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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO_______
COMMISSION FILE NUMBER 1-12610
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GRUPO TELEVISA, S.A.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
UNITED MEXICAN STATES
(Jurisdiction of incorporation or organization)
AV. VASCO DE QUIROGA NO. 2000
COLONIA SANTA FE
01210 MEXICO, D.F.
MEXICO
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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A Shares, without par value ("A Shares") New York Stock Exchange (for listing purposes only)
L Shares, without par value ("L Shares") New York Stock Exchange (for listing purposes only)
Dividend Premium Shares, without par value ("D Shares") New York Stock Exchange (for listing purposes only)
Global Depositary Shares ("GDSs"), each representing twenty Ordinary New York Stock Exchange
Participation Certificates (Certificados de Participacion Ordinarios)
("CPOs")
CPOs, each representing one A Share, one L Share and one D Share New York Stock Exchange (for listing purposes only)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None.
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None.
The number of outstanding shares of each of the issuer's classes of capital or
common stock as of December 31, 2002 was:
4,479,799,524 A Shares
2,184,297,425 L Shares
2,184,297,425 D Shares
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]
Indicate by check which financial statement item the registrant has elected to
follow. Item 17 [ ] Item 18 [X]
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TABLE OF CONTENTS
PAGE
PART I
Item 1. Identity of Directors, Senior Management and Advisers................................... 1
Item 2. Offer Statistics and Expected Timetable................................................. 1
Item 3. Key Information......................................................................... 1
Selected Financial Data........................................................... 1
Dividends......................................................................... 5
Exchange Rate Information......................................................... 5
Risk Factors...................................................................... 7
Forward-Looking Statements........................................................ 19
Item 4. Information on the Company.............................................................. 20
History and Development of the Company............................................ 20
Significant Subsidiaries, etc..................................................... 20
Capital Expenditures.............................................................. 21
Business Overview................................................................. 22
Property, Plant and Equipment..................................................... 54
Item 5. Operating and Financial Review and Prospects............................................ 56
Item 6. Directors, Senior Management and Employees.............................................. 92
Item 7. Major Shareholders and Related Party Transactions....................................... 103
Item 8. Financial Information................................................................... 112
Item 9. Offer and Listing Details............................................................... 112
Trading History of CPOs and GDSs.................................................. 112
Trading on the Mexican Stock Exchange............................................. 113
Item 10. Other Information....................................................................... 118
Mexican Securities Market Law..................................................... 118
Bylaws............................................................................ 120
Material Contracts................................................................ 130
Legal Proceedings................................................................. 131
Exchange Controls................................................................. 132
Taxation.......................................................................... 133
Documents on Display.............................................................. 138
Item 11. Quantitative and Qualitative Disclosures About Market Risk.............................. 139
Item 12. Description of Securities Other than Equity Securities.................................. 143
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies......................................... 143
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds............ 143
Item 15. Controls and Procedures................................................................. 143
PART III
Item 16A. Audit Committee Financial Expert........................................................ 143
Item 16B. Code of Ethics.......................................................................... 143
Item 16C. Principal Accountant Fees and Services.................................................. 143
PART IV
Item 17. Financial Statements.................................................................... 143
Item 18. Financial Statements.................................................................... 143
Item 19. Exhibits................................................................................ 143
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We publish our financial statements in accordance with generally accepted
accounting principles in Mexico, or Mexican GAAP, which differ in some
significant respects from generally accepted accounting principles in the United
States, or U.S. GAAP, and accounting procedures adopted in other countries. The
exchange rates used in preparing our financial statements are determined by
reference as of the specified date to the interbank free market exchange rate,
or the Interbank Rate, as reported by Banco Nacional de Mexico, S.A., or
Banamex. As of December 31, 2002, the Interbank Rate was Ps.10.464 to U.S.$1.00.
See "Key Information -- Exchange Rate Information." The exchange rates used in
translating Pesos into U.S. Dollars elsewhere in this annual report are
determined by reference to the Interbank Rate as of December 31, 2002, unless
otherwise indicated.
Unless otherwise indicated, (i) information included in this annual report
is as of December 31, 2002 and (ii) references to "Ps." or "Pesos" in this
annual report are to Mexican Pesos and references to "Dollars," "U.S. Dollars,"
"U.S. dollars," "$," or "U.S.$" are to United States dollars.
- iii -
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
The following tables present our selected consolidated financial
information as of and for each of the periods indicated. This data is qualified
in its entirety by reference to, and should be read together with, our audited
year-end financial statements. The following data for each of the years ended
December 31, 1998, 1999, 2000, 2001 and 2002 has been derived from our audited
year-end financial statements, including the consolidated balance sheets as of
December 31, 2001 and 2002, and the related consolidated statements of income
and changes in financial position for the years ended December 31, 2000, 2001
and 2002 and the accompanying notes appearing elsewhere in this annual report.
The data should also be read together with "Operating and Financial Review and
Prospects."
The exchange rate used in translating Pesos into U.S. Dollars in
calculating the convenience translations included in the following tables is
determined by reference to the Interbank Rate, as reported by Banamex, as of
December 31, 2002, which was Ps.10.464 per U.S. Dollar. The exchange rate
translations contained in this annual report should not be construed as
representations that the Peso amounts actually represent the U.S. Dollar amounts
presented or that they could be converted into U.S. Dollars at the rate
indicated.
In December 2001, we entered into an agreement to sell our music recording
operations to Univision Communications, Inc., or Univision, and we consummated
this sale in April 2002. See "Information on the Company -- Business Overview --
Music Recording" and "-- Univision." We no longer engage in the music recording
business, and under Mexican GAAP the results of our music recording segment
through December 31, 2001 and from prior and subsequent periods have been
classified as discontinued operations. See "Operating and Financial Review and
Prospects -- Discontinued Operations" and Note 23 to our year-end financial
statements.
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YEAR ENDED DECEMBER 31,
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1998 1999 2000 2001 2002 2002
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(MILLIONS OF PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002 OR MILLIONS OF U.S. DOLLARS)(1)
(MEXICAN GAAP)
INCOME STATEMENT DATA:
Net sales....................... Ps. 20,332 Ps. 20,053 Ps. 21,582 Ps. 20,786 Ps. 21,559 U.S.$2,060
Operating income................ 3,456 4,232 5,211 4,340 4,650 444
Integral cost of financing
-- net(2).................... 2,942 1,090 1,055 437 613 59
Restructuring and
non-recurring
charges(3).................. 1,241 541 2,027 574 842 80
Income (loss) from
continuing operations....... 387 1,570 (705) 1,510 (394) (38)
Income (loss) from
discontinued
operations(4)............... 2,277 (31) 25 14 1,063 102
Cumulative effect of
accounting
change-net.................. -- -- -- (73) -- --
Net income (loss)............... 1,029 1,279 (872) 1,422 738 71
(Loss) income from
continuing operations
per CPO(5).................. (0.41) 0.44 (0.30) 0.51 (0.12) --
Net income (loss) per
CPO(5)...................... 0.32 0.41 (0.30) 0.48 0.24 --
Weighted-average number of
shares outstanding (in
millions)(6)................ 9,270 9,051 8,825 8,877 8,854 --
Shares outstanding (in
millions, at year end)...... 9,270 8,839 8,899 8,856 8,848 --
(U.S. GAAP)(7)
INCOME STATEMENT DATA:
Net sales....................... Ps. 21,901 Ps. 21,606 Ps. 22,954 Ps. 21,830 Ps. 21,767 U.S.$2,080
Operating income................ 928 3,257 4,615 2,435 3,011 288
Income from continuing
operations.................. 1,339 2,244 1,205 2,246 100 10
Cumulative effect of
accounting change-net....... -- -- -- (831) (1,233) (118)
Net income...................... 2,302 2,752 200 1,375 (1,133) (108)
Income from continuing
operations per CPO(5)....... 0.43 0.76 0.40 0.93 0.03 --
Net income per CPO(5)........... 0.76 0.92 0.06 0.48 (0.39) --
Weighted-average number of
shares outstanding (in
millions)(6)(8)............. 9,270 8,902 8,825 8,877 8,854 --
Shares outstanding (in
millions, at year
end)(6)..................... 9,270 8,839 8,899 8,856 8,848 --
(MEXICAN GAAP)
BALANCE SHEET DATA (END OF
YEAR):
Cash and temporary
investments................. Ps. 7,606 Ps. 7,208 Ps. 8,328 Ps. 5,946 Ps. 8,787 U.S.$ 840
Total assets.................... 58,372 53,146 51,523 52,005 56,473 5,397
Current notes payable to
banks and other notes
payable(9).................. 220 946 382 354 1,240 118
Long-term debt(10).............. 12,357 10,474 11,999 13,551 13,345 1,275
Customer deposits and
advances(11)................ 10,328 9,696 10,941 11,417 11,753 1,123
Capital stock(12)............... 7,728 7,369 7,418 7,375 7,369 704
Total stockholders' equity
(including minority
interest)................... 28,146 24,863 19,408 19,796 21,324 2,038
(U.S. GAAP)(7)
BALANCE SHEET DATA (END OF
YEAR):
Property, plant and
equipment, net.............. Ps. 15,748 Ps. 14,896 Ps. 14,849 Ps. 15,053 Ps. 15,201 U.S.$1,453
Total assets.................... 55,198 50,906 48,675 54,115 56,424 5,392
Current notes payable to
banks and other notes
payable(9).................. 220 946 382 354 1,240 118
Long-term debt(10).............. 12,357 10,474 11,999 13,551 13,345 1,275
Total stockholders' equity
(excluding minority
interest)................... 18,295 17,415 17,396 18,920 17,657 1,687
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YEAR ENDED DECEMBER 31,
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1998 1999 2000 2001 2002 2002
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(MILLIONS OF PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002 OR MILLIONS OF U.S. DOLLARS)(1)
(MEXICAN GAAP)
OTHER FINANCIAL INFORMATION:
EBITDA(13)...................... Ps. 4,734 Ps. 5,500 Ps. 6,522 Ps. 5,694 Ps. 6,100 U.S.$ 583
Capital expenditures............ 1,261 1,025 1,655 1,406 1,415 135
(U.S. GAAP)(7)
OTHER FINANCIAL INFORMATION:
Cash (used for) provided
by operating activities..... (2,152) 1,225 1,276 1,924 5,684 543
Cash (used for) provided
by financing activities..... (1,856) (3,437) 405 2,150 382 37
Cash provided by (used
for) investing
activities.................. 9,171 2,397 (487) (6,156) (5,039) (482)
OTHER DATA:
Average prime time
audience share (TV
broadcasting)(14)........... 78.6% 78.0% 73.7% 70.5% 72.4% --
Average prime time rating
(TV broadcasting)(14)....... 41.2 43.0 41.0 39.1 39.6 --
Magazine circulation
(millions of
copies)(15)................. 132 133 140 132 137 --
Number of employees (at
year end)................... 15,400 14,700 14,600 13,700 12,600 --
Number of Innova
subscribers (in
thousands at year
end)(16).................... 266 410 590 692 706 --
Number of Cablevision
subscribers (in
thousands at year
end)(17).................... 275 390 403 452 412 --
Number of EsMas.com
registered users (in
thousands at year
end)(18).................... -- -- 375 866 2,514 --
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA:
(1) Except per CPO, share, ratio, average audience share, average rating,
magazine circulation, employee, subscriber and registered user data.
Information in these footnotes is in thousands of Mexican Pesos in
purchasing power as of December 31, 2002, unless otherwise indicated.
(2) Includes interest expense, interest income, foreign exchange gain or loss
-- net, gain or loss from monetary position and monetary results
classified as provisions for deferred income taxes. See Note 19 to our
year-end financial statements.
(3) See Note 20 to our year-end financial statements.
(4) See Note 23 to our year-end financial statements.
(5) For further analysis of (loss) income from continuing operations per CPO
and net income (loss) per CPO (as well as corresponding amounts per A
Share not traded as CPOs), see Note 24 (for the calculation under Mexican
GAAP) and 27 (for the calculation under U.S. GAAP) to our year-end
financial statements.
(6) We have three classes of common stock, A Shares, L Shares and D Shares.
Some of our A Shares, and all of our L Shares and D Shares, are publicly
traded in Mexico in the form of CPOs, each of which represents one A
Share, one L Share and one D Share, and are publicly traded in the United
States in the form of GDSs, each of which represents twenty CPOs. In all
periods presented, the number of shares and CPOs outstanding gives effect
to the March 1, 2000 10-for-1 stock split. As of December 31, 1998 and
1999, there were 2,271,150,000 CPOs and an additional 2,456,550,000 A
Shares not in the form of CPOs authorized and issued. As of December 31,
2000 and 2001, there were 2,271,150,000 CPOs and an additional
2,319,550,000 A Shares not in the form of CPOs authorized and issued. As
of December 31, 2002, there were 2,271,150,000 CPOs and an additional
2,319,593,117 A Shares not in the form of CPOs authorized and issued. See
Note 14 to our year-end financial statements.
For financial reporting purposes under Mexican GAAP only: (i) as of
December 31, 1999, there were 2,161,908,350 CPOs and an additional
2,353,697,650 A Shares not in the form of CPOs authorized, issued and
outstanding; (ii) as of December 31, 2000, there were 2,201,056,125 CPOs
and an additional 2,295,458,982 A Shares not in the form of CPOs
authorized, issued and outstanding; (iii) as of December 31, 2001, there
were 2,186,933,525 CPOs and an additional 2,295,458,982 A Shares not in
the form of CPOs authorized, issued and outstanding and (iv) as of
December 31, 2002, there were 2,184,297,425 CPOs and an additional
2,295,502,099 A Shares not in the form of CPOs authorized, issued and
outstanding. The number of shares authorized, issued and outstanding for
financial reporting purposes under Mexican GAAP as of December 31, 2002
does not include 86,851,771 CPOs and an additional 24,091,018 A Shares not
in the form of CPOs acquired by Televisa Comercial, S.A. de C.V., or
Televisa Comercial (formerly Grupo Alameda, S.A. de C.V.), one of our
wholly-owned subsidiaries. In April 2003, Televisa Comercial merged into
another one of our wholly-owned subsidiaries, Televisa, S.A. de C.V.
Substantially all of these CPOs and A Shares are currently held by the
trust we created to implement our stock option plan and are included in
the number of shares outstanding for legal purposes. See Notes 14 and 24
to our year-end financial statements.
The number of shares authorized, issued and outstanding during the
four-year period ended December 31, 2002 reflects the repurchase by us of
an aggregate of 32,617,000 CPOs in the open market in 1999 and 2000
pursuant to our share repurchase program, the acquisition of 161,091,018 A
Shares and 111,876,350 CPOs by Televisa Comercial in 2000, 2001 and 2002
(including repurchases in the open market), the cancellation of shares in
the form of 57,640,775 CPOs and an additional 137,000,000 A Shares in
October 2000 and the issuance of
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shares in the form of 57,640,775 CPOs in October 2000 in connection with
the merger of Editorial Televisa, S.A. de C. V. with and into us. See
Notes 2 and 14 to our year-end financial statements.
(7) See Note 27 to our year-end financial statements. In contrast to Mexican
GAAP, the results of our music recording segment from prior and subsequent
periods are not reflected as discontinued operations under U.S. GAAP,
since we continue to have significant influence over Univision.
(8) The weighted average number of shares and CPOs outstanding under U.S. GAAP
as of December 31, 1999 differs from the weighted average number of shares
and CPOs outstanding as of this date under Mexican GAAP as a result of a
difference in the accounting treatment of the 95,117,650 CPOs and an
additional 102,882,350 A Shares that we acquired in connection with our
acquisition of Televisa Comercial in June 1999. Under U.S. GAAP, these
CPOs and additional A Shares have been classified as repurchased shares
since January 1, 1999, the date from which we and Televisa Comercial were
under common control with Grupo Televicentro, S.A. de C.V., or
Televicentro. Under Mexican GAAP, these CPOs and A Shares have been
classified as repurchased shares since June 30, 1999. See Notes 2, 24 and
27 to our year-end financial statements.
(9) Current notes payable to banks and other notes payable include Ps.27.3
million, Ps.61.9 million, Ps.62.8 million, Ps.13.5 million and Ps.7.1
million of other notes payable as of December 31, 1998, 1999, 2000, 2001
and 2002, respectively. See Note 9 to our year-end financial statements.
(10) Long-term debt includes the Ps.65.6 million, Ps.71.1 million, Ps.79.2
million and Ps.6.5 million of other notes payable as of December 31, 1998,
1999, 2000 and 2001, respectively. See "Operating and Financial Review and
Prospects -- Liquidity, Foreign Exchange and Capital Resources --
Indebtedness" and Note 9 to our year-end financial statements.
(11) Prior to the fourth quarter of 1998, we sold advertising time on a
multi-media basis, under a plan that required substantial upfront deposits
from advertisers, but allowed advertisers to take advantage of rates fixed
at the time of their deposits. We implemented a number of changes to our
method of selling advertising over the last four years. As a result of
these changes, we believe that customer deposits as of December 31, 1999,
2000, 2001 and 2002 are not fully comparable to those as of December 31,
1998.
(12) Net of amounts in respect of repurchased shares as of December 31, 2000,
2001 and 2002 in the amount of Ps.195.4 million, Ps.238.5 million and
Ps.245.1 million, respectively.
(13) We evaluate our operating performance based on several factors, including
EBITDA, our primary financial measure of operating income before non-cash
depreciation of tangible assets and amortization of intangible assets of
Televisa and its restricted and unrestricted subsidiaries. EBITDA is not a
Mexican GAAP or U.S. GAAP measurement. We consider EBITDA an important
indicator of the operational strength and performance of our businesses,
including the ability to provide cash flows to service debt and fund
capital expenditures. EBITDA eliminates the uneven effect of considerable
amounts of non-cash depreciation of tangible assets and amortization of
intangible assets. In addition, we believe EBITDA is commonly used by
financial analysts and others in the media industry. However, EBITDA does
not represent cash flow of Televisa and its restricted and unrestricted
subsidiaries for the periods presented and should be considered in
addition to, and not as a substitute for, gross profit, operating income,
net income and other measures of financial performance reported in
accordance with Mexican GAAP or U.S. GAAP. In addition, EBITDA should not
be used as a substitute for our measures of changes in financial position.
The following table sets forth a reconciliation of our EBITDA to net
income (loss) under Mexican GAAP for the five years ended December 31,
1998, 1999, 2000, 2001 and 2002.
YEARS ENDED DECEMBER 31,
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1998 1999 2000 2001 2002
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EBITDA................................. Ps. 4,734 Ps. 5,499 Ps. 6,522 Ps. 5,694 Ps. 6,100
Less: Depreciation and amortization... 1,278 1,267 1,311 1,354 1,450
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Operating income....................... 3,456 4,232 5,211 4,340 4,650
Plus: Other non-operating income...... 7,113 1,926 1,628 1,208 2,535
Less: Other non-operating costs and
expenses............................ 9,540 4,879 7,711 4,126 6,447
--------- --------- --------- --------- ---------
Net income (loss)..................... Ps. 1,029 Ps. 1,279 Ps. (872) Ps. 1,422 Ps. 738
========= ========= ========= ========= =========
Our EBITDA may not be comparable with EBITDA as defined by other
companies, and is different than adjusted EBITDA as defined in our
U.S.$100.0 million five-year term loan facility. See "Operating and
Financial Review and Prospects -- Liquidity, Foreign Exchange and Capital
Resources -- Indebtedness."
(14) "Average prime time audience share" for a period refers to the average
daily prime time audience share for all of our networks and stations
during that period, and "average rating" for a period refers to the
average daily rating for all of our networks and stations during that
period, each rating point representing one percent of all television
households. As used in this annual report, "prime time" in Mexico is 4:00
p.m. to 11:00 p.m., seven days a week, and "weekday prime time" is 7:00
p.m. to 11:00 p.m., Monday through Friday. Data for all periods reflects
the average prime time audience share and ratings nationwide as published
by IBOPE Mexico. For further information regarding audience share and
ratings information and IBOPE Mexico, see "Information on the Company --
Business Overview -- Television -- Television Broadcasting."
(15) The figures set forth in this line item represent total circulation of
magazines that we publish independently and through joint ventures and
other arrangements and do not represent magazines distributed on behalf of
third parties.
(16) Innova, S. de R.L. de C.V., or Innova, our direct-to-home, or DTH
satellite service in Mexico, commenced operations on December 15, 1996.
The figures set forth in this line item represent the total number of
gross active residential subscribers for Innova's basic service package at
the end of each year presented. Our share in the results of operations of
Innova through December 31, 2000 was included in
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our income statement under the line item "Equity in losses of affiliates."
For a description of Innova's business and results of operations and
financial condition, see "Information on the Company -- Business Overview
-- DTH Joint Ventures -- Mexico" and Innova's year-end financial
statements for the years ended December 31, 2000, 2001 and 2002, which
begin on page F-67. Under Mexican GAAP, effective January 1, 2001, we no
longer recognize equity in losses in respect of our investment in Innova
in our income statement. See "Operating and Financial Review and Prospects
-- Equity in Losses of Affiliates."
(17) Through April 2002, we operated our cable television business, Empresas
Cablevision, S.A. de C.V., or Cablevision, through a joint venture with
America Movil, S.A. de C.V., or America Movil. America Movil sold its 49%
equity interest in Cablevision in connection with an offering in Mexico on
April 11, 2002. See "Information on the Company -- Business Overview --
Cable Television." The figures set forth in this line item represent the
total number of subscribers for Cablevision's basic service package at the
end of each year presented. For a description of Cablevision's business
and results of operations and financial condition, see "Operating and
Financial Review and Prospects -- Results of Operations -- Cable
Television" and "Information on the Company -- Business Overview -- Cable
Television."
(18) We launched EsMas.com in May 2000. Since May 2000, the results of
operations of EsMas.com have been included in the results of operations of
our Other Businesses segment. See "Operating and Financial Review and
Prospects -- Other Businesses --2002 vs. 2001" and "-- 2001 vs. 2000." For
a description of EsMas.com, see "Information on the Company -- Business
Overview -- Other Businesses -- EsMas.com." The figures set forth in this
line item represents the number of registered users in each year
presented. The term "registered user" means a visitor that has completed a
profile questionnaire that enables the visitor to use the e-mail service
provided by EsMas.com.
DIVIDENDS
In February 2003, the Board of Directors proposed, and our shareholders
approved at our annual general shareholders' meeting in April 2003, the payment
of a dividend in the aggregate amount of Ps.550 million. This dividend consists
of 0.18936540977 Pesos per CPO, including dividends paid to the holders of A
Shares and L Shares and the cumulative preferred dividend and premium paid to
the holders of D Shares underlying each CPO, and 0.05260150265 Pesos per A Share
not in the form of CPOs. We did not pay dividends on our A Shares, L Shares or D
Shares in 1998, 1999, 2000, 2001 and 2002. The amount of any future dividend
payments will be proposed on an annual basis by the Board of Directors based on
our results of operations, financial condition, investments and other relevant
factors.
Decisions regarding the payment and amount of dividends are subject to
approval by the holders of the A Shares, generally, but not necessarily, on the
recommendation of the Board of Directors. Grupo Televicentro, S.A. de C.V., or
Televicentro, owns a majority of the A Shares and, for so long as it continues
to own a majority of such shares, it will have, as a result of such ownership,
the ability to determine whether dividends are to be paid and the amount of such
dividends. See "Major Shareholders and Related Party Transactions --
Televicentro and the Principal Shareholders." In addition, the agreements
related to some of our outstanding indebtedness contain covenants that restrict,
among other things, the payment of dividends.
EXCHANGE RATE INFORMATION
Since November 1991, Mexico has had a free market for foreign exchange, and
since December 1994, the Mexican government has allowed the Peso to float freely
against the U.S. Dollar. The Peso declined sharply in December 1994 and
continued to fall under conditions of high volatility in 1995. In 1996, the Peso
fell more slowly and was less volatile. Relative stability characterized the
foreign exchange markets during the first three quarters of 1997. The fall of
the Hang Seng Index of the Hong Kong Stock Exchange on October 24, 1997 marked
the beginning of a period of increased volatility in the foreign exchange
markets with the Peso falling over 10% in just a few days. During 1998, the
foreign exchange markets experienced volatility as a result of the financial
crises in Asia and Russia and the financial turmoil in countries such as Brazil
and Venezuela. More recently, the economic and financial crises in Argentina and
Venezuela have resulted in volatility in the foreign exchange markets, have
caused instability in the Latin American financial markets and could continue to
have a negative impact on the value of the Peso. See "-- Risk Factors -- Risk
Factors Related to Mexico -- Developments in Other Emerging Markets Countries or
the United States May Affect Us and the Prices for Our Securities." We cannot
assure you that the Mexican government will maintain its current policies with
regard to the Peso or that the Peso will not further depreciate or appreciate
significantly in the future.
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The following table sets forth, for the periods indicated, the high, low,
average and period end free market exchange rate for the purchase of U.S.
Dollars, expressed in nominal Pesos per U.S. Dollar. All amounts are stated in
Pesos per U.S. Dollar. As of June 25, 2003, the free market exchange rate for
the purchase of U.S. Dollars as reported by the Board of Governors of the
Federal Reserve Bank was Ps.10.48 per U.S. Dollar.
EXCHANGE RATE(1)
----------------
HIGH LOW AVERAGE(2) PERIOD END
---- --- ---------- ----------
YEAR ENDED DECEMBER 31,
1998................................... 10.63 8.04 9.24 9.90
1999................................... 10.60 9.24 9.56 9.48
2000................................... 10.09 9.18 9.47 9.62
2001................................... 9.97 8.95 9.33 9.16
2002................................... 10.43 9.00 9.75 10.43
MONTH ENDED
December 31, 2002...................... 10.43 10.10 10.23 10.43
January 31, 2003....................... 10.98 10.32 10.62 10.90
February 28, 2003...................... 11.06 10.77 10.95 11.03
March 31, 2003......................... 11.24 10.66 10.91 10.78
April 30, 2003......................... 10.77 10.31 10.59 10.31
May 31, 2003........................... 10.42 10.11 10.25 10.34
June 25, 2003.......................... 10.74 10.24 10.51 10.48
(1) The free market exchange rate is the Noon Buying Rate for Pesos reported
by the Board of Governors of the Federal Reserve Bank.
(2) Annual average rates reflect the average of month-end rates. Monthly
average rates reflect the average of daily rates.
The Mexican economy has suffered balance of payment deficits and shortages
in foreign exchange reserves. While the Mexican government does not currently
restrict the ability of Mexican or foreign persons or entities to convert Pesos
to U.S. Dollars, we cannot assure you that the Mexican government will not
institute restrictive exchange control policies in the future, as has occurred
from time to time in the past. To the extent that the Mexican government
institutes restrictive exchange control policies in the future, our ability to
transfer or to convert Pesos into U.S. Dollars and other currencies for the
purpose of making timely payments of interest and principal of indebtedness, as
well as obtaining foreign programming and other goods, would be adversely
affected. See "-- Risk Factors -- Risk Factors Related to Mexico -- Currency
Fluctuations or the Devaluation and Depreciation of the Peso Could Limit the
Ability of Us and Others to Convert Pesos into U.S. Dollars or Other Currencies
and/or Adversely Affect Our Financial Condition."
- 6 -
RISK FACTORS
The following is a discussion of risks associated with our Company and an
investment in our securities. Some of the risks of investing in our securities
are general risks associated with doing business in Mexico. Other risks are
specific to our business. The discussion below contains information about the
Mexican government and the Mexican economy obtained from official statements of
the Mexican government as well as other public sources. We have not
independently verified this information. Any of the following risks, if they
actually occur, could materially and adversely affect our business, financial
condition, results of operations or the price of our securities.
RISK FACTORS RELATED TO MEXICO
ECONOMIC AND POLITICAL DEVELOPMENTS IN MEXICO MAY ADVERSELY AFFECT OUR BUSINESS
Most of our operations and assets are located in Mexico. As a result, our
financial condition, results of operations or business may be affected by the
general condition of the Mexican economy, the devaluation of the Peso as
compared to the U.S. Dollar, Mexican inflation, interest rates, regulation,
taxation, social instability and political, social and economic developments in
Mexico.
MEXICO HAS EXPERIENCED ADVERSE ECONOMIC CONDITIONS
Mexico has experienced a prolonged period of slow economic growth since
2001 primarily as a result of the downturn in the U.S. economy. In 2000,
Mexico's gross domestic product, or GDP, increased 6.6%. According to Mexican
government estimates, GDP decreased 0.3% in 2001 and increased 0.9% and 2.3% in
2002 and the three month period ended March 31, 2003, respectively. Inflation in
2000, 2001, 2002 and the three month period ended March 31, 2003 was 9.0%, 4.4%,
5.7% and 1.3%, respectively. GDP growth fell short of Mexican government
estimates in 2002 due primarily to the slowdown in the growth of the U.S.
economy, the reduction of investments, the increase in unemployment and a
decrease in exports as a result of the 14.01% depreciation of the Peso as
compared to the U.S. Dollar. According to Mexican government estimates, GDP in
Mexico is expected to grow by approximately 2.25%, while inflation is expected
to be less than 4.0%, in 2003. We cannot assure you that these estimates will
prove to be accurate. During the first quarter of 2003, the Mexican economy
continued to slow, in large part, as a result of the continued weakness of the
U.S. economy, the uncertainty generated by the continued hostilities in the
Middle East and the related potential impacts on oil prices and consumer
confidence, uncertainty caused by the continuing threat of large scale
international terrorist attacks and a decrease in consumption as a result of the
recent depreciation of the Mexican Peso as compared to the U.S. Dollar. We
believe that the economic slowdown has negatively affected and could continue to
negatively affect our revenues.
If the Mexican economy falls into a recession or if inflation and interest
rates increase significantly, our business, financial condition and results of
operations may be adversely affected for the following reasons:
- demand for advertising may decrease both because consumers may
reduce expenditures for our advertisers' products and because
advertisers may reduce advertising expenditures; and
- demand for publications, cable television, DTH satellite services,
pay-per-view programming and other services and products may
decrease because consumers may find it difficult to pay for these
services and products.
DEVELOPMENTS IN OTHER EMERGING MARKET COUNTRIES OR THE UNITED STATES MAY AFFECT
US AND THE PRICES FOR OUR SECURITIES
The market value of securities of Mexican companies, the economic and
political situation in Mexico and our financial condition and results of
operations are, to varying degrees, affected by economic and market conditions
in other emerging market countries and in the U.S. In the past, economic crises
in Asia, Russia, Brazil, other emerging markets and in other areas adversely
affected the Mexican economy and thus, future economic developments in Mexico
and other emerging markets, such as Argentina, as well as the recession in the
United States, could adversely affect the Mexican economy in future periods.
Although economic conditions in other emerging market
- 7 -
countries and the U.S. may differ significantly from economic conditions in
Mexico, investors' reactions to developments in any of these other countries may
have an adverse effect on the market value or trading price of securities of
Mexican issuers, including ours, or our business.
In particular, Argentina's insolvency and recent default on its public
debt, which deepened the existing financial, economic and political crises in
that country, could adversely affect Mexico, the market value of our securities
or our business. The former Argentine President, Eduardo Duhalde, took office on
January 6, 2002 in the midst of significant political unrest after a series of
interim presidents and administrations took office following the resignation of
President Fernando de la Rua in December 2001. On May 15, 2003, a new president,
Nestor Kirchner, took office in Argentina and is expected to retain the same
economy minister and continue the fiscal and monetary policies initiated by
President Duhalde. The recent devaluation of the Argentine peso may have a
material adverse effect on Argentina and presents risks that the Argentine
financial system may collapse and that substantial inflation may occur. The
rapid and radical nature of changes in the Argentine social, political, economic
and legal environment have continued to create significant uncertainty. To the
extent that the new Argentine government is unsuccessful in preventing further
economic decline via this and other measures, this crisis may adversely affect
Mexico, the price of our securities or our business.
In addition, on April 12, 2002, following a week of strikes, demonstrations
and riots, Venezuelan President Hugo Chavez was forced to resign from office by
Venezuela's military commanders in an attempted coup d'etat. Although Mr. Chavez
was restored to power on April 14, 2002, the political and economic future of
Venezuela remains uncertain. More recently, a nationwide general strike that
occurred between December 2002 and January 2003 caused a significant reduction
in oil production in Venezuela, and has had a material adverse effect on
Venezuela's oil-dependent economy. In response to the general strike and in an
effort to shore up the economy and control inflation, in February 2003
Venezuelan authorities imposed foreign exchange and price controls on specified
products. We cannot predict what effect, if any, these events will have on the
economies of other emerging market countries, Mexico, the price of our
securities or our business.
In late October 1997, prices of both Mexican debt securities and Mexican
equity securities dropped substantially, precipitated by a sharp drop in Asian
securities markets. Similarly, in the second half of 1998 and in early 1999,
prices of Mexican securities were adversely affected by the economic crises in
Russia and Brazil. The price of our securities has also historically been
adversely affected by increases in interest rates in the United States and
elsewhere.
THE SEPTEMBER 11, 2001 TERRORIST ATTACKS ON THE UNITED STATES, AND MORE RECENTLY
THE UNITED STATES INVASION OF IRAQ, HAVE NEGATIVELY AFFECTED INDUSTRY AND
ECONOMIC CONDITIONS GLOBALLY, AND THESE CONDITIONS HAVE HAD, AND MAY CONTINUE TO
HAVE, A NEGATIVE EFFECT ON OUR BUSINESS
Our profitability is affected by numerous factors, including changes in
viewing preferences, priorities of advertisers and reductions in advertisers'
budgets. Historically, advertising in most forms of media correlates with the
general condition of the economy and thus, is subject to the risks that arise
from adverse changes in domestic and global economic conditions, as well as
fluctuations in consumer confidence and spending, which may decline as a result
of numerous factors outside of our control, such as terrorist attacks and acts
of war. The terrorist attacks on September 11, 2001 depressed economic activity
in the U.S. and globally, including the Mexican economy. Since those attacks,
there have been terrorist attacks abroad and ongoing threats of future terrorist
attacks in the United States and abroad. In response to these terrorist attacks
and threats, the United States has instituted several anti-terrorism measures,
most notably, the formation of the Office of Homeland Security, a declaration of
war against terrorism and the invasion of Iraq. Although it is not possible at
this time to determine the long-term effect of these terrorist threats and
attacks and the consequent response by the United States, there can be no
assurance that there will not be other attacks or threats in the United States
or abroad that will lead to a further economic contraction in the United States
or any other major markets. In the short term, however, terrorist activity
against the United States and the consequent response by the United States has
contributed to the uncertainty of the stability of the United States economy as
well as global capital markets. It is not certain how long these economic
conditions will continue. If terrorist attacks continue or worsen, if the weak
economic conditions in the U.S. continue or worsen, or if a global recession
materializes, our business, financial condition and results of operations may be
materially and adversely affected.
- 8 -
CURRENCY FLUCTUATIONS OR THE DEVALUATION AND DEPRECIATION OF THE PESO COULD
LIMIT THE ABILITY OF US AND OTHERS TO CONVERT PESOS INTO U.S. DOLLARS OR OTHER
CURRENCIES AND/OR ADVERSELY AFFECT OUR FINANCIAL CONDITION
Most of our indebtedness and a significant amount of our costs are U.S.
Dollar-denominated, while our revenues are primarily Peso-denominated. As a
result, decreases in the value of the Peso against the U.S. Dollar could cause
us to incur foreign exchange losses, which would reduce our net income.
Severe devaluation or depreciation of the Peso may also result in
governmental intervention, as has resulted in Argentina, or disruption of
international foreign exchange markets. This may limit our ability to transfer
or convert Pesos into U.S. Dollars and other currencies for the purpose of
making timely payments of interest and principal on our indebtedness and
adversely affect our ability to obtain foreign programming and other imported
goods. While the Mexican government does not currently restrict, and for many
years has not restricted, the right or ability of Mexican or foreign persons or
entities to convert Pesos into U.S. Dollars or to transfer other currencies
outside of Mexico, the Mexican government could institute restrictive exchange
control policies in the future. Devaluation or depreciation of the Peso against
the U.S. Dollar may also adversely affect U.S. Dollar prices for our securities.
HIGH INFLATION RATES IN MEXICO MAY DECREASE DEMAND FOR OUR SERVICES WHILE
INCREASING OUR COSTS
Mexico historically has experienced high levels of inflation, although the
rates have been lower in recent years. The annual rate of inflation, as measured
by changes in the Mexican National Consumer Price Index, or the NCPI, was 9.0%
for 2000, 4.4% for 2001, 5.7% for 2002 and 1.3% for the three month period ended
March 31, 2003. Nonetheless, at approximately 4.7% per annum (as measured from
May 2002 to May 2003), Mexico's current level of inflation remains higher than
the annual inflation rates of its main trading partners. High inflation rates
can adversely affect our business and results of operations in the following
ways:
- inflation can adversely affect consumer purchasing power, thereby
adversely affecting consumer and advertiser demand for our
services and products;
- to the extent inflation exceeds our price increases, our prices
and revenues will be adversely affected in "real" terms; and
- if the rate of Mexican inflation exceeds the rate of devaluation
of the Peso against the U.S. Dollar, our U.S. Dollar-denominated
sales will decrease in relative terms when stated in constant
Pesos.
