredtaxliability
on the price-level
restatementof
permanentassets has beenshownas a long-term
liability
andwillbe reversedto incomeas
the price-level
restatement
is realizedthroughthe disposalofinvestments
andthedepreciation
or disposalofproperty,
plantandequipment.
Ontheotherhand,the deferredtaxassetlliability
arisingfromthe restatement
ofstockholders'
equityaccountsis reversedandcharged
currently
to retainedearnings,sincethisamountdoesnotrepresentan actualtaxbenefit
(cost).
(a)
Reclassification
of liabilities
On March31, 2007 RES- Zero HoraEditoraJornalisticaS.A.reclassifiedpart of the balance
of accountspayablerelatingto investmentacquired,amountingto R$ 14,207,fromcurrentto
long-termliabilitiesin connectionwithmanagement'sintentionto pay this balanceonlyupon
thefinalmaturity.
Thepriorperiodhas beenreclassified
accordingly.
Thereclassification
for
December
31, 2006 amounted
to R$ 13,672.
4
Significant Accounting Policies
(a)
Determination
of resultsof operationsand currentand long-termassets and liabilities
Resultsof operationsare determinedon the accrualbasis and includegains and losses on
monetaryitems,and, whereapplicable,the effectsof adjustmentsof assets to marketor net
realizablevalues.Netexchangegainsand losses on foreigncurrencyliabilitiesare recordedin
financialexpenses.Shares classifiedas marketablesecuritiesare recordedat marketvalue.
F-45
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006, 2005 and 2004 and
Rllarch31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian reals, unless otherwise stated
Revenues from advertisingand classified advertisements are recorded when the related
broadcastingor publishingtakes place.The gross advertisingrevenueof the television
broadcasting
companiesincludesthe saleofadvertising
negotiatedlocally,
as wellas that
negotiatedby
the Globenetworkinthe television
companies'nameforregionalbroadcasting,
according
to the network
agreement(Note1).A percentageofthegrossadvertising
revenue,
as definedinthe networkagreement,is chargedmonthlyby the nationalnetworkas
programming
costs.
Revenuefromcirculationrelatesto sales of newspapersat newsstandsand street vendors
and is recorded at the time the newspapers are sold to consumers.
Subscription
revenuerelatesto salesofnewspapersbysubscription.
Deferredsubscription
revenue,whichrepresentsamountsbilledto customersin advance of newspaperdeliveries,is
appropriated to revenues over the term of the subscription.
Non-cashexchangesof advertisingforservicesor goods are recordedat marketvalue in both
revenues
(6)
and expenses.
Inventories
Inventories
are statedat the averagepurchasecost,whichis lowerthanreplacement
costor
net
(c)
realizable
Permanent
value.
assets
Investmentsin entitiesin whichthe CreditGroup'sownershipinterestexceeds 20%are
accountedforon the equitymethod.TheinvestmentinA NoticiaS.A.EmpresaJornalisticawas
accountedforon the equitymethodup to its mergerintoRES- ZeroHoraEditoraJornalisticaS.A.,
including
goodwill
basedon expectedprofitability.
The otherinvestmentsare stated at cost, less
provision
for estimated
losses.
Property,
plantandequipment
arestatedat costplustheeffectsofrevaluations
ofthemajority
ofland,buildings,
printing
pressesandaccessoriesoftwoofthe companiesincludedinthe
combination
(Note12).Depreciation
ofproperty,
plantandequipmentis computedon the
straight-linemethodat the rates shownin Note12,whichtake intoconsiderationthe estimated
useful
lives of the assets.
F-46
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Statements
at December
Combined
31, 2006,
2005
Financial
and
2004
and
March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless othennrise stated
(d)
Income
taxes
Income tax is calculated at the standard rate plus supplementary rates totaling 25%. Social
contribution tax is calculated
at the current rate of 9% applied to adjusted
income before
income tax. Deferred income taxes are calculated on temporary differences and tax loss
carryforwards (Note 17). Tax losses do not expire but may be used to offset only up to 30% of
future taxable income in any year.
The tax legislation allows the television and radio broadcasting
companies
financial
related
statements
to record
free electoral advertising,
(e)
Swap receivables
and deduct
tax credit
included in these
to the reimbursement
of
as shown in Note 17 (a).
and payables
The assets/liabilities are recorded
date (accrual basis).
5
an income
at cost plus accrued
rate differences
up to the balance sheet
Cash and cash equivalents
December
2006
2005
31
2004
March
2007
(Unaudited)
Financial investment
Cash
funds
75,619
499
76, 118
Financial investment
126
31
2006
(Unaudited)
50,634
106
592
240
782
832
718
240
511416
938
funds earn interest at rates near the CDI (Interbank Certificate of Deposit)
rate.
F-47
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
6
Trade
of Brazilian reals, unless otheMlise stated
accounts
receivable
December
2006
Subscriptions
Advertising
March 31
2004
2007
2006
(Unaudited)
(Unaudited)
12,248
78,370
9,883
61,710
8,793
58,935
15,294
65,941
9,978
56,228
Classified advertisements
9,235
8,774
7,572
9,979
9,404
Checks in collection
1,016
1,004
947
986
958
655
723
454
776
Promissorynotes
Endorsed securities
Others
Allowancefordoubtfulaccounts
1.883
3,527
(3,995)
102,939
7
2005
31
1,786
3,375
549
1,162
3,925
1,133
4,121
1,444
3,707
(3,899)
(3,804)
~4,075)
(3,897)
83,282
78, 151
94.062
78,371
Inventories
December
2006
2005
31
2004
March 31
2007
2006
(Unaudited)
(Unaudited)
Newsprint
7.490
13.233
7,471
7.843
8.181
Maintenance materials
9.376
8.841
8,240
9.866
9.255
4.561
3.272
2.796
3,303
3.552
9.201
101
8,94?
6,618
5.980
Fascicles (inserts), video-cassette
tapes andcompactdiscs(CD)
Provisionfor losses
Importsintransit(newsprint)
(546)
30,082
F-48
(546)
24.901
~960)
26,488
(546)
27.084
(546)
26,422
Brasil
Sul - RES - Credit
Group
Notes to the Special-Purpose
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
8
of Brazilian
reals,
Related party transactions
unless
othennrise
stated
and balances
December
2006
Assets
2005
Assets
31
2004
Assets
March
2007
Assets
31
2006
Assets
(liabilities) (liabilities) (liabilities) (liabilities) (liabilities)
(Unaudited)
Current
assets
- Related
parties
RES Administra~io e CobranFas Ltda.
179,241
Long-term receivables - Related companies
RES Administra~o e CobranFas Ltda.
A Noticia S.A Empresa Jornalistica.
- Comercio
Marcas
Others
Current
e Licenciamento
27,564
1&1,340
151.379
168.019
5.411
154.413
5,411
517
878
995
(10.608)
164.495
5,411
878
688
151,209
5,411
505
878
971
103.218
5.411
459
878
883
878
705
de
Ltda.
liabilities -Related
132,670
2,507
RES Participa~ies S.A.
RES Marketinge Inform8ticaLtda.
RES Empresa de NA Ltda.