HIGH INTEREST RATES IN MEXICO COULD INCREASE OUR FINANCING COSTS
Mexico historically has had, and may continue to have, high real and
nominal interest rates. The interest rates on 28-day Mexican government treasury
securities averaged 15.2%, 11.3%, 7.1% and 8.8% for 2000, 2001, 2002 and the
three month period ended March 31, 2003. Accordingly, if we need to incur
Peso-denominated debt in the future, it will likely be at high interest rates.
POLITICAL EVENTS IN MEXICO COULD AFFECT MEXICAN ECONOMIC POLICY AND OUR
BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In the Mexican national elections held on July 2, 2000, Vicente Fox of the
opposition party, the Partido Accion Nacional, or the National Action Party, won
the presidency. His victory ended more than 70 years of presidential rule by the
Partido Revolucionario Institucional, or the Institutional Revolutionary Party.
Neither the Institutional Revolutionary Party nor the National Action Party
succeeded in securing a majority in the Chamber of Deputies or the Senate, the
two houses of the Mexican Congress. Although members of the National Action
Party have governed several states and municipalities, the National Action Party
had not previously governed on a federal level. President Fox has encountered
strong opposition to a number of his proposed reforms in both the Chamber of
Deputies and the Senate, where opposition forces have frequently joined to block
his initiatives. This legislative deadlock could slow down the progress of
reforms in Mexico. In addition, new legislative elections will be held in July
2003, which may further hinder President Fox's ability to implement his
initiatives. The effects on the social
- 9 -
and political situation in Mexico, as well as currency instability in Mexico,
could adversely affect the Mexican economy, which in turn could have a material
adverse effect on our business, financial condition and results of operations,
as well as market conditions and prices for our securities.
MEXICAN ANTITRUST LAWS MAY LIMIT OUR ABILITY TO EXPAND THROUGH ACQUISITIONS OR
JOINT VENTURES
Mexico's federal antitrust laws and regulations may affect some of our
activities, including our ability to introduce new products and services, enter
into new or complementary businesses or joint ventures and complete
acquisitions. In addition, the federal antitrust laws and regulations may
adversely affect our ability to determine the rates we charge for our services
and products. Approval of the Mexican Antitrust Commission is required for us to
acquire and sell significant businesses or enter into significant joint
ventures. In 2002, the Mexican Antitrust Commission did not approve the proposed
merger of our radio subsidiary, Sistema Radiopolis, S.A. de C.V., or Sistema
Radiopolis, with Grupo Acir Comunicaciones, S.A. de C.V., or Grupo Acir, and it
may not approve any proposed future acquisition or joint venture that we may
pursue. See "Information on the Company -- Business Overview -- Radio" and "--
Regulation."
DIFFERENCES BETWEEN MEXICAN GAAP AND U.S. GAAP MAY HAVE AN IMPACT ON THE
PRESENTATION OF OUR FINANCIAL INFORMATION
Our annual audited consolidated financial statements are prepared in
accordance with Mexican GAAP, which differ in some significant respects from
U.S. GAAP. We are required, however, to file an annual report on Form 20-F
containing financial statements reconciled to U.S. GAAP, although this filing
only contains year-end financial statements reconciled to U.S. GAAP for our
three most recent fiscal years. See Note 27 to our year-end financial
statements.
RISK FACTORS RELATED TO OUR PRINCIPAL SHAREHOLDERS
TELEVICENTRO HAS SUBSTANTIAL INFLUENCE OVER OUR MANAGEMENT AND THE INTERESTS OF
TELEVICENTRO MAY DIFFER FROM THOSE OF OTHER SHAREHOLDERS
Approximately 51.36% of our outstanding A Shares, the class of capital
stock that is entitled to elect a majority of our Board of Directors and the
only class of capital stock entitled to vote on other general corporate matters,
is beneficially owned, directly or indirectly, by Televicentro and its
shareholders. As our controlling shareholder, Televicentro controls our business
through its power to elect a majority of our Board of Directors and to determine
the outcome of almost all actions that require shareholder approval. For
example, Televicentro has the ability to cause us to declare dividends.
Televicentro's common stock is beneficially owned by the following holders:
Emilio Azcarraga Jean owns 55.29%, the SINCA Inbursa Trust owns 24.70% and the
Investor Trust owns 20.01%. In March 2003, SINCA Inbursa transferred its rights
and obligations under the SINCA Inbursa Trust and other agreements among
Televicentro's shareholders to Promotora Inbursa, an indirect subsidiary of
Grupo Financiero Inbursa, S.A. de C.V. Accordingly, Promotora Inbursa is
currently the SINCA Inbursa Trust's sole beneficiary. The SINCA Inbursa Trust
has agreed to vote its 24.70% stock interest in the same manner as Emilio
Azcarraga Jean votes, as long as Mr. Azcarraga Jean owns at least 27.0% of the
capital stock of Televicentro. Members of the Aramburuzabala family and the
Fernandez family are the Investor Trust's sole beneficiaries. Through the
Investor Trust, the Aramburuzabala family owns 16.21% and the Fernandez family
owns 3.80% of Televicentro's capital stock. For so long as he continues to own a
majority of Televicentro's capital stock, Mr. Azcarraga Jean will have the power
to elect a majority of the Board of Directors of Televicentro. Other than some
actions that require the approval of the other shareholders or their designees
on Televicentro's Board of Directors, directors elected by Mr. Azcarraga Jean
generally have the power to direct the voting of our capital stock beneficially
owned by Televicentro. The disposition by Televicentro of our capital stock
having an aggregate value in excess of U.S.$30 million in any 12-month period
requires the approval of a supermajority of the directors on Televicentro's
Board of Directors, including the directors elected by Televicentro's minority
shareholders. In addition to their indirect ownership interest in our company
through Televicentro, Mr. Azcarraga Jean and Ms. Maria Asuncion Aramburuzabala
Larregui serve as our directors and directly and indirectly own some CPOs. Mr.
Azcarraga Jean also serves as our Chairman of the Board, President, President of
the Executive Committee and Chief Executive Officer. See "Major Shareholders and
Related Party Transactions -- Televicentro and the Principal Shareholders" and
"Directors, Senior Management and Employees."
- 10 -
The investment by the SINCA Inbursa Trust in Televicentro was authorized by
a resolution of the Mexican Comision Federal de Competencia in July 1999.
Pursuant to this resolution, the SINCA Inbursa Trust was required to withdraw
its investment in Televicentro within a three year term that expired in August
2002. In July 2002, the Mexican Comision Federal de Competencia authorized an
extension of the three year term until September 2005, provided that by
September 2004, Promotora Inbursa (formerly SINCA Inbursa) shall have entered
into arrangements to withdraw its investment in Televicentro on or prior to
September 2005. Any such disposition may involve the sale of this interest to
another shareholder of Televicentro or to a third party, and could possibly
involve a secondary sale of our equity by or on behalf of Televicentro or its
shareholders and/or other alternatives. Any sale of our equity securities by
Televicentro or its shareholders could have an adverse effect on the market for
our equity securities and/or result in a change of control of our ownership. In
addition, upon the occurrence of a change of control, we would be required to
make an offer to repurchase all of our outstanding publicly-held debt securities
at a price of 101% of the principal amount plus accrued and unpaid interest, and
we cannot assure you that we would have sufficient funds to repurchase these
securities. If an offer to repurchase our debt securities is required to be made
and we do not have available sufficient funds to repurchase such debt
securities, an event of default would occur under our indentures, which, in
turn, would result in the acceleration of the maturity of our publicly-held debt
securities and other indebtedness. No assurances can be given that the
disposition of Promotora Inbursa's interest, through the SINCA Inbursa Trust,
will be completed in a timely manner and, if not, the consequences thereof. In
addition, no assurances can be given that additional conditions will not be
imposed by the Comision Federal de Competencia related to Promotora Inbursa's
ownership or disposition of its interest in Televicentro.
On April 29, 2003, our Board of Directors approved the acquisition of all
the outstanding equity of Telespecialidades, S.A. de C.V., or Telespecialidades,
a company which is owned by all of the shareholders of Televicentro in the same
proportion that they own Televicentro. The total consideration to be paid in
connection with this acquisition will be approximately U.S.$83 million, which
will be financed with cash on hand. At the time of the acquisition,
Telespecialidades's net assets will consist principally of 4,773,849 shares of
our capital stock in the form of 1,591,283 CPOs, which shares were previously
owned by Televicentro, and tax loss carryforwards of approximately Ps.6,457
million. The terms of this acquisition have been approved by our Audit
Committee. The completion of this acquisition is subject to a number of
conditions. See "Major Shareholders and Related Party Transactions --
Televicentro and the Principal Shareholders."
AS OUR CONTROLLING SHAREHOLDER, TELEVICENTRO MAY LIMIT OUR ABILITY TO RAISE
CAPITAL, WHICH WOULD REQUIRE US TO SEEK OTHER FINANCING ARRANGEMENTS
Televicentro has the voting power to prevent us from raising money through
equity offerings. Televicentro has informed us that if we conduct a primary sale
of our equity, it would consider exercising its pre-emptive rights to purchase a
sufficient number of additional A Shares in order to maintain its majority
interest in our equity securities. In the event that Televicentro is unwilling
to subscribe for additional shares, we would need to raise money through a
combination of debt or other financing, which we may not obtain, or if so,
possibly not on favorable terms.
RISK FACTORS RELATED TO OUR BUSINESS
THE OPERATION OF OUR BUSINESS MAY BE TERMINATED OR INTERRUPTED IF THE MEXICAN
GOVERNMENT DOES NOT RENEW OR REVOKES OUR BROADCAST OR OTHER CONCESSIONS
Under Mexican law, we need concessions from the Secretaria de
Comunicaciones y Transportes, or SCT, to broadcast our programming over our
television and radio stations and our cable and DTH satellite systems, as well
as to operate our nationwide paging business. The expiration dates for the
concessions for our television stations range from 2003 to 2012. Our concessions
for Channels 2, 4, 5 and 9 expire in 2009. In the past, the SCT has typically
renewed the concessions of those concessionaires that comply with the requisite
procedures set forth for renewal under Mexican law. This may not happen in the
future and the current law may change or be superseded by new laws. If we are
unable to renew our concessions for any of our significant stations before they
expire, our business would be materially adversely affected. The SCT can revoke
our concessions and the Mexican government can require us to forfeit our
broadcast assets under the circumstances described under "Information on the
Company -- Business Overview -- Regulation."
- 11 -
WE FACE COMPETITION IN EACH OF OUR MARKETS THAT WE EXPECT WILL INTENSIFY
We face competition in all of our businesses, including television
advertising and other media businesses, as well as our strategic investments and
joint ventures. In particular, we face substantial competition from TV Azteca,
S.A. de C.V., or TV Azteca. See "Information on the Company -- Business Overview
-- Television -- Television Industry in Mexico" and "-- Television
Broadcasting." In addition, the entertainment and communications industries in
which we operate are changing rapidly because of evolving distribution
technologies. Our future success will be affected by these changes, which we
cannot predict. Developments may limit our access to new distribution channels,
may require us to make significant capital expenditures in order to have access
to new digital and other distribution channels or may create additional
competitive pressures on some or all of our businesses.
THE SEASONAL NATURE OF OUR BUSINESS AFFECTS OUR REVENUE AND A SIGNIFICANT
REDUCTION IN FOURTH QUARTER NET SALES COULD IMPACT OUR RESULTS OF OPERATIONS
Our business reflects seasonal patterns of advertising expenditures, which
is common in the television broadcast industry. We typically recognize a
disproportionately large percentage of our overall advertising net sales in the
fourth quarter in connection with the holiday shopping season. For example, in
2000, 2001 and 2002, we recognized 29.2%, 28.8% and 29.5% of our net sales in
the fourth quarter of the year. Accordingly, a significant reduction in fourth
quarter advertising revenue could adversely affect our business, financial
condition and results of operations.
FUTURE ACTIVITIES WHICH WE MAY WISH TO UNDERTAKE IN THE UNITED STATES MAY BE
AFFECTED BY OUR ARRANGEMENTS WITH UNIVISION AND MAY AFFECT OUR EQUITY INTEREST
IN UNIVISION
We have an agreement with Univision that requires us to grant Univision an
exclusive right to broadcast our television programming in the U.S., with some
exceptions, as described in "Information on the Company -- Business Overview --
Univision."
We are required to offer Univision the opportunity to acquire a 50%
economic interest in our interest in certain Spanish-language television
broadcasting ventures to the extent they relate to U.S. Spanish-language
television broadcasting. Should Univision exercise these rights, Univision would
reduce our share of potentially lucrative corporate opportunities involving
these ventures. In April 2003, we entered into a joint venture with Univision to
introduce our satellite and cable pay-TV programming into the United States,
including two of our existing movie channels and three channels featuring music
videos, celebrity lifestyle and interviews and entertainment news programming,
and to create future channels available in the U.S. that feature our
programming. See "Information on the Company -- Business Overview -- Univision."
The current joint venture with Univision and any future venture we might pursue
involving U.S. Spanish-language television broadcasting, with or without
Univision as a partner, may compete directly with Univision to the extent such
ventures seek viewership among Hispanic households in the United States. Direct
competition between Univision and these ventures could have a material adverse
effect on the financial condition and results of operations of the ventures and
the value of our investment in Univision.
In the past, we had disagreements with Univision over our ability to
broadcast over the Internet programs to which Univision had rights in the United
States. As part of the amendments in December 2001 to our arrangements with
Univision, we agreed that for a five-year period, we and Univision each would
have limited rights to transmit via the Internet certain limited programming.
After a five-year period, the terms of our agreement with Univision in respect
of these rights will revert to the provisions of our prior agreement. We
continue to believe that these terms allow us to distribute internationally,
including in the United States, on our Internet service originating from Mexico,
programs to which Univision believes it has exclusive rights in the United
States. Univision disagrees with our position. We cannot assure you as to
whether, after the expiration of the five-year period described above, we would
provide our television programming over the Internet for U.S. distribution.
However, if we do provide our programming for U.S. distribution via the
Internet, Univision may commence legal proceedings and we may not prevail in
litigation.
In addition, by operation of the ownership rules and policies of the U.S.
Federal Communications Commission, or the FCC, our interest in Univision may
limit our ability to invest in other U.S. media entities. See "Information
- 12 -
on the Company -- Business Overview -- Regulation -- Television -- U.S.
Regulation of Television Broadcast Stations."
WE HAVE EXPERIENCED SUBSTANTIAL LOSSES, PRIMARILY IN RESPECT OF OUR INVESTMENTS
IN INNOVA AND MCOP, AND EXPECT TO CONTINUE TO EXPERIENCE SUBSTANTIAL LOSSES AS A
RESULT OF OUR PARTICIPATION IN DTH JOINT VENTURES, WHICH WOULD ADVERSELY AFFECT
OUR NET INCOME
We have invested a significant amount, and will continue to invest
significant additional amounts, to develop DTH satellite services primarily in
Mexico and other countries throughout Latin America. In recent years, we have
experienced substantial losses and substantial negative cash flow, and we expect
to continue to experience substantial losses for at least the next several
years, as a result of our participation in the DTH joint ventures, which would
adversely affect our net income. See Notes 11 and 13 to our year-end financial
statements. Under Mexican GAAP, effective January 2001 and December 2002, we no
longer recognize equity in losses in respect of our investments in Innova and
Sky Multi-Country Partners, or MCOP, respectively, in our income statement. See
"Operating and Financial Review and Prospects -- Equity in Losses of
Affiliates."
Our DTH joint ventures face competition from other DTH satellite services
and other means of television broadcast, including multi-channel, multi-point
distribution systems and cable television systems. If we or our partners cannot
invest the amounts necessary to fund our ventures' operations, we or our
partners may be in breach of our agreements. If our ventures are unable to
obtain independent financing, these ventures may ultimately fail, possibly
resulting in a loss of our entire investment and in our being required to make
payments under some of our guarantees of these ventures' obligations.
We own a 60% interest in Innova, our DTH joint venture in Mexico. The
balance of Innova's equity is owned by The News Corporation Limited, or News
Corp., and Liberty Media International, or Liberty Media. Although we hold a
majority of Innova's equity, News Corp. has significant governance rights,
including the right to block any transaction between us and Innova. Accordingly,
we do not have control over the operations of Innova. The indentures that govern
the terms of the notes issued by Innova in April 1997 contain covenants that
restrict the ability of Innova to pay dividends and make investments and other
restricted payments.
We own minority interests in the DTH joint ventures in Spain, Colombia and
Chile. See "Information on the Company -- Business Overview -- DTH Joint
Ventures." Although we have some governance rights, we do not control these
joint ventures.
ONE OF INNOVA'S OWNERS, NEWS CORP., MAY ACQUIRE SIGNIFICANT INTERESTS IN
DIRECTV, INNOVA'S DTH COMPETITOR IN MEXICO, AND PANAMSAT, AND WE CANNOT PREDICT
WHAT EFFECT THIS WILL HAVE ON US OR INNOVA
On March 18, 2003, DirecTV Latin America, LLC, or DLA, announced that it
had filed a voluntary petition for bankruptcy protection, under chapter 11 of
the U.S. Bankruptcy Code, in the U.S. Bankruptcy Court in Wilmington, Delaware.
DLA cited its debt burden and high fixed costs and listed liabilities of US$1.6
billion as of the end of 2002. DLA also reported a loss of 54,000 net
subscribers in the first quarter of 2003, or 7% of its subscriber base. DLA is a
competitor of Innova's which provides DTH programming and services in Mexico
through an affiliated Mexican operating company, DirecTV Mexico. According to
its 2002 annual report, Hughes Electronics Corporation, or Hughes, owns
approximately 75% of DLA and holds an indirect interest in DirecTV Mexico. On
April 9, 2003, News Corp. announced that it reached a definitive agreement with
General Motors Corporation, or General Motors, and Hughes in which News Corp.
would acquire General Motors' 19.9% stake in Hughes and a further 14.1% of
Hughes from public shareholders and General Motors' pension and other benefit
plans, for a total of 34% of Hughes. If the agreement is consummated, a
subsidiary of News Corp. will transfer its ownership interest in Hughes' common
stock to Fox Entertainment Group, Inc., an 80.6% owned News Corp. subsidiary.
The businesses contained in Hughes include a leading U.S. satellite broadcaster,
DirecTV, which has more than 11 million subscribers; an 81% equity holding in
satellite operator PanAmSat; and Hughes Network Systems, a provider of broadband
satellite network solutions.
This agreement is subject to a number of conditions including the receipt
of required regulatory approvals in the United States and elsewhere, and no
assurance can be given that this acquisition will be consummated, or, if
consummated, that it will occur on the terms announced on April 9, 2003.
Additionally, Innova's Social Part
- 13 -
Holders Agreement provides that neither we nor News Corp. may directly or
indirectly operate or acquire an interest in any business that operates a DTH
satellite system in Mexico (subject to certain limited exceptions). If News
Corp. were to consummate the proposed acquisition of an interest in Hughes while
Hughes continued to own an interest in DirecTV, News Corp. would become an
indirect owner of DirecTV Mexico, Innova's DTH competitor. Accordingly, under
Innova's Social Part Holders Agreement any such acquisition of an indirect
interest in the Mexican operations of DLA would require the consent of us and
Innova.
We cannot predict what impact either the DLA bankruptcy or, if consummated,
News Corp.'s acquisition of an interest in Hughes, will have on the competitive
environment for DTH in Mexico or on our or Innova's business, financial
condition or results of operations. See "Item 4 -- Information on the Company --
Business Overview -- Competition."
Increased competition could result in a loss of Innova's subscribers or
pricing pressure, which may adversely affect our or Innova's business, financial
condition or results of operations.
MCOP, OUR DTH JOINT VENTURE IN LATIN AMERICA OUTSIDE OF MEXICO AND BRAZIL, MAY
NOT BE ABLE TO CONTINUE AS A GOING CONCERN AND IF IT CEASES OPERATIONS, IT WOULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR FINANCIAL CONDITION
We indirectly hold a 30% equity interest in MCOP, our DTH non-consolidated
joint venture in Latin America outside of Mexico and Brazil. The balance of
MCOP's equity is owned by News Corp. and Globo Comunicacoes e Participacoes
S.A., or Globopar, each of which indirectly holds a 30% equity interest, and
Liberty Media, which indirectly holds a 10% equity interest. The financial
condition of MCOP raises substantial doubt about its ability to continue as a
going concern. MCOP has suffered substantial losses and substantial negative
cash flow in recent years and we expect it to continue experiencing substantial
losses for at least the next several years. MCOP recently shut down operations
in Argentina and is currently expected to continue operations in Colombia and
Chile. In addition, in October 2002 Globopar announced that it will reevaluate
its capital structure due to significant devaluation of the Real, deteriorating
economic conditions in Brazil and significant reduction in credit available to
Brazilian companies. Globopar and certain of its subsidiaries are rescheduling
their financial debt obligations and currently reviewing their business plans
together with certain Steering Committees, comprised of institutional holders of
Globopar's bank debt and bonds. As a result of Globopar's financial condition,
since September 2002 Globopar has ceased providing financial support to MCOP. It
is unclear whether Globopar can or will continue to make any capital
contributions to MCOP. While we and our partners intend to continue operating
MCOP in respect of its operations in Colombia and Chile in a restructured form,
decisions as to the operations of MCOP, including the making of capital
contributions, require the affirmative vote of 75% of the partners. We currently
do not intend to dedicate resources and make funding available to these
operations other than the amounts required to be paid under MCOP's transponder
service agreement with PanAmSat, which is described below and elsewhere in this
annual report, and since September 2002 we, News Corp. and Liberty Media have
funded such payments through the making of loans. MCOP also intends to explore
its various alternatives, including by entering into negotiations with the
creditors and other parties with whom MCOP has arrangements in an effort to
mitigate its costs and expenses.
MCOP is currently delinquent in respect of a portion of its transponder
payments to PanAmSat, and since November 2002 has been operating under a
forbearance agreement with PanAmSat, which has been extended through July 31,
2003. Under the transponder service agreement, MCOP is obligated to pay a
monthly service fee of U.S.$3.0 million to PanAmSat for satellite signal
reception and retransmission service from transponders on the PAS-6B satellite
through 2014. We, News Corp., Globopar and Liberty Media have guaranteed 30%,
30%, 30% and 10%, respectively, of MCOP's obligations under this agreement. MCOP
was in compliance with its obligations until November 2002. Since then, we, News
Corp. and Liberty Media have loaned to MCOP amounts equal to our respective
guaranteed portion of the obligations, and MCOP has, in turn, paid to PanAmSat
70% of its obligations under this agreement. Pursuant to the forbearance
agreement, MCOP or its guarantors, including us, has agreed to pay 70% of the
service fee payments that are past due under the transponder service agreement
plus any applicable late payment interest. The remaining service fees will
continue to be due and payable by MCOP or its guarantors as specified in the
transponder service agreement. If MCOP fails to pay any of the forbearance fees
or any service fees for which PanAmSat has not granted forbearance rights,
PanAmSat will be entitled to terminate the transponder service agreement and
demand payment for all amounts due under the agreement. As one of four
guarantors under
- 14 -
the transponder service agreement, we are only liable for up to 30% of MCOP's
obligations under the transponder service agreement. As of December 31, 2002, we
had guaranteed payments in the aggregate amount of U.S.$120.4 million
(undiscounted) over the life of the agreement, and we recognized a liability up
to the amount of these guarantees in our consolidated balance sheet in an
aggregate amount of approximately U.S.$75.7 million, which represents the
present value of these payments as of that date. The partners of MCOP, other
than Globopar, are currently in discussions with PanAmSat to address the
Globopar situation and the status of MCOP's obligations. If MCOP defaults on its
obligations to PanAmSat or these obligations were declared due or payable by
PanAmSat, a substantial liability to PanAmSat could become immediately due and
payable which would, in turn, have a material adverse effect on our financial
condition. In addition, PanAmSat could terminate services and unless we found
alternative transponder services, MCOP could not continue to provide services to
Colombia and Chile.
Globopar's announcement relating to its restructuring of its financial debt
obligations may also affect the operations of DTH TechCo Partners, or TechCo,
our U.S. partnership formed to provide certain technical services from two
uplink facilities located in Florida. TechCo provides these services primarily
to MCOP, Innova and Sky Brasil Servicos Ltda., or Sky Brasil (a DTH service
owned indirectly by Globopar, News Corp. and Liberty Media). TechCo depends on
payments from MCOP, Innova and Sky Brasil to fund its operations. Since
September 2002, Globopar has ceased providing financial support to TechCo and
MCOP, and MCOP, in turn, has ceased making payments to TechCo, which payments we
believe previously accounted for over 50% of TechCo's revenue. TechCo is
obligated to make payments under its capital leases with various maturities
between 2003 and 2007 for an aggregate amount of U.S.$60.8 million. We, News
Corp., Globopar and Liberty Media indirectly hold an interest (in the same
proportion as our interests in MCOP are held) in TechCo, and have guaranteed
36%, 36%, 36% and 12%, respectively, of certain of TechCo's obligations. As of
December 31, 2002, we had guaranteed payments by TechCo in the aggregate amount
of U.S.$21.9 million. We, News Corp. and Liberty Media have been funding
TechCo's operating cash shortfall through loans, and we currently intend to
continue to fund TechCo's shortfall in the form of loans. In addition, we are in
discussions regarding how TechCo will be fully funded, although no assurances
can be given that we will reach a satisfactory resolution as to how to provide
continued funding for TechCo. If, as a result of its financial condition and
restructuring, Globopar fails to make its contributions to TechCo and MCOP, MCOP
and Sky Brasil continue to fail to make their required payments and we, News
Corp. and Liberty Media decide not to make up the shortfall, then TechCo's
ability to provide service to its customers, including Innova, and Innova's
ability to provide services to its customers, could be compromised. In that
case, if Innova is unable to obtain replacement services at comparable prices,
it would be unable to provide a substantial portion of its programming services
to its customers which would, in turn, have a material adverse effect on its
business.
THE IMPOSITION OF A 10% EXCISE TAX ON REVENUES FROM TELECOMMUNICATIONS AND PAY
TELEVISION SERVICES HAS ADVERSELY AFFECTED AND COULD CONTINUE TO ADVERSELY
AFFECT OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In December 2001, the Mexican Congress passed a series of tax reforms, and
in December 2002 it amended these tax reforms. As a result of these tax reforms,
subject to certain exceptions, revenues from telecommunications and pay
television services, including such services provided by Innova and Cablevision,
are subject to a 10% excise tax. In addition, services provided by Skytel, our
nationwide paging service, were subject to this tax in 2002 but are no longer
subject to it beginning January 2003. In February 2002, Cablevision, Innova,
Skytel and a number of other companies in the telecommunications and pay
television industries filed amparo proceedings challenging the constitutionality
of this excise tax, and in 2003 amparo proceedings were filed by Cablevision and
Innova challenging the constitutionality of the December 2002 amendments. The
2002 amparo proceeding was denied with respect to Skytel, but Innova obtained a
favorable ruling in respect of its 2002 amparo proceeding, although this ruling
does not entitle Innova to any amounts paid for this tax in 2002. We cannot
assure you that Innova will be able to recover any portion of the amounts paid
for this excise tax during 2002. Resolution is still pending with respect to
Cablevision's 2002 and Cablevision's and Innova's 2003 amparo proceedings.
Nonetheless, Cablevision and Innova implemented rate increases in January 2002
in an effort to mitigate, in part, the impact of this tax on their results of
operations and financial condition, whereas Skytel decided not to increase its
rates. See "Information on the Company -- Business Overview -- Cable Television,
" "-- DTH Joint Ventures -- Mexico" and "--Other Businesses -- Nationwide
Paging." These rate increases adversely affected consumer demand and resulted in
a loss of subscribers for Cablevision's services, and the imposition of the tax
caused a decrease in net income attributable
- 15 -
to those services provided by Cablevision, Innova and Skytel, as well as
adversely impacted the ability of these businesses to attract new subscribers.
We will continue to evaluate the potential impact of this tax on our
results of operations and financial condition, as well as various measures we
could implement to mitigate this impact. Neither Cablevision nor Innova have
further increased rates in response to the tax in 2003. If Cablevision and
Innova choose to further increase the rates they charge their customers, such
rate increases could adversely affect our business, financial condition and
results of operations.
RISK FACTORS RELATED TO OUR SECURITIES
ANY ACTIONS SHAREHOLDERS MAY WISH TO BRING CONCERNING OUR BYLAWS OR THE CPO
TRUST MUST BE BROUGHT IN A MEXICAN COURT
Our bylaws provide that you must bring any legal actions concerning our
bylaws in courts located in Mexico City. The trust agreement governing the CPOs
provides that you must bring any legal actions concerning the trust agreement in
courts located in Mexico City. All parties to the trust agreement governing the
CPOs, including the holders of CPOs, have agreed to submit these disputes only
to Mexican courts.
WE ARE UNABLE TO FURNISH AUDITED FINANCIAL STATEMENTS FOR MCOP AND THEREFORE MAY
BE PRECLUDED FROM ACCESSING THE CAPITAL MARKETS
In light of continued losses by MCOP, a U.S. partnership in which we
indirectly hold a 30% interest, and other factors, in our 2002 financial
statements we recognized a loss of approximately U.S.$82.2 million (Ps.860.1
million) to reflect our aggregate guaranteed liability at December 31, 2002 in
respect of transponder lease obligations of MCOP. Upon recognition of this
liability, we believe that we will have no further legal or contractual exposure
in the MCOP venture that has not already been recognized. Nonetheless, after
giving effect to this recognized loss, under relevant SEC rules, financial
statements for MCOP are required to be included in this annual report.
One of our venture partners in MCOP, which indirectly holds a 30%
interest, has informed us that it does not agree with certain accounting
estimates required by the auditors for the preparation of stand-alone financial
statements for MCOP under U.S. GAAP. Because any audited financial statements of
MCOP would require the approval of holders representing 75% of the aggregate
partnership interests, audited financial statements for MCOP are not available
for inclusion in this annual report, and are not expected to become available.
In order to provide meaningful and useful information regarding our
investment in MCOP, and because we cannot include separate audited financial
statements for MCOP, we have included supplemental disclosure in the footnotes
to our audited consolidated financial statements. See Note 27(f) to our
financial statements. We believe that the supplemental information included in
this footnote will enable you to assess and understand the impact of our equity
investees, including MCOP, in relationship to our consolidated financial
statements on a U.S. GAAP basis, individually and in the aggregate.
Nonetheless, because of the failure to include audited financial
statements for MCOP as required under relevant SEC rules, this annual report on
Form 20-F does not fully comply with Exchange Act regulations. Similarly, any
registration statement which requires but does not include these financial
statements would not fully comply with the Securities Act regulations.
Accordingly, although we have no current intention to access the capital
markets, unless and until we are fully compliant with these regulations, or
unless we are able to obtain a waiver in respect of these requirements, we would
be precluded from making offerings under effective registration statements.
We are evaluating all alternatives regarding this situation, including
seeking a waiver from the Securities and Exchange Commission of the requirement
to file audited financial statements for MCOP. If we are unable to obtain this
relief, we would then further discuss the issues involving MCOP's financial
statements with our venture partners and MCOP's auditors. There can be no
assurances that we will be successful in either obtaining a waiver or reaching
an agreement with our equity partners and MCOP's independent auditors regarding
MCOP's audited financial statements.
NON-MEXICANS MAY NOT HOLD A SHARES DIRECTLY AND MUST HAVE THEM HELD IN A TRUST
AT ALL TIMES
Non-Mexicans may not directly own A Shares, but may hold them indirectly
through a CPO trust, which will control the voting of the A Shares. The CNBV
authorization related to the CPO trust expires in 2008. If the CNBV does not
renew this authorization upon its expiration, then we anticipate that we may
have to apply to have the A Shares, L Shares and/or D Shares listed on the
Mexican Stock Exchange. In this case, since non-Mexican holders currently cannot
hold A Shares directly, they may be required to sell all of their A Shares to a
Mexican national or a Mexican custodian or agent.
NON-MEXICAN HOLDERS OF OUR SECURITIES FORFEIT THEIR SECURITIES IF THEY INVOKE
THE PROTECTION OF THEIR GOVERNMENT
Pursuant to Mexican law, our bylaws provide that non-Mexican holders of
CPOs and GDSs may not ask their government to interpose a claim against the
Mexican government regarding their rights as shareholders. If non-Mexican
holders of CPOs and GDSs violate this provision of our bylaws, they will
automatically forfeit the A Shares, L Shares and D Shares underlying their CPOs
and GDSs to the Mexican government.
NON-MEXICAN HOLDERS OF OUR SECURITIES HAVE LIMITED VOTING RIGHTS
Non-Mexican holders of GDSs are not entitled to vote the A Shares and D
Shares underlying their securities. The L Shares underlying GDSs, the only
series of our shares that can be voted by non-Mexican holders of GDSs, have
limited voting rights. These limited voting rights include the right to elect
two directors and limited rights to vote on extraordinary corporate actions,
including the delisting of the L Shares and other actions which are adverse to
the holders of the L Shares. For a brief description of the circumstances under
which holders of L Shares are entitled to vote, see "Other Information -- Bylaws
-- Voting Rights and Shareholders' Meetings."
OUR ANTITAKEOVER PROTECTIONS MAY DETER POTENTIAL ACQUIRORS AND MAY DEPRESS OUR
STOCK PRICE
Certain provisions of our bylaws could make it substantially more difficult
for a third party to acquire control of us. These provisions in our bylaws may
discourage certain types of transactions involving the acquisition of our
securities. These provisions may also limit our shareholders' ability to approve
transactions that may be in their best interests and discourage transactions in
which our shareholders might otherwise receive a premium for their shares over
the then current market price, and could possibly adversely affect the trading
volume in our equity securities. As a result, these provisions may adversely
affect the market price of our securities. Holders of our securities who acquire
shares in violation of these provisions will not be able to vote, or receive
dividends, distributions or other
- 16 -
rights in respect of, these securities and would be obligated to pay us a
penalty. For a description of these provisions, see "Other Information -- Bylaws
-- Antitakeover Protections."
GDS HOLDERS MAY FACE DISADVANTAGES WHEN ATTEMPTING TO EXERCISE VOTING RIGHTS AS
COMPARED TO OTHER HOLDERS OF OUR SECURITIES
In situations where we request that JPMorgan Chase Bank, the depositary,
ask holders for voting instructions, holders may instruct the depositary to
exercise their voting rights, if any, pertaining to the deposited securities
underlying their GDSs. The depositary will attempt, to the extent practical, to
arrange to deliver voting materials to these holders. We cannot assure holders
of GDSs that they will receive the voting materials in time to ensure that they
can instruct the depositary how to vote the deposited securities underlying
their GDSs, or that the depositary will be able to forward those instructions
and the appropriate proxy request to the CPO Trustee in a timely manner. If the
depositary does not receive voting instructions from holders of GDSs or does not
forward such instructions and appropriate proxy request in a timely manner, it
will either provide a proxy to a representative designated by us to exercise
these voting rights or attend the relevant meeting and allow the shares
underlying such GDSs to be counted for purposes of satisfying applicable quorum
requirements. Alternatively, the technical committee may instruct the CPO
Trustee to appoint a representative to represent and vote all shares underlying
such GDSs in the same manner as the majority at the relevant meeting. This means
that holders of GDSs may not be able to exercise their right to vote and there
may be nothing they can do if the deposited securities underlying their GDSs are
not voted as they request.
THE INTERESTS OF OUR GDS HOLDERS WILL BE DILUTED IF WE ISSUE NEW SHARES AND
THESE HOLDERS ARE UNABLE TO EXERCISE PREEMPTIVE RIGHTS FOR CASH
Under Mexican law, our shareholders have preemptive rights. This means that
in the event that we issue new shares for cash, our shareholders will have the
right to purchase the number of shares necessary to maintain their existing
ownership percentage. U.S. holders of our GDSs cannot exercise their preemptive
rights unless we register any newly issued shares under the Securities Act of
1933, or the Securities Act, or qualify for an exemption from registration. If
U.S. holders of GDSs cannot exercise their preemptive rights, the interests of
these holders would be diluted in the event that we issue new shares for cash.