AgBnciaRES de Noticias Ltda.
TelevisBoAno Uruguai S.A.
RES
(Unaudited)
150
176
136
374
124
79
153
208
139
358
174,305
159,484
100.444
175.374
162,711
companies
Otherrelatedcompanies
(115)
(105)
(114)
(126)
(63)
(63)
(63)
(63)
Televisso TuiutiS.A.
TelevisBoImembui S.A.
Radio e N Caxias S.A.
Radio e TV Umb~ Ltda.
TV Coligadas de Santa Catarina S.A.
Cia. Catarinense de Radio e TV
TelevisBoChapec6 S.A.
(lss)
(313)
(495)
(213)
(296)
(366)
(124)
(Iss)
(313)
(495)
(213)
(296)
(366)
(124)
(169)
(313)
(495)
(213)
(296)
(366)
(124)
(lss)
(313)
(495)
(213)
(296)
(366)
(124)
(169)
(313)
(495)
(213)
(296)
(366)
(124)
RES TV Santa CruZ Ltda.
RES TV Santa Rosa Ltda.
(229)
(197)
(229)
(197)
(229)
(197)
(229)
(197)
(229)
(197)
Others
(283)
(283)
(283)
(283)
(283)
(2,685)
(2,685)
(2.685)
(2.685)
(2.6851
Long-term liabilities - Advance for future
capital increase
Stockholders
Long-term
liabilities - Related
~63)
companies
F-49
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Group
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 3?, 2007 and 2006 (Unaudited)
In thousands
of Brazilian reals, unless othenrvise stated
Years ended
December
31
2006
Income
2005
Income
Quarters
2004
Income
ended
March 31
2007
Income
2006
Income
(expenses) (expenses) (expenses) (expenses) (expenses)
(Unaudited)
Financial
expenses
RESAdministra~ao
e CobranFasLtda.
Financial
(1,331)
(1,046)
11.279
473
income
RESParticipa~desS.A.
16,607
Canal Rural ProduFbes Ltda..
- ComBrcio
e Licenciamento
4,405
4,004
21
15
29
166
RES Empresade NA Ltda.
TelevisBoAltoUruguaiS.A.
RES
(Unaudited)
63
122
58
111
208
de
Marcas Ltda.
PlanejarProcessamentode DadosLtda.
Others
17
14
14
(130)
29
30
217
118
16.708
11.709
1.146
1,023
1.072
1,054
1,014
11.054
9.603
7.052
6.934
12.446 _ _ 13.083
795
622
167
6
1
4
(130)
8
3.930
Depreciation (reimbursement)
Other RES Group companies
Operating
cost (reimbursement)
Other RES Group companies
Network agreement
Otherrelatedcompanies
General and administrative
(reimbursement)
31,979
expenses
OtherRESGroupcompanies
(a)
2.896
RES Administra~goe Cobran~as Ltda. is a group company which functions as a treasury
department,carryingout allcollectionsand makingall paymentson behalfof the companiesof
the RES Group. Except as described in the next sentence, the balances of receivables from
this company bear no interest and are shown in current assets because the funds held by this
company on behalf of the group companies are readilyavailable. At December 31, 2004 there
is an additional liabilityof R$ 10,608 shown as reduction or long-term assets which bears
interest
(b)
calculated
at market
rates.
Loans to and from other related companies bear interest calculated at market rates. Advances
for future capital increase and loans to RES Marketinge Inform~ticaLtda. and AgQnciaRES
de Noticias Ltda. bear no interest. Some of the balance with RES Participa~des
S.A.
(December31, 2006 and 2005- R$ 18,803;December31, 2004- R$ 16,836;March31, 2007
and 2006 - R$ 18,803) bears no interest.
F-50
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Group
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless otherwise stated
(c)
The Credit Group has guaranteed the first and second tranches, amounting to US$ 50,000
thousand and US$ 125,000 thousand, respectively, of a US$ 200,000 thousand Global
Medium-Term Notes Program issued by RES ParticipaC~es S.A. in December 1995 and in
March 1997, with f~nalmaturityin December 2003 and April1, 2007. The first tranche was fully
settled in December 2003. In connection with this Program, the Credit Group is required to
observe certain negative covenants. All of these covenants are being observed. The first and
second tranches were fully paid in December 2003 and March 2007, respectively.
On November 25, 2005, RES Participa~bes S.A. contracted an interest rate swap in the
notional amount of R$ 129,744 (equivalent to US$ 58,155 thousand on that date) exchanging
the U.S. dollar exchange variation for the CDI interest rate less 5.00% p.a. This contract was
terminated
in March 2007 and is guaranteed
by the Credit Group.
With the objective of reducing the refinancing risk to which the RES Group was exposed in
2007, on August 2, 2004, RES Participa~Bes S.A. and RES - Zero Nora Editora Jornalistica
S.A. successfully completed an Exchange Offer Program under which some of the holders of
the second tranche of Notes issued by RES Participa~Bes S.A. exchanged those notes for new
ones issued by RES - Zero Hora Editora Jornalistica S.A. In accordance with the terms of the
Exchange Offer, for each US$ 1,000 principal amount, the noteholder received US$ 150 in
cash and US$ 850 in notes issued by RES - Zero Nora Editora Jornalistica S.A., with final
maturity in April 2010 and interest of 11% p.a. payable in April and October of each year. The
new notes (the "2010 Notes") are jointly and severally guaranteed by Televis~o GaQcha S.A.,
RES TV de Florian6polis S.A. and Rgdio GaQcha S.A. Overall, notes with an aggregate face
value of US$ 66,845 thousand were exchanged under the terms of the Exchange Offer.
On November
25, 2005, RES - Zero Hora Editora Jornalistica
S.A. contracted
an interest rate
swap in the notional amount of R$ 126,762, equivalent to US$ 56,818 thousand on the
inception date, exchanging the U.S. dollar exchange variation for the interbank certificate of
deposit (CDI) interest rate less 5.04% p.a. the swap is guaranteed by Rgdio Galicha S.A.,
together with TelevisBo Galicha S.A. and RES n/ de FlorianC~polisS.A. The due date of the
contract
is March 30, 2010. Under the terms of this swap, either party is required to settle on
preestabilished dates (March 27, July 27 and November 27 of each year) the excess of the
aggregate
(d)
fair value of the swaps.
In April 1996, Televis~o Ga~cha S.A. and RES TV de FlorianC~polisS.A. received deposits
(R$ 2,685) from the affiliated stations to guarantee the companies' equipment used by these
affiliated stations; these are recorded
as long-term liabilities.
F-51
Brasil
Sul - RES - Credit
Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
(e)
RES - Zero NoraEditoraJornalisticaS.A.has guaranteeda loanamountingto R$ 8,000,
equivalentto US$3.575thousand,receivedby RESAdministra~oe Cobran~asLtda.in
November
(f)
of Brazilian reals, unless othemrise stated
2005 and finished in May 2006.