We intend to evaluate at the time of any offering of preemptive rights the costs
and potential liabilities associated with registering any additional shares. We
cannot assure you that we will register under the Securities Act any new shares
that we issue for cash, and we do not intend to register any new A Shares we
issue in connection with our Long Term Retention Plan. In that connection, in
2002 we did not register the 430.3 million A Shares authorized in connection
with our Long Term Retention Plan. Accordingly, upon the issuance of all or a
portion of the A Shares authorized in connection with our Long Term Retention
Plan, the interests of GDS holders will be diluted. See "Directors, Senior
Management and Employees -- Long Term Retention Plan" and "Other Information --
Bylaws -- Preemptive Rights." In addition, although the deposit agreement
provides that the depositary may, after consultation with us, sell preemptive
rights in Mexico or elsewhere outside the United States and distribute the
proceeds to holders of GDSs, under current Mexican law these sales are not
possible.
THE PROTECTIONS AFFORDED TO MINORITY SHAREHOLDERS IN MEXICO ARE DIFFERENT FROM
THOSE IN THE UNITED STATES
In accordance with the Ley del Mercado de Valores, or the Mexican
Securities Market Law, as amended, we recently amended our bylaws to increase
the protections afforded to our minority shareholders in an effort to try to
ensure that our corporate governance procedures are substantially similar to
international standards. See "Other Information -- Mexican Securities Market
Law" and "-- Bylaws -- Other Provisions -- Appraisal Rights and Other Minority
Protections." Notwithstanding these amendments, under Mexican law, the
protections afforded to minority shareholders are different from those in the
United States. In particular, the law concerning fiduciary duties of directors
is not well developed, there is no procedure for class actions or shareholder
derivative actions and there are different procedural requirements for bringing
shareholder lawsuits. As a result, in practice, it may be more difficult for our
minority shareholders to enforce their rights against us or our directors or
principal shareholders than it would be for shareholders of a U.S. company.
- 17 -
IT MAY BE DIFFICULT TO ENFORCE CIVIL LIABILITIES AGAINST US OR OUR DIRECTORS,
EXECUTIVE OFFICERS AND CONTROLLING PERSONS
We are organized under the laws of Mexico. Substantially all of our
directors, executive officers and controlling persons reside outside of the
United States, all or a significant portion of the assets of our directors,
executive officers and controlling persons, and substantially all of our assets,
are located outside of the United States, and some of the experts named in this
annual report also reside outside of the United States. As a result, it may be
difficult for you to effect service of process within the United States upon
these persons or to enforce against them or us in U.S. courts judgments
predicated upon the civil liability provisions of the federal securities laws of
the United States. We have been advised by our Mexican counsel, Mijares,
Angoitia, Cortes y Fuentes, S.C., that there is doubt as to the enforceability,
in original actions in Mexican courts, of liabilities predicated solely on U.S.
federal securities laws and as to the enforceability in Mexican courts of
judgments of U.S. courts obtained in actions predicated upon the civil liability
provisions of the U.S. federal securities laws.
- 18 -
FORWARD-LOOKING STATEMENTS
This annual report and the documents incorporated by reference into this
annual report contain forward-looking statements. We may from time to time make
forward-looking statements in our periodic reports to the SEC on Form 6-K, in
our annual report to shareholders, in prospectuses, press releases and other
written materials and in oral statements made by our officers, directors or
employees to analysts, institutional investors, representatives of the media and
others. Examples of these forward-looking statements include:
- projections of operating revenues, net income (loss), net income
(loss) per share, capital expenditures, liquidity, dividends,
capital structure or other financial items or ratios;
- statements of our or our affiliates' and partners' plans,
objectives or goals, including those relating to anticipated
trends, competition, regulation and rates;
- statements about our or our affiliates' and partners' future
economic performance or that of Mexico or other countries in which
we operate or have investments; and
- statements of assumptions underlying these statements.
Words such as "believe," "anticipate," "plan," "expect," "intend,"
"target," "estimate," "project," "predict," "forecast," "guideline," "should"
and similar expressions are intended to identify forward-looking statements, but
are not the exclusive means of identifying these statements.
Forward-looking statements involve inherent risks and uncertainties. We
caution you that a number of important factors could cause actual results to
differ materially from the plans, objectives, expectations, estimates and
intentions expressed in these forward-looking statements. These factors, some of
which are discussed under "-- Risk Factors," include economic and political
conditions and government policies in Mexico or elsewhere, inflation rates,
exchange rates, regulatory developments, customer demand and competition. We
caution you that the foregoing list of factors is not exclusive and that other
risks and uncertainties may cause actual results to differ materially from those
in forward-looking statements.
Forward-looking statements speak only as of the date they are made, and we
do not undertake any obligation to update them in light of new information or
future developments.
- 19 -
ITEM 4. INFORMATION ON THE COMPANY
HISTORY AND DEVELOPMENT OF THE COMPANY
Grupo Televisa, S.A. is a sociedad anonima, or limited liability stock
corporation, which was organized under the laws of Mexico in accordance with the
Ley General de Sociedades Mercantiles, or Mexican Companies Law. Grupo Televisa
was incorporated under Public Deed Number 30,200, dated December 19, 1990,
granted before Notary Public Number 73 of Mexico City, and registered with the
Public Registry of Commerce in Mexico City under Commercial Page (folio
mercantil) Number 142,164. Pursuant to the terms of our estatutos sociales, or
bylaws, our corporate existence continues through 2089. Our principal executive
offices are located at Avenida Vasco de Quiroga, No. 2000, Colonia Santa Fe,
01210 Mexico, D.F., Mexico. Our telephone number at that address is (52) (555)
261-2000.
We are the largest media company in the Spanish-speaking world and a major
player in the international entertainment industry. We produce the most
Spanish-language television programs, and we believe we own the largest library
of Spanish-language television programming, in the world. We broadcast those
programs, as well as programs produced by others, through our own networks,
through our cable system and through our DTH satellite services in which we own
interests in Mexico, Latin America and Spain. We also license our programming to
other television, pay-per-view television and cable broadcasters throughout the
world in many languages. We believe we are also the leading publisher in the
world, in terms of circulation, of Spanish-language magazines. We are also a
major international distributor of Spanish-language magazines and other
periodicals. We engage in other businesses, including radio production and
broadcasting, professional sports and show business promotions, paging services,
feature film production and distribution, dubbing and an Internet portal. We
also own an unconsolidated equity interest in Univision, the leading
Spanish-language television broadcaster in the United States.
The programs shown on our networks are among the most-watched programs in
Mexico. In 2001 and 2002, approximately 70% and 72% of all Mexicans watching
television during prime time hours and over 73% and 74% watching from sign-on to
sign-off watched our networks or stations. Our television operations represent
our primary source of revenues, and in 2001 and 2002, those operations generated
approximately 63.0% and 64.0% of our total revenues.
SIGNIFICANT SUBSIDIARIES, ETC.
The table below sets forth our significant subsidiaries as of December 31,
2002, as well as Innova, the joint venture through which we operate our DTH
business in Mexico.
JURISDICTION OF
ORGANIZATION OR PERCENTAGE
NAME OF SIGNIFICANT SUBSIDIARY OR JOINT VENTURE INCORPORATION OWNERSHIP(1)
----------------------------------------------- ------------- ------------
Corporativo Vasco de Quiroga, S.A. de C.V.(2)(3).................. Mexico 100.0%
CVQ Espectaculos, S.A. de C.V.(2)(3).............................. Mexico 100.0%
Editora Factum, S.A. de C.V.(4)................................... Mexico 100.0%
Empresas Cablevision, S.A. de C.V.(3)(5)....................... Mexico 50.9%
Cablevision, S.A. de C.V.(3)(6)............................ Mexico 50.9%
Galavision DTH, S. de R.L. de C.V.(7).......................... Mexico 100.0%
DTH, LLC(8)................................................ U.S.A. 100.0%
Televisa MCOP Holdings, Inc.(8).......................... U.S.A. 100.0%
Editorial Televisa, S.A. de C.V.(9)............................... Mexico 100.0%
Factum Mas, S.A. de C.V.(10)...................................... Mexico 100.0%
Sky DTH, S. de R.L. de C.V.(10)................................ Mexico 100.0%
Innova, S. de R.L. de C.V.(11)............................. Mexico 60.0%
Grupo Distribuidoras Intermex, S.A. de C.V.(3)(12)................ Mexico 100.0%
Sistema Radiopolis, S.A. de C.V.(3)(13)........................... Mexico 50.0%
Telesistema Mexicano, S.A. de C.V.(14)............................ Mexico 100.0%
Televisa, S.A. de C.V.(15)..................................... Mexico 100.0%
Televisa Comercial, S.A. de C.V.(14).............................. Mexico 100.0%
Television Independiente de Mexico, S.A. de C.V.(14).............. Mexico 100.0%
- 20 -
(1) Percentage of equity owned by us directly or indirectly through
subsidiaries or affiliates.
(2) One of two direct subsidiaries through which we conduct the operations of
our Other Businesses segment, excluding Internet operations.
(3) While this direct subsidiary is not a significant subsidiary within the
meaning of Rule 1-02(w) of Regulation S-X under the Securities Act of
1933, as amended, or the Securities Act, we have included this subsidiary
in the table above to provide a more complete description of our
operations.
(4) Direct subsidiary through which we own equity interests in and conduct our
cable television and Internet businesses.
(5) For a description of America Movil's sale of its 49% equity interest in
Cablevision in April 2002, see "Information on the Company -- Business
Overview -- Cable Television -- Mexico City Cable System."
(6) Indirect subsidiary through which we hold the concession for, and conduct
the operations of, our cable television business.
(7) Direct subsidiary through which we own equity interests in DTH joint
ventures, excluding Innova.
(8) Indirect subsidiary through which we own a 30% interest in a DTH joint
venture with operations in Colombia and Chile. We hold a 30% equity
interest in MCOP through a non-consolidated joint venture with News Corp.
and Globopar, each of which owns a 30% equity interest, and Liberty Media,
which owns a 10% equity interest in MCOP. MCOP is not one of our
subsidiaries, nor is MCOP a member of our consolidated group for financial
reporting purposes. Through November 2002, our share in the results of
operations of MCOP was included in our consolidated income statement under
the line item "Equity in losses of affiliates." Under Mexican GAAP,
effective December 2002, we no longer recognize equity in losses in
respect of our investment in MCOP. See "Operating and Financial Review and
Prospects -- Equity in Losses of Affiliates."
(9) Direct subsidiary through which we conduct the operations of our
Publishing segment.
(10) One of two indirect subsidiaries through which we own a 60% equity
interest in Innova.
(11) We hold a 60% equity interest in Innova through a non-consolidated joint
venture with News Corp., which owns a 30% equity interest in Innova, and
Liberty Media, which owns a 10% interest in Innova. Innova is not one of
our subsidiaries, nor is Innova a member of our consolidated group for
financial reporting purposes. Through December 31, 2000, our share in the
results of operations of Innova was included in our consolidated income
statement under the line item "Equity in losses of affiliates." For a more
detailed discussion of the results of operations and financial condition
of Innova, see Innova's year-end financial statements for the years ended
December 31, 2000, 2001 and 2002, which begin on page F-67. Under Mexican
GAAP, effective January 2001, we no longer recognize equity in losses in
respect of our investment in Innova. See "Operating and Financial Review
and Prospects -- Equity in Losses of Affiliates."
(12) Direct subsidiary through which we conduct the operations of our
Publishing Distribution segment.
(13) Direct subsidiary through which we conduct the operations of our Radio
segment. As described under "Information on the Company -- Business
Overview -- Radio -- Joint Venture; Proposed Acquisition," in October
2001, we entered into agreements with Grupo Prisa, a leading
Spanish-language communications group, to form a radio joint venture in
Mexico. Under these arrangements, Grupo Prisa acquired a 50% equity
interest in Sistema Radiopolis, with limited voting rights, for U.S.$50.0
million, and made a U.S.$10.0 million capital contribution. Since we hold
a controlling 50% full voting stake in this subsidiary and have the right
to elect a majority of the members of its Board of Directors, we will
continue to consolidate 100% of the results of operations of this
subsidiary in accordance with Mexican GAAP. See "Operating and Financial
Review and Prospects -- Results of Operations -- Radio" and "-- Minority
Interest."
(14) One of three direct subsidiaries through which we conduct the operations
of our Television Broadcasting, Programming for Pay Television and
Programming Licensing segments. In April 2003, Televisa Comercial merged
into another one of our wholly-owned subsidiaries, Televisa, S.A. de C.V.
(15) Indirect subsidiary through which we conduct the operations of our
Television Broadcasting, Programming for Pay Television and Programming
Licensing segments.
CAPITAL EXPENDITURES
The table below sets forth our actual capital expenditures, investments and
acquisitions for the years ended December 31, 2000, 2001 and 2002 and our
projected capital expenditures for the year ended December 31, 2003. For a
discussion of how we intend to fund our projected capital expenditures,
investments and acquisitions for 2003, as well as a more detailed description of
our capital expenditures, investments and acquisitions in prior years, see
"Operating and Financial Review and Prospects -- Liquidity, Foreign Exchange and
Capital Resources -- Liquidity" and "-- Capital Expenditures, Acquisitions and
Investments, Distributions and Other Sources of Liquidity."
YEAR ENDED DECEMBER 31,(1)
------------------------------------------------------------
2000 2001 2002 2003
------------ ------------ ------------ ------------
(MILLIONS OF U.S. DOLLARS)
Capital expenditures(2)............................ U.S.$ 149.9 U.S.$ 141.8 U.S.$ 135.2 U.S.$ 110.0
Investments in DTH joint ventures(3)............... 108.2 115.9 32.5 35.0
Investments in Internet-related businesses......... 58.4 11.4 -- --
Investment in Univision(4)......................... -- 375.0 -- --
Investment in OCEN(5).............................. -- -- 104.7 4.8
Other acquisitions and investments(6).............. -- 15.0 -- 88.0
------------ ------------ ------------ ------------
Total capital expenditures and investments...... U.S.$ 316.5 U.S.$ 659.1 U.S.$ 272.4 U.S.$ 237.8
============ ============ ============ ============
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(1) Amounts in respect of some of the capital expenditures, investments and
acquisitions we made in 2000, 2001 and 2002 were paid for in Pesos. These
Peso amounts were translated into U.S. Dollars at the Interbank Rate in
effect on the dates on which a given capital expenditure, investment or
acquisition was made. As a result, U.S. Dollar amounts presented in the
table immediately above are not comparable to: (i) data regarding capital
expenditures set forth in "Key Information -- Selected Financial Data,"
which is presented in constant Pesos of purchasing power as of December
31, 2002 and, in the case of data presented in U.S. Dollars, is translated
at a rate of Ps.10.464 to one U.S. Dollar, the Interbank Rate as of
December 31, 2002, and (ii) certain data regarding capital expenditures
set forth under "Operating and Financial Review and Prospects --
Liquidity, Foreign Exchange and Capital Resources -- Capital Expenditures,
Acquisitions and Investments, Distributions and Other Sources of
Liquidity."
(2) Reflects capital expenditures for property, plant and equipment, as well
as general capital expenditures, in all periods presented. Also includes
U.S.$29.7 million in 2000, U.S.$40.2 million in 2001 and U.S.$18.8 million
in 2002 for the expansion and improvement of our cable business.
(3) Includes investments made in the form of capital contributions and loans
in all periods.
(4) In 2001, reflects an equity investment in Univision in the aggregate
amount of U.S. $375.0 million. In 2002, we acquired in a non-cash
transaction an additional stake in Univision valued at U.S.$235.1 million
as consideration for selling our music recording business. See "--
Business Overview -- Television Broadcasting," "-- Univision" and Note 2
to our year-end financial statements.
(5) In 2002, we acquired a 40% stake in OCESA Entretenimiento, or OCEN, our
live entertainment venture in Mexico, for U.S.$104.7 million, of which
U.S.$37.7 million was paid in the first quarter of 2003. Additionally, in
the first quarter of 2003, we made a capital contribution to OCEN of
approximately U.S.$4.8 million. See "-- Business Overview -- Other
Businesses -- Sports and Show Business Promotions" and Note 2 to our
year-end financial statements.
(6) In 2001, reflects a U.S.$15.0 million minority investment in a programming
production company. In 2003, we expect to acquire Telespecialidades, S.A.
de C.V., or Telespecialidades, a company which is owned by all of the
shareholders of Televicentro in the same proportion that they own
Televicentro, for an aggregate amount of U.S.$83.0 million.
Telespecialidades's net assets at the time of acquisition will consist
principally of shares of our capital stock in the form of CPOs, which
shares were previously owned by Televicentro, and tax loss carryforwards.
See "Major Shareholders and Related Party Transactions -- Televicentro and
the Principal Shareholders." Additionally, in 2003 we expect to invest
approximately U.S.$5.0 million in our 50/50 programming for pay television
joint venture with Univision, which operations commenced in the United
States in the second quarter of 2003. See "-- Business Overview --
Univision" and Note 2 to our year-end financial statements.
In December 2001, we made a U.S.$375.0 million equity investment in
Univision. We used the net proceeds from borrowings made under a U.S.$276.0
million bridge loan facility to finance this equity investment. We repaid this
bridge loan in full in March 2002 using a portion of the net proceeds from the
issuance of the 8.5% Senior Notes due 2032, together with U.S.$99.0 million of
cash on hand. See "Operating and Financial Review and Prospects -- Liquidity,
Foreign Exchange and Capital Resources -- Indebtedness." In October 2002, we
acquired a 40% stake in OCEN, a subsidiary of Corporacion Interamericana de
Entretenimiento, S.A de C.V., or CIE, which owns all of the assets related to
CIE's live entertainment business unit in Mexico, for U.S.$104.7 million. See
"Information on the Company -- Business Overview -- Other Businesses -- Sports
and Show Business Promotions." In 2000, 2001 and 2002, we relied on a
combination of operating revenues, borrowings and net proceeds from dispositions
to fund our capital expenditures, acquisitions and investments. We expect to
fund our capital expenditures in 2003, other than cash needs in connection with
any potential investments and acquisitions, through a combination of cash from
operations and cash on hand. We intend to finance our potential investments or
acquisitions in 2003 through available cash from operations, cash on hand and/or
borrowings. The amount of borrowings required to fund these cash needs in 2003
will depend upon the timing of cash payments from advertisers under our
advertising sales plan.
BUSINESS OVERVIEW
We are the largest media company in the Spanish-speaking world and a major
player in the international entertainment industry. We produce the most
Spanish-language television programs, and we believe we own the largest library
of Spanish-language television programming in the world. We broadcast those
programs, as well as programs produced by others, through our own networks,
through our cable system and through our DTH satellite services in which we own
interests in Mexico, Latin America and Spain. We also license our programming to
other television, pay-per-view television and cable broadcasters throughout the
world in many languages. We believe we are also the leading publisher in the
world, in terms of circulation, of Spanish-language magazines. We are a major
international distributor of Spanish-language magazines. We engage in other
businesses, including radio production and broadcasting, professional sports and
show business promotions, paging services, feature film production and
distribution, dubbing and an Internet portal. We also own an unconsolidated
equity interest in Univision, the leading Spanish-language television
broadcaster in the United States.
The programs shown on our networks are among the most-watched programs in
Mexico. In 2001 and 2002, approximately 70% and 72% of all Mexicans watching
television during prime time hours, 70% and 73% watching
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during weekday prime time hours and 73% and 74% watching from sign-on to
sign-off watched our networks or stations. Our television operations represent
our primary source of revenues, and in 2001 and 2002, those operations generated
approximately 63.0% and 64.0% of our total revenues.
BUSINESS STRATEGY
We intend to use our position as the leading media company in the
Spanish-speaking world and Mexico's dominant advertising medium to help maximize
our financial performance and diversify our sources of cash flow. We intend to
do so by increasing advertising revenues, continuing to improve operating
margins and focusing on new and existing distribution business segments with
high growth potential and high margins, as well as increasing international
programming sales. Our strategy is to leverage our position as the largest
producer of Spanish-language television programming in the world and the leading
publisher of Spanish-language magazines by:
CONTINUING TO CREATE AND PROMOTE HIGH QUALITY PROGRAMMING. We aim to
continue producing the type of high quality television programming that has
propelled many of our programs to the top of the national ratings and audience
share in Mexico. In 2001 and 2002, our networks aired over 93% and 92% of the
200 most watched television programs throughout Mexico. We plan to continue
investing in innovative areas, such as high definition television. We have
launched a number of initiatives in creative development, program scheduling and
on-air promotion. These creative initiatives include improved production of our
highly-rated telenovelas, the overhaul of our news division, new public affairs
programming, comedy programs and game shows and the development of new formats
for both our telenovela and non-telenovela programming. We have improved our
scheduling to be better attuned to viewer habits by demographic segment while
improving viewer retention through more dynamic on-air graphics and pacing. We
have enhanced tune-in promotion both in terms of creative content and strategic
placement. In addition, we plan to continue expanding and leveraging our
exclusive Spanish-language video and international film library, exclusive
rights to soccer games and other events, as well as cultural, musical and show
business productions.
INCREASING ADVERTISING REVENUES IN MEXICO THROUGH IMPROVED MARKETING
EFFORTS. The rate of growth in advertising expenditures and rates for the
Mexican television market have decelerated since 2000 due to the slowdown of the
Mexican economy. However in 2002, we outperformed Mexican economic growth by
increasing our television broadcasting revenues by 4.4% in real terms as
compared to an increase of only 0.9% in GDP during the same period. See "Key
Information -- Risk Factors -- Risk Factors Related to Mexico -- Mexico Has
Experienced Adverse Economic Conditions." The increase in our television
broadcasting revenues was primarily due to the marketing and advertising
strategies we have implemented over the course of the last several years.
Over the past five years we have improved our advertising plan, including
by introducing a rate structure for television advertising that more closely
ties individual program pricing to audience ratings, group demographics and
advertiser demand, implementing differentiated pricing by quarter, reorganizing
our sales force into teams focusing on each of our divisions and emphasizing a
compensation policy for salespeople that is performance-based, with variable
commissions tied to year-end results for a larger portion of total compensation.
Our consolidated advertising revenues have increased, and we believe they will
continue to increase, as compared to what they would have been under our prior
advertising plan, due to new pricing strategies, and by targeting underserved
industries and increasing our focus on local sales.
We plan to continue expanding our customer base by targeting medium-sized
and local Mexican companies who were previously underserved. For example, as
part of our plan to attract medium-sized and local advertisers in Mexico City,
we reduced the number of households reached by the Channel 4 Network throughout
Mexico and revised its format to create 4TV, which targets viewers in the Mexico
City metropolitan area. See "-- Television Broadcasting -- Channel 4 Network."
We currently sell local advertising time on 4TV to medium-sized and local
advertisers at rates comparable to those charged for advertising time on local,
non-television mediums, such as radio, newspapers and billboards. However, by
purchasing local advertising time on 4TV, medium-sized and local advertisers are
able to reach a wider audience than they would reach through local,
non-television mediums. We are also developing new advertising plans in the
Mexican market, such as product tie-ins on our shows, and encouraging customers
to advertise their products jointly through co-marketing and co-branding
arrangements.
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CONTINUING TO PURSUE HIGH GROWTH MEDIA CONTENT DISTRIBUTION BUSINESSES AND
EXPAND PROGRAMMING SALES IN INTERNATIONAL MARKETS. We intend to maintain and
enhance our position as the premier multi-media company in the Spanish-speaking
world. We seek to continuously leverage our unique and exclusive content and
programming, as well as our long-term associations with other global media
conglomerates, to supply the increasing demand for leisure and entertainment
programming in Mexico and throughout the world. We have enhanced our leadership
in pay television markets and expanded strongly our programming sales,
principally through Univision, to the rapidly growing Hispanic market in the
U.S.
DTH. We have established a presence as one of the premier DTH satellite
service providers in the Spanish-speaking world. We believe that Ku-band DTH
satellite services offer the greatest opportunity for rapid expansion of pay
television services into cable households seeking to upgrade and in areas not
currently serviced by operators of cable or multi-channel, multi-point
distribution services. Our joint venture, Innova, is the dominant player in the
Mexican DTH market with approximately 705,900 gross active residential
subscribers as of December 31, 2002, as compared to approximately 692,000 gross
active residential subscribers as of December 31, 2001 and over 590,000 gross
active residential subscribers as of December 31, 2000.
The key components of our DTH strategy include:
- offering high quality and exclusive programming, including rights
in Mexico to our four over-the-air broadcast channels and other
channels produced by our partners;
- capitalizing on our relationship with News Corp. and Liberty Media
and local operators in terms of technology, distribution networks,
infrastructure and cross-promotional opportunities;
- capitalizing on the low penetration of pay television services in
Mexico and elsewhere; and
- providing superior digital Ku-band DTH satellite services and
emphasizing customer service.
Cable. With over 452,000 and 412,000 basic subscribers as of December 31,
2001 and December 31, 2002, Cablevision, the Mexico City cable system in which
we own a 51% interest, is the largest cable television operator in Mexico in
terms of number of subscribers and homes passed. Over 95,000 and 65,000 of
Cablevision's basic subscribers as of December 31, 2001 and December 31, 2002,
respectively, also subscribed for one of Cablevision's premium service packages.
Cablevision's strategy consists of the following elements:
- increasing its subscriber base, average monthly revenues per
subscriber and penetration rate through the upgrade of its
existing cable network into a broadband bidirectional network,
continuing to offer high quality programming, marketing primarily
its premium digital service packages, and introducing new
multimedia products and services;
- reducing its operating costs per subscriber and facilitating the
control of unauthorized, or pirate, users;
- increasing the penetration of its high-speed and bidirectional
Internet access and other multimedia services as well as providing
a platform to offer IP telephony services; and
- continuing the roll out of digital set-top boxes and beginning the
roll out of advanced digital set-top boxes subject to their
availability and their ability to provide advanced interactive
services such as smart card shopping services, picture-in-picture
functions, electronic commerce from home, and video games.
Cablevision also introduced a variety of new multimedia communications
services over the past three years, such as interactive television and other
enhanced program services, including television based Internet access services
and high speed Internet access via personal computers through cable modems.
Cablevision also intends to introduce video on demand, or VOD, services,
e-commerce applications and, subject to the receipt of the requisite
governmental approvals and the availability of certain technology, IP telephony
services.
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U.S. Hispanic market. The U.S. Hispanic population, estimated to be 35.3
million people, or approximately 12.5% of the U.S. population according to the
2000 U.S. Census, is currently one of the fastest growing segments in the U.S.
population, growing at approximately seven times the rate of the non-Hispanic
population. The U.S. Census Bureau projects that the Hispanic percentage will
double to approximately 25% of the U.S. population by the middle of this
century. According to current U.S. Census estimates, there are approximately 37
million Hispanics living in the United States, which account for approximately
13% of the U.S. population. The Hispanic population represents estimated total
consumer expenditures of U.S.$569 billion in 2003, or 7.9% of the total U.S.
consumer expenditures, an increase of 165% since 1990. Hispanics are expected to
account for U.S.$1 trillion of U.S. consumer spending, or 9.5% of the U.S. total
consumer expenditures, by 2010, outpacing the expected growth in total U.S.
consumer expenditures.
During 2000, 2001 and 2002, substantially all of the 7:00 p.m. to 10:00
p.m. weekday prime time programming broadcast by Univision was produced by
Televisa and we received U.S.$76.5 million, U.S.$75.5 million and U.S.$77.7
million in royalties, a significant increase over the U.S.$61.0 million and
U.S.$45.4 million in royalties we received in 1999 and 1998. In 2003, we began
receiving an additional 12% in royalties from the net time sales of the
TeleFutura Network, subject to certain adjustments. For a description of
agreements we entered into with Univision in December 2001, including amendments
to our program license agreement that increased our percentage royalties based
on net time sales, see "-- Univision." We also publish and distribute
Spanish-language magazines in the United States, and we believe that we can
increase our distribution efforts in this area directly and through partnerships
with others.
FOCUSING ON OUR CORE BUSINESSES. Our core businesses consist of television
broadcasting and production, programming for pay television and program
licensing. In recent years we have sold and discontinued some of our non-core
operations. In that connection, we sold our interests in Pegaso, our PCS joint
venture, and our newspaper, Ovaciones, and sold our music recording operations
and our subsidiary principally engaged in consumer product sales. We are
continuing to evaluate strategic alternatives relating to our non-core assets.
Under the terms of our U.S.$100.0 million five-year term loan facility and the
indenture relating to our outstanding Senior Notes, all of the subsidiaries
through which we hold our non-core assets, as well as the subsidiary through
which we operate Bay City Television, our English-language television station on
the border of San Diego and Tijuana, are "unrestricted subsidiaries" and we can
transfer all or a portion of our interests in these subsidiaries or their
assets. We are currently in the process of exploring various alternatives
relating to these unrestricted subsidiaries, including entering into joint
ventures with, or selling or spinning-off to our shareholders interests in,
these subsidiaries. In the event of a spin-off of these subsidiaries, we may
also distribute a substantial amount of cash in order to fund the capital
requirements and acquisition strategies of the spun-off companies, which
strategies may include further expansion into the U.S. Hispanic market. All or a
portion of any such cash distribution would be funded through the incurrence of
debt.
We will continue to explore strategic opportunities to make investments and
acquisitions in the future in our core businesses, as well as operations that
complement these businesses.
CONTINUING TO IMPROVE CASH FLOW MARGINS. Our cash flow margin (operating
income before non-cash depreciation of tangible assets and amortization of
intangible assets over net sales) has improved from 10.7% in 1995, and reached
28.3% during 2002. See Note (13) to "Key Information -- Selected Financial
Data." We intend to continue to improve our margins by increasing revenues and
maintaining our focus on cost containment, as well as through the elimination of
under-performing assets and the discontinuation of businesses which in our view
are not sufficiently profitable.
Between 1995 and 2000, in addition to reducing the number of full- and
part-time employees by 29.5%, we consolidated offices and facilities, shut down,
ceased, downsized or sold non-essential operations, reduced promotional and real
estate expenses, relocated some U.S. magazine operations to Mexico and took
other actions to reduce costs and expenses.
In response to the slowdown in Mexican GDP growth in 2001, we introduced a
number of new cost-cutting initiatives. These initiatives include the
introduction of stricter cost controls, the continued elimination of
under-performing assets and further reductions in the number of employees. As a
result of these initiatives, in April 2001 we ceased production of ECO, our
international news program, and further reduced our workforce by 750 personnel.
As of December 31, 2002, our total employee headcount was approximately 12,600
employees. We intend to
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continue to implement these cost-cutting initiatives throughout 2003, as well as
to introduce new initiatives, such as a performance-based compensation policy
for executives, and to continue increasing the awareness of our employees to
cost containment programs.
TELEVISION
TELEVISION INDUSTRY IN MEXICO
General. There are nine commercial television stations operating in Mexico
City and approximately 462 other television stations elsewhere in Mexico. Most
of the stations outside of Mexico City re-transmit programming originating from
the Mexico City stations. We own and operate four of the television stations in
Mexico City, Channels 2, 4, 5 and 9. These stations are affiliated with 221
repeater stations and 32 local stations outside of Mexico City. See "--
Television Broadcasting." In addition, we own an English-language television
station in Mexico on the California border. Our major competitor, TV Azteca,
owns and operates Channels 7 and 13 in Mexico City, which are affiliated with 87
and 89 stations, respectively, outside of Mexico City. TV Azteca also has a
minority interest in CNI Channel 40, S.A. de C.V., or CNI Channel 40, a UHF
channel that broadcasts in the Mexico City metropolitan area. The Mexican
government currently operates two stations in Mexico City, Channel 11, which has
5 repeater stations, and Channel 22. In addition, there are 19 independent
stations outside of Mexico City which are unaffiliated with any other stations.
See "-- Competition."
We estimate that approximately 19.6 million Mexican households have
television sets, representing approximately 86% of the total households in
Mexico as of December 31, 2002. We believe that approximately 96% of all
households in Mexico City and the surrounding area have television sets.
Ratings and Audience Share. All television ratings and audience share
information included in this annual report relate to data supplied by IBOPE
Mexico, a privately owned market research firm based in Mexico City. IBOPE
Mexico is one of the nine Latin American branch offices of the Brazilian
Institute of Statistics and Public Opinion, or Instituto Brasileno de Opinion
Publica y Estadistica, or IBOPE, the largest research company in Brazil. IBOPE
Mexico conducts operations in Mexico City, Guadalajara, Monterrey and 24 other
Mexican cities with a population over 400,000, and the survey data provided in
this annual report covers data collected from national surveys. IBOPE Mexico
reports that its television surveys have a margin of error of plus or minus 5%.
As used in this annual report, "audience share" for a period means the
number of television sets tuned into a particular program as a percentage of the
number of households watching television during that period, without regard to
the number of viewers. "Rating" for a period refers to the number of television
sets tuned into a particular program as a percentage of the total number of all
television households. "Average audience share" for a period refers to the
average daily audience share during that period, and "average rating" for a
period refers to the average daily rating during that period, with each rating
point representing one percent of all television households. "Prime time" is
4:00 p.m. to 11:00 p.m., seven days a week, "weekday prime time" is 7:00 p.m. to
11:00 p.m., Monday through Friday, and "sign-on to sign-off" is 6:00 a.m. to
midnight, seven days a week. The average ratings and average audience share for
our television networks and local affiliates and programs relate to conventional
over-the-air television stations only; cable services, multi-channel,
multi-point distribution system and DTH satellite services, videocassettes and
video games are excluded.
PROGRAMMING
Programming We Produce. We produce the most Spanish-language television
programming in the world. In 2000, 2001 and 2002, we produced approximately
47,000 hours, 50,000 hours and 52,000 hours, respectively, of programming for
broadcast on our network stations and through our cable operations and DTH
satellite joint ventures, including programming produced by our local stations.
As a result of new cost-cutting initiatives introduced in the first half of
2001, in April 2001 we ceased production of ECO, our international news program.
See "-- Business Strategy -- Continuing to Improve Cash Flow Margins" and
"Operating and Financial Review and Prospects -- Non-recurring Charges."
- 26 -
We produce a variety of programs, including telenovelas, newscasts,
situation comedies, game shows, reality shows, children's programs, musical and
cultural events, movies and educational programming. Our telenovelas are
broadcast in a variety of languages throughout the world.
Our programming also includes broadcasts of special events and sports
events in Mexico promoted by us and others. Among the sports events that we
broadcast are soccer games of our and other teams and professional wrestling
matches. See "-- Other Businesses -- Sports and Show Business Promotions." In
2000, we broadcast the 2000 Summer Olympic Games, as well as a wide variety of
live and taped cultural events, musical concerts and other show business
productions, many of which we promoted. In addition, in 2000, we had extensive
coverage of the Mexican Presidential elections, one of the most competitive
Presidential campaigns in Mexico's history. In 2002, we broadcast in Mexico
certain matches of the Korea-Japan World Cup on our over-the-air channels and
our cable system, but not on our DTH satellite system, and we achieved a 70%
audience share, reflecting our dominant position in broadcasting major sports
events.
Our programming is produced primarily at our 24 studios in Mexico City. We
also operate 16 fully equipped remote control units. Some of our local
television stations also produce their own programming. These local stations
operate 34 studios and 23 fully equipped remote control units. See "--
Television Broadcasting -- Local Affiliates."
In September 2001, we entered into a joint venture with Endemol, B.V., or
Endemol, a leading international developer and producer of programming and other
content for television and online platforms, to jointly develop, produce,
acquire and license Spanish-language programming and the related formats for the
production of such programming, including Endemol programming and formats, in
Mexico and select countries in Central America. Endemol has agreed to license,
on a first option basis, the rights to use its formats, including the format for
Big Brother, which was licensed and became the first reality show produced in
Mexico, to the joint venture, while we have agreed to develop programming based
on these formats. As of December 31, 2002, we have committed to produce
programming based on Endemol formats in an aggregate maximum amount of U.S.$54.8
million through 2006. We began broadcasting Big Brother on our over-the-air
channels, cable and DTH satellite systems in March 2002 and approximately 58% of
the national television audience watched the final episode in June 2002. We also
produced other reality shows, including "Big Brother VIP" and "Operacion
Triunfo."
Foreign-Produced Programming. We license and broadcast television programs
produced by third parties outside of Mexico. Most of this foreign programming is
from the United States and includes television series, movies and sports events,
including coverage of Major League Baseball and National Football League games.
Foreign-produced programming represented approximately 39%, 38% and 37% of the
programming broadcast on our four networks in 2000, 2001 and 2002, respectively.
A substantial majority of the foreign-produced programming aired on our networks
during those periods was aired on Channels 4 and 5, and the remainder was aired
on Channel 9. We dub most of the foreign-produced programming into Spanish prior
to broadcast.
Talent Promotion. We operate Centro de Educacion Artistica, or CEA, a
school in Mexico City to develop and train actors and technicians. We provide
instruction free of charge, and a substantial number of the actors appearing on
our programs have attended the school. We also promote writers and directors
through a writers' school as well as various contests and scholarships.
- 27 -
TELEVISION BROADCASTING
Through Channels 2, 4, 5 and 9 in Mexico City, we operate four television
networks that can be viewed throughout Mexico on our affiliated television
stations. The following table indicates the total number of operating television
stations in Mexico affiliated with each of our four networks, as well as the
total number of local affiliates, as of December 31, 2002.