RES- Zero NoraEditoraJornalisticaS.A.,togetherwithTelevis~oGaOchaS.A.,has
guaranteedlocalcurrencyloansamountingto R$ 23,375receivedby RESAdministra~%o
e
CobranCasLtda.in July2003withfinalmaturityin July2006(December31, 2005 - R$ 6,818;
December 31, 2004 - R$ 18,505).Accordingly,RES Administra~o e Cobran~as Ltda.
completed its settlements on the preestablished dates.
(g)
Televis~oGalichaS.A.has guaranteedlocalcurrencyloansamountingto R$ 10,000received
by RESAdministra~~o
e Cobran~asLtda.in December2005and withfinalmaturityin
December 2007 (December 31, 2006 - R$ 7,059).
(h)
RES - Zero NoraEditoraJornalisticaS.A.has guaranteedlocalcurrencyloans amountingto
R$ 15,000 received by RES Administra~o e Cobran~as Ltda. in March 2006 with maturityin
March
(i)
2008.
Televis~o GaQcha S.A. together with RES - Zero Hora EditoraJornalistica S.A., has
guaranteed local currency loans amounting to R$ 15,000 received by RES Administra~~oe
CobranCas Ltda. in May 2006 with final maturity in May 2008.
(j)
RES - Zero HoraEditoraJornalisticaS.A.has guaranteedlocalcurrencyloans amountingto
R$ 10,000receivedby RESAdministraC~o
e Cobran~asLtda.in April2006withmaturityin
April 2007.
(k)
Incomeand expenses on transactionsamongthe RESGroupcompaniesare allocatedamong
the companiesthat benefitfromor incurthe incomeand expenses usingbases that may not
necessarilybe the same as those thatwouldhave been appliedifthe transactionshad been
made with unrelated parties. UntilDecember 2005, the RES Group also included other
affiliated television and broadcast
(I)
companies.
On December26, 1996,RES- Zero HoraEditoraJornalisticaS.A.,TelevisBoGalichaS.A.
and Rgdio Galicha S.A. transferred all their trademarks registered with the Institute Nacienal
de PrepriedadeIndustrial- INPI(NationalIndustrialPatents Institute),whichalso includethose
of RES TV de Florian6polisS.A., to another RES Group company, RES Participa~bes S.A.,
free of charge. RES ParticipaCdesS.A. was entitled to collect royalties from all RES Group
companies on their net operating revenues, calculated at 3.5%.
F-52
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
othemrise
stated
On September24, 2004,the CreditGroupsettledin advancethe royaltiesto be incurred
duringthe ten years fromJanuary2005throughoutDecember2014.Thispaymentto RES
Participa~es S.A.was calculatedas the net presentvalueof the royaltieson the projectednet
operating revenues of each company for the period.
(m)
Televis~oGabchaS.A.and RESn/ de Florian6polis
S.A.are reimbursedfor administrative
and general expenses incurred on behalf of other RES Group companies. UntilDecember
2005, the RES Group included other affiliatedtelevision companies, which also reimbursed
administrativeand generalexpenses and operatingcosts incurredby the companies,as well
as depreciation expenses related to the equipment used by these affiliatedcompanies.
Rgdio Galjcha S.A. is reimbursed for administrative and general expenses incurred on behalf
of other RES Group companies. UntilDecember 2005, the RES Group included other radio
and broadcast companies, which also reimbursed depreciation expenses incurred by the
company in 2005. As from January 2006, the amounts reimbursed to and by the company
reflect the changes in the shareholding structure mentioned in Note 1.
Some of the RES Group companies are reimbursed by RES - Zero Nora Editora Jornalistica
S.A. for administrativeand general expenses incurred by them on behalf of RES - Zero Nora
Editora Jornalistica S.A. As from January 2006, the amounts reimbursed by RES - Zero Nora
Editora Jornalistica S.A. reflect the changes in the shareholding structure mentioned in Note 1.
9
Taxes
recoverable
December
Excise tax (IPI)
31
March
2007
(Unaudited)
31
2006
2005
2004
2006
(Unaudited)
1,669
2.133
1,274
1,921
2,305
26
1.748
577
Withholding income tax on financial
investments (IRRF)
Social
contributions
609
on revenues
(PIS/COFINS)
784
Other
829
22
222
158
49
65
3,084
2,355
1.458
4.547
2,947
F-53
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless otherwise stated
10
Judicial
deposits
and fiscal incentives
December
2006
Fiscal incentives
Provision
for losses
2004
31
2007
2006
(Unaudited)
(Unaudited)
4.052
4,052
4,052
4.052
4,052
(4,052)
14.909
(3,775)
14,423
(3,178)
14.777
(4.052)
16.502
(4.052)
14,664
14.909
14,700
15.651
16,502
14,664
Current assets
(89)
Long-term receivables
14.820
(89)
14,700
15.651
16.413
14.664
Investments
December
2006
A Noticia S.A Empresa Jornalistica
Goodwill on acquisition of A Noticia
S.A. Empresa Jornalistica
Net Servi~os de Comunica~o
S.A.
Provision for losses
Negative goodwill on acquisition of
RES Online Ltda.
Provision
for losses
2005
31
March
2004
31
2007
2006
(Unaudited)
(Unaudited)
4,564
4.499
(13,900)
64,279
31,006
(27,070)
(538)
Fiscal incentives
~726)
31,835
(27.070)
(1.067)
4,499
(686)
4.498
4.499
(5.132)
(4.499)
(5.148)
(4.499)
2,723
2,219
1,708
2,858
2,341
51.930
5.429
91630
2.274
1.655
on fiscal
incentives and other inves~nents
Other investments
(a)
March
on fiscal
incentives
Judicial deposits
11
2005
31
(275)
The investment in Net Servi~os de Comunica~go S.A. (formerly known as Globe Cabo S.A.)
consists
of 3,757,947
preferred shares on December
31, 2005 (December
31, 2004 -
3,665,417 preferred shares), representing approximately 0.1% of the investee's total capital,
3,548,152 of which were acquired by RES - Zero Nora Editora Jornalistica
2001 from RES Participa~des S.A. for R$ 31,753.
F-54
S.A. on August 24,
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Group
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
otherwise
stated
Net Senri~os de Comunica~~oS.A. (NET)is a holdingcompany for several subsidiary
companies which operate cable and microwaven/ systems in the main Braziliancities.
Duringthe quarter ended March 31, 2006, RES - Zero Hora Editora Jornalistica S.A. sold
1,883,825 NET preferred shares, recording a gain of R$ 353 as non-operating income. The
remaining 1,874,122 NETpreferred shares were reclassified from Investments to Marketable
Securities due to management's plans to sell them in the short term. These shares were
transferred at their carryingvalue of R$ 1,963 and the unrealized gain of R$ 452 was recorded
in reversal of provision for losses on investments.
During the quarter ended June 30, 2006, RES - Zero Hora Editora Jornalistica S.A. sold the
remaining NET preferred shares, recording a gain of R$ 244 as non-operating income.
(b)
On January 17, 2004, Televis~oGaljcha S.A. contributedadditional capital of R$ 2,035 to RES
Online Ltda. At the same date, RES - Zero Hora Editora Jornalistica
S.A. acquired from
Televis~o Gadcha S.A and other related parties a 100% interest in RES Online Ltda. for.