WHOLLY OWNED
MEXICO CITY WHOLLY MAJORITY MINORITY
ANCHOR OWNED OWNED OWNED INDEPENDENT TOTAL
STATIONS AFFILIATES AFFILIATES AFFILIATES AFFILIATES STATIONS
--------------- ---------- ---------- ---------- ---------- --------
Channel 2................ 1 124 2 -- 1 128
Channel 4................ 1 -- -- -- -- 1
Channel 5................ 1 59 -- -- 6 66
Channel 9................ 1 17 -- -- 12 30
---- ---- ---- ---- ---- ----
Subtotal............. 4 200 2 -- 19 225
---- ---- ---- ---- ---- ----
Local Affiliates......... -- 18 -- 1 13 32
---- ---- ---- ---- ---- ----
Total................ 4 218 2 1 32 257
==== ==== ==== ==== ==== ====
The programs shown on our networks are among the most-watched television
programs in Mexico. Based on IBOPE Mexico surveys during 2000, 2001 and 2002 our
networks aired 189, 186 and 184 of the 200 most-watched television programs
throughout Mexico and produced 14, 18 and 16 of the 25 most-watched television
programs in Mexico, respectively. Most of the remaining top 25 programs in those
periods were soccer games and special feature films which were aired on our
networks.
The following charts below compare the average audience share and average
ratings during prime time hours, weekday prime time hours and from sign-on to
sign-off hours, of our television networks as measured by the national audience,
from January 2000 through December 2002, shown on a bi-monthly basis.
AVERAGE AUDIENCE SHARE
JANUARY 2000 -- DECEMBER 2002
AUDIENCE
Audience Audience
Audience Share Share
Share Weekday Sign-on to
Prime Time Prime Time Sign-off
National National National
-----------------------------------------------
Jan-99 79.5% 79.1% 78.4%
Jan- 00 76.9% 75.5% 77.5%
Mar- 00 74.0% 73.9% 76.0%
May- 00 73.4% 72.9% 75.5%
Jul- 00 73.9% 74.1% 76.0%
Sep- 00 73.4% 73.5% 73.8%
Nov- 00 71.4% 73.0% 74.1%
Dec- 00 71.0% 71.9% 73.3%
Jan- 01 72.4% 74.8% 74.1%
Mar- 01 73.4% 75.0% 75.0%
May- 01 71.4% 72.0% 73.7%
Jul- 01 70.9% 70.1% 73.2%
Sep- 01 68.1% 67.9% 71.2%
Nov- 01 68.7% 66.3% 73.2%
Dec- 01 69.0% 65.2% 71.2%
Jan- 02 70.3% 68.1% 73.0%
Mar- 02 72.5% 71.3% 75.0%
May- 02 76.9% 77.9% 78.0%
Jul- 02 76.5% 77.5% 77.6%
Sep- 02 70.7% 71.2% 72.9%
Nov- 02 69.2% 70.1% 71.5%
Dec- 02 70.6% 73.0% 72.3%
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AVERAGE RATINGS
JANUARY 2000 -- DECEMBER 2002
RATINGS
Ratings Ratings
Ratings Weekday Sign-on to
Prime Time Prime Time Sign-off
National National National
-----------------------------------------------
Jan- 00 42.5 49.1 28.8
Mar- 00 41.9 47.6 29.5
May- 00 40.9 44.6 28.9
Jul- 00 40.6 46.1 29.4
Sep- 00 40.6 46.7 28.3
Nov- 00 40.4 47.7 28.4
Dec- 00 38.0 46.0 27.0
Jan- 01 42.2 50.1 28.7
Mar- 01 41.6 48.7 28.9
May- 01 38.2 43.5 27.2
Jul- 01 38.7 43.1 27.5
Sep- 01 38.1 44.0 27.6
Nov- 01 39.5 43.9 28.4
Dec- 01 36.7 39.7 26.5
Jan- 02 40.1 28.6 28.2
Mar- 02 39.8 29.3 28.3
May- 02 41.6 30.2 29.1
Jul- 02 42.3 31.0 29.7
Sep- 02 38.5 28.3 27.3
Nov- 02 39.5 28.4 27.3
Dec- 02 36.5 26.1 25.6
Channel 2 Network. Channel 2, together with its affiliated stations, is the
leading television network in Mexico and the leading Spanish-language television
network in the world, as measured by the size of the audience capable of
receiving its signal. Channel 2, which is known as "El Canal de las Estrellas,"
or The Channel of the Stars, is broadcast daily by satellite to Central and
South America, Europe and North Africa. See "-- International Television
Business." Channel 2's programming is broadcast on 128 television stations
located throughout Mexico, 24 hours a day, seven days a week. We estimate that
the Channel 2 Network reaches approximately 19.4 million households,
representing 99% of the households with television sets in Mexico. The Channel 2
Network accounted for a majority of our national television advertising sales in
each of 2000, 2001 and 2002.
The following table shows the average audience share of the Channel 2
Network during prime time hours, weekday prime time hours and sign-on to
sign-off hours for the periods indicated:
YEAR ENDED DECEMBER 31,
------------------------------
2000(1) 2001(1) 2002(1)
------- ------- -------
Prime time hours................................... 33.7% 33.3% 32.7%
Weekday prime time hours........................... 36.8% 36.2% 35.2%
Sign-on to sign-off hours.......................... 31.5% 31.8% 31.5%
(1) Source: IBOPE Mexico national surveys.
The Channel 2 Network targets the average Spanish-speaking family as its
audience. Its programs include telenovelas, news, entertainment, comedy and
variety programs, movies, game shows and sports. The telenovelas make up the
bulk of the prime time lineup and consist of romantic dramas that unfold over
the course of 120 to 200 half-hour episodes. Substantially all of Channel 2's
programming is aired on a first-run basis and virtually all of it, other than
Spanish-language movies, is produced by us.
- 29 -
In addition to its anchor station, the Channel 2 Network is affiliated with
127 stations that generally re-transmit the programming and advertising
transmitted to them by Channel 2 without interruption, which stations are
referred to as "repeater" stations.
Channel 5 Network. In addition to its anchor station, Channel 5 is
affiliated with 65 repeater stations located throughout Mexico. We estimate that
the Channel 5 Network reaches approximately 17.8 million households,
representing approximately 91% of households with television sets in Mexico. We
believe that Channel 5 offers the best option to reach the 18-34 year old
demographic, and we have extended its reach into this key group by offering
exciting new content.
The following table shows the average audience share of the Channel 5
Network during prime time hours, weekday prime time hours and sign-on to
sign-off hours during the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------------
2000(1) 2001(1) 2002(1)
------- ------- -------
Prime time hours............................................. 18.8% 18.4% 18.9%
Weekday prime time hours..................................... 18.2% 18.1% 18.3%
Sign-on to sign-off hours.................................... 21.6% 21.0% 21.2%
(1) Source: IBOPE Mexico national surveys.
We believe that Channel 5 has positioned itself as the most innovative
television channel in Mexico with a combination of reality shows, sitcoms,
dramas, movies, cartoons and other children's programming. The majority of
Channel 5's programs are produced outside of Mexico, primarily in the United
States. Most of these programs are produced in English and dubbed or subtitled
at our production facilities. In 2002, Channel 5 aired 19 of the top 20 rated
movies, including the hits "The Mummy," "Men In Black" and "Titanic."
Channel 4 Network. Channel 4 broadcasts in the Mexico City metropolitan
area and, according to our estimates, reaches over 4.5 million households
throughout Mexico, representing approximately 23% of television households in
Mexico. As described above, as part of our plan to attract medium-sized and
local Mexico City advertisers, we reduced the number of households reached by
this network throughout Mexico and revised the format of Channel 4 to create 4TV
in an effort to target viewers in the Mexico City metropolitan area. We
currently sell local advertising time on 4TV to medium-sized and local
advertisers at rates comparable to those charged for advertising time on local,
non-television mediums, such as radio, newspapers and billboards. However, by
purchasing local advertising time on 4TV, medium-sized and local advertisers are
able to reach a wider audience than they would reach through local,
non-television mediums. We are also developing new advertising plans in the
Mexican market, such as product tie-ins on our shows, and encouraging customers
to advertise their products jointly through co-marketing and co-branding
arrangements.
The following table shows the average audience share of the Channel 4
Network during prime time hours, weekday prime time hours and sign-on to
sign-off hours during the periods indicated, including audience share for local
stations:
YEAR ENDED DECEMBER 31,
--------------------------------
2000(1) 2001(1) 2002(1)
------- ------- -------
Prime time hours............................................. 8.8% 6.8% 8.1%
Weekday prime time hours..................................... 9.3% 5.8% 8.2%
Sign-on to sign-off hours.................................... 10.1% 9.2% 10.4%
(1) Source: IBOPE Mexico national surveys.
The Channel 4 Network targets young adults and housewives. Its programs
consist primarily of news, comedy, sports, and entertainment shows produced by
us, as well as a late night home shopping program, foreign-produced series,
mini-series and movies, which are dubbed or subtitled in Spanish. In an attempt
to attract a larger share of
- 30 -
the Mexico City television audience, 4TV also began
broadcasting two new local newscasts relating to the Mexico City metropolitan
area.
Channel 9 Network. In addition to its anchor station, Channel 9 is
affiliated with 29 repeater stations, approximately one-third of which are
located in central Mexico. We estimate that Channel 9 reaches approximately 14.5
million households, representing approximately 74% of households with television
sets in Mexico. Channel 9 broadcasts in all of the 26 cities other than Mexico
City that are covered by national surveys. The following table shows the average
audience share of the Channel 9 Network during prime time hours, weekday prime
time hours and sign-on to sign-off hours during the periods indicated:
YEAR ENDED DECEMBER 31,
2000(1) 2001(1) 2002(1)
------- ------- -------
Prime time hours............................................. 12.5% 11.9% 12.7%
Weekday prime time hours..................................... 9.3% 10.3% 10.8%
Sign-on to sign-off hours.................................... 12.2% 11.1% 11.2%
(1) Source: IBOPE Mexico national surveys.
The Channel 9 Network targets families as its audience. Its programs
principally consist of movies, sports, sitcoms, game shows, news and re-runs of
popular programs from Channel 2.
Local Affiliates. There are 32 local television stations affiliated with
our networks, of which 18 stations are wholly owned, one station is minority
owned and 13 stations are independent affiliated stations. These stations
receive only part of their programming from Channels 4 and 9. See "-- Channel 4
Network." The remaining programs aired consist primarily of programs licensed
from our program library and locally produced programs. The locally produced
programs include news, game shows, musicals and other cultural programs and
programs offering professional advice. In 2000, 2001 and 2002, the local
television stations owned by us produced 27,900 hours, 35,000 hours and 37,000
hours of programming. Each of the local affiliates maintains its own sales
department and sells advertising time during broadcasts of programs that it
produces and/or licenses. Generally, we pay the affiliate stations that we do
not wholly own a fixed percentage of advertising sales for network affiliation.
Border Stations. We currently own a television station on the Mexico/U.S.
border that broadcasts English-language programs, as an affiliate of the Fox
Television network under an affiliation agreement with Fox, and under renewable
permits issued by the FCC to the station and to Fox Television that authorize
electronic cross-border programming transmissions. The station, XETV, which is
licensed to Tijuana and serves the San Diego television market, is operated on
our behalf by Entravision Communications Corporation, or Entravision, a U.S.
broadcaster, pursuant to a joint marketing and programming agreement we have
with Entravision whose initial term expires at the end of 2004. XETV's FCC
cross-border permit was recently renewed for a five-year term expiring in June
2008. Fox's cross-border FCC permit expires in 2006, and the Fox affiliation
agreement for XETV expires in 2008. In March 2002, we converted two of the
additional border stations that we own and operate from English-language Fox
Television network affiliates to stations broadcasting entirely in Spanish.
Advertising Sales Plan. Our sales force is organized into separate teams,
each of which focuses on a particular segment of our business. Our method of
selling advertising attempts to maximize unit rates as opposed to upfront
deposits. We also have differentiated pricing by quarter, with the highest rates
applicable in the fourth quarter of a given year. In addition, sales force
incentive compensation largely ties bonuses to total year-end results. For a
description of our advertising sales plan, see "Operating and Financial Review
and Prospects -- Results of Operations -- Television Broadcasting."
We currently sell only a portion of our available television advertising
time. We use our remaining available television advertising time to satisfy our
legal obligation to the Mexican government to provide up to 18 minutes per day
of our broadcast time between 6:00 a.m. to midnight for public service
announcements and 30 minutes per day for public programming, in each case
distributed in an equitable and proportionate manner, and to promote our
products, including television, DTH satellite services, radio and cable
programming, records, magazines, sports and special events. We sold
approximately 70%, 56% and 56% of total available national advertising time on
our
- 31 -
networks during prime time broadcasts in 2000, 2001 and 2002, and approximately
44%, 35% and 42% of total available national advertising time during all time
periods in those periods. See "Operating and Financial Review and Prospects --
Results of Operations -- Television Broadcasting," "-- Programming for Pay
Television," "-- Publishing," "-- Cable Television" and "-- Radio."
PROGRAMMING FOR PAY TELEVISION. We provide programming for cable and
pay-per-view television in Mexico and in other countries in Latin America. We
currently transmit this programming through our DTH satellite joint ventures in
Mexico, Spain, Colombia and Chile and intend to transmit in the United States
via the joint venture we recently entered into with Univision. The programs
include telenovelas, movies, music videos, sports and news programs produced by
us and programs produced by other parties. See "-- DTH Joint Ventures --
Programming." In 2000, 2001 and 2002, we produced approximately 10,400 hours,
5,900 hours and 4,400 hours of programming for broadcast on pay television
services. The decrease in programming hours produced resulted primarily from our
elimination of some under-performing programming in connection with our
cost-cutting efforts. See "-- Programming -- Programming We Produce."
In April 2003, we entered into a joint venture with Univision to operate
and distribute a suite of Spanish-language television networks for digital cable
and satellite delivery in the United States. The joint venture, which commenced
operations in the second quarter of 2003, will initially distribute five cable
networks, including two movie channels and three channels featuring music
videos, celebrity lifestyle and interviews and entertainment news programming.
See "-- Univision."
PROGRAMMING LICENSING. We license our programs and our rights to programs
produced by others to television stations in Mexico and other television
broadcasters and pay television providers in the United States, Latin America,
Asia, Europe and Africa. We collect licensing fees based on the size of the
market for which the license is granted or on a percentage of the advertising
sales generated from the programming. In addition to the programming licensed to
Univision, we licensed over 68,000 hours, 64,000 hours and 60,000 hours of
programming in 2000, 2001 and 2002. A substantial portion of the programming
licensed by us in the United States is to Univision. See "-- Univision" and
"Operating and Financial Review and Prospects -- Results of Operations --
Programming Licensing." As of December 31, 2002, we had approximately 166,000
half-hours of television programming in our library available for licensing.
INTERNATIONAL TELEVISION BUSINESS. Our international television business
focuses on:
- our equity interest in the Univision network and stations in the
United States;
- our participation in DTH satellite joint ventures;
- the expansion of our broadcast reach in other countries; and
- the licensing of our programming to other broadcasters throughout
the world.
Expansion of Programming Reach. Our programs can be seen in the United
States, Latin America, Asia, Europe and Africa. We intend to continue to expand
our sales of Spanish-language programming internationally through our cable and
DTH satellite services.
PUBLISHING
We believe that we are the largest publisher and distributor of magazines
in Mexico, and of Spanish-language magazines in the world, as measured by
circulation.
EDITORIAL. With a total circulation of approximately 140 million copies in
2000, 132 million copies in 2001 and 137 million copies in 2002, we publish over
50 titles that are distributed in 18 countries, including Mexico, Colombia,
Chile, Argentina, Ecuador, Peru and Panama. See "-- Publishing Distribution."
Our principal publications in Mexico include a weekly entertainment and
telenovelas magazine, TV y Novelas, and a weekly television guide, Tele Guia. TV
y Novelas and Tele Guia, which had an average circulation during 2002 of
- 32 -
approximately 472,000 and 195,000 per issue, respectively, are the first and
second ranking magazines in Mexico by circulation according to our estimates. We
also publish the following popular magazines: Eres, a bi-weekly magazine for
teenagers; Vanidades, a bi-weekly magazine for women; Muy Interesante, a monthly
science and culture magazine; and Furia Musical, a bi-weekly musical magazine
that promotes principally Banda and Onda Grupera music performers. Our other
principal publications in Latin America and the United States include Vanidades
and TV y Novelas USA. Through a joint venture with The Hearst Corporation, we
publish the Spanish-language editions of Cosmopolitan, Good Housekeeping,
Harper's Bazaar and Popular Mechanics.
We publish the Spanish-language edition of PC Magazine pursuant to a
license agreement with Ziff-Davis Publishing Company, Automovil Panamericano, a
popular automotive magazine, through a joint venture with Luike Motorpress, and
Golf Digest pursuant to a license agreement with The New York Times Magazine
Group. We also publish a Spanish-language edition of National Geographic in
Latin America and the United States through a licensing agreement with The
National Geographic Society.
In 2002, we launched several new titles, some of which are Spanish-language
versions of popular magazines, including Travel+Leisure, pursuant to a licensing
agreement with American Express Publishing, Maxim, through a licensing agreement
with Dennis Publishing, Electronic Gaming, pursuant to a licensing agreement
with Ziff-Davis Publishing Company, Disney Witch, through a licensing agreement
with the Walt Disney Company. We also launched a monthly cable guide for
Cablevision, Contacto Digital, and Caras, a new lifestyle/socialite magazine.
PUBLISHING DISTRIBUTION. We estimate that we distribute approximately 60%,
in terms of volume, of the magazines circulated in Mexico through our
subsidiary, Distribuidora Intermex, S.A. de C.V., the largest publishing
distribution network in Latin America. We believe that our distribution network
reaches over 300 million Spanish-speaking people in 18 countries, including
Mexico, Colombia, Chile, Argentina, Ecuador, Peru and Panama. We also believe
that our distribution network reaches over 20,000 points of sale in Mexico and
over 80,000 points of sale outside of Mexico. We also own publishing
distribution operations in six countries. Our publications are also sold in the
United States, the Caribbean and elsewhere through independent distributors.
Historically, our distribution network sold publications published primarily by
our Publishing segment, and in 2002, over 64% of the publications distributed by
this segment were published by our Publishing segment. Our distribution network
recently began selling an increased number of publications published by joint
ventures and independent publishers, as well as CDs, videos, lottery tickets and
other consumer products.
CABLE TELEVISION
THE CABLE TELEVISION INDUSTRY IN MEXICO. Cable television offers multiple
channels of entertainment, news and informational programs to subscribers who
pay a monthly fee. These fees are based on the package of channels they receive.
See "-- Cable Television Services." We believe that as of December 31, 2002,
there were approximately 53 cable operators in Mexico, serving approximately 2.3
million subscribers.
MEXICO CITY CABLE SYSTEM. We own a 51% interest in Cablevision, the largest
cable television operator in Mexico in terms of number of subscribers and homes
passed, which provides cable television services to subscribers in Mexico City
and surrounding areas. As of December 31, 2002, Cablevision had over 412,000
basic subscribers, as compared to approximately 452,000 and 403,000 basic
subscribers as of December 31, 2001 and December 31, 2000, respectively. Over
95,000 and 65,000 of Cablevision's basic subscribers as of December 31, 2001 and
December 31, 2002 also subscribed for one of Cablevision's premium service
packages. Cablevision is currently the largest cable television operator and the
only high-speed Internet access provider through cable modem in Mexico City.
Through April 2002, we operated Cablevision through a joint venture with
America Movil, Latin America's largest cellular communications provider and an
affiliate of Telmex, which owned 49% of Cablevision. America Movil sold its 49%
equity interest in Cablevision in April 2002 in connection with an offering on
the Mexican Stock Exchange. CPOs, each representing two series A shares and one
series B share of Cablevision, began trading on the Mexican Stock Exchange under
the ticker symbol "CABLE" in April 2002.
CABLE TELEVISION SERVICES. Cablevision's basic service package offers 49
channels, including Mexico City's nine over-the-air television channels. Other
channels in the basic service package include E!Entertainment, the
- 33 -
Latin American MTV channel, ESPN International, Nickelodeon, the Latin American
Discovery Channel, the Sony Channel, the Warner Channel and various
sports-related and international film channels. Cablevision also currently
offers five premium digital service packages ranging in price from Ps.322.00 to
Ps.579.00, in each case, including the Ps.245.00 basic service fee. Cablevision
previously offered seven analog premium service packages. Following the
discontinuation of these packages on January 15, 2002, analog premium
subscribers were converted to Cablevision's basic service package or one of its
five premium digital service packages. Cablevision's five premium digital
service packages offer up to 100 video channels and 50 audio channels, which
provide access to a variety of additional channels, including CNN International,
HBO, Cinemax, Cinecanal and Movie City, and 28 pay-per-view channels. At
December 31, 2002, approximately 65,000 of Cablevision's over 412,000 basic
subscribers also subscribed for one or more of its premium service packages.
PAY-PER-VIEW CHANNELS. Cablevision currently offers 28 pay-per-view cable
television channels in each of its five premium digital service packages.
Pay-per-view channels show films and special events programs, including sports
and musical events.
CABLE TELEVISION REVENUES. Cablevision's revenues are generated from
subscriptions for its cable services and from sales of advertising to local and
national advertisers. Subscriber revenues come from monthly service and rental
fees, and to a lesser extent, one-time installation fees. In an effort to expand
its subscriber base and in response to competitive pressures from DTH satellite
services, until January 2002 Cablevision had been offering its basic service
package at reduced rates. In January 2002, Cablevision increased the monthly fee
of its basic service package from Ps.199.00 to Ps.245.00, reflecting the
imposition of a 10% excise tax on pay television services and an increase in the
number of channels offered in the basic service package to 49. See "Key
Information -- Risk Factors -- Risk Factors Related to Our Business -- The
Imposition of a 10% Excise Tax on Revenues From Telecommunications and Pay
Television Services Has Adversely Affected and Could Continue to Adversely
Affect Our Business, Financial Condition and Results of Operations." See "--
Cable Television Services." The Mexican government does not currently regulate
the rates Cablevision charges for its basic and digital premium service
packages, although we cannot assure you that the Mexican government will not
regulate the Cablevision's rates in the future. If the SCT were to determine
that the size and nature of Cablevision's market presence was significant enough
so as to have an anti-competitive effect, then it could regulate the rates it
charges for its various services.
CABLE TELEVISION INITIATIVES. In an effort to expand its subscriber base
and increase its average monthly revenues per subscriber, Cablevision began
offering, on a limited basis, television based and high speed Internet access
services through cable modems in 2000. Cablevision plans to offer the following
multimedia communications services to its subscribers, subject to the expansion
and upgrade of its existing network, the receipt of the requisite governmental
approvals and, in the case of IP telephony, the availability of certain
technology:
- enhanced programming services, including VOD services and video
games beginning in 2004; and
- IP telephony services beginning in 2004.
In order to have access to these multimedia communications services,
subscribers will need to have access to a cable network with bidirectional
capability operating at a speed of at least 870 MHz, and a digital set-top box.
In order to provide these new services, Cablevision is in the process of
upgrading its existing cable network. Cablevision's cable network currently
consists of more than 9,800 kilometers with over 1.4 million homes passed. In
2002, Cablevision expanded its network by over 320 kilometers. Over 50% of
Cablevision's network runs at least at 750 MHz and approximately 36% of
Cablevision's network has a bi-directional capability operating at a speed of at
least 870 MHz. Cablevision currently expects that more than half of its current
network will be operating at 870 MHz and have bidirectional capability by the
beginning of 2004. Cablevision is also continuing the roll-out of digital
set-top boxes, a process which began in the second half of 2000. We expect that
the roll-out of these products and services will increase both Cablevision's
subscriber base and its average monthly revenues per subscriber in the future.
- 34 -
RADIO
RADIO STATIONS. We own and operate 17 radio stations in Mexico, including
three AM and three FM radio stations in Mexico City, five AM and two FM radio
stations in Guadalajara, one FM radio station in Mexicali and repeater radio
stations in each of Monterrey, San Luis Potosi and Veracruz. Some of our
stations transmit powerful signals which reach beyond the market areas they
serve. For example, XEW-AM and XEWA-AM transmit signals that reach the southern
part of the United States. XEW-AM serves most of southern Mexico. We estimate
that our radio stations reach approximately half of the population of Mexico. We
are currently exploring expanding the reach of our radio programming and
advertising through affiliations with third parties and through acquisitions.
See "-- Joint Venture; Proposed Acquisition."
According to International Research Associates Mexicana, S.A. de C.V., or
INRA, in 2000, 2001 and 2002, XEW-AM ranked ninth, sixteenth and tenth among the
34 stations in the Mexico City metropolitan area AM market, and XEQ-FM ranked
second, fifteenth and sixth among the 28 stations in the Mexico City
metropolitan area FM market. INRA conducts daily door-to-door interviews in the
Mexico City metropolitan area to determine radio listeners' preferences. Outside
Mexico City, INRA conducts periodic surveys. We believe that no other
independent survey of this nature is routinely conducted in Mexico. INRA reports
that the margin of error of its surveys is plus or minus 1.7%.
Our radio stations use various program formats which target specific
audiences and advertisers, and cross-promote the talent, content and programming
of many of our other businesses, including television, sports and news.
JOINT VENTURE; PROPOSED ACQUISITION. In October 2001, we entered into
agreements with Grupo Prisa, a leading Spanish-language communications group.
Under these agreements, Grupo Prisa acquired a 50% equity stake, with limited
voting rights, in our radio subsidiary, Sistema Radiopolis, for U.S.$50.0
million, and made a U.S.$10.0 million capital contribution. See "Operating and
Financial Review and Prospects -- Results of Operations -- Radio" and "--
Minority Interest."
Under this joint venture, we hold a controlling 50% full voting stake in
this subsidiary and we have the right to appoint the majority of the members of
the joint venture's Board of Directors. Except in the case of matters that
require unanimous Board and/or shareholder approval, such as extraordinary
corporate transactions, the removal of directors and the amendment of the joint
venture's organizational documents, among others, we control the outcome of most
matters that require Board and/or shareholder approval. We also have the right
to appoint the joint venture's Chief Financial Officer. Grupo Prisa has the
right to nominate the joint venture's Chief Executive Officer, subject to our
approval.
In September 2000, we reached an agreement in principle with the
controlling shareholders of Grupo Acir to merge our radio subsidiary, Sistema
Radiopolis with Grupo Acir. As a result of the continued opposition to the
proposed merger by the Mexican Antitrust Commission since December 2000, the
merger agreement expired in January 2002. Neither party has any further
obligations, financial or otherwise, under the agreement in principle. See "--
Mexican Antitrust Law."
RADIO ADVERTISING. We sell both national and local advertising on our radio
stations. Our radio advertising sales force sells advertising time primarily on
a scatter basis. See "-- Television -- Television Broadcasting -- Advertising
Sales Plan." In addition, we use some of our available radio advertising time to
satisfy our legal obligation to provide up to 35 minutes per day of our
broadcast time between 6:00 a.m. to midnight to the Mexican government for
public service announcements and programming, distributed in an equitable and
proportionate manner.
MUSIC RECORDING BUSINESS SOLD TO UNIVISION
Until recently, we operated one of the largest music recording companies in
Mexico. We owned several record labels, including Melody and Fonovisa, which
produce cassettes and compact disc recordings of Mexican and other well known
Spanish-language artists. In April 2002, we sold our music recording operations
to Univision. See "Operating and Financial Review and Prospects -- Discontinued
Operations" and "-- Liquidity, Foreign Exchange
- 35 -
and Capital Resources -- Capital Expenditures, Acquisitions and Investments,
Distributions and Other Sources of Liquidity."
OTHER BUSINESSES
ESMAS.COM. In May 2000, we launched EsMas.com, a Spanish-language
horizontal Internet portal integrating several sites. The portal leverages our
unique and extensive Spanish-language content, including news, sports, business,
music and entertainment, editorials, life and style, technology, culture,
shopping, health, kids and an opinion survey channel, and offers a variety of
services, including e-mail, search engines, chat forums, e-cards, on-line radio
stations, recruitment services, news bulletins and a downloadable service for
customer assistance. We believe that EsMas.com has positioned itself as one of
the leading Internet portals in Mexico. We are currently targeting users in
Mexico and intend to explore targeting users in the rest of the world.
Currently, we control 100% of the venture.
In July 2001, we acquired submarino.com.mx (currently known as
"EsMasCompras.com," the vertical shopping channel for EsMas.com), the leading
Mexican e-shopping website in terms of the number of customers, repeat business
rates and catalogue size, which features a wide selection of CDs, DVDs, books,
toys and electronic goods. Prior to this acquisition, submarino.com.mx had been
operating the vertical shopping channel for EsMas.com since November 2000. We
may enter into future joint ventures or strategic alliances with regional
Internet content and access providers, although we cannot give you any
assurances in this regard.
In connection with the series of transactions we entered into with
Univision in December 2001, as described under "-- Univision," we amended our
program license agreement such that, for a five-year period, we are permitted to
show certain limited programming over the Internet. For a description of a
possible dispute we may have with Univision after this five-year period
regarding the broadcast of programming over the Internet, see "Key Information
-- Risk Factors -- Risk Factors Related to Our Business -- Future Activities
Which We May Wish to Undertake in the U.S. May Be Affected by Our Arrangements
with Univision and May Affect Our Equity Interest in Univision."
SPORTS AND SHOW BUSINESS PROMOTIONS. We actively promote a wide variety of
sports events and cultural, musical and other entertainment productions in
Mexico. Most of these events and productions are broadcast on our television
stations, cable television system, radio stations and DTH satellite services.
See "-- Television -- Programming," "-- Cable Television -- Cable Television
Services," "-- Pay-Per-View Channels" and "-- DTH Joint Ventures -- Mexico."
Soccer. We own three of Mexico's professional soccer teams, America, Necaxa
and Real San Luis, of which America and Necaxa are among the most popular and
successful in Mexico. In 2002, America won the Premiere League championship, and
Real San Luis won the minor league championship, enabling Real San Luis to
compete in the Premiere League in 2003. Each team plays two 19 game regular
seasons. The best teams of each season engage in post-season championship play.
In 2000, 2001 and 2002, we broadcast 80, 84 and 111 hours, respectively, of our
teams' home games.
We own the Azteca Stadium which has a seating capacity of approximately
105,000 people. Azteca Stadium has hosted two World Cup Soccer Championships.
America and the Mexican National Soccer team generally play their home games at
this stadium. We have exclusive rights to broadcast the home games of the
America, Necaxa and Real San Luis teams, as well as those of seven other
Premiere League soccer teams.
Promotions. We promote a wide variety of concerts and other shows,
including beauty pageants, song festivals and nightclub shows of popular Mexican
and international artists. In 2002, Azteca Stadium was the site of the annual
Teleton, a charity fundraiser, which raised over Ps.217.8 million (nominal) for
disabled children.
In 2001, we entered into arrangements with Clear Channel, to establish a
Mexico-focused live entertainment joint enterprise, En Vivo. In April 2002, we
and Clear Channel expanded this venture to include the U.S. Hispanic market. In
December 2002, we terminated the Mexican operations of En Vivo and our 50/50
venture with Clear Channel is now focused exclusively on the operations in the
United States. Under this arrangement, we produce and
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promote worldwide tours of Spanish-speaking artists and other live events
primarily targeting Spanish-speaking audiences in the United States.
In October 2002, we acquired a 40% stake in OCEN, a subsidiary of CIE, for
U.S.$104.7 million. OCEN owns all of the assets related to CIE's live
entertainment business unit in Mexico. OCEN's business includes the production
and promotion of concerts, theatrical, family and cultural events, as well as
the operation of entertainment venues, the sale of entrance tickets, food,
beverage and souvenirs, and the organization of special and corporate events. We
will continue to produce and promote events separately outside of Mexico. OCEN
will have access to our media assets to promote its events throughout Mexico,
and we will have the right of first refusal to broadcast on our over-the-air
channels and Pay TV ventures movies and events produced and distributed by CIE.
FEATURE FILM PRODUCTION AND DISTRIBUTION. We produce first-run
Spanish-language feature films, some of which are among Mexico's top films based
on box office receipts. We co-produced one feature film in 1999 and 2000. In
2001, we began co-production of nine feature films, and in 2002 we co-produced
four feature films. We enter into co-production arrangements, primarily with
U.S. film production companies, on a case by case basis. We will continue to
consider entering into co-production arrangements with third parties in the
future, although no assurances can be given in this regard.
We distribute our films to Mexican movie theaters and later release them on
video for broadcast on cable and network television. In 2000, 2001 and 2002, we
released one, two and five of our feature films through movie theaters,
including films from our film library. We also distribute our feature films
outside of Mexico.
In December 1999, we entered into an agreement with CIE pursuant to which
we have a first option to purchase rights in Mexico to distribute CIE's feature
films in movie theatres and broadcast these films on our cable and television
networks. We purchased the distribution rights in Mexico for 19 and 13 of CIE's
feature films in 2001 and 2002.
We distribute feature films produced by non-Mexican producers in Mexico. We
are the exclusive distributor in Mexico of feature films produced by Warner
Brothers. The agreement with Warner Brothers expires on December 31, 2003. Since
February 1997, we have also been the exclusive distributor in Mexico of feature
films produced by New Line Cinema under a license agreement that expires on
December 31, 2003 and by Polygram under a license agreement that expires in
2008. In 2000, 2001 and 2002, we distributed 61, 57 and 53 feature films,
including, in 2002, several U.S. box office hits, such as Lord of the Rings,
Harry Potter II: The Chamber of Secrets, Scooby Doo and Ocean's Eleven. We also
distribute independently produced non-Mexican and Mexican films in Mexico.
At December 31, 2002, we owned or had rights to more than 560
Spanish-language films and 25 video movies. Many of these films and movies have
been shown on our television networks, cable system and DTH services. We also
licensed the rights to 19 films produced by third parties.
DUBBING. We provide dubbing for television programs and films that we or
others, including several major U.S. production companies, purchase. Dubbing
services include script and dialogue translation, voice-over dubbing of
narration and songs, preparation of sound tracks for international distribution,
sound effects and transfers between different recording formats. Our dubbing
facilities consist of 13 studios for recording dialogue, 6 post-production
studios and 4 quality control rooms. These facilities are capable of producing
230 hours of dubbing per month. In 2000, 2001 and 2002, we produced over 1,750,
1,600 and 1,750 hours of dubbing in these facilities.
NATIONWIDE PAGING. We own a 51% interest in a joint venture called
"Skytel," which has a license to provide nationwide paging services in Mexico. A
subsidiary of Mobile Telecommunications Technologies Corp., a U.S. paging
company, indirectly owns the remaining 49% interest in Skytel. The license
allows Skytel to provide paging services on the 901, 931 and 940 MHz
frequencies. The expiration dates of the nationwide paging concessions are 2006
and 2019. As of December 31, 2002, Skytel had over 94,000 subscribers as
compared to approximately 143,000 subscribers as of December 31, 2001. During
2002, our nationwide paging services were subject to a 10% excise tax, but these
services became tax exempt again effective January 1, 2003. See "Key Information
-- Risk Factors -- Risk Factors Related to Our Business -- The Imposition of a
10% Excise Tax on Revenues From Telecommunications and Pay Television Services
Has Adversely Affected and Could Continue to Adversely Affect Our Business,
Financial Condition and Results of Operations."
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MUTUAL FUND VENTURE. In October 2002 we entered into a joint venture with a
group of investors, including Manuel Robleda, former president of the Mexican
Stock Exchange, to establish "Mas Fondos," the first mutual fund distribution
company in Mexico. Mas Fondos sells mutual funds that are owned and managed by
third parties to individual investors. Currently, Mas Fondos distributes 50
funds managed by five entities. The company operates under a license granted by
the CNBV. We own a 51% interest in this joint venture, and we have the right to
elect the majority of the members of its board of directors.
INVESTMENTS
We have investments in several other businesses. See Note 5 to our year-end
financial statements.
DTH JOINT VENTURES
BACKGROUND. In November 1995, we, along with Globopar, News Corp. and, at a
later date, Liberty Media, agreed to form a number of joint ventures to develop
and operate DTH satellite services for Latin America and the Caribbean basin.
In October 1997, we and our partners formed Sky Multi-Country Partners, or
MCOP, a U.S. partnership in which we, News Corp., and Globopar each indirectly
hold a 30% interest and in which Liberty Media indirectly holds a 10% interest,
to make investments in, and to supply programming and other services to, the Sky
DTH platforms in Latin America outside of Mexico and Brazil. In addition, each
of Televisa, News Corp., Globopar and Liberty Media indirectly holds an interest
(in the same proportion as their interests in MCOP are held) in Sky Latin
America Partners, or ServiceCo, a U.S. partnership formed to provide certain
business and management services, and TechCo, a U.S. partnership formed to
provide certain technical services from two uplink facilities located in
Florida.
In October 2002, Globopar announced that it will reevaluate its capital
structure due to significant devaluation of the Real, deteriorating economic
conditions in Brazil and significant reduction in credit available to Brazilian
companies. Globopar and certain of its subsidiaries are rescheduling their
financial debt obligations and currently reviewing its business plans together
with certain Steering Committees, comprised of institutional holders of
Globopar's bank debt and bonds. For a description of the potential impact that
Globopar's announcement may have on MCOP's and TechCo's operations, as well as
our financial condition, see "Key Information -- Risk Factors -- Risk Factors
Related to Our Business -- MCOP, Our DTH Joint Venture in Latin America Outside
of Mexico and Brazil, May Not Be Able to Continue as a Going Concern and if It
Ceases Operations, It Would Have a Material Adverse Effect on Our Financial
Condition."
Digital Ku-band DTH satellite services commenced operations in the fourth
quarter of 1996 in Mexico and Brazil, in the third quarter of 1997 in Spain, in
the fourth quarter of 1997 in Colombia, in the fourth quarter of 1998 in Chile
and in the fourth quarter of 2000 in Argentina. We, directly and indirectly, own
interests in DTH satellite joint ventures in Mexico, Spain, Colombia and Chile.
In July 2002, we ceased operations in Argentina. We do not own any equity
interest in the venture in Brazil. No assurances can be given that the DTH joint
ventures will be successful. See "Key Information -- Risk Factors -- Risk
Factors Related to Our Business -- We Have Experienced Substantial Losses,
Primarily in Respect of Our Investments in Innova and MCOP, and Expect to
Continue to Experience Substantial Losses as a Result of Our Participation in
DTH Joint Ventures, Which Would Adversely Affect Our Net Income." For a
description of capital contributions and loans we have made to date to those
ventures, see "Operating and Financial Review and Prospects -- Results of
Operations -- Liquidity, Foreign Exchange and Capital Resources -- Capital
Expenditures, Acquisitions and Investments, Distributions and Other Sources of
Liquidity" and "Major Shareholders and Related Party Transactions -- Related
Party Transactions -- Transactions and Arrangements With Innova -- Capital
Contributions and Loans."
We have also been developing channels exclusively for pay television
broadcast. Through our relationship with News Corp., we expect that our DTH
satellite service will continue to negotiate favorable terms for programming
rights with both third parties in Mexico and with international suppliers from
the United States, Europe and Latin America.
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On April 9, 2003, News Corp. announced that it reached a definitive
agreement with General Motors and Hughes in which News Corp. would acquire
General Motors' 19.9% stake in Hughes and a further 14.1% of Hughes from public
shareholders and General Motors' pension and other benefit plans, for a total of
34% of Hughes. According to its 2002 annual report, Hughes owns approximately
75% of DLA and holds an indirect interest in DirecTV Mexico. We cannot predict
what impact News Corp.'s acquisition of an interest in Hughes, if consummated,
will have on the competitive environment for DTH in Mexico or on our or Innova's
business, financial condition or results operations. See "Key Information --
Risk Factors -- Risk Factors Related to Our Business -- One of Innova's Owners,
News Corp., May Acquire Significant Interests in DirecTV, Innova's DTH
Competitor in Mexico, and PanAmSat, and We Cannot Predict What Effect This Will
Have on Us or Innova."
MEXICO. We operate "Sky," our DTH satellite joint venture in Mexico,
through Innova. We own 60% of this joint venture, and our partners are News
Corp., which owns a 30% interest, and Liberty Media, which owns a 10% interest.
As of December 31, 2002, Innova's DTH satellite pay television service had
approximately 705,900 gross active residential subscribers, as compared to
approximately 692,000 gross active residential subscribers as of December 31,
2001. Innova primarily attributes its successful growth to its superior
programming content, its exclusive transmission of sporting events such as
soccer tournaments and its nationwide distribution network with more than 3,600
points of sale. SKY continues to offer the highest quality content in the
Mexican pay television industry. Its programming packages combine the
exclusivity of Televisa's over-the-air channels with other DTH exclusive
channels produced by News Corporation.
In 2002, Sky re-launched its programming packages by reducing the number of
packages offered to five (Basic, Fun, Movie City, HBO and Universe), launched
"Big Brother," Operacion Triunfo and "Big Brother VIP," shows produced by
Endemol and us that were broadcast on a pay-TV exclusive basis 24 hours a day,
and launched several new channels added to Sky's line-up including Eurochannel,
Sky Local News (north and south), and Cosmopolitan TV, a channel focused on
women. In addition, Sky broadcast several professional sporting events,
including the Mexican 2002 Summer Soccer tournament and the soccer games of the
America team during the "Copa Libertadores" tournament, the Pre-Libertadores Cup
2003 Selection tournament live, the 2002 U.S. Open tennis tournament, the Tyson
vs. Lewis and Barrera vs. Morales fights, the exclusive pay TV live transmission
of the 2002-2003 Mexican bullfight season and the Ultimate Fighting
Championship.
Sky currently offers 168 digital channels through five programming
packages: Sky Basic (60 video channels); Sky Fun (78 video channels); Sky Movie
City (91 video channels); Sky HBO (similar to Sky Movie City but with different
movie channels including a total of 91 video channels) and Sky Universe (107
video channels); each with 32 audio channels and 29 pay-per-view channels, for a
monthly fee of Ps.251.00, Ps.301.00, Ps.421.00, Ps.471.00, and Ps.611.00,
respectively. The subscriber receives a "prompt payment" discount if the monthly
subscription payment is made within 12 days after the billing date.
Programming package monthly fees for residential subscribers, net of a
prompt payment discount, are the following: Sky Basic Ps.174.00, Sky Fun
Ps.264.00, Sky Movie City Ps.374.00, Sky HBO Ps.424.00 and Sky Universe
Ps.564.00. Monthly fees for each programming package do not reflect a one-time
installation fee of Ps.1,099.00, which is reduced to Ps. 99.00 if the subscriber
pays the monthly programming fees via an automatic debit to a credit card, and a
monthly rental fee in the amount of Ps.125.00 for the decoder necessary to
receive the service (or Ps.138.00 without the discount). In October 2002, Innova
re-launched its programming packages by reducing the number of packages offered
to five (Basic, Fun, Movie City, HBO and Universe), providing simpler choices to
the subscriber. As part of this strategy Innova has distributed among the five
packages twenty channels that were previously available as "a la carte"
channels. Sky devotes twenty-four pay-per-view channels to family entertainment
and movies and five channels are devoted to adult entertainment. In addition,
Sky assigns five extra channels exclusively for special events, known as Sky
Events, which include boxing matches, concerts, sports and movies. Sky provides
some Sky Events at no additional cost while it sells others on a pay-per-view
basis. Effective January 1, 2002, the pay television services we offer through
Sky are subject to a 10% excise tax. See "Key Information - Risk Factors - Risk
Factors Related to Our Business - The Imposition of a 10% Excise Tax on Revenues
From Telecommunications and Pay Television Services Has Adversely Affected and
Could Continue to Adversely Affect Our Business, Financial Condition and Results
of Operations." In an attempt to mitigate the impact that this new 10% excise
tax will likely have on its net sales, Innova increased the monthly fees for its
various service packages in January 2002, reduced its budgeted corporate
expenses and capital expenditures for 2002 and reduced the number of its
employees. Although Innova obtained a favorable ruling in respect of the
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amparo proceeding that it filed in 2002 challenging the constitutionality of
this excise tax, this ruling does not entitle Innova to any amounts paid for
this tax in 2002. We cannot assure you that Innova will be able to recover any
portion of the amounts paid for this excise tax during 2002. Innova has not
increased prices for its services in 2003 and continues to maintain strict
control over costs and expenses to mitigate the impact this tax, but Innova
continues to review the steps it might implement to mitigate the effects of this
tax, including increasing its rates.
SPAIN. The Spanish DTH platform, "Via Digital," began broadcasting
throughout Spain in September 1997 and as of December 31, 2001 and December 31,
2002, had over 800,000 and over 775,000 gross active subscribers and provided 57
video channels, 30 pay-per-view channels, 31 audio channels and 16 channels with
interactive services. We currently provide programming for two of Via Digital's
channels, although the terms of the license agreements relating to these two
channels may be amended upon the completion of the merger between Via Digital
and Canal Satelite Digital, the Spanish DTH platform controlled by Sogecable, as
described below. The concession for the Spanish DTH platform expires in 2003.
As a result of the sale of a portion of our interest in Via Digital and
capital calls in which we did not participate, our interest in Via Digital has
decreased from 10% at December 31, 2002 to a de minimus ownership stake as of
May 31, 2003. Only one of our partners, Telefonica de Contenidos, or Telefonica,
has participated in the capital calls by the shareholders of Via Digital and as
a result, has an approximate 87% ownership interest in Via Digital as of May 31,
2003. On May 8, 2002, Sogecable, a Spanish public company which is controlled
through a joint venture between Grupo Prisa and the French media conglomerate
Canal Plus, entered into a merger agreement with Telefonica and offered to
acquire all of the outstanding shares of Via Digital in exchange for shares of
Sogecable at an agreed-upon exchange ratio. If we and the other shareholders of
Via Digital accept this offer, we would have a de minimus ownership stake in
Sogecable. In connection with this proposed exchange offer, we and our partners
agreed to terminate Via Digital's joint venture agreement and if this exchange
offer is consummated, we would not have the right to appoint any of the members
of Sogecable's Board of Directors.
COLOMBIA. The Colombian DTH platform commenced operations in December 1997
and as of December 31, 2001 and December 31, 2002, had over 39,000 and 35,000
gross active subscribers and provided 52 video channels, 24 pay-per-view
channels and 45 audio channels. As of December 31, 2002, we owned a 25.60%
interest in this venture on a fully diluted basis through MCOP, and our
partners, Casa Editorial El Tiempo, S.A., Radio Cadena Nacional, S.A., RTI
Comunicaciones de Colombia Ltda. and Pastrana Arango, owned 4.26%, 4.15%, 4.21%
and 2.02%, respectively. We have veto rights over some extraordinary
transactions requiring supermajority shareholder approval. The concession for
the Colombian DTH platform does not have an expiration date.
CHILE. The Chilean DTH platform commenced operations in October 1998 and,
as of December 31, 2001 and December 31, 2002, had over 63,000 and over 56,000
gross active subscribers, respectively, and provided 68 video channels, 24
pay-per-view channels and 35 audio channels. As of December 31, 2002, we owned a
30% interest in this venture on a fully diluted basis through MCOP. As of
December 31, 2002, we did not have any local partners in this joint venture. We
have veto rights over some extraordinary transactions requiring supermajority
shareholder approval. The concession for the Chilean DTH platform does not have
an expiration date.
PROGRAMMING. We and News Corp. are major sources of programming content for
our DTH joint ventures and have granted our DTH joint ventures in Latin America
and Mexico exclusive DTH satellite service broadcast rights to all of our and
News Corp.'s existing and future program services (including pay-per-view
services on DTH), subject to some pre-existing third-party agreements in the
territories of our DTH joint ventures in Latin America and Mexico and excluding
the Fox Sports (Americas) channel. In addition to sports, news and general
entertainment programming, we provide our DTH joint ventures in Mexico with
exclusive DTH satellite service broadcast rights to our four over-the-air
broadcast channels, which are among the most popular television channels in
Mexico. Our DTH satellite service in Mexico is the only pay television service
that offers all the over-the-air broadcast signals from Mexico City as well as
our channels from Guadalajara and Monterrey. Our DTH satellite service also has
exclusive DTH broadcast rights in Mexico to Fox Kids channel, Fox News and Canal
Fox, one of the leading pay television channels in Mexico. Through its
relationships with us and News Corp., we expect that the DTH satellite service
in Mexico will be able to continue to negotiate favorable terms for programming
both with third parties in Mexico and with international suppliers from the
United States, Europe and Latin America.
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UNIVISION
In December 1992, A. Jerrold Perenchio, a Los Angeles private investor,
Corporacion Venezolana de Television (Venevision), C.A. and one of our
subsidiaries acquired the businesses of Univision from Hallmark Cards, Inc. We
currently own shares and warrants representing an approximate 14.8% equity
interest in Univision, on a fully diluted basis. Information regarding
Univision's business and the U.S. Hispanic market which appears in this annual
report has been derived primarily from public filings made by Univision with the
SEC and the FCC, and from public documents originating with the U.S. Department
of Justice.
The operations of Univision, the leading Spanish-language media company
in the United States, include the Univision Network, the most-watched
Spanish-language television network in the United States, reaching 97% of U.S.
Hispanic television households; Univision Television Group, or UTG, which owns
and operates 19 full power and 9 low power television stations, or UTG O&Os,
including full power stations in most of the top 15 U.S. Hispanic markets; the
TeleFutura Network, the new 24-hour Spanish-language broadcast television
network designed to counter-program traditional Spanish-language lineups and
draw additional viewers to Spanish-language television, whose signal covers
approximately 75% of all U.S. Hispanic households; TeleFutura Television Group,
or TTG, which owns and operates 16 full power and 10 low power television
stations, or TTG O&Os, including full power stations in many of the top 15 U.S.
Hispanic markets; Galavision, the country's leading Spanish-language general
entertainment basic cable network; Univision Music Group, the leading
Spanish-language music recording and publishing company in terms of music record
sales in the U.S., which includes a 50% interest in Disa Records, the second
largest independent Spanish-language record label in the world; and Univision
Online, Inc., which operates Univision's Internet portal, Univision.com. In
addition to the UTG O&Os and the TTG O&Os, Univision relies on affiliation and
carriage agreements with such non-owned program distribution outlets as full
power and low power television stations, cable television systems, and direct
broadcast satellites to achieve coverage by its two broadcast networks of the
specified percentages of U.S. Hispanic households.
Univision has entered into an agreement to acquire all of the voting
securities of Hispanic Broadcasting Corporation, or HBC, the owner or operator
of more than 60 radio stations in 18 geographic regions in the United States and
the largest Spanish-language radio broadcaster in the U.S. At the time the
proposed acquisition was announced, Univision owned an approximate 30% equity
and 7% voting interest in Entravision, which owns and operates numerous U.S.
radio and television stations including the majority of Univision's non-owned
full power television station affiliates, and is HBC's principal competitor in
Spanish-language radio in a number of markets. To settle a civil antitrust
complaint brought by the U.S. Department of Justice in connection with the
proposed HBC acquisition, Univision entered into a consent decree in March 2003
agreeing to exchange all of its Entravision common shares for nonvoting
preferred stock prior to closing the HBC transaction; to reduce its equity
interest in Entravision to 15% over three years and 10% over six years; and to
relinquish its right to place directors on Entravision's Board, eliminate
certain veto rights over important Entravision actions, and refrain from
interfering in the conduct of Entravision's radio business. These measures are
designed to preserve competition in the sale of advertising time on
Spanish-language radio stations in six geographic markets where both HBC and
Entravision own such stations. Univision's applications to acquire control of
HBC remain pending at the FCC, where they have been vigorously opposed by third
parties.
Effective February 1, 2002, Univision entered into a time brokerage
agreement with Raycom Media, Inc., or Raycom, to manage two television stations
in Puerto Rico, WLII-TV 11 in San Juan and WSUR-TV 9 in Ponce, collectively
branded as "Teleonce," on behalf of Raycom. In addition, Univision entered into
an option agreement that expires on December 31, 2004 to acquire these stations
for U.S.$190.0 million. If Univision exercises its option, it will be required
to offer us the right to acquire a 15% interest in the Puerto Rico stations, and
to offer Venevision the right to acquire a 10% interest in them.
We and Venevision have agreed to supply programming to Univision under
program license agreements that expire in December 2017. Under these program
license agreements, as amended and restated in December 2001, we and Venevision
granted Univision an exclusive license to broadcast in the United States, solely
over the Univision, Galavision and TeleFutura Networks, substantially all
Spanish-language television programming, including programming with Spanish
subtitles, for which we or Venevision own the U.S. distribution rights, subject
to some exceptions, including some co-productions. In exchange for these rights,
Univision pays to us and Venevision programming royalties based upon combined
net time sales. Univision must pay these royalties to us and
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Venevision each year regardless of the amount of our and Venevision's
programming used by Univision. See "Operating and Financial Review and Prospects
-- Results of Operations -- Programming Licensing." In December 2001, we amended
the program license agreement to increase our royalties. After giving effect to
these amendments, we are now entitled, in addition to our existing 9%
programming royalty on net time sales in respect of the Univision and Galavision
Networks, to an incremental 3% programming royalty on net time sales on these
networks to the extent such net time sales exceed net time sales for the year
2001, as well as a 12% programming royalty on net time sales of the TeleFutura
Network which we began receiving in 2003, subject to certain adjustments,
including minimum annual royalties of U.S.$5.0 million in respect of TeleFutura
for 2003, increasing by U.S.$2.5 million each year to U.S.$12.5 million.
Univision also has some rights regarding some special events and other
television programming produced or co-produced by us and Venevision. We have
agreed that we will provide Univision with 8,531 hours of programming per year
for the term of the agreement and that this programming will be representative
of the quality of programming that we produced during 2000. We have also agreed
that a certain portion of the 8,531 hours of programming that we provide will be
telenovelas. In 2002, Televisa programming represented approximately 32% and 20%
of the Univision and TeleFutura Networks' non-repeat broadcast hours,
respectively.
Under an agreement we have with Univision, we are required to offer
Univision the opportunity to acquire a 50% economic interest in our interest in
certain ventures relating to U.S. Spanish-language broadcasting.
We also entered into several other transactions and arrangements with
Univision in December 2001, including an agreement to establish a joint venture
to introduce our satellite and cable pay-TV programming into the United States.
We and Univision entered into definitive agreements to commence this joint
venture's operations in April 2003. The joint venture company will initially
distribute five cable networks, including two of our existing movie channels and
three channels featuring music videos, celebrity lifestyle and interviews and
entertainment news programming, and will create future channels available in the
U.S. that feature our programming. The joint venture, which commenced operations
in the second quarter of 2003, will be jointly controlled by Univision and us,
and we have each agreed to contribute U.S.$20 million over the first three years
of the venture. We cannot assure you that this venture will be profitable. In
addition, we entered into certain arrangements with Univision regarding the
stations it programs in Puerto Rico, including an agreement to enter into
certain program license agreements, subject to existing contractual agreements.
We have an international program rights agreement with Univision that, as
amended in December 2001, requires Univision to grant us and Venevision the
right to broadcast outside the United States programs produced by Univision for
broadcast on the Univision or Galavision networks. We have the exclusive right
to broadcast these programs in Mexico and Venevision has the exclusive right to
broadcast these programs in Venezuela. We and Venevision each have an undivided
right to broadcast these programs in all other territories (other than the
United States, but including Puerto Rico), provided those programs were on the
air as of October 2, 1996. The rights to these programs granted to us and
Venevision will revert back to Univision when the relevant program license
agreement terminates. For such programs produced after October 2, 1996, we and
Venevision have the exclusive broadcast and related merchandising rights for
Mexico and Venezuela, but Univision retains all rights for the rest of the
world. For such programs produced after September 26, 1996, we and Venevision
have merchandising rights only in those territories. The rights to these
programs granted to us and Venevision will revert back to Univision when we or
Venevision, as the case may be, own less than an aggregate of 13,578,084 shares
and warrants of Univision, unless our ownership interest changes as a result of
a merger or other similar transaction involving Univision, in which case these
rights will continue until the termination of the program license agreement. We
and Venevision have been granted certain rights of first offer to broadcast in
Mexico and Venezuela, respectively, programs that have not been shown on the
Univision or Galavision networks. If Univision cannot reach an agreement with us
or Venevision to license the broadcast in Mexico or Venezuela, respectively,
programs that have aired on the TeleFutura Network, then it may not broadcast or
license the broadcast of such programs by any other third party in Mexico or
Venezuela.
In December 2001, we made a U.S.$375.0 million equity investment in
Univision for which we ultimately received 10,594,500 shares of Univision Class
A Common Stock. In addition, in consideration for surrendering certain
governance rights that we previously held under Univision's organizational
documents, we received a warrant to purchase an additional 9,000,000 shares of
Univision common stock. Because the exercise of the warrant
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is conditioned on compliance with the alien share ownership provisions of the
U.S. Communications Act, we cannot assure you that the warrant may be exercised.
We also sold our music recording operations to Univision in exchange for
6,000,000 shares of Univision Class A Common Stock and warrants to purchase
100,000 shares of Univision Class A Common Stock in April 2002. We currently own
39,289,534 shares and warrants of Univision, representing an approximate 14.8%
equity stake, on a fully diluted basis. We have rights to require Univision to
register for public sale the shares of Univision stock that we own.
In addition, we are entitled to elect one director and one alternate
director to Univision's Board of Directors. In 2002, we appointed Emilio
Azcarraga Jean, our Chairman of the Board, Chief Executive Officer, President
and President of our Executive Committee of our Board, as our director of
Univision, and Alfonso de Angoitia Noriega, our Executive Vice President and
Chief Financial Officer, as our alternate director of Univision. Univision
subsequently appointed Mr. Azcarraga Jean as Vice-Chairman of its Board of
Directors.
COMPETITION
We compete with various forms of media and entertainment companies in
Mexico, both Mexican and non-Mexican.
TELEVISION BROADCASTING
Our television stations compete for advertising revenues and for the
services of recognized talent and qualified personnel with other television
stations (including the stations owned by TV Azteca) in their markets, as well
as with other advertising media, such as radio, newspapers, outdoor advertising,
cable television and multi-channel, multi-point, multi-channel distribution
system and DTH satellite services. We generally compete with 200 channels
throughout Mexico, including the channels of our major competitor, TV Azteca,
which owns and operates Channels 7 and 13 in Mexico City, which are affiliated
with 176 stations outside of Mexico City. As described under "-- Television --
Television Industry in Mexico," in 1998 TV Azteca acquired a minority interest
in CNI Channel 40, a UHF channel that broadcasts in the Mexico City Metropolitan
area. Based upon IBOPE Mexico surveys, during 2000, 2001 and 2002, the average
audience share throughout Mexico of both the Channel 7 and 13 networks was
26.3%, 29.5% and 27.6% respectively, during prime time, and 24.6%, 27.0% and
25.6% respectively, during sign-on to sign-off hours. See "-- Television --
Television Industry in Mexico."
In addition to the foregoing channels, there are additional operating
channels in Mexico with which we also compete, including Channel 11, which has 5
repeater stations, and Channel 22 in Mexico City, which are operated by the
Mexican government. Our television stations are the leading television stations
in their respective markets. See "-- Television -- Television Broadcasting."
Our English- and Spanish-language border stations compete with English-and
Spanish-language television stations in the United States, and our
Spanish-language productions compete with other English-and Spanish-language
programs broadcast in the United States.
We are a major supplier of Spanish-language programming in the United
States and throughout the world. We face competition from other international
producers of Spanish-language programming and other types of programming.
PUBLISHING
Each of our magazine publications competes for readership and advertising
revenues with other magazines of a general character and with other forms of
print and non-print media. Competition for advertising is based on circulation
levels, reader demographics and advertising rates.
CABLE TELEVISION
Cable systems in Mexico are currently operated by approximately 53 cable
television operators. Cablevision is currently the largest cable system operator
in Mexico City and one of seven cable system operators in the areas
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surrounding Mexico City. Cablevision also competes with several DTH satellite
service providers in Mexico, including our DTH joint venture, Innova. See "--
Cable Television -- Pay-Per-View Channels" and "-- DTH Satellite Services."
Cablevision also faces competition from MVS Multivision, S.A. de C.V., or
Multivision, a multi-point, multi-channel distribution system, or MMDS,
operator, in Mexico City and the surrounding areas. MMDS, commonly called
wireless cable, is a microwave transmission system which operates from a headend
similar to that of a cable system. Multivision has been in operation for more
than 14 years and offers 23 channels to its subscribers, but it cannot broadcast
Mexico's over-the-air channels, including Channels 2, 4, 5 and 9. Some of the
channels that Multivision broadcasts compete directly with the Cablevision
channels, as well as Cablevision's 28 pay-per-view channels. However,
Multivision's share of the Mexican pay television has declined consistently
since 1999. See "-- Television -- Programming -- Programming We Produce" and "--
Cable Television." Furthermore, since Cablevision operates under non-exclusive
franchises, other companies may obtain permission to build cable television
systems and MMDS systems in areas where Cablevision presently operates. In
addition, pursuant to the Ley Federal de Telecomunicaciones, or the
Telecommunications Law, Cablevision is required to provide access to its cable
network to the extent it has available capacity on its network.
In addition, in connection with its Internet access services and other new
products and multimedia communications services, we believe that Cablevision
will face competition from several media and telecommunications companies
throughout Mexico, including Internet service providers, DTH services and other
personal communication and telephone companies, including us and our affiliates.
RADIO
The radio broadcast business is highly competitive in Mexico. Our radio
stations compete with other radio stations in their respective markets, as well
as with other advertising media, such as television, newspapers, magazines and
outdoor advertising. Among our principal competitors in the radio broadcast
business are Grupo Radio Centro, S.A. de C.V., which owns or operates 14 radio
stations in Mexico, 12 of which are located in Mexico City, and Grupo Acir,
which owns or operates 164 radio stations in Mexico, 7 of which are located in
Mexico City.
Competition for audience share in the radio broadcasting industry in Mexico
occurs primarily in individual geographic markets. Our radio stations are
located in highly competitive areas. However, the strength of the signals
broadcast by a number of our stations enables them to reach a larger percentage
of the radio audience outside the market areas served by their competitors.
NATIONWIDE PAGING
Our nationwide paging business faces competition from other nationwide
paging businesses and from local paging companies in particular cities
throughout Mexico. In addition, we are also facing growing competition from cell
phone companies, which now provide text messaging services.
FEATURE FILM PRODUCTION AND DISTRIBUTION
Production and distribution of feature films is a highly competitive
business in Mexico. The various producers compete for the services of recognized
talent and for film rights to scripts and other literary property. We compete
with other feature film producers, Mexican and non-Mexican, and distributors in
the distribution of films in Mexico. See "-- Other Businesses -- Feature Film
Production and Distribution." Our films also compete with other forms of
entertainment and leisure time activities.
DTH SATELLITE SERVICES
Innova presently competes with, or expects to compete with, among others,
DirecTV, cable systems (including Cablevision), MMDS systems, national broadcast
networks (including our four networks), regional and local broadcast stations,
unauthorized C-band and Ku-band television signals obtained by Mexican viewers
on the gray market, radio, movie theaters, video rental stores and other
entertainment and leisure activities generally.
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Innova's main DTH competitor in Mexico is DLA, which operates DirecTV
Mexico and is controlled by a partnership among Hughes, Organizacion Cisneros
and the Clarin Group of Argentina, according to press reports. DirecTV, as the
system is commercially known, currently offers 75 video, 32 audio and 26
pay-per-view channels.
On April 9, 2003, News Corp. announced that it reached a definitive
agreement with General Motors and Hughes in which News Corp. would acquire
General Motors' 19.9% stake in Hughes and a further 14.1% of Hughes from public
shareholders and General Motors' pension and other benefit plans, for a total of
34% of Hughes. According to its 2002 annual report, Hughes owns approximately
75% of DLA and holds an indirect interest in DirecTV Mexico. We cannot predict
what impact News Corp.'s acquisition of an interest in Hughes, if consummated,
will have on the competitive environment for DTH in Mexico or on our or Innova's
business, financial condition or results operations. See "Key Information --
Risk Factors -- Risk Factors Related to Our Business -- One of Innova's Owners,
News Corp., May Acquire Significant Interests in DirecTV, Innova's DTH
Competitor in Mexico, and PanAmSat, and We Cannot Predict What Effect This Will
Have on Us or Innova."
Other entities have announced the formation of partnerships or ventures or
obtained licenses to provide DTH satellite services in Latin America but are not
yet operational.
In the second half of 2003, our DTH satellite service in Spain will merge
with its competitor, Canal Satelite Digital, which is controlled by Sogecable.
See "-- DTH Joint Ventures." We believe that Canal Satelite Digital currently
offers 107 channels (63 video, 22 pay-per-view and 22 with interactive
services).
REGULATION
Our business, activities and investments are subject to various Mexican and
U.S. federal, state and local statutes, rules, regulations, policies and
procedures, which are constantly subject to change, and are affected by the
actions of various Mexican and U.S. federal, state and local governmental
authorities. The material Mexican and U.S. federal, state and local statutes,
rules, regulations, policies and procedures to which our business, activities
and investments are subject are summarized below. These summaries do not purport
to be complete and should be read together with the full texts of the relevant
statutes, rules, regulations, policies and procedures described therein.
TELEVISION
Mexican Television Regulations
Concessions. In order to own and operate a television station in Mexico, a
broadcaster must obtain a concession, which must be published in the Official
Gazette of the Federation, from the SCT to broadcast over a certain channel.
Applications are submitted to the SCT and, after a formal review process of all
competing applications and an objection period open to third parties, a
concession is granted. Concessions may be granted for up to 30 years, with most
concessions currently being granted for a term of 12 years. The SCT may void the
grant of any concession or terminate or revoke the concession at any time, upon
the occurrence of, among others, the following events:
- failure to construct broadcasting facilities within a specified
time period;
- changes in the location of the broadcasting facilities or changes
in the frequency assigned without prior governmental
authorization;
- direct or indirect transfer of the concession, the rights arising
therefrom or ownership of the broadcasting facilities without
prior governmental authorization;
- transfer or encumbrance on, in whole or in part, of the
concession, the rights arising therefrom, the broadcasting
equipment or any assets dedicated to the concessionaire's
activities, to a foreign government, company or individual, or the
admission of any such person as a partner in the concessionaire's
business;
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- failure to broadcast for more than 60 days without reasonable
justification;
- any amendment to the bylaws of the concessionaire that is in
violation of applicable Mexican law; and
- any breach to the terms of the concession title.
None of our concessions has ever been revoked or otherwise terminated.
We believe that we have operated our television concessions substantially
in compliance with their terms and applicable Mexican law. If a concession is
revoked or terminated, the concessionaire could be required to forfeit to the
Mexican government all of its assets or the Mexican government could have the
right to purchase all the concessionaire's assets. In our case, the assets of
our licensee subsidiaries generally consist of transmitting facilities and
antennas. See "Key Information -- Risk Factors -- Risk Factors Related to Our
Business -- The Operation of Our Business May Be Terminated or Interrupted if
the Mexican Government Does Not Renew or Revokes Our Broadcast or Other
Concessions."
Concessions may be renewed for a term of up to 30 years (with 12 years
currently being standard). The concession for Channels 2, 4, 5 and 9 in Mexico
City expires in 2009. As of December 31, 2002, the expiration dates for the
concessions for our other television stations range from 2003 to 2012. See "Key
Information -- Risk Factors -- Risk Factors Related to Our Business -- The
Operation of Our Business May Be Terminated or Interrupted if the Mexican
Government Does Not Renew or Revokes Our Broadcast or Other Concessions."
Supervision of Operations. The SCT regularly inspects the television
stations and the companies to which concessions have been granted must file
annual reports with the SCT.
Television programming is not censored under Mexican law, except that it is
subject to various regulations, including prohibitions on foul language and
programming which is offensive or is against the national safety or against
public order. Under Mexican regulations, the Secretaria de Gobernacion, or
Mexican Ministry of the Interior, reviews most television programming and
classifies the age group for which the programming is acceptable for viewing.
Programs classified for adults may be broadcast only after 10:00 p.m.; programs
classified for adults and teenagers over 15 years old may be broadcast only
after 9:00 p.m.; programs classified for adults and teenagers under 15 years old
may be broadcast only after 8:00 p.m.; and programs classified for all age
groups may be shown at any time. Signals with foreign produced programming
require prior authorization of the Mexican Ministry of Government.
Television programming is required to promote Mexico's cultural, social and
ideological identity. Each concessionaire is also required to transmit each day,
free of charge, up to 30 minutes of programming regarding cultural, educational,
family counseling and other social matters using programming provided by the
Mexican government. Historically, the Mexican government has not used a
significant portion of this time. In addition, during political campaigns all
registered political parties have the right to purchase time to broadcast
political messages at commercial rates.
Networks. There are no Mexican regulations regarding the ownership and
operation of a television network, such as the Channel 2, 4, 5 and 9 networks,
apart from the regulations applicable to operating a television station as
described above.
Restrictions on Advertising. Mexican law regulates the type and content of
advertising broadcast on television. Concessionaires may not broadcast
misleading advertisements. Under current law, advertisements of alcoholic
beverages (other than beer and wine) may be broadcast only after 10:00 p.m. and
advertisements for tobacco products may be broadcast only after 9:00 p.m.
Advertising for alcoholic beverages must not be excessive and must be combined
with general promotions of nutrition and general hygiene. The advertisements of
some products and services, such as medicine, tobacco and alcohol, require
approval of the Mexican government prior to their broadcast. Moreover, the
Mexican government must approve any advertisement of lotteries and other games.
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No more than 18% of broadcast time may be used for advertisements on any
day. The SCT approves the minimum advertising rates. There are no restrictions
on maximum rates.
Broadcast Tax. Since 1969, radio and television stations have been subject
to a tax which may be paid by granting the Mexican government the right to use
12.5% of all daily broadcast time. In October 2002, the 12.5% tax was replaced
by the obligation to the Mexican government to provide up to 18 minutes per day
of our television broadcast time and 35 minutes per day of our radio broadcast
time between 6:00 a.m. and midnight, in each case distributed in an equitable
and proportionate manner. Any time not used by the Mexican government on any day
is forfeited. Generally, the Mexican government uses all or substantially all of
the broadcast time available under this tax.
Foreign Ownership. Non-Mexican ownership of shares of Mexican enterprises
is restricted in some economic sectors, including broadcast television, cable
television, radio, DTH satellite services and airlines. Under Mexico's Ley de
Inversion Extranjera, or the Foreign Investment Law, the Ley Federal de Radio y
Television, or the Radio and Television Law, and the Reglamento de la Ley de
Inversion Extranjera, or the Foreign Investment Law Regulations, foreign
investors may not vote the capital stock of Mexican broadcasting companies
(other than through "neutral investment" mechanisms, such as through the CPOs
held by certain of our shareholders). See "-- Satellite Communications --
Mexican Regulation of DTH Satellite Services."
U.S. TELEVISION BROADCAST AND SATELLITE CABLE NETWORK REGULATIONS
Univision is subject to U.S. laws and regulations affecting the Univision
and TeleFutura broadcast networks and the Galavision satellite cable network.
Television Broadcast Network Restrictions. Under current FCC rules, there
are no limits either on the number of broadcast networks that may be maintained
by a network organization, or on the number of television stations that may be
affiliated with a network organization. Mergers among any existing or future
U.S. television broadcast networks are permitted by the FCC except among ABC,
CBS, Fox or NBC, and television networks may acquire, or be acquired by or
commonly controlled with, cable television systems.
FCC rules restrict television networks' contractual relationships with
their affiliated stations. These rules require that affiliates be permitted to
reject network programs that they believe are unsuitable or contrary to the
public interest, and to preempt network programs in favor of programs they deem
to be of greater local or national importance. The rules bar networks from
optioning station time, from requiring affiliates to clear time for the network
that is already scheduled for other use, from controlling the advertising rates
charged by affiliates during non-network programs, and from entering into
certain territorially restrictive or exclusive arrangements with affiliates
regarding the distribution of the network's programs. A rule preventing a
network from representing its affiliates in the sale of non-network advertising
time was permanently waived for Univision.
Currently, the FCC is considering a petition filed by a number of
network-affiliated stations alleging that certain practices of the top four
English-language television broadcast networks are inconsistent with some of the
FCC network rules. This proceeding could result in the reactivation of a dormant
1995 proceeding that had proposed modifications to the network rules, generally
so as to permit greater freedom of contract between networks and affiliated
stations.
Satellite Cable Program Network Restrictions. Chiefly through its
jurisdiction over cable system operators, the FCC regulates satellite cable
program networks in a variety of ways, including, but not limited to, by
preventing the ability of certain cable networks to discriminate against
non-affiliated multi-channel video programming distributors in the sale or
delivery of programming, limiting the number of commercial minutes that may be
sold within children's programming, and imposing closed captioning requirements
on programs transmitted to cable subscribers.
Ownership Restrictions. There are no restrictions on non-U.S. ownership of
U.S. television broadcast or satellite cable program networks.
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U.S. REGULATION OF TELEVISION BROADCAST STATIONS
The ownership and operation of U.S. television stations, including those
owned by and/or affiliated with Univision, are subject to the jurisdiction of
the FCC, which acts under authority granted by the Communications Act of 1934,
as amended, or the Communications Act. The FCC allots particular TV channels to
specific communities, approves stations' technical parameters and operating
equipment, issues, modifies, renews and revokes licenses, approves changes in
licensee ownership or control, regulates the ownership and employment practices
of licensees, and in certain limited respects controls the content of broadcast
programming. The FCC collects annual regulatory fees and imposes penalties,
including monetary fines and license revocation, for violations of the
Communications Act or its rules.