R$ 1,987. The acquisition price was based on an appraisal of statutory book value carried out
by experts. As a result of this transaction, Televisso Ga6cha S.A. recorded a loss of R$ 460
from the difference between the carrying value of the investment and the sales price.
As a result of this transaction,
RES - Zero Nora Editora Jornalistica
S.A. recorded
negative
goodwill of R$ 1,500 from the difference between the acquisition price of the investment and
the shareholders' equity of RES Online Ltda., which will be amortized in approximately 7 years.
On the same date, RES Online Ltda. was merged into RES - Zero Hora Editora Jornalistica
S.A. In March, 2007, the negative goodwill balance amounting to R$ 538 was transferred to
current
(c)
liabilities.
On November 6, 2006, RES - Zero Nora EditoraJornalistica S.A. acquired a 99.08% interest
in A Noticia S.A. Empresa Jornalistica, a newspaper publisher in the area of Joinville, state of
Santa Catarina,
for the amount of R$ 52,628, of which R$ 27,743 remains unpaid at
December 31,2006. Because this company's net worth was negative R$ 11,651, goodwill of
R$ 64,279 was recorded on the acquisition. The unpaid balance bears interest of 80% of CDI
and has a final maturity in August 2008.
F-55
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Statements
at December
Group
Combined Financial
31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian reals, unless othennrise stated
On December 31, 2006, the investment in A NoticiaS.A. Empresa Jomalistica is accounted for
on the equitymethod,includinggoodwillbased on expectedprofitability,
as presentedbelow:
A Noticia
S.A.
Empresa
Jornalistica
Activity
Networthon acquisitiondate
Goodwillon acquisition
Equityin losses
(11,651)
64,279
(2,249)
At December 31, 2006
50,379
In January,2007,RES- Zero HoraEditoraJornalisticaS.A acquiredthe remaining0.92%
interest in A NoticiaS.A. Empresa Jornalistica for the amount of R$ 118. In the same month,
the stockholders of the company and of A NoticiaS. A. Empresa Jornalistica (A Noticia),
decidedto unifythe operationsby mergingA NoticiaintoRES- Zero HoraEditoraJornalistica
S.A.The mergerwas based on an appraisalof statutorybookvalueat December31, 2006, as
presented
below (Unaudited):
F-56
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Statements
at December
Combined Financial
31, 2006,
2005
and
2004
and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
othennrise
stated
Assets
Liabilities
Current
and net capital
deficiency
Current
Cash and cash equivalents
114
Trade accounts receivable
Inventories
Taxes recoverable
5.742
259
76
Others
54
6.245
Accounts payable
903
Salaries and social security contributions
Other taxes payable
Commissions and bonuses payable
Loans
1.643
720
645
104
Provision for contingencies
Advances from customers
7.198
4.319
Others
714
Non-Current
Long-term receivables
16.246
Deferredincometaxes
Judicial deposits
Others
2.447
and fiscal incentives
939
51
3,437
Non-Current
Long-term liabilities
Special tax payment installments-PAES
8.956
Advance for future capital increase
2,507
Loans
Permanent
Investments
Property.
41
assets
28
plant and equipment
11.504
4.010
4.038
Net capital deficiency
Capital
Capital reserves
2.000
64
Revenuereserves
Accumulated
861
losses
(16.455)
(14.030)
Total assets
In January,
13,720
Total liabilities and net capital deficiency
2007, goodwill of R$ 64,279 was transferred
to deferred charges
13,720
and will be
amortized in approximately 10 years, based on expected profitability, according to an appraisal
carried out by an independent
expert on November 20, 2006.
F-57
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Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Statements
at December
Group
Combined
31, 2006
Financial
, 2005
and
2004
and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
otherwise
stated
(a)
On December 31, 1994, RES - Zero Hora Editora Jornalistica S.A. and Televisso GaOcha S.A.
decided to revalue their major items of machinery and equipment, and land and buildings and
structures, respectively, based on appraisals carried out by independent experts. Deferred tax
effects on the revaluation increments are recorded upon realization of the reserves.
(b)
On December 31, 2003, RES - Zero Hora Editora Jornalistica S.A. decided to revalue the
printing presses and accessories based on an appraisal carried out by independent experts.
Deferred tax effects on the revaluation increment are recorded upon realization of the reserve.
13
Trade accounts
payable
Trade accounts payable at December 31, 2006 include R$ 23,386 (December 31, 2005 R$ 21,332; December 31, 2004 - R$ 22,709 ; March 31, 2007 - R$ 19,636 ; March 31, 2006 -
R$ 15,717) payable to foreign suppliers and indexed to the U.S. dollar.
14
Loans
December
Interest
2006
2005
31
2004
March
2007
(Unaudited)
Foreign currency
US$ 9.869 thousand (December 31.
2005 - US$ 1.526 thousand:
December 31, 2004 - US$ 1.070
thousand;
March
31.2007
-
31
2006
(Unaudited)
LIBOR plus 0.2% to
1.8% p.a. plus
commission
US$ 5.482 thousand; March 31,
2006 - US$ 5.642 thousand)
of
0.4% p.a. to
4.4X p.a. (i)
21.099
3,578
2.841
11.240
12.257
155,507
116.500
123.432
9,671
9.771
LIBOR plus
0.20/0 p.a. plus
commission
US$ 3.190 thousand
of 1.55%
Pa (ii)
7,467
US$ 58.585 thousand (Global
Medium-Term Notes)(March 31,
2007 and 2006 - US$ 56.818
thousand)
125,253
137.128
US$ 4,663 thousand (March 31,
2007 - CIS$ 4.717
thousand:
March
31, 2006 - US$ 4.497 thousand)
US$ 467 thousand (December 31,
2004 - US$ 1,090 thousand;
March 31. 2006 - US$ 312
thousand)
4,8% p.a. (iv)
LIBOR plus 1.8% p.a.
plus commission of
4.4% p.a. ~v)
F-59
9.969
1.094
2.892
677
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Statements
at December
Group
Combined
31, 2008,
Financial
2005
and
2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless othemise stated
December
Interest
Interest rate swaps
(vi)
2006
3.884
(vii)
Local currency
2005
31
March
2004
(4,681)
31
2007
2006
(Unaudited)
(Unaudited)
26.615
2782
(46)
1,450
(5)
108% of CDI (viii)
82,267
84.364
76,283
84.405
108% of CDI (b)
39.886
71,378
36.985
64.922
110% of CDI (xiii)
60.650
62.673
110% of CDI (xiv)
40,433
41,782
105% of CDI 0x)
7.516
5.010
10,025
cDI plus
3% p.a. (xi)
11,230
25,828
7,514
493
673
829
446
630
145
15?