Ownership Matters. FCC rules limit the "attributable" interests that an
individual or entity may hold in broadcast licensees. Generally, the officers,
directors, general partners, parties who own or control a 5% or greater voting
stock interest (20% if the holder is a qualified passive investor), and
non-"insulated" limited partners and limited liability company members of a
licensee or its parent hold "attributable" interests in the licensee. Also
constituting "attributable" interests are the brokering of more than 15% of a
television station's weekly program time by another TV station in the market,
and the holding of equity and debt interests that together exceed 33% of a
licensee's total assets, if the interest holder supplies more than 15% of total
weekly programming or is a same-market media entity.
Under FCC rules adopted in June 2003 of which only a summary has been
released to date, an entity may hold "attributable" interests in U.S. television
stations with an aggregate national audience reach of 45% of total U.S.
television households. For purposes of this national audience reach cap (which
stood at 35% prior to the recent FCC action), all potential viewers in each
market in which an entity holds an "attributable" TV station interest are
counted regardless of the station's actual audience ratings, but UHF television
stations are attributed with only 50% of the television households in their
markets. The FCC's June 2003 action temporarily retained this "UHF Discount,"
which benefits Univision since virtually all of its television stations operate
in the UHF band.
The FCC also limits television ownership at the local level, that is,
within each individual market (as between different markets, only the national
audience reach cap limits the ownership of television stations). The June 2003
FCC action liberalized the circumstances under which a single entity may own two
stations in the same market, and for the first time permits common ownership of
three same-market television stations in the largest markets, including some
markets where Univision currently owns two stations.
Beginning in 2002, common ownership of television stations and cable
television systems in the same market has been allowed. Now also permitted for
the first time, as a result of the FCC's June 2003 rule changes, will be common
ownership of certain combinations of daily newspapers and radio and television
broadcast stations, in markets with at least four television stations. An FCC
rule limiting common ownership of radio and television stations in the same
market was also liberalized in June 2003.
There is no national limit on the number of U.S. radio stations in which a
single entity may hold "attributable" interests. On the local level,
"attributable" interests may be held in up to eight radio stations in a given
market, depending on the total number of radio stations in that market. Although
the FCC did not alter the local radio ownership limits in its June 2003
decision, it did decide to use a different methodology for defining a radio
market for purposes of determining compliance with these limits. The new
methodology will mean that certain existing commonly owned station groups will
exceed the current limits. Although the FCC announced that these combinations
will be "grandfathered," it intends to process currently pending station sale
applications that remain pending when the new rules take effect under the
revised market definition methodology. If Univision's pending applications to
acquire the HBC radio stations do not comply with the radio ownership limits
under the revised method of defining local radio markets, and fail to be granted
in the current interim period before the effective date of the new rules,
Univision could be adversely affected.
The June 2003 FCC ownership changes remain highly controversial; some or
all of these changes could be overturned by Congress (in which legislation to do
so has been introduced) or by the federal courts.
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Alien Ownership. Under the Communications Act, broadcast licenses may not
be granted to non-U.S. citizens (including their representatives), foreign
governments or their representatives, or non-U.S. companies (collectively,
"non-U.S. Persons"); to any entity having more than 20% of its equity owned or
voted by non-U.S. Persons; or to any entity whose parent company is more than
25% owned by non-U.S. Persons. The 25% provision may be waived, but waivers are
rare in the broadcast context.
License Renewal. Television broadcasting licenses are subject to renewal,
normally for an eight-year term, upon application to the FCC. A license renewal
application will be granted, and no competing applications for the same
frequency will be entertained, if the licensee has served the public interest,
has committed no serious violations of the Communications Act or the FCC's
rules, and has not committed other violations which together would constitute a
pattern of abuse of such Act or rules. However, interested parties, including
members of the public, may file petitions to deny license renewal applications,
and the transferability of an applicant's license may be restricted during the
pendency of its renewal application.
Programming and Operation. The Communications Act requires broadcasters to
serve the public interest. All licensees must present programming that is
responsive to community problems, needs and interests, and maintain certain
records demonstrating such responsiveness. By Act of Congress, television
licensees must also present programming specifically designed to educate and
inform children, must limit the number of commercial minutes and comply with
other restrictions on commercial practices during children's programming, and
must maintain and file records demonstrating compliance with these requirements.
Complaints from viewers concerning a station's programming will be considered if
directed to the FCC, and television broadcast licensees must file with their
license renewal applications a summary of written complaints received from the
public regarding violent programming. In addition, the FCC has approved the U.S.
television industry's voluntary agreement generally to rate broadcast television
and cable television programming for "sexual, violent or other indecent" content
and to transmit the rating for any program that has been rated for such content
when transmitting the program itself. Stations also must follow various rules
regarding, among other things, political advertising, sponsorship
identification, station-conducted contests, lottery and casino advertising,
obscene and indecent broadcasts, the closed captioning of programming (including
Spanish-language programming), the transmission of emergency information, and
technical operations, including limits on radio frequency radiation. In
addition, certain major modifications to a broadcast station's transmission
facilities require prior FCC consent. FCC rules also require licensees to
develop and implement recruitment practices designed to promote equal employment
opportunities, and to comply with related record-keeping and reporting
obligations.
Failure to observe FCC rules and policies can result in the imposition of
various sanctions, including monetary forfeitures, the grant of renewals for
less than the standard eight-year renewal term or, for particularly egregious
violations, the denial of a license renewal application or the revocation of a
license.
Digital Television Transition. The FCC has assigned each U.S. full power
television station an additional 6 MHz of broadcast spectrum for the provision
of a free digital video programming service. Broadcasters may utilize this
spectrum to provide multiple video programming streams, and may also use some of
the new spectrum for data transmission and other revenue-generating services, so
long as such services do not detract from the free over-the-air program service.
The broadcast licensee must pay the FCC 5% of any gross subscription and
advertising revenues received from all ancillary or supplementary services.
Assuming that certain penetration levels relating to the transmission and
reception of digital television signals have been achieved, the FCC will
generally require the termination of analog television transmissions and the
return of one 6-MHz channel per licensed station by December 31, 2006.
Univision's transition to digital television is expected to require
significant expenditures, although the FCC has permitted lower-powered, and
therefore less expensive, initial DTV facilities to be constructed. Moreover,
although the FCC has attempted to assign digital television channels and power
levels that will reasonably replicate each licensee's current coverage area (and
thus its audience reach levels), there is no assurance that such replication
will be fully achieved for any or all of the Univision television stations. In
addition, there is no requirement that cable television systems retransmit both
digital and analog television broadcast signals during the period when
television licensees must transmit in both modes, or that in the post-transition
period, cable television systems will be required to carry more than the primary
video signal of each digital television station, although the FCC is currently
considering these and related issues. Moreover, digital television receivers
have not been widely purchased by
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consumers, and issues of cable compatibility, mandatory inclusion of DTV tuners
in TV sets, control over navigational devices, and copy protection (digital
rights management) have also delayed the deployment of digital television. In
addition, it is widely expected that the 2006 analog termination deadline will
be altered. For all these reasons, it is unclear whether, or when, audience
levels for digital television broadcasts will equal current levels for analog
television broadcasting.
Although Univision obtained extensions of the May 1, 2002 digital
television construction deadline for all of its full power television stations,
many of these stations have now commenced digital operations. On the other hand,
some of Univision's numerous low power television stations may be adversely
affected by the digital television transition, since low power television is a
secondary service whose stations may be displaced by full service digital
television operations. However, most of Univision's low power television
stations have been certified as eligible for Class A status, a new regulatory
classification mandated by Congress that offers greater protection against
displacement than low power television status.
Cable Carriage. Most U.S. residents view television broadcast signals by
means of cable television retransmissions of these signals. Cable television
systems must devote up to one-third of their available channels to the carriage
of local commercial television stations, and Univision has stated that its full
power television stations rely on these "must-carry" rights to obtain cable
carriage. However, there is presently no assurance of the extent to which these
"must-carry" provisions or the related "retransmission consent" option will also
encompass digital television transmissions, particularly while analog broadcasts
continue. The FCC is currently examining the applicability of the mandatory
carriage and retransmission consent provisions to digital television.
Direct Broadcast Satellite Carriage. The Satellite Home Viewer Improvement
Act of 1999 contemplates mandatory carriage of all local television stations by
a DBS carrier in any market in which that carrier chooses to provide one or more
local signals pursuant to the statutory copyright license; currently, two DBS
carriers provide such local service in about sixty of the largest markets,
including many Univision markets. Univision has stated that it intends to obtain
DBS carriage for each of its eligible stations.
Proposed Changes. Congress and the FCC are considering, and may in the
future consider and adopt, new laws, regulations, policies and recommendations
regarding a wide variety of matters that could, directly or indirectly, affect
the ownership and operation of Univision. In addition to matters we have already
noted, the FCC or Congress have considered, or are considering, for example,
proposals to stimulate the market for digital television (including by altering
the various deadlines related to the DTV transition, fining television stations
or rescinding their DTV authorizations for non-compliance with the deadlines, or
mandating software and hardware protection of digital content); authorize a
tenfold increase in the maximum fines the FCC may impose; eliminate the "UHF
Discount"; require that broadcast spectrum be shared with other users; regulate
or monitor television advertising of adult-themed entertainment, or otherwise
attempt to protect children from violent program content; prohibit
advertisements for hard liquor on television; regulate interactive television;
facilitate consumer complaints to the FCC regarding broadcasters; require
television broadcast licensees to fulfill public service obligations on their
digital channels; reinstate video description rules struck down by a federal
court; and standardize and enhance program-related reporting and disclosure
obligations. In addition, Congress recently enacted campaign reform legislation
whose provisions, including limitations on political issue advertising on
television, are being challenged by broadcasters and others in the federal
courts.
RADIO
The regulations applicable to the operation of radio stations in Mexico are
identical in all material respects to those applicable to television stations.
As of December 31, 2002, the expiration dates of our radio concessions ranged
from 2003 to 2009. See "-- Television," "-- Radio -- Radio Stations" and "Key
Information -- Risk Factors -- Risk Factors Related to Our Business -- The
Operation of Our Business May Be Terminated or Interrupted if the Mexican
Government Does Not Renew or Revokes Our Broadcast or Other Concessions."
CABLE TELEVISION
Concessions. Prior to June 1995, cable television operators had to obtain a
cable television concession from the SCT in order to operate their networks and
provide cable television services. Since the enactment of the Ley
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Federal de Telecomunicaciones, or the Telecommunications Law, in 1995, cable
television operators must now apply for a public telecommunications network
concession from the SCT in order to operate their networks and provide cable
television services and other multimedia communications services. Applications
are submitted to the SCT and, after a formal review process, a public
telecommunications network concession is granted for an initial term of up to 30
years. Cablevision's cable television concession expired in August 1999. On
September 23, 1999, Cablevision obtained a telecommunications concession from
the SCT, which expires in 2029, and the concession to transmit two over-the-air
UHF restricted television channels, which expires in 2010. Pursuant to its
public telecommunications concession, Cablevision can provide cable television,
limited audio transmission services, specifically music programming,
bidirectional Internet access and unlimited data transmission services in Mexico
City and surrounding areas in the State of Mexico. The scope of Cablevision's
public telecommunications concession is much broader than the scope of its
former cable television concession, which covered only cable television services
and audio programming. A public telecommunications concession may be renewed
upon its expiration, or revoked or terminated prior to its expiration in a
variety of circumstances including:
- unauthorized interruption or termination of service;
- interference by the concessionaire with services provided by other
operators;
- noncompliance with the terms and conditions of the public
telecommunications concession;
- the concessionaire's refusal to interconnect with other operators;
- loss of the concessionaire's Mexican nationality;
- unauthorized assignment, transfer or encumbrance, in whole or in
part, of the concession or any rights or assets;
- the liquidation or bankruptcy of the concessionaire; and
- ownership or control of the capital stock of the concessionaire by
a foreign government.
In addition, the SCT may establish under any public telecommunications
concession further events which could result in revocation of the concession.
Under current Mexican laws and regulations, upon the expiration or termination
of a public telecommunications concession, the Mexican government has the right
to purchase those assets of the concessionaire that are directly related to the
concession, at market value.
Cable television operators, including Cablevision, are subject to the
Telecommunications Law, and since February 2000, have been subject to the
Reglamento del Servicio de Television y Audio Restringidos, or Restricted
Television and Audio Services Regulations. Under current Mexican law, cable
television operators are classified as public telecommunications networks, and
must conduct their business in accordance with Mexican laws and regulations
applicable to public telecommunications networks, which in addition to the
Telecommunications Law and the Restricted Television and Audio Services
Regulations, includes the Federal Television and Radio Law and the Reglamento de
la Ley Federal de Radio y Television y de la Industria Cinematografica, or the
Federal Television, Radio and Film Industry Regulations.
Under the applicable Mexican law, the Mexican government, through the SCT,
may also temporarily seize or even expropriate all of a public
telecommunications concessionaire's assets in the event of a natural disaster,
war, significant public disturbance or threats to internal peace and for other
reasons related to preserving public order or for economic reasons. The Mexican
government is obligated by Mexican law to compensate the concessionaire, both
for the value of the assets seized and related profits.
Supervision of Operations. The SCT regularly inspects the operations of
cable systems and cable television operators must file annual reports with the
SCT.
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Under Mexican law, programming broadcast on Cablevision networks is not
subject to judicial or administrative censorship. However, this programming is
subject to various regulations, including prohibitions on foul language,
programming which is against good manners and customs or programming which is
against the national safety or against public order.
Mexican law also requires cable television operators, including
Cablevision, to broadcast programming that promotes Mexican culture, although
cable television operators are not required to broadcast a specified amount of
this type of programming.
In addition to broadcasting programming that promotes Mexican culture,
cable television operators must also set aside a specified number of their
channels, which number is based on the total number of channels they transmit,
to transmit programming provided by the Mexican government. Cablevision
currently broadcasts programming provided by the Mexican government on three of
its channels, Channel 11, Channel 22 and Channel 5, a channel used by the
Mexican Congress.
Restrictions on Advertising. Mexican law restricts the type of advertising
which may be broadcast on cable television. These restrictions are similar to
those applicable to advertising broadcast on Channels 2, 4, 5 and 9. See "--
Regulation -- Television -- Mexican Television Regulations -- Restrictions on
Advertising."
Government Participation. Pursuant to the terms of cable concessions, cable
television operators, including Cablevision through September 23, 1999, were
required to pay, on a monthly basis, absent a waiver from the Mexican
government, up to 15% of revenues derived from subscriber revenues and
substantially all other revenues, including advertising revenues, to the Mexican
government in exchange for use of the cable concession. Most cable
concessionaires, including Cablevision, obtained a waiver on an annual basis to
pay 9% of their revenues as participation to the Mexican government, as opposed
to 15%. Under the Federal Telecommunications Law and accompanying regulations,
cable television operators with public telecommunications network concessions,
including Cablevision, no longer have to pay the Mexican government any
percentage of their revenues.
Forfeiture of Assets. Under Mexican regulations, at the end of the term of
a public telecommunications concession, assets of concessionaires may be
purchased by the Mexican government at market value.
NON-MEXICAN OWNERSHIP OF PUBLIC TELECOMMUNICATIONS NETWORKS
Under current Mexican law, non-Mexicans may currently own up to 49% of the
outstanding voting stock of Mexican companies with a public telecommunications
concession. However, non-Mexicans may currently own up to all of the outstanding
voting stock of Mexican companies with a public telecommunications concession to
provide cellular telephone services, provided, that the requisite approvals are
obtained from the Comision Nacional de Inversiones Extranjeras, or the Foreign
Investment Commission. In addition, non-Mexicans may acquire only non-voting or
limited voting shares that are considered "neutral investments" under the
Foreign Investment Law.
APPLICATION OF EXISTING REGULATORY FRAMEWORK TO INTERNET ACCESS AND IP TELEPHONY
SERVICES
When Cablevision begins offering IP telephony services, it may be required,
under Mexican law, to permit other concessionaires to connect their network to
its network in a manner that enables its customers to choose the network by
which the services are carried.
To the extent that a cable television operator has any available capacity
on its network, as a public telecommunications network, Mexican law requires the
operator to offer third party providers access to its network. Cablevision
currently does not have any capacity available on its network to offer to third
party providers and does not expect that it will have capacity available in the
future given the broad range of services it plans to provide over its network.
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SATELLITE COMMUNICATIONS
MEXICAN REGULATION OF DTH SATELLITE SERVICES. Concessions to broadcast DTH
satellite services are for an initial term of up to 30 years, and are renewable
for up to 30 years. We received a 30-year concession to operate DTH satellite
services in Mexico utilizing SatMex satellites on May 24, 1996. In November
2000, we received a new concession to operate our DTH satellite service in
Mexico using the PAS-9 satellite system, a foreign-owned satellite system. The
concession expires in 2020.
Like a public telecommunications network concession, a DTH concession may
be revoked or terminated by the SCT prior to the end of its term in certain
circumstances, which for a DTH concession include:
- the failure to use the concession within 180 days after it was
granted;
- a declaration of bankruptcy of the concessionaire;
- a failure to comply with the obligations or conditions specified in
the concession;
- assignments of, or encumbrances on, the concession; or
- a failure to pay to the government the required fees.
At the termination of a concession, the Mexican government has the
preemptive right to acquire the assets of a DTH satellite service
concessionaire. In the event of a natural disaster, war or significant public
disturbance, the Mexican government may temporarily seize and expropriate all
assets related to a concession, but must compensate the concessionaire for such
seizure. The Mexican government does not require fees based on DTH satellite
service revenues of a satellite concessionaire.
Under the Telecommunications Law, DTH satellite service concessionaires may
freely set customer fees but must notify the SCT of the amount, except that if a
concessionaire has substantial market power, the SCT may determine fees that may
be charged by such concessionaire. The Telecommunications Law specifically
prohibits cross-subsidies.
Non-Mexican investors may currently own up to 49% of DTH satellite system
concessionaires; provided that Mexican investors maintain control of the
operation. Foreign investors may increase their economic participation in the
equity of a concessionaire through neutral investment mechanisms such as the CPO
trust.
REGULATION OF DTH SATELLITE SERVICES IN SPAIN AND OTHER COUNTRIES. Our DTH
joint ventures in Spain and our proposed DTH joint ventures in other countries
in the Americas are and will be governed by laws, regulations and other
restrictions of such countries, as well as treaties that such countries have
entered into, regulating the delivery of communications signals to, or the
uplink of signals from, such countries. In addition, the laws of Spain and some
other countries establish restrictions on our ownership interest in some of
these DTH joint ventures as well as restrictions on programming that may be
broadcast by these DTH joint ventures.
MEXICAN ANTITRUST LAW
Mexico's federal antitrust law, or Ley Federal de Competencia Economica,
and the accompanying regulations, the Reglamento de la Ley Federal de
Competencia Economica, may affect some of our activities, including our ability
to introduce new products and services, enter into new or complementary
businesses and complete acquisitions. In addition, the federal antitrust law and
the accompanying regulations may adversely affect our ability to determine the
rates we charge for our services and products. In addition, approval of the
Mexican Antitrust Commission is required for us to acquire and sell significant
businesses or enter into significant transactions, such as joint ventures.
In September 2000, we reached an agreement in principal with the
controlling shareholders of Grupo Acir to merge our radio subsidiary, Sistema
Radiopolis with Grupo Acir. As a result of the continued opposition to the
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proposed merger by the Mexican Antitrust Commission since December 2000, the
merger agreement expired in January 2002. Neither party has any further
obligations, financial or otherwise, under the agreement in principal.
PROPERTY, PLANT AND EQUIPMENT
BROADCASTING, OFFICE AND PRODUCTION FACILITIES. Our properties consist
primarily of broadcasting, production and office facilities, most of which are
located in Mexico. We own substantially all of these properties through indirect
wholly owned and majority owned subsidiaries. There are no major encumbrances on
any of our properties, and we currently do not have any significant plans to
construct any new properties or expand or improve our existing properties. Our
principal offices, which we own, are located in Santa Fe, a suburb of Mexico
City. Each of our television stations has individual transmission facilities
located in Mexico, substantially all of which we own. Our television production
operations are concentrated in 2 locations in Mexico City, 14 studios in San
Angel and 10 studios located in Chapultepec. We own substantially all of these
studios. The local television stations wholly or majority owned by us have in
the aggregate 34 production studios. We own other properties used in connection
with our operations, including a training center, technical operations
facilities and office facilities. We beneficially own Azteca Stadium, which
seats approximately 105,000 people, through a trust arrangement which was
renewed in 1993 for a term of 30 years and which we may extend for additional
periods. In the aggregate, these properties, excluding Azteca Stadium, currently
represent approximately 3.7 million square feet of space, of which over 3
million square feet are located in Mexico City and the surrounding areas, and
the remainder of which is located outside of Mexico City and the surrounding
areas.
Our cable television, radio, dubbing and Mexican DTH satellite service
businesses are located in Mexico City. We also own the transmission and
production equipment and facilities of our radio stations located outside Mexico
City.
We also own or lease properties in the United States and Latin America in
connection with our activities there. We own or lease all of these properties
through indirect wholly owned and majority owned subsidiaries. In connection
with our television and news activities, we own one property in San Diego,
California and one property in Miami, Florida, and lease two properties, one in
Beverly Hills, California and the other in San Diego, California. In connection
with our publishing activities, we own one property in each of the following
areas: Miami, Florida, Cali, Colombia, Barranquilla, Colombia, Lima, Peru,
Buenos Aires, Argentina and Guayaquil, Ecuador. In the aggregate, these
properties currently represent over 289,000 square feet of space, of which
approximately 44,000 square feet are located in California, approximately
151,000 square feet are located in Florida, approximately 59,000 square feet are
located in Colombia, approximately 30,000 square feet are located in Peru,
approximately 3,800 square feet are located in Argentina and approximately 1,600
square feet are located in Ecuador.
SATELLITES. We currently use transponder capacity on three satellites:
Telstar 7, which reaches Mexico, the United States and Canada, PAS-3R, which
reaches North America, Western Europe, Latin America and the Caribbean, and
Galaxy IVR, which reaches Mexico, the United States and Canada. Through
September 2000, we used transponder capacity on Solidaridad II, at which point
we began using transponder capacity on Telstar 7. Our rights to Telstar 7
expired in June 2003, at which point we began using transponder capacity on
SatMex V. Our DTH joint ventures in Latin America are currently using
transponder capacity on two satellites: PAS-6B for the DTH satellite services in
Colombia and Chile and PAS-9 for the DTH satellite service in Mexico. PAS-9
provides coverage of Central America, Mexico, the Southern United States and the
Caribbean. For a description of guarantees related to our DTH joint venture
transponder obligations, see Note 13 to our year-end financial statements.
On September 20, 1996, PanAmSat agreed to provide us transponder service on
three to five PAS-3R Ku-band transponders, at least three of which were intended
to be for the delivery of DTH satellite services to Spain. In addition, the DTH
joint venture in Spain is using 11 transponders on two Hispasat, state-owned
satellites, the footprints of which cover all of Spain. Under the PAS-3R
transponder contract, as amended, we were required to pay for five transponders
at an annual fee for each transponder of U.S.$3.1 million. We currently have
available transponder capacity on two 36 Mhz C-band transponders on Galaxy IVR,
which reaches Mexico, the United States and Canada, due to an exchange with
three of the five 54 Mhz Ku-band transponders on PAS-3R described above. For
each of the 36 Mhz C-band transponders we pay an annual fee of approximately
U.S.$3.7 million.
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On April 9, 2003, News Corp. announced that it reached a definitive
agreement with General Motors and Hughes in which News Corp. would acquire
General Motors' 19.9% stake in Hughes and a further 14.1% of Hughes from public
shareholders and General Motors' pension and other benefit plans, for a total of
34% of Hughes. PanAmSat is 81% owned by Hughes. If News Corp. acquires 34% of
Hughes, then News Corp. would indirectly own a significant interest in PanAmSat,
our primary satellite service provider. See "Key Information -- Risk Factors --
Risk Factors Related to Our Business -- One of Innova's Owners, News Corp., May
Acquire Significant Interests in DirecTV, Innova's DTH Competitor in Mexico, and
PanAmSat, and We Cannot Predict What Effect This Will Have on Us or Innova."
With several new domestic and international satellites having been launched
recently, and with several others scheduled for launch in the next few years,
including those scheduled for launch by PanAmSat, we believe that we will be
able to secure satellite capacity to meet our needs in the future, although no
assurances can be given in this regard.
INSURANCE. We maintain comprehensive insurance coverage that covers our
offices, equipment and other property, subject to some limitations, that result
from a business interruption due to natural disasters or other similar events.
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ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read the following discussion together with our year-end
financial statements and the accompanying notes, which appear elsewhere in this
annual report. This annual report contains forward-looking statements that
reflect our plans, estimates and beliefs. Our actual results could differ
materially from those discussed in these forward-looking statements. Factors
that could cause or contribute to these differences include, but are not limited
to, those discussed below and elsewhere in this annual report, particularly in
"Key Information -- Risk Factors." In addition to the other information in this
annual report, investors should consider carefully the following discussion and
the information set forth under "Key Information -- Risk Factors" before
evaluating us and our business.
PREPARATION OF FINANCIAL STATEMENTS
Our year-end financial statements have been prepared in accordance with
Mexican GAAP, which differ in some significant respects from U.S. GAAP. Note 27
to our year-end financial statements describes the principal differences between
Mexican GAAP and U.S. GAAP as they relate to us through December 31, 2002. Note
27 to our year-end financial statements provides a reconciliation to U.S. GAAP
of net income and total stockholders' equity. Note 27 to our year-end financial
statements also describes the differences in classification between the
statement of changes in financial position under Mexican GAAP and the
requirements under U.S. GAAP for a statement of cash flows.
As described under "Information on the Company -- Business Overview --
Music Recording," in April 2002, we sold our music recording operations to
Univision in exchange for 6,000,000 shares of Class A Common Stock of Univision
and warrants to purchase 100,000 shares of Class A Common Stock of Univision.
Under Mexican GAAP, the results of our music recording segment for the year
ended December 31, 2001 and from prior and subsequent periods have been
classified as discontinued operations. See "-- Discontinued Operations" and Note
23 to our year-end financial statements.
In April 2003, the Mexican Institute of Public Accountants, or MIPA, issued
Bulletin B-5, "Financial Information by Segments." Bulletin B-5 requires that
Mexican companies look to their internal organizational structure and internal
reporting system for the purpose of identifying segments, and provides guidance
for the measurement and disclosure of a company's operating segments, including
information related to products or services, geographical areas and principal
customers. Bulletin B-5 became effective in April 2003. Since the provisions of
Bulletin B-5 are similar to those standards previously applied by us under
International Accounting Standard No. 14, "Segment Reporting," which was
applicable to Mexican companies pursuant to Bulletin A-8, we estimate that the
adoption of Bulletin B-5 in 2003 will not have a significant impact on our
financial statements.
In March 2003, the MIPA issued Bulletin C-15, "Impairment and Disposition
of Long-Lived Assets," which requires the recognition and measurement of the
impairment of long-lived assets to be held and used, including goodwill, and the
measurement of long-lived assets to be disposed of by sale. Bulletin C-15 is
effective for periods beginning on January 1, 2004, with early adoption
recommended. We are evaluating the impact that the adoption of Bulletin C-15
will have on our consolidated financial statements.
In January 2002, the MIPA issued Bulletin C-8, "Intangible Assets," which
defines intangible assets as costs incurred and rights or privileges acquired
that will generate a future economic benefit. Bulletin C-8 excludes the
accounting for goodwill, an intangible asset which accounting is still covered
by Mexican GAAP Bulletin B-8, "Consolidated and Combined Financial Statements
and Valuation of Permanent Investments in Shares." Bulletin C-8 provides a
definition of research and development costs requiring that only development
costs can be deferred to a future period. Furthermore, Bulletin C-8 states that
pre-operating costs should be expensed as a period cost, unless they can be
classified as development costs. Under the provisions of Bulletin C-8,
intangible assets with indefinite useful lives should not be amortized, but
rather tested for impairment on an annual basis. Intangible assets with finite
useful lives should continue to be amortized over their useful lives. The
provisions of Bulletin C-8 became effective as of January 1, 2003. Beginning in
2003, in accordance with the provisions of Bulletin C-8 related to intangible
assets with indefinite useful lives, we no longer amortize the carrying value of
our trademarks and transmission rights in perpetuity. See Notes 4 and 7 to our
year-
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end financial statements. We estimate that the adoption of the other provisions
of Bulletin C-8 in 2003 will not have a significant impact on our consolidated
financial statements.
In December 2001, the MIPA issued Bulletin C-9, "Liability, Provisions,
Contingent Assets and Liabilities, and Commitments." Bulletin C-9 provides
guidance for the valuation, presentation and disclosure of liabilities and
provisions (other than income taxes, employee benefit plans, financial
instruments to be valued on a fair value basis and asset allowances), including
contingent assets and liabilities, as well as disclosure guidelines for
commitments incurred by an entity as a part of its operations. Bulletin C-9
became effective as of January 1, 2003. We estimate that the adoption of
Bulletin C-9 in 2003 will not have a significant impact on our consolidated
financial statements.
Mexican GAAP requires that our financial statements recognize the effects
of inflation. In particular, our financial statements reflect the:
- restatement of Mexican non-monetary assets (other than transmission
rights, inventories and equipment of non-Mexican origin),
non-monetary liabilities and shareholders' equity using the NCPI;
- restatement of all inventories at net replacement cost;
- restatement of equipment of non-Mexican origin using a specific
index that reflects inflation in the country of origin and the
exchange rate as of the latest balance sheet date;
- recognition of gains and losses in purchasing power from holding
monetary liabilities or assets in income;
- restatement and presentation of all amounts in constant Pesos as of
the most recent balance sheet date, December 31, 2002; and
- restatement of the results of operations and balance sheet items of
foreign operations, which are not integral to Mexican operations,
at the rate of inflation in the applicable foreign country before
translating them into Mexican Pesos.
CRITICAL ACCOUNTING POLICIES
We have identified certain key accounting policies upon which our
consolidated financial condition and results of operations are dependent. The
application of these key accounting policies often involve complex
considerations and assumptions and the making of subjective judgments or
decisions on the part of our management. In the opinion of our management, our
most critical accounting policies under both Mexican GAAP and U.S. GAAP are
those related to the accounting for programming, equity investments and the
evaluation of long-lived assets. For a full description of these and other
accounting policies, see Note 1 to our year-end financial statements.
ACCOUNTING FOR PROGRAMMING. We produce a significant portion of programming
for initial broadcast over our television networks in Mexico, our primary
market. Following the initial broadcast of this programming, we then license
some of this programming for broadcast in secondary markets, such as the United
States, Latin America, Asia, Europe and Africa. In order to properly capitalize
and subsequently amortize production costs related to this programming, we must
estimate the expected future benefit period over which a given program will
generate revenues (generally, over a five-year period). We then capitalize the
production costs related to a given program over the expected future benefit
period. Under this policy, we generally expense approximately 70% of the
production costs related to a given program in the year of its initial broadcast
and defer and expense the remaining production costs over the remainder of the
expected future benefit period. See Note 4 to our year-end financial statements.
We estimate expected future benefit periods based on past historical
revenue patterns for similar types of programming and any potential future
events, such as new outlets through which we can exploit or distribute our
programming, including our consolidated subsidiaries, equity investees and joint
ventures, among other outlets. To the extent that a given future expected
benefit period is shorter than we estimate, we may have to write-off
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capitalized production costs sooner than anticipated. Conversely, to the extent
that a given future expected benefit period is longer than we estimate, we may
have to extend the amortization schedule for the remaining capitalized
production costs.
We also purchase programming from, and enter into license arrangements
with, various third party programming producers and providers, pursuant to which
we receive the rights to broadcast programming produced by third parties over
our television networks in Mexico and/or our pay television and other media
outlets. In the case of programming acquired from third parties, we estimate the
expected future benefit period based on the anticipated number of showings in
Mexico over our television networks and/or our pay television and other media
outlets. In the case of programming licensed from third parties, we estimate the
expected future benefit period based upon the term of the license. To the extent
that a given future expected benefit period is shorter than we estimate, we may
have to write off the purchase price or the license fee sooner than anticipated.
Conversely, to the extent that a given future expected benefit period is longer
than we estimate, we may have to extend the amortization schedule for the
remaining portion of the purchase price or the license fee.
EQUITY INVESTMENTS. Over the past few years, we have made significant
investments in DTH satellite and Internet ventures, both in Mexico and abroad,
as well as in Univision. The majority of our investments are structured as
equity investments. See Notes 1(f) and 2 to our year-end financial statements.
As a result, the results of operations attributable to our investments are not
consolidated with the results of our various segments for financial reporting
purposes, but are reported as equity in income (losses) of affiliates in our
consolidated income statement. See Note 5 to our year-end financial statements.
In the past we have made significant capital contributions and loans to our
DTH satellite and Internet ventures, and we expect that we will continue to make
significant capital contributions and loans to at least some of our DTH
satellite ventures. In the past, these ventures have generated, and we expect
that they will continue to generate, significant operating losses and negative
cash flow as they continue to build and expand their respective businesses. We
periodically evaluate our investments in these ventures for impairment, taking
into consideration the performance of these joint ventures as compared to
projections related to net sales, expenditures and subscriber growth, strategic
plans and future required cash contributions, among other factors. Nevertheless,
given the dynamic environments in which these businesses operate, as well as
changing macroeconomic conditions, we cannot assure you that our future
evaluations would not result in our recognizing an impairment charge for these
investments.
Once the carrying balance of a given investment is reduced to zero, we
evaluate whether we should suspend the equity method accounting, taking into
consideration both quantitative and qualitative factors, such as guarantees we
have provided to these ventures, future funding commitments and expectations as
to the viability of the business. These conditions may change from year to year,
and accordingly, we periodically evaluate whether to continue to account for our
various investments under the equity method.
GOODWILL AND OTHER INTANGIBLE ASSETS. Under Mexican GAAP, goodwill and
other intangibles are amortized on a straight-line basis over their estimated
useful lives. We assess the recoverability of goodwill and intangibles whenever
events or changes in circumstances indicate that expected future undiscounted
cash flows may not be sufficient to support the carrying amount of an asset.
Estimates of future cash flow involve considerable management judgment. These
estimates are based on historical data, anticipated market conditions and
management plans.
Under U.S. GAAP, effective January 1, 2002 we applied Statement of
Financial Accounting Standard No. 142, "Goodwill and Other Intangible Assets."
Under SFAS 142, goodwill, and certain other intangible assets deemed to have an
indefinite useful life, are no longer being amortized, but are subject to annual
impairment testing. The identification and measurement of impairment to goodwill
and intangible assets with indefinite lives involves the estimation of fair
values. Determining the fair value of a reporting unit under the first step of
the goodwill impairment test and determining the fair value of individual assets
and liabilities of a reporting unit (including unrecognized intangible assets)
under the second step of the goodwill impairment test is judgmental in nature
and often involves the use of significant estimates and assumptions. Similarly,
estimates and assumptions are used in determining the fair value of other
intangible assets. These estimates and assumptions could have a significant
impact on whether or not an impairment charge is recognized and also the
magnitude of any such charge. We perform valuation analyses with the assistance
of third parties and consider relevant internal data, as well as other market
information, that is
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publicly available. Estimates of fair value are primarily determined using
discounted cash flows and market comparisons. These approaches use significant
estimates and assumptions including projected future cash flows (including
timing), discount rate reflecting the risk inherent in future cash flows,
perpetual growth rate, determination of appropriate market comparables and the
determination of whether a premium or discount should be applied to comparables.
Inherent in these estimates and assumptions is a certain level of risk, which we
believe we have considered in our valuations. Nevertheless, if future actual
results differ from estimates, a possible impairment charge may be recognized in
future periods related to the write-down of the carrying value of goodwill and
other intangibles in addition to the amounts recognized in 2002.
LONG-LIVED ASSETS. We present certain long-lived assets and capitalized
costs in our consolidated balance sheet. We periodically evaluate these
long-lived assets for impairment and recognize any such impairment to the extent
that we believe the carrying value is no longer recoverable from future
projected cash flows. The principal factor we take into consideration when
performing an impairment analysis is the future projected cash flows related to
a given long-lived asset. In the case of long-lived assets related to our
Mexican operations, since inflation accounting requires us to restate the
carrying value of these assets to give effect to inflation prior to performing
our impairment analysis, we must also take into consideration the possible
impact that inflation may have on the ability of these assets to generate future
cash flow. In that connection, we consider, among other factors, assumptions
regarding projected rates of inflation, currency fluctuations and future revenue
growth. If these assumptions are not correct, we would have to recognize a
write-off or write-down or accelerate the amortization schedule related to the
carrying value of these assets. See Notes 1(i), 7 and 21 to our year-end
financial statements.