150
556
254
TJLP plus
4.5% p.a. (xii)
Local
currency-
others
391.595
313,827
214.662
363.928
313.836
Current liabilities
(91.199)
(58.326)
(23,017)
(85.155)
(61.852)
Long-term liabilities
300.396
2551501
191.645
278,773
251,984
Long-term loans fall due as follows:
December
2006
2005
2006
31
2007
2006
(Unaudited)
(Unaudited)
66.674
66.594
167,128
35.901
35.901
35.823
147.876
180
180
105
177.433
56,036
66.600
156,137
41.944
35.902
35.824
138.314
300.396
255,501
191,645
278,773
251.984
Loans contracted by RES - Zero Hora Editora Jornalistica S.A are backed by sureties from
RES Administra~o e Cobran~a Ltda. On March 31, 2007, part of the balance (R$ 2,671) is
guaranteed
(ii)
2004
March
13,747
2007
2008
2009
2010
(i)
31
by Televis~o Galjcha S.A.
Loans paid in 2006.
F-60
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006 , 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
(iii)
of Brazilian reals, unless othemise
stated
On August 2, 2004, RES - Zero Hora Jornalistica S.A. issued Global Medium-TermNotes in
the amountof US$56,818thousand,withfinalmaturityinApril2010and bearinginterestof
11%per year,withsemiannualpayments.These Notesoriginatedfromthe ExchangeOffer
Programmentionedin Note8 (c) and are jointlyand severallyguaranteedby Televis~o
GaLichaS.A., RES n/ de Florian6polisS.A. and Rgdio GaLichaS.A.
(iv) OnMarch29,2006RES- ZeroHoraEditoraJornalistica
S.A.contractedforeigncurrency
loansin amountof R$ 10,000(equivalentto US$4,497thousand)withfinalmaturityand
payments
(v)
in May 2007. These loans are not secured.
Theseforeigncurrencyloanscontracted
byTelevidoGaljchaS.A.are guaranteedbythe
related company RES Administra~~oe Cobran~as Ltda.
(vi)
On August 20, 2004, RES - Zero Hora EditoraJornalistica S.A. contracted an interest rate
swap in the notionalamountof R$ 169,148(equivalentto US$56,818thousandon that date,
matchingthe amountof the GlobalMedium-Term
Notesmentionedin item(iii)above)
exchangingthe U.S.dollarexchangevariationforthe CDIinterestrate less 2.30%p.a. Under
thetermsofthe swap,eitherpartyis requiredto settleonpreestablished
dates(April27,
August27 and December27 of each year)the excess of the aggregatefairvalue of RES Zero i-loraEditoraJornalisticaS.A.'sand RESParticipaCbes
S.A.'sswaps over a
preestablishedlimitof US$26,000thousand(equivalentto R$ 62,735on August29, 2005).
Thisswapcontractwasterminated
on November
25,2005,andthe resultinglosswas
recorded in financialexpenses (R$ 85,364).
On the same date, RES - Zero Hora EditoraJornalistica S.A. contracted a new interest rate
swap in the notionalamountof R$ 126,762(Nlarch27, 2007- R$ 117,273)(equivalentto
US$56,818thousandon that date) exchangingthe U.S.dollarexchangevariationfor the
interbankcertificateof deposit(CDI)interestrate less 5.04%p.a. (March27, 2007-
5.77%p.a.)Theduedateofthecontractis March30,2010.Underthetermsofthisswap,
eitherpartyis requiredto settleon preestabiisheddates (March27, July27 and November27
ofeachyear)the excessoftheaggregatefairvalueoftheswaps.Accordingly,
RES- Zero
HoraEditoraJornalisticaS.A.completedits settlementson the preestablisheddates and the
resultingloss was recordedinfinancialexpensesduringthe year ended December31, 2006
totalingR$ 15,053(quarterended March31,2007- R$ 9,015).
F-61
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Group
Combined Financial
Statements
at December 31, 2006,2005
and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless otherwise stated
These contracts are guaranteed by Televis%o Galicha S.A., RES TV de Florian6polis S.A. and
Rgdio
Galicha
S.A.
December
2006
Interest rate swaps - liabilities (assets)
Book value
Fair value
2.663
2.304
2005
(4,681)
(3.564)
31
2004
26,615
42.821
March
31
2007
2006
(Unaudited)
(Unaudited)
890
656
(294)
572
On March 29, 2006, RES - Zero Nora Editora Jornalistica S.A. contracted a swap in the
notional amount of R$ 10,000 (equivalent to US$ 4,497 thousand on that date) in connection
with the contract mentioned in item (iv) above, exchanging the U.S. dollar exchange variation
plus 4.8% p.a. for the 110% of the CDI, with final maturity in May 2007. On December 31,
2006, the book value of this swap was R$ 1,221 (loss). On March 31, 2007 the book value of
this swap was R$ 1,892 (loss) (March 31, 2006 - R$ 248 (loss)).
(vii)
On January 31, 2005, Televisso Galicha S.A. contracted interest rate swaps in the notional
amount of R$ 30,000 exchanging 108% of the CDI interest rate for the higher of the U.S. dollar
exchange variation or 70% of CDI. The swaps were settled bimonthly and terminated in
November 2006, resulting in a loss of R$ 47 recognized in the statement of operations.
(viii)
On November 25, 2005, RES - Zero Hora Editora Jornalistica S.A. contracted loans in the
principal amount of R$ 84,185 with final maturity in May 2010 and monthly payments as from
December 2006. These contracts are guaranteed by Televis~o Galicha S.A., RES n/ de
Florianbpolis S.A. and Rgdio Ga6cha S.A. (December 31, 2006 - R$ 82,180)
(ix)
On January 31, 2005, Televido Galicha S.A. contracted a local currency loans, in the total
amount of R$ 30,000 with final maturity in November 2006 and bearing interest of 108% of the
interbank certificate of deposit (CDI), with bimonthly payments. Accordingly, the company
completed
its settlements
on the preestablished
dates.
On November 25, 2005, Televis~o GaQcha S.A. contracted local currency loans in the total
amount of R$ 40,815 with final maturity in May 2010 and bearing interest of 108% of the
interbank certificate of deposit (CDI) interest rate, with monthly payments as from December
2006. These loans are guaranteed by the related companies RES - Zero Hora Editora
Jornalistica S.A., RES n/ de Florian6polis S.A. and Rgdio Galjcha S.A.
F-62
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Statements
at December
Group
Combined
31, 2006
Financial
,2005
and
2004
and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
otherwise
stated
(x)
On March 27, 2006 RES - Zero Hora Editora Jornalistica S.A. contracted local currency loans
in the notional amount of R$ 10,000 with final maturity in September 2007 and monthly
payments as from October 2006. These loans are not secured (December 31, 2006 R$ 7,500).
(xi)
These loans were paid in 2006.
(xii)
The loans contracted by RES TV de Floriani~polis S.A have a final maturity in 2009 and
interest based on the Taxa de Jures de Lengo Prate
4.5% p.a.
- TJLP (long-temn interest rate) plus
(xiii)
On November 30, 2006, TelevisBo Gailcha S.A; contracted a loan in the notional amount of
R$ 60,000 with final maturity in November 2010 and bearing interest of 110% of CDI. These
loans are guaranteed by RES - Zero Hora Editora Jornalistica S.A.
(xiv)
On November 30, 2006, RES TV de Florian6polis S.A. contracted a loan in the notional
amount of R$ 40,000 with final maturity in November 2010 and bearing interest of 110% of
CDI. These loans are guaranteed by RES - Zero Hora Editora Jornalistica S.A.
In connection with the above loans, RES - Zero Hora Editora Jornalistica S.A. and certain
other RES Group companies, mainly engaged in TV and radio broadcasting activities, are
required to observe certain negative covenants. All of these covenants are being observed.
15
(a)
Stockholders'
equity
The stockholders
financial
statements
of the individual companies
are entitled
to annual
included in the special-purpose
minimum
dividends
of not less than
combined
25% of net
income per the statutory financial statements, except for RES TV de Floriani~polis S.A. (6%);
after appropriation to the legal reserve of an amount equivalent to 5% of the annual net
income, up to the limit of 20% of capital, also per the statutory financial statements.
In accordance with the by-laws of the companies, except in the case of RES TV de
FlorianC~polisS.A., a statutory reserve for investments and working capital should be
established based on 10% of net income after appropriations to the legal reserve and the
minimum annual dividend. The total of the legal and statutory reserves cannot exceed the
amount of each company's
capital. At December
31, 2006, 2005 and 2004, the boards of
directors decided not to make this appropriation. The respective Annual General Stockholders
Meetings confirmed these decisions.
F-63
Brasil
Sul - RES - Credit
Notes to the Special-Purpose
Statements
at December
Group
Combined Financial
31, 2006 , 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
Inthousandsof Brazilianreals,unlessotherwisestated
RES - Zero Hora Editora Jornalistica S.A., Televisso GaQchaS.A., RES n/ de Florianbpolis
S.A.and RgdioGatichaS.A.didnot pay any interestto theirstockholdersin 2006. In2005 and
2004,onlyRESn/de Florian6polis
S.A1andRBdioGaOchaS.A.
paidintereston capital
described in item (b) below, which exceeded the minimumannual dividend.
At the Annual General Stockholders Meetings held on years 2007, 2006 and 2005,
stockholders of Televis~oGalicha S.A., R~dioGaljcha S.A. and RES n/ de Florian6polisS.A.
approved,respectively,
theproposalofthemanagement
to transferthebalanceofthe
statutorynetincomefortheyears2006,2005and2004,afterdeducting
legalreservesand
dividends, to the Guaranty Reserve for Payment of Dividends.
At the Annual General Stockholders Meetings of Rgdio GaQchaS.A. and RES n/ de
Florianbpolis
S.A.heldonApril30,2004,theirstockholders
decidedto distribute
dividends
in
the amountsof R$ 1,840and R~ 10.950relatingto the year 2003 and R$ 6,420(onlyfor RES
n/ de Florianbpolis S.A.) relating to the year 2002.
On September16,2004,RESTVde FlorianC~polis
S.A.'sboardofdirectorsdecidedto
distribute interim dividends totaling R$ 1,000 related to this year.
On December 31, 2005, Televis~o GaQcha S.A.'s, Rgdio Galjcha's and RES TV de
Florian6polis
S.A'sboardsofdirectorsdecidedto distributedividendsin the amountof
R~ 10,000, R$ 3,500 and R$ 20,000 relatingto the year 2005; decisions which were
subsequently approved at the respective Annual General Meetings.
On December 31, 2006, Televis~oGaljcha S.A.'s, Rgdio Ga6cha's and RES n/ de
FlorianC~polis
S.A'sboardsofdirectorsdecidedto distribute
dividends
intheamountof
R$ 24,000, R$ 3.000 and R$ 25,000 relating to the year 2006.
(b)
Law9249introduced
as from1996an optionforcompanies
to calculatea nominalinterest
charge on capitalinvestedand utilizedin operationsforthe period(definedas total
stockholders'equityless revaluationreserves)calculatedon a pro rata basis based on the
Taxade Joros de LongoPrate - TJLP(long-terninterestrate).Thischarge,limitedto 50%of
the net income for the period or of retained earnings, is deductible for income tax purposes
and socialcontribution,
but is subjectto 15%withholding
tax; such interestamountsmaybe
used to increasecapitalor be paiddirectlyto stockholderseitheras interestor as prepayment
of the minimum statutory dividend.
TheCreditGrouphas takenthislatteroptionand has chargedtheamountsdirectlyto retained
earnings and has considered them as additionaldividend distributions.
F-64
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006 , 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
in thousands
of Brazilian reals, unless otherwise
stated
Retainedearningsavailablefordistribution
are restrictedto the amountspresentedineach
individual
company'sstatutoryfinancial
statements.Theindividual
statutoryfinancial
statements,preparedinaccordancewithaccounting
principles
prescribedbyBrazilian
CorporationLaw,are the primaryfinancialstatementsfor purposesof incometax and dividend
determinations.
(c)
Thesumofthe retainedearnings(accumulated
losses)balancesineach of the Credit Group's
statutoryfinancial
statementsis reconciled
to the balanceinthesespecial-purpose
combined
financial statements
as follows:
December
2006
Balances
perstatutory
financial
statements
20.158
2005
31
2004
March
2007
(Unaudited)
31
2006
(Unaudited)
(6.165) (26.190) 40,325
22,205
Adjustmentsarisingfromthe constantcurrency
accounting
methodology
(9,110) (7.025) (4.540)
(9.355)
(7.360)
5,784
2.957
5,479
Further adjustments to conform the financial
statements to accounting principlesgenerally
acceptedinBrazil
Balances
inthese
financial
statements
F-65
6.542
2.807
16.832 (6.648)(2_7,923)
_36,927 20,324
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Combined Financial
Statements at December 31, 2006 , 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless otherwise stated
16
Financial income (expenses)
Years ended
December
31
2006
2005
Quarters
2004
Financial
income
2007
ended
March 31
2006
(Unaudited)
(Unaudited)
Earnings
onfinancial
investments
1,949
Interest
onrelated
companies
(Note
8)
21
16.708 71.709
Exchange
variations
onassets
Interestontaxes
4.700
1,380
Interestrate swap
Otherfinancialincome
1.615
1,657
28,009
13
1,146
1,932
4.433
949
124
5
3,930
3,976
(288)
5,898
128
2,007
1.307
377
485
8.492
7.815
9.613
3.055
49
2.089
17.425 ~
Financial expenses
Interest
andcharges
onloans
andfinancing (41,858) (29.241) (13,657) (11,338) (11,794)
Exchangevan'ationson loansand financing
andlossfrominterestrateswap,net
(13.584) (36.750)
Interest
ontaxes
Interest
onrelated
companies
(Note8)
Other financial expenses
(3.397) ~4,701) (2.443)
(8,098)
(1.951)
(3.532)
(538)
(431)
(3,446)
(1.180)
(1,331)
(1,046)
(2.762)
(2,467)
~841)
(74,785) (27,711) (15,007) (16,598)
17
Social contribution and income tax
The concept of consolidated income tax returns for companies comprising a group, such as
the RES Group, does not exist in Brazil. Each company maintains its own tax records and files
its own tax returns. The tax information in the special-purpose combined financial statements
and in this note is thus the summation of the information
relatingto each of the fourcompanies
includedin the special-purposecombinedfinancialstatements.