DEFERRED INCOME TAXES. Under both Mexican and U.S. GAAP, we record deferred
income tax assets and liabilities using enacted tax rates for the effect of
temporary differences between the book and tax basis of assets and liabilities.
If enacted tax rates change, we adjust the deferred tax assets and liabilities
through the provision for income taxes in the period of change to reflect the
enacted tax rate expected to be in effect when the deferred tax items reverse.
We also record a valuation allowance to reduce our deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event we were to
determine that we would be able to realize our deferred tax assets in the future
in excess of the net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Should we
determine that we would not be able to realize all or part of our net deferred
tax asset in the future, an adjustment to the deferred tax asset would be
charged to income in the period such determination was made.
EFFECTS OF DEVALUATION AND INFLATION
The following table sets forth, for the periods indicated:
- the percentage that the Peso devalued or appreciated against the
U.S. Dollar;
- the Mexican inflation rate;
- the U.S. inflation rate; and
- the percentage change in Mexican GDP compared to the prior period.
YEAR ENDED DECEMBER 31,
----------------------------
2000 2001 2002
---- ---- ----
Devaluation (appreciation) of the Mexican Peso as compared to the
U.S. Dollar(1)................................................ 1.2% (4.5)% 14.01%
Mexican inflation rate(2)........................................ 9.0 4.4 5.7
U.S. inflation rate.............................................. 3.4 1.6 2.4
Increase (decrease) in Mexican GDP(3)............................ 6.6 (0.3) 0.9
(1) Based on changes in the Interbank Rates, as reported by Banamex, at the
end of each period, which were as follows: Ps.9.495 per U.S. Dollar as of
December 31, 1999; Ps.9.610 per U.S. Dollar as of December 31, 2000;
Ps.9.178 per U.S. Dollar as of December 31, 2001; and Ps.10.464 per U.S.
Dollar as of December 31, 2002.
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(2) Based on changes in the NCPI from the previous period, as reported by the
Mexican Central Bank, which were as follows: 85.6 in 1999; 93.2 in 2000;
97.4 in 2001; and 102.9 in 2002.
(3) As reported by the Instituto Nacional de Estadistica, Geografia e
Informatica, or INEGI, and, in the case of GDP information for 2001 and
2002, as estimated by INEGI.
The general condition of the Mexican economy, the devaluation of the Peso
as compared to the U.S. Dollar, inflation and high interest rates have in the
past adversely affected, and may in the future adversely affect, our:
- advertising and other revenues. Inflation in Mexico adversely
affects consumers. As a result, our advertising customers may
purchase less advertising, which would reduce our advertising
revenues, and consumers may reduce expenditures for our other
products and services, including pay television services. Unless we
increase our nominal advertising rates and the prices for our other
products and services at a rate greater than the rate of inflation,
our advertising and other revenues will remain flat or decline when
expressed in constant Pesos.
- U.S. Dollar-denominated revenues and operating costs and expenses.
We have substantial operating costs and expenses denominated in
U.S. Dollars. These costs are principally due to our activities in
the U.S., the costs of foreign-produced programming and publishing
supplies and the leasing of satellite transponders. In 2000, 2001
and 2002 our U.S. Dollar-denominated revenues of U.S.$429 million,
U.S.$427 million and U.S.$434 million exceeded our U.S.
Dollar-denominated costs and expenses of U.S.$385 million, U.S.$377
million and U.S.$404 million, primarily due to the improvement of
our Programming Licensing and Publishing Distribution segments.
Nonetheless, in the past our U.S. Dollar-denominated costs and
expenses have exceeded our U.S. Dollar-denominated revenues;
therefore, we will continue to remain vulnerable to future
devaluations of the Peso, which will increase the Peso equivalent
of our U.S. Dollar-denominated costs and expenses.
- depreciation and amortization expense. We restate our non-monetary
Mexican and foreign assets to give effect to inflation. The
restatement of these assets in periods of high inflation, as well
as the devaluation of the Peso as compared to the U.S. Dollar,
increases the carrying value of these assets, which in turn
increases the related depreciation expense.
- integral cost of financing. The devaluation of the Peso as compared
to the U.S. Dollar generates foreign exchange losses relating to
our net U.S. Dollar-denominated liabilities and increases the Peso
equivalent of our interest expense on our U.S. Dollar-denominated
indebtedness. Foreign exchanges losses and increased interest
expense increase our integral cost of financing.
During 2000, we completed a refinancing of our indebtedness, pursuant to
which we reduced our borrowing costs, extended the maturities of our
indebtedness and replaced a portion of our U.S. Dollar-denominated indebtedness
with Peso-indexed denominated indebtedness. In addition, in December 2001, we
refinanced all of the approximately U.S.$100.0 million of indebtedness then
outstanding under our former U.S.$400.0 million term loan facility. In the
second quarter of 2003, we repaid all of the remaining Series A Senior Notes,
which matured in May 2003, with the net proceeds from a long-term credit
agreement that we entered into with a Mexican Bank for an aggregate principal
amount of Ps.800.0 million. As a result of these refinancings, we reduced our
exposure to the effects of the devaluation of the Peso as compared to the U.S.
Dollar, inflation and increases in interest rates. See "-- Liquidity, Foreign
Exchange and Capital Resources -- Refinancings," "-- Indebtedness" and Note 9 to
our year-end financial statements.
We also have entered into and will continue to consider entering into
additional financial instruments to hedge against Peso devaluations and reduce
our overall exposure to the devaluation of the Peso as compared to the U.S.
Dollar, inflation and high interest rates. We cannot assure you that we will be
able to enter into financial instruments to protect ourselves from the effects
of the devaluation of the Peso as compared to the U.S. Dollar, inflation and
increases in interest rates, or if so, on favorable terms. In the past we have
designated, and from time to time in the future we may designate, certain of our
investments or other assets as effective hedges against Peso devaluations. In
that connection, effective March 2002, we designated our investment in Univision
as an effective hedge against our U.S. Dollar-denominated semi-annual interest
payments with respect to both our U.S.$300.0 million aggregate principal amount
of 8% Senior Notes due 2011 and our U.S.$300.0 million aggregate principal
- 60 -
amount of 8.5% Senior Notes due 2032. See "Key Information -- Risk Factors --
Risk Factors Related to Mexico," "Quantitative and Qualitative Disclosures About
Market Risk" and Note 10 to our year-end financial statements.
SUMMARY OF BUSINESS SEGMENT RESULTS
The following tables set forth the net sales and operating income (loss) of
each of our business segments and intersegment sales and corporate expenses for
the years ended December 31, 2000, 2001 and 2002. Information regarding our
business segments and unallocated corporate expenses is prepared in accordance
with International Accounting Standard No. 14, "Segment Reporting," which is
applicable to Mexican companies under Bulletin A-8. This standard requires us to
look to our internal organizational structure and reporting system to identify
our business segments. In accordance with this standard, we currently classify
our operations into eight business segments: Television Broadcasting,
Programming for Pay Television, Programming Licensing, Publishing, Publishing
Distribution, Cable Television, Radio and Other Businesses. See Note 26 to our
year-end financial statements. Results attributable to our music recording
operations, which we sold to Univision in April 2002, have been classified as
discontinued operations. See "-- Discontinued Operations" and Note 23 to our
year-end financial statements. Segment data from prior periods has been
reclassified to reflect this classification.
YEAR ENDED DECEMBER 31,(1)(2)
-------------------------------------------------------
2000 2001 2002
------------ ------------ ------------
(MILLIONS OF MEXICAN PESOS IN PURCHASING POWER AS OF
DECEMBER 31, 2002)
NET SALES
Television Broadcasting............. Ps. 14,060.7 Ps. 13,445.4 Ps. 14,038.2
Programming for Pay Television...... 529.5 543.6 608.0
Programming Licensing............... 1,614.3 1,485.0 1,405.2
Publishing(3)....................... 1,831.4 1,695.7 1,683.1
Publishing Distribution............. 955.0 948.2 1,343.8
Cable Television.................... 981.2 1,143.9 1,108.2
Radio(4)............................ 361.9 249.2 187.1
Other Businesses(5)................. 1,652.4 1,824.2 1,548.9
------------ ------------ ------------
Total Segment Net Sales.......... 21,986.4 21,335.2 21,922.5
Intersegment Operations............. (404.6) (549.6) (363.2)
------------ ------------ ------------
Total Consolidated Net Sales..... Ps. 21,581.8 Ps. 20,785.6 Ps. 21,559.3
============ ============ ============
YEAR ENDED DECEMBER 31,(1)(2)
-------------------------------------------------------
2000 2001 2002
------------ ------------ ------------
(MILLIONS OF MEXICAN PESOS IN PURCHASING POWER AS OF
DECEMBER 31, 2002)
OPERATING INCOME (LOSS)
Television Broadcasting(6).......... Ps. 4,866.0 Ps. 4,251.9 Ps. 4,564.3
Programming for Pay Television(7)... (95.8) 2.8 60.3
Programming Licensing............... 383.7 307.3 218.0
Publishing(3)....................... 341.9 247.8 243.6
Publishing Distribution............. 43.6 8.5 (1.9)
Cable Television.................... 156.7 250.6 201.4
Radio(4)............................ 46.0 (15.9) (45.7)
Other Businesses(5)................. (386.9) (570.5) (446.2)
------------ ------------ ------------
Total Segment Operating Income... 5,355.2 4,482.5 4,793.8
Intersegment Corporate Expenses(8).. (144.6) (142.9) (143.5)
------------ ------------ ------------
Total Consolidated Operating
Incom Ps. 5,210.6 Ps. 4,339.6 Ps. 4,650.3
============ ============ ============
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(1) Certain segment data set forth in these tables vary from certain data set
forth in our year-end financial statements due to differences in rounding.
The segment net sales and total segment net sales data set forth in this
annual report reflect sales from intersegment operations in all periods
presented. See Note 26 to our year-end financial statements.
(2) Total segment net sales, total consolidated net sales, operating income
(loss) and total consolidated operating income do not reflect the results
of operations of our Music Recording segment. As described under
"Information on the Company -- Business Overview -- Music Recording," we
sold our music recording operations to Univision in April 2002. We no
longer engage in the music recording business, and under Mexican GAAP the
results of our Music Recording segment for the year ended December 31,
2001 and from prior and subsequent periods have been classified as
discontinued operations. See "-- Discontinued Operations" and Note 23 to
our year-end financial statements.
(3) Through July 2000, includes Ps.92.0 million in revenues and an operating
loss of Ps.8.7 million from the operations of Ovaciones. We sold Ovaciones
in July 2000.
(4) As described under "Information on the Company -- Business Overview --
Radio -- Joint Venture; Proposed Acquisition," in October 2001, we entered
into agreements with Grupo Prisa, a leading Spanish-language
communications group, to form a radio joint venture in Mexico. Under these
arrangements, Grupo Prisa acquired a 50% equity stake, with limited voting
rights, in our radio subsidiary, Sistema Radiopolis, for U.S.$50.0
million, and made a U.S.$10.0 million capital contribution. Since we hold
a controlling 50% full voting stake in this subsidiary and have the right
to elect a majority of the members of its Board of Directors, we will
continue to consolidate 100% of the results of operations of this
subsidiary in accordance with Mexican GAAP. See "-- Results of Operations
-- Radio" and "-- Minority Interest."
(5) Beginning in May 2000, includes the operations of EsMas.com, which
accounted for Ps.24.1 million, Ps.100.3 million and Ps.90.0 million, or
1.5%, 5.5% and 5.8%, of the net sales of our Other Businesses segment for
the years ended December 31, 2000, 2001 and 2002, respectively. The
operations of EsMas.com generated operating losses in the amount of
Ps.280.7 million, Ps.399.7 million and Ps.234.0 million for the years
ended December 31, 2000, 2001 and 2002, respectively.
(6) Reflects fixed costs related to the production of ECO in the amount of
Ps.300.7 million and Ps.107.6 million for the years ended December 31,
2000 and 2001, respectively. We ceased production of ECO in April 2001.
See "-- Television Broadcasting" and "-- Programming for Pay Television."
(7) Through April 2001, reflects production and programming costs and other
direct operating costs and expenses related to ECO. See "-- Television
Broadcasting" and "-- Programming for Pay Television."
(8) The segment operating income (loss) and total segment operating income
data set forth in this annual report do not reflect corporate expenses in
any period presented. Total consolidated operating income reflects
corporate expenses in all periods presented. See Note 26 to our year-end
financial statements.
SEASONALITY
Our results of operations are seasonal. We typically recognize a
disproportionately large percentage of our overall advertising net sales in the
fourth quarter in connection with the holiday shopping season. For example, in
2000, 2001 and 2002, we recognized 29.2%, 28.8% and 29.5% of our net sales in
the fourth quarter of the year. In 2000, our overall advertising net sales were
less seasonal than in prior years as a result of political campaigns in
connection with the Presidential election in the first half of 2000 and as a
result of the 2000 Summer Olympics in the third quarter of 2000. Our costs, in
contrast to our revenues, are more evenly incurred throughout the year and
generally do not correlate with the amount of advertising sales.
- 62 -
RESULTS OF OPERATIONS
The following tables set forth our results of operations data as a
percentage of net sales:
YEAR ENDED DECEMBER 31,(1)(2)
------------------------------
2000 2001 2002
---- ---- ----
TOTAL NET SALES
Television Broadcasting....................... 63.9% 63.0% 64.0%
Programming for Pay Television................ 2.4 2.5 2.8
Programming Licensing......................... 7.3 7.0 6.4
Publishing(3)................................. 8.3 7.9 7.7
Publishing Distribution....................... 4.4 4.4 6.1
Cable Television.............................. 4.5 5.4 5.1
Radio(4)...................................... 1.7 1.2 0.8
Other Businesses(5)........................... 7.5 8.6 7.1
----- ----- -----
Total Segment Net Sales.................... 100.0% 100.0% 100.0%
Intersegment Operations....................... (1.9) (2.6) (1.7)
----- ----- -----
Total Consolidated Net Sales............... 98.1% 97.4% 98.3%
===== ===== =====
YEAR ENDED DECEMBER 31,(1)
------------------------------
2000 2001 2002
---- ---- ----
TOTAL NET SALES
Cost of sales................................. 55.9% 58.2% 57.6%
Selling expenses.............................. 7.2 7.6 7.8
Administrative expenses....................... 6.7 6.8 6.3
Depreciation and amortization................. 6.1 6.5 6.7
Operating income.............................. 24.1 20.9 21.6
----- ----- -----
Total.................................... 100.0% 100.0% 100.0%
===== ===== =====
(1) Certain segment data set forth in these tables vary from certain data set
forth in our year-end financial statements due to differences in rounding.
The segment net sales and total segment net sales data set forth in this
annual report reflect sales from intersegment operations in all periods
presented. See Note 26 to our year-end financial statements.
(2) Percentages for all periods have been reclassified to reflect the
classification of the results of our Music Recording segment as
discontinued operations. See footnote (2) to the tables set forth under
the caption "-- Summary of Business Segment Results," "-- Discontinued
Operations" and Note 23 to our year-end financial statements.
(3) See footnote (3) to the tables set forth under the caption "--Summary of
Business Segment Results."
(4) See footnote (4) to the tables set forth under the caption "--Summary of
Business Segment Results."
(5) See footnote (5) to the tables set forth under the caption "--Summary of
Business Segment Results."
TOTAL SEGMENT RESULTS
2002 vs. 2001. Our net sales increased by Ps.773.7 million, or 3.7%, to
Ps.21,559.3 million for the year ended December 31, 2002 from Ps.20,785.6
million for the year ended December 31, 2001. This increase reflects higher
revenues in our Television Broadcasting, Publishing Distribution and Programming
for Pay Television segments, and was partially offset by lower net sales in our
Programming Licensing, Publishing, Cable Television, Radio and Other Businesses
segments.
Cost of sales increased by Ps.323.6 million, or 2.7%, to Ps.12,418.1
million for the year ended December 31, 2002 from Ps.12,094.5 million for the
year ended December 31, 2001. This increase reflects higher costs in the
Publishing Distribution, Television Broadcasting, Cable Television and
Publishing segments. These increases were partially offset by lower costs in the
Other Businesses, Programming for Pay Television, Programming Licensing and
Radio segments.
- 63 -
Selling expenses increased by Ps.111.5 million, or 7.1%, to Ps.1,685.6
million for the year ended December 31, 2002 from Ps.1,574.1 million for the
year ended December 31, 2001. This increase reflects an increase in our
Television Broadcasting, Programming for Pay Television, Programming Licensing,
Publishing and Publishing Distribution segments as a result of increased
promotional and advertising expenses, distribution costs and higher provision
for doubtful trade accounts. This increase was partially offset by a decrease in
the selling expenses of our Cable Television, Radio and Other Businesses
segments.
Administrative expenses decreased by Ps.67.8 million, or 4.8%, to
Ps.1,355.6 million for the year ended December 31, 2002 from Ps.1,423.4 million
for the year ended December 31, 2001. This decrease was primarily due to a
decrease in personnel costs as a result of workforce reductions and layoffs, as
well as reductions in other office facilities expenses, in connection with our
continued cost-cutting efforts, and decreases in the administrative expenses of
our Television Broadcasting, Programming Licensing, Publishing, Radio and Other
Businesses segments. This decrease was partially offset by an increase in the
administrative expenses of our Publishing Distribution and Cable Television
segments.
Depreciation and amortization expense increased by Ps.95.7 million, or
7.1%, to Ps.1,449.7 million for the year ended December 31, 2002 from Ps.1,354.0
million for the year ended December 31, 2001. This change primarily reflects
increases in the depreciation and amortization expenses related to our
Television Broadcasting and Cable Television segments, as well as amortization
of deferred costs related to EsMas.com for the year ended December 31, 2002.
For the foregoing reasons, our operating income increased by Ps.310.7
million, or 7.2%, to Ps.4,650.3 million for the year ended December 31, 2002
from Ps.4,339.6 million for the year ended December 31, 2001.
2001 vs. 2000. Our net sales decreased by Ps.796.2 million, or 3.7%, to
Ps.20,785.6 million for the year ended December 31, 2001 from Ps.21,581.8
million for the year ended December 31, 2000. This decrease primarily reflects
decreases in the net sales of our Television Broadcasting, Programming
Licensing, Publishing, Publishing Distribution and Radio segments. This decrease
was partially offset by increases in the net sales of our Programming for Pay
Television, Cable Television and Other Businesses segments.
The decreases in the net sales of each of our Television Broadcasting,
Publishing and Radio segments primarily reflect the adverse comparison to the
year ended December 31, 2000, which included non-recurring revenues in the
aggregate amount of approximately Ps.1,053.4 million attributable to advertising
time and pages sold in connection with the Mexican presidential and
congressional and other federal and local campaigns and the 2000 Summer Olympic
Games. These decreases also reflected the economic slowdown in Mexico, which, in
particular, adversely affected the television advertising spot market in 2001,
particularly in the fourth quarter, and, in the case of our Programming
Licensing, Publishing and Publishing Distribution segments, the effects of the
4.5% appreciation of the Peso as compared to the U.S. Dollar on foreign
currency-denominated sales during the year ended December 31, 2001.
Cost of sales increased by Ps.41.7 million, or 0.3%, to Ps.12,094.5 million
for the year ended December 31, 2001 from Ps.12,052.8 million for the year ended
December 31, 2000. Cost of sales represented approximately 58.2% and 55.9% of
our net sales for 2001 and 2000. This increase primarily reflects increases in
the cost of sales of our Television Broadcasting segment, which increase
reflects increased production and programming costs incurred primarily in the
fourth quarter of 2001 related to the introduction of new programming for
Channel 4 and increased news coverage following the terrorist attacks on
September 11, 2001, as well as increases in the cost of sales of our Publishing
Distribution, Cable Television and Other Businesses segments. This increase also
reflects an increase in personnel costs as a result of a nominal 10.5% wage
increase implemented in two stages in February and April of 2001. This increase
was partially offset by decreases in the cost of sales of our Programming for
Pay Television segment, which decrease primarily reflects decreased production
and programming costs following the April 2001 discontinuation of ECO, our
international news program, as well as decreases in the cost of sales of our
Programming Licensing, Publishing and Radio segments due to lower net sales.
Selling expenses increased by Ps.12.3 million, or 0.8%, to Ps.1,574.1
million for the year ended December 31, 2001 from Ps.1,561.8 million for the
year ended December 31, 2000. This increase primarily reflects an increase in
personnel costs as a result of the nominal 10.5% wage increase implemented in
2001 and an increase in the selling
- 64 -
expenses of our Programming for Pay Television, Publishing, Publishing
Distribution and Other Businesses segments as a result of increased promotional
and advertising expenses and distribution costs. This increase was partially
offset by a decrease in the selling expenses of our Television Broadcasting,
Cable Television and Radio segments.
Administrative expenses decreased by Ps.21.6 million, or 1.5%, to
Ps.1,423.4 million for the year ended December 31, 2001 from Ps.1,445.0 million
for the year ended December 31, 2000. This decrease was primarily due to a
decrease in personnel costs as a result of workforce reductions and layoffs, as
well as reductions in travel and other office facilities expenses, in connection
with our continued cost-cutting efforts, and decreases in the administrative
expenses of our Television Broadcasting, Programming Licensing, Publishing
Distribution and Other Businesses segments. This decrease was partially offset
by an increase in personnel costs as a result of the nominal 10.5% wage increase
implemented in 2001 and by increases in administrative expenses relating to our
Programming for Pay Television, Publishing, Cable Television and Radio segments.
Depreciation and amortization expense increased by Ps.42.4 million, or
3.2%, to Ps.1,354.0 million for the year ended December 31, 2001 from Ps.1,311.6
million for the year ended December 31, 2000. This change primarily reflects
increases in the depreciation and amortization expenses related to our Cable
Television segment and EsMas.com for the year ended December 31, 2001.
For the foregoing reasons, our operating income decreased by Ps.871.0
million, or 16.7%, to Ps.4,339.6 million for the year ended December 31, 2001
from Ps.5,210.6 million for the year ended December 31, 2000.
TELEVISION BROADCASTING. Television Broadcasting net sales are derived
primarily from the sale of advertising time on our national television networks,
Channels 2, 4, 5 and 9, and local stations, including our English-language
station on the Mexico/U.S. border. The contribution of Television Broadcasting's
net sales was 64.0% of our total segment net sales in 2002, 63.0% in 2001, and
63.9% in 2000. No Television Broadcasting advertiser accounted for more than 10%
of Television Broadcasting advertising sales in any of these periods. The
contribution of local stations net sales to Television Broadcasting net sales
was 12.5% in 2002, 10.9% in 2001 and 9.6% in 2000.
Advertising Rates and Sales. The Mexican government does not restrict our
ability to set our advertising rates. In setting advertising rates and terms, we
consider, among other factors, the likely effect of rate increases on the volume
of advertising sales. We have historically been flexible in setting rates and
terms for our television advertising. Since April 1996, we have been
implementing a strategy to revise the advertising rate structure for our
television networks. Nominal rate increases have traditionally been much higher
in prime time and weekday prime time hours as a result of high demand for
advertising during these hours. During 2000, we increased our nominal
advertising rates twice. During 2001, 2002 and the first half of 2003, we
increased our nominal advertising rates on a quarterly basis, and we intend to
continue to increase our nominal advertising rates on a quarterly basis
throughout 2003. Unless we increase our nominal advertising rates by more than
the rate of inflation, our net sales in Mexico will remain flat or decline when
expressed in constant Pesos.
During prime time broadcasts, we sold an aggregate of 1,336 hours of
advertising time in 2002, 1,340 hours of advertising time in 2001 and 1,675
hours of advertising time in 2000. During sign-on to sign-off hours, we sold
2,555 hours of advertising time in 2002, 2,144 hours of advertising time in 2001
and 2,698 hours of advertising time in 2000. Television Broadcasting advertising
time that is not sold to the public is primarily used to satisfy our legal
requirement to make broadcast time available to the Mexican government and to
promote our programs, services and products and entities in which we have made
investments.
We sell commercial time on an advanced payment, upfront and scatter basis
with the objective of maximizing unit rates as opposed to upfront deposits.
Advertisers that elect the advanced payment or upfront options lock in prices
for the upcoming year or quarter, regardless of future price changes.
Advertisers that choose the advanced payment option make annual prepayments,
with cash or notes, are charged the lowest rates for their commercial time and
are given the highest priority in schedule placement. These advertisers are also
given a first option in advertising during special programs. Upfront advertisers
make commitments for a year or a quarter, without making advance payments, and
have second priority in scheduling commercial time during regular and special
programs. Scatter advertisers risk both higher prices and lack of access to
choice commercial time slots. We offer no bonus commercial time as we did prior
to the fourth quarter of 1998, but we do offer guarantees to advanced payment
and
- 65 -
upfront advertisers based on the growth level of their annual commitment. In
addition, sales force incentive compensation, formerly tied exclusively to
obtaining maximum upfront deposits, now largely ties bonuses to total year-end
results.
As of December 31, 2002 and December 31, 2001, we had received Ps.11,304.7
million (nominal) and Ps.10,480.0 million (nominal) of advertising deposits for
television advertising during 2003 and 2002, representing U.S.$1,080.3 million
and U.S.$1,142.0 million at the applicable year-end exchange rates. The deposits
as of December 31, 2002 represented a 7.9% (nominal) increase, or 2.4% in real
terms, as compared to year-end 2001, and the deposits at December 31, 2001
represented an 8.8% (nominal) increase.
Approximately 62.6%, 60.6% and 53.6% of the advanced payment deposits as of
each of December 31, 2002, December 31, 2001 and December 31, 2000 respectively,
were in the form of short-term, non-interest bearing notes, with the remainder
in each of those years consisting of cash deposits. The weighted average
maturity of these notes at December 31, 2002, December 31, 2001 and December 31,
2000 was 3.5 months, 4.0 months and 3.6 months.
We no longer sell advertising on a multi-media basis as we did prior to the
fourth quarter of 1998. Segments other than Television Broadcasting that sell
advertising, specifically Programming for Pay Television, Publishing, Cable
Television and Radio, currently have their own respective advertising sales
forces that sell advertising primarily on a scatter basis.
2002 vs. 2001. Television Broadcasting net sales, representing 63.0% and
64.0% of our total segment net sales for the years ended December 31, 2001 and
2002, respectively, increased by Ps.592.8 million, or 4.4%, to Ps.14,038.2
million for the year ended December 31, 2002 from Ps.13,445.4 million for the
year ended December 31, 2001. This increase primarily reflects Ps.363.6 million
related to the transmission of the World Cup in the second quarter of 2002 and a
record increase of 19.5% in our local sales driven by Channel 4. Excluding the
non-recurring revenues related to the World Cup, Television Broadcasting net
sales would have increased by Ps.229.2 million, or 1.7%, to Ps.13,674.6 million
for the year ended December 31, 2002 from Ps.13,445.4 million for the year ended
December 31, 2001.
Television Broadcasting operating income increased by Ps.312.4 million, or
7.3%, to Ps.4,564.3 million for the year ended December 31, 2002, from
Ps.4,251.9 million for the year ended December 31, 2001. This increase was
primarily due to the increase in net sales, partially offset by an increase in
cost of sales, due to the transmission rights of the World Cup, an increase in
selling expenses due to higher provision for doubtful trade accounts, as well as
higher depreciation expense related to technical and transportation equipment.
Excluding the results of the transmission of the World Cup, Television
Broadcasting operating income would have increased by Ps.123.9 million, or 2.9%,
to Ps.4,375.8 million for the year ended December 31, 2002, from Ps. 4,251.9
million for the year ended December 31, 2001.
2001 vs. 2000. Television Broadcasting net sales, representing 63.0% and
63.9% of our total segment net sales for the years ended December 31, 2001 and
2000, respectively, decreased by Ps.615.3 million, or 4.4%, to Ps.13,445.4
million for the year ended December 31, 2001 from Ps.14,060.7 million for the
year ended December 31, 2000. This decrease primarily reflects the adverse
comparison to the year ended December 31, 2000, which included non-recurring
revenues in the amount of approximately Ps.801.3 million in advertising sold in
connection with the Mexican presidential and congressional and other federal and
local campaigns and Ps.198.8 million in connection with the 2000 Summer Olympic
Games, as well as the economic slowdown in Mexico, which adversely affected the
television spot market throughout 2001, particularly in the fourth quarter, and
the 0.3% decrease in Mexican GDP in 2001 as compared to 2000. This decrease was
partially offset by an increase in advertising rates, in real terms, in each
quarter of 2001.
Television Broadcasting operating income decreased by Ps.614.1 million, or
12.6%, to Ps.4,251.9 million for the year ended December 31, 2001 from
Ps.4,866.0 million for the year ended December 31, 2000. This decrease was
primarily due to the decrease in net sales, as well as an increase in cost of
sales, particularly in the fourth quarter, due to increased production and
programming costs related to the introduction of new programming for Channel 4
and increased news coverage after the terrorist attacks on September 11, 2001.
This decrease was partially offset by decreased production costs in connection
with cost-cutting efforts introduced in April 2001, including a reduction in
production costs related to telenovelas and special events and the closing of
two production
- 66 -
studios, and decreases in selling expenses and administrative expenses
reflecting, in the case of administrative expenses, a decrease in personnel
costs as a result of workforce reductions in connection with our cost-cutting
efforts.
Following the discontinuation of ECO in April 2001, fixed costs of ECO
related to production studios and technical equipment in the amount of Ps.300.7
million and Ps.107.6 million for the years ended December 31, 2000 and 2001,
respectively, are now reflected in the results of our Television Broadcasting
segment. The operations related to these fixed costs are also reflected in the
results of our Television Broadcasting segment. Programming costs related to ECO
continued to be reflected in the results of our Programming for Pay Television
segment through April 2001. See Note 26 to our year-end financial statements.
PROGRAMMING FOR PAY TELEVISION. Programming for Pay Television net sales
are derived primarily from revenues received from providing programming to pay
television providers servicing Latin America, the United States and Europe,
including other cable systems in Mexico and the DTH satellite joint ventures in
which we have interests. Revenues from advertising time sold on programs
provided to cable systems in Mexico are also reflected in this segment. Since
the fourth quarter of 1998, Programming for Pay Television has sold advertising
independently from our other media-related segments on a scatter basis.
The contribution of Programming for Pay Television net sales to our total
segment sales was 2.8% in 2002, 2.5% in 2001 and 2.4% in 2000.
2002 vs. 2001. Programming for Pay Television net sales increased by
Ps.64.4 million, or 11.9%, to Ps.608.0 million for the year ended December 31,
2002 from Ps.543.6 million for the year ended December 31, 2001. This increase
was primarily due to higher revenues from signals sold to pay television systems
in Mexico, partially offset by lower revenues from signals sold to pay
television systems in Latin America and Spain, as well as lower advertising
sales.
Programming for Pay Television operating income increased by Ps.57.5
million to Ps.60.3 million for the year ended December 31, 2002, from Ps.2.8
million for the year ended December 31, 2001, primarily due to higher sales and
lower programming costs as a result of the discontinuation of ECO in April 2001.
As described above under "-- Television Broadcasting," since May 2001, fixed
costs of ECO related to production studios and technical equipment are now
reflected in the results of our Television Broadcasting segment, while
programming costs related to ECO (through the date we ceased production)
continue to be reflected in the results of our Programming for Pay Television
segment. See Note 26 to our year-end financial statements. This increase was
partially offset by higher signal costs and operating expenses due to an
increase in the provision for doubtful trade accounts related to Latin America.
2001 vs. 2000. Programming for Pay Television net sales increased by
Ps.14.1 million, or 2.7%, to Ps.543.6 million for the year ended December 31,
2001 from Ps.529.5 million for the year ended December 31, 2000. This increase
primarily reflects an increase in revenues from the license of signals to pay
television providers in Mexico and abroad. This increase was partially offset by
the decrease in advertising revenues and the adverse comparison to the year
ended December 31, 2000, which included non-recurring revenues in the amount of
approximately Ps.5.8 million in connection with the Mexican presidential and
congressional and other federal and local campaigns and Ps.13.7 million in
connection with the 2000 Summer Olympic Games and the effects of the
appreciation of the Peso as compared to the U.S. Dollar on foreign
currency-denominated sales during the year ended December 31, 2001.
Programming for Pay Television operating results increased by Ps.98.6
million to operating income of Ps.2.8 million for the year ended December 31,
2001, as compared to an operating loss in the amount of Ps.95.8 million for the
year ended December 31, 2000. This change primarily reflects a decrease in cost
of sales as a result of a decrease in production and programming costs following
the discontinuation of ECO in April 2001. This change was partially offset by
increases in administrative and selling expenses.
Excluding programming costs related to ECO for the years ended December 31,
2000 and 2001, Programming for Pay Television would have generated operating
income in the amount of Ps.45.3 million for the year ended December 31, 2001, as
compared to an operating income in the amount of Ps.27.1 million during the year
ended December 31, 2000.
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PROGRAMMING LICENSING. Programming Licensing net sales consist primarily of
revenues from program license agreements principally for our telenovelas,
variety programs and programming produced by third parties. Approximately 55.3%
in 2002, 50.8% in 2001 and 51.6% in 2000 of net sales for this segment were
attributable to programming licensed under our program license agreement with
Univision. In 2002, 2001 and 2000, we received U.S.$77.7 million, U.S.$75.6
million and U.S.$76.5 million in program royalties from Univision, related to
the Univision and Galavision networks. In 2003, we began receiving from
Univision an additional 12% in royalties from the net time sales of the
TeleFutura network, subject to certain adjustments. We also license programming
to broadcasters in Latin America, the Middle East, Russia and other countries.
For a description of a series of transactions we entered into with Univision in
December 2001, including an amendment to our program license agreements, see
"Information on the Company -- Business Overview -- Univision."
The contribution of Programming Licensing's net sales to our total segment
sales was 6.4% in 2002, 7.0% in 2001 and 7.3% in 2000.
2002 vs. 2001. Programming Licensing net sales decreased by Ps.79.8
million, or 5.4%, to Ps.1,405.2 million for the year ended December 31, 2002
from Ps.1,485.0 million for the year ended December 31, 2001. This decrease was
primarily due to lower export sales to Latin America due to the difficult
economic conditions in that region, as well as in Europe. These decreases were
partially offset by higher export sales to Asia and Africa.
Programming Licensing operating income decreased by Ps.89.3 million, or
29.0%, to Ps.218.0 million for the year ended December 31, 2002 from Ps.307.3
million for the year ended December 31, 2001. This decrease was primarily due to
the decrease in net sales, as well as an increase in selling expenses due to
higher provision for doubtful trade accounts. This decrease was partially offset
by decreases in cost of sales, primarily production costs, and administrative
expenses.
2001 vs. 2000. Programming Licensing net sales decreased by Ps.129.3
million, or 8.0%, to Ps.1,485.0 million for the year ended December 31, 2001
from Ps.1,614.3 million for the year ended December 31, 2000. This decrease was
primarily due to the effects of the appreciation of the Peso as compared to the
U.S. Dollar on foreign-currency denominated sales during the year ended December
31, 2001, particularly in the fourth quarter, a decrease in revenues from
programming exports to Europe, Asia and Africa and a 1.2% decrease in royalties
paid to us pursuant to our program license agreements with Univision due to the
economic slowdown in the United States. This decrease was partially offset by an
increase in revenues from programming exports to Latin America.
Programming Licensing operating income decreased by Ps.76.4 million, or
19.9%, to Ps.307.3 million for the year ended December 31, 2001 from Ps.383.7
million for the year ended December 31, 2000. This decrease was primarily due to
the decrease in net sales, partially offset by decreases in cost of sales,
primarily production costs, and administrative expenses.
PUBLISHING. Publishing net sales are primarily derived from the sale of
advertising pages in our various magazines and through July 2000, our newspaper,
Ovaciones, as well as magazine and periodical sales to distributors. Since the
fourth quarter of 1998, Publishing sells advertising independently from our
other media-related segments. Advertising rates are based on the publication and
the assigned space of the advertisement. In October 2000, we acquired the
remaining 35% interest of the subsidiary through which we conduct the operations
of our Publishing segment, Editorial Televisa, S.A. de C.V., or Editorial
Televisa, from Laura Diez Barroso de Laviada, a member of the Azcarraga family
and a former President of Publishing. See "Information on the Company --
Business Overview -- Publishing," "-- Minority Interest" and Notes 2 and 18 to
our year-end financial statements.
We sold our interest in Ovaciones to Alejandro Burillo Azcarraga, a former
executive officer and principal shareholder, in July 2000. This sale was made as
part of a series of transactions related to the sale by Mr. Burillo of his
interest in Televicentro to the Aramburuzabala and Fernandez families. See
"Major Shareholders and Related Party Transactions -- Televicentro and the
Principal Shareholders -- Sale of Mr. Burillo's Interest and Related
Transactions," "-- Related Party Transactions -- Transactions and Arrangements
with Our Directors and Officers" and Notes 2 and 18 to our year-end financial
statements.