F-66
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006 , 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless otherwise stated
(6)
Reconciliationof social contribution and income tax
Years ended
December 31
?006
2005
Quarters ended
March 31
2004
2007
(Unaudited)
(I)
Social
2006
(Unaudited)
contribution
~oenleq~efore
taxes
onincome
149.894 112.750 74.756 28.990 38.085
9
(13,491)
9
(30.148)
9
(6,728)
9
(2,609)
9
(3.428)
Effects of permanent differences:
Non~eductible
expenses
Non-taxableincome
Effect of provisionfor losses on the investment
(754)
76
inNetServi~os
de ComunicaFbes
S.A.
(470)
197
(768)
234
(142)
(120)
16
23
(80)
(309)
1,073
Other
(527)
Expenseiorthsyear
(~)
Current
(12,148)
(2,548)
Deferred
(14.696)
F-67
449
(168)
~8.8991_n.430) (2.815)
__(3.834)
(10.820)
1,921
(8,899)_
(8.273)
843
(3,242)
427
(2.964)
(870)
(7,430)
(2.815)
(3,834)
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Statements
at December
Combined
31, 2006
, 2005
Financial
and
2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands of Brazilian reals, unless otherwise stated
(II)
Income
tax
Years
ended
December
2006
2005
Quarters
31
2004
2007
(Unaudited)
Income
before taxes on income
149,894
Rate-%
Effects of permanent
differences:
Non-deductible
expenses
Non-taxable
for losses
(28,188)
74.756
~
(1,314)
553
31
2006
(Unaudited)
28,990
38,085
25
25
25
(18.689)
(7.247)
(9,521)
(2.136)
(65)
648
46
(7)
67
14.564
8,038
9.836
272
1,967
49
2.976
2.037
908
212
(487)
on the investment
in Net Servi~os de Comunica~es
Other
S.A.
Expense for the year
~23,328)
(15,898)
(9.433)
(6,782)
(7.981)
Current
(16,538)
(19.843)
(11.162)
(7,020)
(5,249)
Deferred
(6,790)
3,945
1.729
238
(2,732)
(b)
Nature
(I)
Prepaid
income
(15.898~_
(9,433)
(6,782)_
(7,981)
2,255
927
1,256
535
15
370
2,790
942
1.626
2,485
3,054
1.580
1,974
715
1.390
2.361
5.669
1,886
2.276
5.539
3,554
2.105
8,030
4,162
taxes - current
Income tax
Provision
Current
(23,328)
of balances
Social contribution
(II)
(37.473)
310
Credit for electoral advertising (Note 4 (d))
Effect of provision
25
(778)
income
112,750
25
ended
March
for income
taxes
358
358
- current
liabilities
Social contribution
Income tax
F-68
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Combined Financial
Statements at December 31, 2006 , 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
(III)
Deferred
of Brazilian reals. unless othennrise stated
income
taxes
Years ended
December
31
2006
2005
2004
Quarters
2007
(Unaudited)
ended
March 31
2006
(Unaudited)
Social contribution
Indexation of permanent assets
TaxlosscanyfoMlards
12.153
Temporary differences
Income
1,491
12.641
14,096
11.873
3.516
634
2,858
12.560
2.893
13.644
16,157
14,730 _14.731
15.453
40,350
42,713
48.295
41;845
tax
Indexation of permanent assets
TaxlosscanyfoMlards
Temporarydifferences
4.438
Current
assets
38,646
1,760
8,242
8,344
44,788
52.783
50,056
46,888
50.189
58.432
68.940
64,786
61,619
65,642
64.786
52,214
60,149
(7.800)
Long-term
receivables
10.070
50.632., 68,940
(9,405) (5.493)
Long-term liabilities
Social contribution
Deferred social contribution on revaluation
reserve
1,948
Indexation
ofpermanent
assets
2,080
Temporary differences
Income
2.672
1.897
2,578
2.012
502
320
919
4,816
5,074
5.570
4,828
5.544
6.508
788
tax
2,286
2,286
2,202
2.250
704
Deferred income taxes on revaluation
reserve
Indexation
ofpermanent
assets
5.610
Temporary differences
2.190
F-69
6.353
7.422
7.160
5.270
6.266
5,584
6,251
1.395
890
2,553
1,961
13.344
14,256
15,472
13.407
14,478
18,160
19,330
21.042
18,235
19,634
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006 , 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
otherwise
stated
The Credit Group expect to offset the deferred income tax assets against future taxable
income according
to the following schedule:
December
Year
31,
March 31,
2006
2007
(Unaudited)
2007
7,800
7,991
2008
2009
2010
8,412
6,110
9,029
8,380
6,254
8,340
2011
10,603
9,580
2012
2013
11,286
5,192
10,387
10,687
58,432
61,619
Currentassets
(7.800)
(9,405)
Long-termreceivable
50,632
52,214
Consideringthat taxableincomeencompassesnotonlythe accountingprofitthat can be
generated, but also the existence of non-taxable income and non-deductible expense, tax
creditsand otherdifferences,there is no directrelationshipbetweenthe accountingprofitand
the taxableincome.As a result,the CreditGroup'sexpectedtimingto offsetdeferredincome
tax assets shouldnot be takenas an indicatoroffutureprofitsofthe CreditGroup.
(c)
Deferred
tax on revaluation
reserve
Accountingpractices adopted in Brazilrequire the recognitionof deferred tax liabilitieson
revaluationsrecordedas fromJuly 1, 1995.Thisrequirementwas not applicableat the time
that Televisso Galicha S.A. recorded the revaluations of certain fixed assets in December
1994,the reservesfromwhichwere capitalizedin 1995;the relatedunrecognizeddeferred
incometax liabilityat December31, 2006 amountsto R$ 5,152(December31, 2005 R$ 5,533; December 31, 2004 - R$ 5,767; March 31, 2007 - R$ 5,095; March 31, 2006 R$ 5,475).
F-70
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose Combined Financial
Statements at December 31, 2006 ,2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian reals, unless othemrise stated
18
Contingencies
(a)
TheCreditGroupis partiesto variouscivillawsuitsthathavearisenin the ordinarycourseof
its business,includingactionsfor libel.Provisionsforestimatedprobablelosses from
contingencieshave been recordedbased on the opinionsof externaland in-houselegal
advisors.Duringthe year ended December31, 2006,the CreditGrouppaid,eitheras a result
of unfavorablejudicialdecisionsor settlement,the amountof R$ 2,475 (December31, 2005 R$ 1.865;December31, 2004- R$ 2,004;quarterended March31, 2007 - R$ 176,quarter
ended March 31, 2006 - R$ 408).
(b)
TheCreditGroupis defendantincertainlaborandtaxsuits.Provisions
forestimatedprobable
losses fromcontingenceshave been recordedbased on the opinionsof externaland in-house
legal advisors.
Provision for probable losses
December
2006
Tax matters
Laborand socialmatters
Civilmatters
Current
liabilities
Long-term
liabilities
2005
31
2004
1,600
9.268
4.421
1,600
7,124
4,348
1,600
7,921
3,317
15.289
13.072
12,838
(12,986) (10,795)
2,303
2,277
March
31
2007
2006
(Unaudited)
(Unaudited)
1,600
13.111
7,462
(9,131)
22,173
1,600
6,877
4,398
12,875
(19,864) (10,593)
3,707
2,309
2,282
The activityin the provisionfor probable losses in 2006 and 2007 was as follows:
December
31,
2006
March 31,
2007
(Unaudited)
Atthe beginning
oftheyear/quarter
Increase
Reversal
Amounts
paid
13,072
15,289
16,680
(11,988)
10,818
(3,758)
15.289
22,173
(2,475)
Atthe end of yearlquarter
F-71
(176)
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Combined Financial
Statements
at December 31, 2006, 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
Possible
of Brazilian
reals,
unless
othen~vise
stated
losses
The Credit Group is defendant in certain civiland labor suits which are estimated as possible
losses based on the opinionof external and in-house advisors. For these suits no provisions
have been recorded by the Credit Group, and the respective amounts at December 31, 2006
and March 31, 2007 are presented
below:
December
31,
March 31,
2006
2007
(Unaudited)
Civilmatters
Labor and social matters
19
Pension
3,276
4,407
3,152
4,400
7.683
7,552
fund
The Credit Group, together with RES Comunica~es S.A. and other associated companies
(the "Sponsors"), have formed RES Prev-Sociedade Previdencisria, a private pension fund
(the "Fund"),to provide employees with supplementary pension and disabilitybenefits, in
addition to those paid by the NationalSocial Security System. The Fund was approved by the
Ministryof Social Security in October 1996 and was implemented as from January 1997.
The Fund is a defined contributionplan, with contributionsfrom Sponsors and participants
calculated based on variable amounts and percentages at the option of each participant. The
normal contributionsof the Sponsors are based on the basic contributionof the participants at
rates of up to 300% depending on the participant's age. These contributionswillautomatically
cease when the participantterminates employmentfor any reason, reaches retirement age,
dies or becomes disabled. Past service benefits willbe funded by the Sponsors over twenty
years through monthlypayments adjusted by the indice Nacional de Pre~os ao Consumidor INPC (National Consumer Price Index).
Furthermore,the Sponsorsmayopt to make additionalcontributionsat any time,and the
normal and additional contributionsmay be revised by the Sponsors in February of each year.
The Sponsorsmayalso temporarilyreduce or suspendtheircontributions,maintainingonly
those necessary to cover the minimumbenefits mentioned below, the payments related to the
past service benefits and the Fund's administrative
F-72
costs.
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Combined Financial
Statements
at December 31, 2006 , 2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
othennrise
stated
The plan grants all the participants a minimum one-time retirement benefit equal to a maximum
of 3 times the participant's monthly salary for participants with 30 years of service upon
retirement. Participants with less than 30 years of service are entitled to a proportional amount,
based on their years of service. Except for this minimum benefit, the Sponsors do not have any
responsibility to guarantee the minimum level of the benefits to the participants when they
terminate
their employment.
The Credit Group's contributions in the year ended December 31, 2006 amounted to R$ 4,408
(December 31, 2005 - R$ 3,916; December 31, 2004 - R$ 3,839; quarter ended March 31,
2007 - R$ 1,202; quarter ended March 31, 2006 - R$ 1,037).
The Fund's financial statements at December 31, 2006, 2005 and 2004 were examined by
independent auditors, and the actuarial reserves were determined by an actuary. The
independent auditors issued an unqualified opinion on those financial statements.
20
Financial
instruments
The Credit Group has financial assets and liabilities recorded in the balance sheet which are
characterized as financial instruments. Except for the interest rate swaps mentioned in
Note 14, the investment in NET mentioned in Note 11, and the accounts receivable from
related companies bearing no interest (Notes 8 (a) and (b)), the balances of other financial
assets and liabilities are stated based on their contractual conditions, which are equivalent to
the respective
21
market values.
Insurance
The Credit Group's policyof insurance risk management seeks coverage compatible with their
responsibilities
and its operations.
The insurance
was contracted
for amounts
which were
considered sufficientfor the Credit Group to cover eventual losses, considering the nature of
its activity, the risks involved in its operations and its insurance consultants' recommendations.
F-73
Brasil Sul - RES - Credit Group
Notes to the Special-Purpose
Combined Financial
Statements
at December 31, 2006 ,2005 and 2004 and
March 31, 2007 and 2006 (Unaudited)
In thousands
of Brazilian
reals,
unless
othemise
stated
On March 31, 2007, the Credit Group had the followingprincipalinsurance policies with third
parties:
Insured
Type
amount
(Unaudited)
Fire damage to property, plant and equipment
Civilliability
Diverse risks
22
344,161
13,000
37,497
Tax Recovery Program (PAES)
A Noticia S.A. Empresa Jornalistica, whichwas merged into RES - Zero Hora Editora
Jornalistica S.A. in January 2007, joined the PAES program tin July, 2003) for its federal tax
debts in the amount of R$ 6,874, to be paid in 180 monthlyinstallments plus interest based on
the TJLP (long-terminterest rate). On March31, 2007 the balance was R$ 9,499, R$ 1,594
classifiedin Othertaxes payable- currentliabilitiesand R$ 7,904in Specialtax payment
installments- PAES-long-term
liabilities.
Property, plant and equipment are pledged in guarantee of this fiscal program, in the amount
of R$ 1,925.
F-74
PRINCIPAL OFFICE OF ISSUER
Av. Érico Veríssimo, 400 2º andar
Porto Alegre, Brazil 90160-180
LEGAL ADVISERS
To the Issuer
As to United States law
As to Brazilian law
Arnold & Porter LLP
399 Park Avenue
New York, New York 10022
United States of America
Tozzini Freire Teixeira & Silva Advogados
Rua Borges Lagoa, 1328
04038-904 - São Paulo, SP
Brazil
To the Initial Purchaser
As to United States law
As to Brazilian law
Linklaters LLP
1345 Avenue of the Americas
New York, New York 10105
United States of America
Lefosse Advogados
Rua General Furtado do Nascimento, 66
05465-070, São Paulo, SP
Brazil
AUDITORS
To the Issuer
PricewaterhouseCoopers Auditores Independentes
Avenida Francisco Matarazzo, 1400
São Paulo, SP 05001-903
Brazil
Rua Mostardeiro, 800 – 9th floor
Porto Alegre 90430-000
Brazil
TRUSTEE, PAYING AGENT, CALCULATION AGENT AND SECURITY REGISTRAR
The Bank of New York
101 Barclay Street, Floor 4E
New York, New York 10286
United States of America
IRISH PAYING AGENT, TRANSFER AGENT AND LISTING AGENT
Transfer and Listing Agent
Paying Agent
The Bank of New York, London
One Canada Square, 40th floor,
London E14 5AL
United Kingdom
BNY Fund Services (Ireland) Limited
Guild House, Guild Street
IFSC, Dublin 1
Ireland
RBS–Zero Hora
Editora Jornalística S.A.
BRL 300,000,000 11.25%
GUARANTEED NOTES DUE 2017
OFFERING MEMORANDUM
JUNE 26, 2007
Standard Bank Plc