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The contribution of Publishing net sales to our total segment sales was
7.7% in 2002, 7.9% in 2001 and 8.3% in 2000. The percentage of Publishing's net
sales derived from advertising sales was 42.8% in 2002, 42.8% in 2001 and 39.8%
in 2000. The remainder of Publishing net sales in each period presented
consisted of revenues from sales of publications to distributors.
2002 vs. 2001. Publishing net sales decreased by Ps.12.6 million, or 0.7%,
to Ps.1,683.1 million for the year ended December 31, 2002 from Ps.1,695.7
million for the year ended December 31, 2001. This decrease was primarily due to
a decrease in the number of magazines sold in Mexico and abroad as a result of
the recent economic slowdown in Mexico and abroad as well as a reduction in the
number of advertising pages sold in the international market. This decrease was
partially offset by an increase in the number of advertising pages sold in the
domestic market due to the launch of new magazines, and by the translation
effect on foreign-currency denominated sales.
Publishing operating income decreased by Ps.4.2 million, or 1.7%, to
Ps.243.6 million for the year ended December 31, 2002 from Ps.247.8 million for
the year ended December 31, 2001. This decrease primarily reflects the decrease
in net sales and marginal increases in cost of sales and selling expenses due to
an increase in marketing and paper costs. This decrease was partially offset by
a decrease in administrative expenses and amortization of new magazine design
expenses.
2001 vs. 2000. Publishing net sales decreased by Ps.135.7million, or 7.4%,
to Ps.1,695.7 million for the year ended December 31, 2001 from Ps.1,831.4
million for the year ended December 31, 2000. This decrease was primarily due to
a decrease in the number of magazines sold in Mexico and abroad as a result of
price increases and the recent economic slowdown in Mexico and abroad and the
effects of the appreciation of the Peso on foreign currency-denominated sales
during the year ended December 31, 2001, particularly in the fourth quarter.
This decrease also reflects the absence of revenues from Ovaciones subsequent to
its sale in July 2000, the operations of which accounted for Ps.92.0 million of
revenues during the year ended December 31, 2000. This decrease was partially
offset by an increase in the number of advertising pages sold in Mexico and
abroad and an increase in advertising rates.
Excluding revenues attributable to the results of Ovaciones for the year
ended December 31, 2000, Publishing net sales would have decreased by Ps.43.7
million, or 2.5%, to Ps.1,695.7 million for the year ended December 31, 2001
from Ps.1,739.4 million for the year ended December 31, 2000.
Publishing operating income decreased by Ps.94.1 million, or 27.5%, to
Ps.247.8 million for the year ended December 31, 2001 from Ps.341.9 million for
the year ended December 31, 2000. This decrease primarily reflects the decrease
in net sales and an increase in operating expenses due to an increase in
personnel costs. This decrease was partially offset by a decrease in cost of
sales due to a reduction in print runs of magazines, and the effects of the
appreciation of the Peso as compared to the U.S. Dollar on foreign-currency
denominated costs and expenses during the year ended December 31, 2001.
PUBLISHING DISTRIBUTION. Publishing Distribution net sales are primarily
derived from the distribution of magazines published by us, our joint ventures
or independent publishers and pursuant to licenses and other arrangements with
third parties. Of the total volume of magazines distributed, approximately 64.2%
in 2002, 59.9% in 2001 and 62.2% in 2000 were published by our Publishing
segment.
The contribution of Publishing Distribution's net sales to our total
segment sales was 6.1% in 2002 and 4.4% in 2001 and 2000.
2002 vs. 2001. Publishing Distribution net sales increased by Ps.395.6
million, or 41.7%, to Ps.1,343.8 million for the year ended December 31, 2002
from Ps.948.2 million for the year ended December 31, 2001. This increase was
primarily due to the integration of revenue from the acquisition of the
operations in Chile in May 2002 and by the translation effect on
foreign-currency denominated sales. Excluding the sales from the company
acquired in Chile, Publishing Distribution net sales would have decreased 9.7%.
Publishing Distribution operating result decreased by Ps.10.4 million to a
loss of Ps.1.9 million for the year ended December 31, 2002 from an income of
Ps.8.5 million for the year ended December 31, 2001. This change
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primarily reflects higher cost of sales and operating expenses associated with
the distribution company acquired in Chile, partially offset by the increase in
net sales. Excluding the operations in Chile, Publishing Distribution operating
result would have decreased by Ps.20.0 million to a loss of Ps.11.5 million for
the year ended December 31, 2002, from an income of Ps.8.5 million for the year
ended December 31, 2001.
2001 vs. 2000. Publishing Distribution net sales decreased by Ps.6.8
million, or 0.7%, to Ps.948.2 million for the year ended December 31, 2001 from
Ps.955.0 million for the year ended December 31, 2000. This decrease was
primarily due to a decrease in the volume of third-party magazines sold abroad,
a decrease in the volume of magazines sold in Mexico and abroad that were
published by our Publishing Segment and the effects of the appreciation of the
Peso as compared to the U.S. Dollar on foreign currency-denominated sales during
the year ended December 31, 2001, particularly in the fourth quarter. This
decrease was partially offset by an increase in revenues from the sale of phone
cards and tax forms abroad.
Publishing Distribution operating income decreased by Ps.35.1 million, or
80.5%, to Ps.8.5 million for the year ended December 31, 2001 from Ps.43.6
million for the year ended December 31, 2000. This decrease primarily reflects
the decrease in net sales and an increase in selling expenses as a result of
higher distribution costs. This decrease was partially offset by a decrease in
administrative expenses as a result of our continued cost-cutting efforts.
CABLE TELEVISION. Cable Television net sales are derived from Cable
Television services and advertising sales. Cable television service net sales
generally consist of monthly subscription fees for basic and premium service
packages, fees charged for pay-per-view programming and, to a significantly
lesser extent, monthly rental and one-time installation fees. Effective January
1, 2002, cable television and certain other services offered by Cablevision are
subject to a 10% excise tax. See "Key Information -- Risk Factors -- Risk
Factors Related to Our Business -- The Imposition of a 10% Excise Tax on
Revenues From Telecommunications and Pay Television Services Has Adversely
Affected and Could Continue to Adversely Affect Our Business, Financial
Condition and Results of Operations." In January 2002, Cablevision increased the
rates for its basic service package from Ps.199.00 to Ps.245.00. This increase
reflects the imposition of the 10% excise tax on pay television services and an
increase in the number of channels offered in the basic service package to 49.
See "Information on the Company -- Business Overview -- Cable Television --
Cable Television Services." Advertising net sales consist of revenues from the
sale of local and national advertising on Cablevision. Since the fourth quarter
of 1998, Cable Television sells advertising independently from our other
media-related segments on a scatter basis. Rates are based on the day and time
the advertising is aired, as well the type of programming in which the
advertising is aired. Cable subscription and advertising rates are increased
periodically in response to inflation and in accordance with market conditions.
The contribution of Cable Television's net sales to our total segment sales
was 5.1% in 2002, 5.4% in 2001 and 4.5% in 2000.
2002 vs. 2001. Cable Television net sales decreased by Ps.35.7 million, or
3.1%, to Ps.1,108.2 million for the year ended December 31, 2002 from Ps.1,143.9
million for the year ended December 31, 2001. This decrease is attributable to
the negative impact of the new 10% tax on telecommunications services, effective
since January 1, 2002, the loss of subscribers during 2002 as compared to last
year, and a decrease in advertising sales. The decrease in Cable Television
sales was partially offset by a 23.1% and 10.3% increase in the basic and
digital packages rates, respectively, as well as higher revenues from our cable
modem service.
Cable Television operating income decreased by Ps.49.2 million, or 19.6%,
to Ps.201.4 million for the year ended December 31, 2002 from Ps.250.6 million
for the year ended December 31, 2001. This decrease primarily reflects the
decrease in net sales and higher signal and depreciation costs, due to the
upgrading process in the network, and the acquisition of digital boxes. This
decrease was partially offset by a decrease in selling expenses related to
marketing costs.
2001 vs. 2000. Cable Television net sales increased by Ps.162.7 million, or
16.6%, to Ps.1,143.9 million for the year ended December 31, 2001 from Ps.981.2
million for the year ended December 31, 2000. This increase was primarily due to
an increase in the number of basic subscribers to approximately 452,000 as of
December 31, 2001, as compared to over 403,000 as of December 31, 2000, as well
as an increase in the number of digital subscribers to
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over 81,500 as of December 31, 2001, as compared to over 49,000 as of December
31, 2000. This increase was partially offset by a decrease in advertising
revenues as a result of less advertising time sold.
Cable Television operating income increased by Ps.93.9 million, or 59.9%,
to Ps.250.6 million for the year ended December 31, 2001 from Ps.156.7 million
for the year ended December 31, 2000. This increase primarily reflects the
increase in net sales and a decrease in selling expenses, which was partially
offset by an increase in cost of sales due to higher signal costs and additional
costs associated with new subscribers and an increase in administrative
expenses.
RADIO. Radio net sales consist of advertising sold on our radio stations.
Since the fourth quarter of 1998, our Radio segment has sold advertising
independently from our other media-related segments on a scatter basis. Rates
are based on the day and time the advertising is aired, as well as the type of
programming in which the advertising is aired.
The contribution of Radio net sales to our total segment sales was 0.8% in
2002, 1.2% in 2001 and 1.7% in 2000.
As described under "Information on the Company -- Business Overview --
Radio -- Joint Venture; Proposed Acquisition," in October 2001, we entered into
agreements with Grupo Prisa, a leading Spanish-language communications group, to
form a radio joint venture in Mexico. Under these arrangements, Grupo Prisa
acquired a 50% equity stake, with limited voting rights, in our radio
subsidiary, Sistema Radiopolis, for U.S.$50.0 million, and made a U.S.$10.0
million capital contribution. A portion of the purchase price was paid in
October 2001, and the remainder was paid in July 2002. Since we hold a
controlling 50% full voting stake in this subsidiary, we continue to consolidate
100% of the results of operations of this subsidiary in accordance with Mexican
GAAP. See "-- Minority Interest."
2002 vs. 2001. Radio net sales decreased by Ps.62.1 million, or 24.9%, to
Ps.187.1 million for the year ended December 31, 2002 from Ps.249.2 million for
the year ended December 31, 2001. This decrease primarily reflects a decrease in
advertising revenues as a result of the slowdown in the growth of the Mexican
economy and the radio industry during the year ended December 31, 2002.
Radio operating loss increased Ps.29.8, or 187.1%, to Ps.45.7 million for
the year ended December 31, 2002 from Ps.15.9 million for the year ended
December 31, 2001. This change was primarily due to the decrease in net sales,
which was partially offset by a decrease in cost of sales and operating expenses
in connection with our continued cost-cutting efforts.
2001 vs. 2000. Radio net sales decreased by Ps.112.7 million, or 31.1%, to
Ps.249.2 million for the year ended December 31, 2001 from Ps.361.9 million for
the year ended December 31, 2000. This decrease primarily reflects a decrease in
advertising revenues as a result of the slowdown in the growth of the Mexican
economy and the radio industry during the year ended December 31, 2001. This
decrease also reflects the adverse comparison to the year ended December 31,
2000, which included approximately Ps.23.8 million in non-recurring advertising
revenues in connection with the Mexican presidential and congressional and other
federal and local campaigns and Ps.1.3 million in connection with the 2000
Summer Olympic Games.
Radio generated an operating loss of Ps.15.9 million for the year ended
December 31, 2001 as compared to operating income of Ps.46.0 million for the
year ended December 31, 2000. This change was primarily due to the decrease in
net sales, which was partially offset by a decrease in cost of sales and
operating expenses in connection with our continued cost-cutting efforts and a
decrease in selling expenses.
OTHER BUSINESSES. Other Businesses net sales are primarily derived from the
promotion of sports and special events in Mexico, subscriber fees for nationwide
paging services, the distribution of feature films, revenues from dubbing
services and revenues from advertisers for advertising space on EsMas.com.
In May 2000, we launched EsMas.com, our Spanish-language horizontal
Internet portal. Total capital expenditures and investments in EsMas.com were
U.S.$58.4 million in 2000 and U.S.$11.4 million in 2001. We did
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not make any significant expenditures and investments in EsMas.com in 2002. See
"Information on the Company -- Business Overview -- Other Businesses."
The contribution of Other Businesses net sales to our total segment sales
was 7.1% in 2002, 8.6% in 2001 and 7.5% in 2000.
2002 vs. 2001. Other Businesses net sales decreased by Ps.275.3 million, or
15.1%, to Ps.1,548.9 million for the year ended December 31, 2002 from
Ps.1,824.2 million for the year ended December 31, 2001. This decrease was
primarily due to lower sales attributable to our nationwide paging business and
a decrease in revenues of En Vivo, our live entertainment operation which we
launched in the first half of 2001, and EsMas.com, which we launched in May
2000. In November 2002, we acquired Clear Channel's 50% ownership interest in,
and later suspended, En Vivo's Mexican operations following our acquisition of a
40% stake in OCEN. However, we and Clear Channel each continue to own 50% of the
joint venture in the United States, which we jointly manage and operate. This
decrease was partially offset by higher sales related to our sport events and
feature film distribution businesses.
Other Businesses operating loss decreased by Ps.124.3 million, or 21.8%, to
Ps.446.2 million for the year ended December 31, 2002 from Ps.570.5 million for
the year ended December 31, 2001. This decrease reflects the reduction in
personnel costs and promotion expenses, primarily in our internet and paging
businesses. This decrease was partially offset by the decrease in net sales.
2001 vs. 2000. Other Businesses net sales increased by Ps.171.8 million, or
10.4%, to Ps.1,824.2 million for the year ended December 31, 2001 from
Ps.1,652.4 million for the year ended December 31, 2000. This increase was
primarily due to an increase in revenues attributable to our feature film
distribution and sporting events businesses, an increase in revenues
attributable to En Vivo and an increase in revenues attributable to the
operation of EsMas.com. This increase was partially offset by a decrease in
revenues attributable to our nationwide paging and dubbing businesses.
Other Businesses operating loss increased by Ps.183.6 million, or 47.5%, to
Ps.570.5 million for the year ended December 31, 2001 from Ps.386.9 million for
the year ended December 31, 2000. This increase primarily reflects operating
losses attributable to EsMas.com, and a decrease in the level of operations of
our nationwide paging business, as well as increases in costs related to the
distribution of feature films and En Vivo and selling expenses. This increase
was partially offset by the increase in net sales, a decrease in cost of sales
related to sporting events and a decrease in administrative expenses following
the sale of our call center to Innova in June 2001. See "Major Shareholders and
Related Party Transactions -- Related Party Transactions -- Transactions and
Arrangements with Innova."
INTEGRAL COST OF FINANCING
Integral cost of financing significantly impacts our financial statements
in periods of high inflation or currency fluctuations. Under Mexican GAAP,
integral cost of financing reflects:
- interest income;
- interest expense, including the restatement of our UDI-denominated
notes, as described under "-- Liquidity, Foreign Exchange and
Capital Resources -- Interest Expense;"
- foreign exchange gain or loss attributable to monetary assets and
liabilities denominated in foreign currencies (including gains or
losses from derivative instruments); and
- gain or loss attributable to holding monetary assets and
liabilities exposed to inflation.
Our foreign exchange position is affected by our assets or liabilities
denominated in foreign currencies. We record a foreign exchange gain or loss if
the exchange rate of the Peso to the other currencies in which our monetary
assets or liabilities are denominated rises or falls. Effective March 1, 2002,
we accounted for the semi-annual
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interest payments in respect of our 8% Senior Notes due 2011 and 8.5% Senior
Notes due 2032 as being hedged by our equity investment in Univision. See
"Quantitative and Qualitative Disclosures About Market Risk" and Note 10 to our
year-end financial statements.
2002 vs. 2001. The expense attributable to integral cost of financing
increased by Ps.176.1 million, or 40.3%, to Ps.613.0 million for the year ended
December 31, 2002 from Ps.436.9 million for the year ended December 31, 2001.
This increase reflects:
- a Ps.728.0 million increase in net foreign exchange loss, primarily
due to the 14.01% depreciation of the Mexican Peso as compared to
the U.S. Dollar during the year ended December 31, 2002, versus a
4.5% appreciation of the Mexican Peso as compared to the U.S.
Dollar during the year ended December 31, 2001, as well as a higher
net liability foreign currency monetary position of the Company
during the year ended December 31, 2002 as compared to the year
ended December 31, 2001;
- a Ps.388.8 million decrease in interest income, primarily as a
result of a reduction in interest rates during the year ended
December 31, 2002 as compared to the year ended December 31, 2001,
which was partially offset by a higher average amount of temporary
investments during the year ended December 31, 2002 as compared to
the year ended December 31, 2001;
- a Ps.96.9 million increase in interest expense, primarily as a
result of a higher level of debt outstanding during the year ended
December 31, 2002 as compared to the year ended December 31, 2001,
which was partially offset by a reduction in interest rates
attributable to certain of our debt during the year ended December
31, 2002 as compared to the year ended December 31, 2001; and
- a Ps.18.6 million increase in the restatement of our Ps.3.0 billion
(nominal) UDI-denominated debt notes, which we issued on April 14,
2000, primarily due to higher inflation during the year ended
December 31, 2002 as compared to the year ended December 31, 2001.
The increases in integral cost of financing were partially offset by:
- a Ps.795.2 million decrease in the foreign exchange loss incurred
in connection with the principal amount of our 8% Senior Notes due
2011 and 8.5% Senior Notes due 2032 being hedged by our equity
investment in Univision;
- a Ps.106.2 million decrease in loss attributable to foreign
exchange contracts which were settled down in the fourth quarter of
2001;
- a Ps.137.1 million decrease in loss from monetary position
primarily as a result of a lower net asset monetary position during
the year ended December 31, 2002 as compared to the year ended
December 31, 2001, which was partially offset by higher inflation
in Mexico of 5.7% during the year ended December 31, 2002 as
compared to 4.4% during the year ended December 31, 2001; and
- a Ps.17.7 million gain attributable to interest swap contracts
outstanding during the fourth quarter of 2002.
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2001 vs. 2000. The expense attributable to integral cost of financing
decreased by Ps.618.0 million, or 58.6%, to Ps.436.9 million for the year ended
December 31, 2001 from Ps.1,054.9 million for the year ended December 31, 2000.
This decrease primarily reflects:
- a Ps.262.6 million decrease in interest expense (excluding the
restatement of the UDI-denominated debt notes) as a result of both
the refinancing of our long-term indebtedness in the second quarter
of 2000 and a decrease in interest rates during the year ended
December 31, 2001 as compared to the year ended December 31, 2000;
- a Ps.115.3 million increase in net foreign exchange gain (excluding
losses attributable to foreign exchange contracts), which increase
was due primarily to the 4.5% appreciation of the Peso as compared
to the U.S. Dollar during the year ended December 31, 2001, versus
a 1.2% depreciation of the Peso as compared to the U.S. Dollar
during the year ended December 31, 2000;
- a Ps.102.8 million decrease in non-recurring loss attributable to
foreign exchange contracts and a Ps.120.3 million decrease in
monetary loss primarily due to both the reduction in inflation and
a decrease in net asset monetary position during the year ended
December 31, 2001 as compared to the year ended December 31, 2000;
- a Ps.7.6 million increase in interest income primarily as a result
of a higher average cash position in our temporary investments
during the year ended December 31, 2001 as compared to the year
ended December 31, 2000; and
- a Ps.9.3 million decrease in the restatement of our UDI-denominated
debt notes, which amount reflects a decrease in interest expense
payable to holders as a result of the restatement.
RESTRUCTURING AND NON-RECURRING CHARGES
Restructuring and non-recurring charges increased by Ps.267.5 million, or
46.6%, to Ps.841.8 million for the year ended December 31, 2002 from Ps.574.3
million for the year ended December 31, 2001. This increase primarily reflects a
Ps.325.4 million non-recurring charge taken in connection with the write-off of
exclusive rights letters for soccer players, as well as a Ps.163.4 million
non-recurring charge related to the drawdown by DirecTV under a letter of credit
posted by us in connection with certain arrangements between DirecTV and us to
broadcast the 2002 World Cup, which amount is in dispute by the parties. This
increase was partially offset by a reduction in restructuring charges due to
fewer work force reductions in the year ended December 31, 2002 as compared to
the year ended December 31, 2001.
Restructuring and non-recurring charges decreased by Ps.1,452.5 million, or
71.7%, to Ps.574.3 million for the year ended December 31, 2001 from Ps.2,026.8
million for the year ended December 31, 2000. This decrease primarily reflects a
Ps.1,547.0 million non-recurring charge taken in connection with our refinancing
in the second quarter of 2000. This decrease was partially offset by a
non-recurring charge in the amount of Ps.60.7 million taken in connection with
the redemption of our Senior Discount Debentures in May 2001 and an increase of
Ps.176.4 million in severance costs in connection with the termination of
personnel as part of our continued cost-cutting efforts, which are described
below.
We recorded non-recurring charges in the amount of Ps.2,026.8 million in
2000. These charges primarily reflect a Ps.1,547.0 million charge taken in
connection with our debt refinancing during the second quarter of 2000, as well
as other charges taken in connection with work force reductions. See "--
Liquidity, Foreign Exchange and Capital Expenditures -- Refinancings" and Notes
9 and 20 to our year-end financial statements. We have taken various steps to
reduce our costs and expenses, including reducing the number of our full- and
part-time employees. As of December 31, 2000, our total employee headcount had
been reduced to approximately 14,600. As a result of new cost-cutting
initiatives introduced in the first half of 2001, in April 2001 we further
reduced our workforce by 750 personnel, including 684 employees and 66
independent contractors. As of December 31, 2001 and 2002, our total employee
headcount was approximately 13,700 and 12,550 employees.
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Other steps taken by us to reduce our costs and expenses include:
- consolidating our offices and facilities and the shutdown or sale
of non-essential operations;
- relocating some of our U.S. magazine operations to Mexico to reduce
printing costs;
- downsizing non-essential post-production studios;
- eliminating some of our underperforming programming;
- reducing real estate rental, promotional and employee travel
expenses, charitable donations and amenities; and
- reducing overtime payments.
In response to the slowdown in Mexican GDP growth in the beginning of 2001,
we introduced a number of new cost-cutting initiatives. See "Key Information --
Risk Factors -- Risk Factors Related to Mexico -- Mexico Has Experienced Adverse
Economic Conditions." These initiatives include the introduction of stricter
cost controls, the continued elimination of under-performing assets and further
reductions in the number of employees. As a result of these initiatives, in
April 2001 we ceased production of ECO, our international news program, and
further reduced our employee headcount, as described above. Our budgeted
operating costs and expenses for the year ended December 31, 2001 decreased on
an annualized basis by approximately U.S.$60.6 million as a result of the
implementation of these initiatives. We intend to continue to implement these
cost-cutting initiatives throughout 2003, as well as introduce new initiatives,
such as a performance-based compensation policy for executives (see "Directors,
Senior Management and Employees -- Stock Option Plan" and "-- Long Term
Retention Plan"), and to continue to increase the awareness of our employees to
cost containment programs.
In connection with our workforce reductions and other cost-cutting
measures, we recorded non-recurring charges of Ps.346.6 million in 2002,
Ps.513.7 million in 2001 and Ps.479.9 million in 2000, which consisted primarily
of severance payments and other termination charges. We will continue to seek to
cut costs and expenses and expect to take additional charges in the future,
although we currently do not expect these cost and expense reductions or related
charges to be as significant as in prior periods.
OTHER EXPENSE, NET
In 2002, other expense, net increased by Ps.1,439.6 million, or 207.3%, to
Ps.2,134.1 million for the year ended December 31, 2002, as compared to Ps.694.5
million for the year ended December 31, 2001. Other expense, net for the year
ended December 31, 2002 primarily reflects:
- a Ps.235.2 million increase in the amortization of goodwill,
primarily in connection with the acquisition of shares of Univision
in December 2001 and April 2002;
- a Ps.844.0 million increase in the write-off of unamortized
goodwill, resulting from the evaluation of the recoverability of
certain long-lived assets; and
- a Ps.330.8 million decrease in the net results on disposition of
investments for the year ended December 31, 2002, as compared to
the gain for the year ended December 31, 2001, which primarily
included the gain on the sale of a 50% limited voting stake in our
radio subsidiary in October 2001.
Other expense-net for the year ended December 31, 2002 primarily reflects
non-cash charges in connection with the amortization of goodwill in the amount
of Ps.437.8 million and the write-off of unamortized goodwill in the amount of
Ps.1,067.0 million, as well as fees and expenses for professional services,
donations and a net loss in the disposition of certain investments and
non-current assets for an aggregate amount of Ps.388.5 million.
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In 2001, other expense, net increased by Ps.166.8 million, or 31.6%, to
Ps.694.5 million, as compared to Ps.527.7 million in 2000. Other expense, net
for the year ended December 31, 2001 primarily reflects:
- the amortization of goodwill in the amount of Ps.202.6 million and
the write-off of unamortized goodwill in the amount of Ps.222.7
million primarily related to the impairment of goodwill
attributable to Internet ventures;
- a Ps.184.3 million charge primarily related to the write-off of a
note receivable obtained by us in connection with the sale of a
prior foreign subsidiary;
- Ps.105.5 million in fees and expenses for professional services;
- charitable donations in the amount of Ps.125.6 million; and
- a Ps.96.6 million charge related to the disposition of property,
plant and equipment, the write-off of certain obsolete equipment
and exclusive rights letters for soccer players, and Ps.51.9
million in other items.
The increase in other expense, net was partially offset by a net pre-tax
gain in the amount of Ps.294.6 million primarily on the sale of a 50% limited
voting stake in our radio subsidiary, Sistema Radiopolis, to Grupo Prisa.
INCOME TAX, ASSETS TAX AND EMPLOYEES' PROFIT SHARING
Income tax, assets tax and employees' profit sharing decreased by Ps.272.1
million to Ps.299.3 million for the year ended December 31, 2002 from a tax
provision of Ps.571.4 million for the year ended December 31, 2001. This
decrease primarily reflects a tax benefit resulting from an annual decrease in
the corporate income tax rate starting in 2003 and continuing through 2005 when
the corporate rate will be 32%, and applicable to Mexican companies in
accordance with the Mexican Income Tax Law. The provision for income taxes
primarily reflected the effect of recognizing assets tax (alternative minimum
tax) rather than income tax for consolidation tax purposes in Mexico for the
years ended December 31, 2002 and 2001, as well as income taxes attributable to
our foreign subsidiaries for the year ended December 31, 2002.
Income tax, assets tax and employees' profit sharing increased by Ps.204.5
million, or 55.7%, to Ps.571.4 million for the year ended December 31, 2001 from
Ps.366.9 million for the year ended December 31, 2000. This increase reflects a
Ps.2.9 million increase in employees' profit sharing and a Ps.490.0 million
decrease in deferred income tax benefit for the year ended December 31, 2001 as
compared to the year ended December 31, 2000. This increase was partially offset
by a Ps.251.7 million decrease in current income and asset taxes for the year
ended December 31, 2001 as compared to the year ended December 31, 2000.
The statutory rate of Mexican corporate income tax was 35% in 2002, 2001
and 2000. The corporate income tax rate for 2003 is 34%. As discussed above, in
accordance with the Mexican Income Tax Law, effective January 1, 2002, the
corporate income tax of 35% in 2002 will decrease to 32%, which decrease will be
implemented gradually over a three-year period commencing in January 2003. As a
result, our deferred income tax liability decreased in 2002. We and our
subsidiaries are also subject to an assets tax on the adjusted book value of
some of our assets. In some cases, income tax paid in excess of asset tax can be
individually credited against any assets tax payable by us and our subsidiaries.
The assets tax rate is 1.8% for all periods and continues to be 1.8% as of the
date of this annual report. Income tax and assets tax from continuing operations
as a percentage of income before provisions was 27.8% in 2002, 20.8% in 2001 and
19.4% in 2000. See Note 22 to our year-end financial statements for the
effective rate reconciliation for each of these periods.
We had virtually no current Mexican income tax liability in 2002, 2001 and
2000. This was primarily the result of:
- premiums, consent fees and other expenses paid in connection with
our financial restructuring, which we completed in 2000;
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- the availability of pre-tax operating losses generated in previous
periods;
- timing differentials as a result of expensing inventory, which were
partially offset by inflationary differentials; and
- the application of a consolidated assets tax credit against
consolidated income taxes payable.
Substantially all of the Ps.295.3 million, Ps.548.7 million and Ps.310.4
million in current and deferred taxes we incurred in 2002, 2001 and 2000
consisted of:
- Mexican asset taxes, which were offset in prior years under
applicable legislation;
- foreign income taxes relating to non-Mexican operations; and
- income taxes payable in respect of minority interests that third
parties hold in our consolidated businesses. See Note 22 to our
year-end financial statements.
See Note 22 to our year-end financial statements for a description and
quantification of the principal differences between the statutory tax rate and
the effective income tax rate and our consolidated and unconsolidated loss
carryforwards in 2002, 2001 and 2000.
We recognized deferred income tax in 2000, 2001 and 2002 by using the
comprehensive asset and liability method. The cumulative effect of recognizing
deferred taxes under the comprehensive asset and liability method at January 1,
2000 increased our deferred tax liability and decreased our stockholders' equity
by Ps.2,712.0 million (of which Ps.2,642.5 million impacted our majority
stockholders' equity).
As of December 31, 2002, we had tax loss carry-forwards from our
unconsolidated Mexican subsidiaries in the amount of Ps.500.4 million and tax
loss carry-forwards from our unconsolidated non-Mexican subsidiaries in the
amount of Ps.1,259.4 million. The tax loss carry-forwards from our
unconsolidated Mexican subsidiaries have expiration dates ranging from 2003 to
2011 and the tax loss carry-forwards from our unconsolidated non-Mexican
subsidiaries have expiration dates ranging from 2003 to 2022. During 2000, we
used consolidated operating tax loss carry-forwards in the amount of Ps.1,009.7
million. We did not have any consolidated operating tax loss carry-forwards
available for use in 2001. During 2002, 2001 and 2000, we used unconsolidated
operating tax loss carry-forwards in the amount of Ps.1,048.3 million, Ps.535.9
million, Ps.1,954.9 million. See Note 22 to our year-end financial statements.
We, like other Mexican companies, are required by law to pay our employees,
in addition to their agreed compensation and benefits, profit sharing in an
aggregate amount equal to 10% of our taxable income, calculated, on a subsidiary
by subsidiary basis, on a statutory basis that differs from the calculation of
taxable income under Mexican income tax law. We have also agreed to pay our
employees a special bonus each year, which we record under selling and
administrative expenses. In 2002, 2001 and 2000, our subsidiaries recognized
little or no taxable income for purposes of calculating employees' profit
sharing, largely as a result of inflationary differentials and temporary
differences of expensing inventory. We recorded Ps.69.6 million, Ps.80.8 million
and Ps.82.6 million in 2002, 2001 and 2000 under selling and administrative
expenses for special bonuses paid to our employees.
EQUITY IN LOSSES OF AFFILIATES
This line item reflects our equity participation in the operating results
and net assets of unconsolidated businesses in which we maintain an interest,
but over which we have no control. We recognize equity in losses of affiliates
up to the amount of our initial investment and subsequent capital contributions,
or beyond that amount when guaranteed commitments have been made by us in
respect of obligations incurred by affiliates. In 2002, 2001 and 2000, this line
item primarily reflected:
- our investments in DTH satellite services in Mexico and other
countries throughout Latin America; and
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- our investment in Univision.
Through July 2000, this line item also reflected our investment in Pegaso.
We sold our interest in Pegaso to Alejandro Burillo Azcarraga, a former
executive officer and principal shareholder, in July 2000. See "Major
Shareholders and Related Party Transactions -- Televicentro and the Principal
Shareholders -- Sale of Mr. Burillo's Interest and Related Transactions," "--
Related Party Transactions -- Transactions and Arrangements with Our Directors
and Officers" and Notes 2 and 18 to our year-end financial statements.
Equity in results of affiliates increased by Ps.603.9 million to a loss of
Ps.1,155.8 million for the year ended December 31, 2002 from a loss of Ps.551.9
million for the year ended December 31, 2001. This increase primarily reflects
the recognition of approximately Ps.327.0 million of additional equity losses of
Innova, our DTH joint venture in Mexico, and approximately Ps.434.8 million of
additional equity losses of Sky Multi-Country Partners, our multi-country DTH
joint venture with current operations in Colombia and Chile, as described below.
These equity losses were slightly offset by the increase of the equity in income
relating to our investment in Univision.
Equity in results of affiliates decreased by Ps.1,386.8 million to a loss
of Ps.551.9 million for the year ended December 31, 2001 from a loss of
Ps.1,938.7 million for the year ended December 31, 2000.
Losses on these investments in 2001 primarily reflect our decision to
discontinue the recognition of additional losses with respect to our investment
in Innova, as described below, which resulted in a Ps.1,132.1 million decrease
in equity in losses of affiliates in 2001, a decrease in equity in losses with
respect to our investments in DTH joint ventures in Spain and Latin America
outside of Mexico, as well as the absence of equity in losses attributable to
our investment in Pegaso, our former PCS joint venture, which we sold in July
2000. Losses on these investments in 2000 reflect equity in losses of Innova as
a result of a non-recurring charge in the amount of approximately Ps.285.1
million taken in connection with the migration of subscribers to a single
satellite and equity in losses of Pegaso in the amount of Ps.173.2 million.
We expect that our DTH joint ventures will continue to experience
substantial net losses and substantial negative cash flow over at least the next
several years while they develop and expand their DTH satellite services. We do
not consolidate the results of our DTH joint ventures because we do not control
these joint ventures. Although we hold a majority equity position in Innova, we
do not control this joint venture under the terms of its joint venture
agreement. See "Information on the Company -- Business Overview -- DTH Joint
Ventures" and Note 5 to our year-end financial statements.
Through December 31, 2000, we recognized 60% of the losses of Innova as
equity in losses of affiliates on our income statement. As a result of our
recognition of these losses since Innova's inception in December 1996, as of
December 31, 2000 our investment in Innova was represented by a net liability
position on our consolidated balance sheet. Beginning in the first quarter of
2001, consistent with Mexican GAAP we discontinued the recognition of losses of
Innova as equity in losses of affiliates in our income statement, primarily
because our net liability position in Innova during 2001 exceeded the
outstanding long-term debt incurred by this joint venture in connection with a
transponder capital lease guaranteed by us and our existing commitments to
provide Innova with additional funding through 2001. As of December 31, 2002 and
2001, this net liability position represented equity losses recognized in excess
of our capital contributions and long-term loans to Innova, but not in excess of
the outstanding total debt incurred by this joint venture in connection with a
transponder capital lease being guaranteed by us. During the year ended December
31, 2002, we recognized additional equity in losses of Innova, which primarily
reflected our additional funding to Innova in the first quarter of 2002, as well
as the increase in the outstanding debt of Innova being guaranteed by us, as a
result of the depreciation of the Mexican Peso as compared to the U.S. Dollar
for the year ended December 31, 2002. As of December 31, 2002 and December 31,
2001, our investment in Innova was represented by a net liability position of
Ps.853.0 million and Ps.1,829.8 million.
During the years ended December 31, 2002 and 2001, our investment in Sky
Multi-Country Partners has been represented by a net liability position on our
consolidated balance sheet. This net liability position has represented equity
losses recognized in excess of our capital contributions to Sky Multi-Country
Partners, but not in excess of the outstanding total debt incurred by this joint
venture in connection with a transponder capital lease being guaranteed by us.
In the fourth quarter of 2002, as a result of the economic difficulties of this
joint venture in South America, we recognized an additional equity loss of
Ps.465.0 million to cover the outstanding total debt incurred by
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this joint venture being guaranteed by us. As of December 31, 2002 and December
31, 2001, our investment in Sky Multi-Country Partners was represented by a
liability position of Ps.792.2 million and Ps.85.5 million.
To the extent that we make additional funding to Innova and Sky
Multi-Country Partners in excess of our net liability position, we will be
required to recognize our equity in losses generated by Innova and Sky
Multi-Country Partners up to the amount of any such excess under this line item.
In addition, in the event that Innova or Sky Multi-Country Partners generates
net income in the future, we will not be able to recognize our proportionate
share of this net income unless we first recognize our proportionate share of
any losses not previously recognized.
We substantially increased our equity stake in Univision through a series
of transactions that we entered into with Univision in December 2001. See
"Information on the Company -- Business Overview -- Univision."
DISCONTINUED OPERATIONS
As described under "Information on the Company -- Business Overview --
Music Recording," in December 2001, we entered into an agreement to sell our
music recording operations to Univision, and we consummated this sale in April
2002. We no longer engage in the music recording business, and under Mexican
GAAP the results of our music recording segment through December 31, 2001 and
from prior and subsequent periods have been classified as discontinued
operations. As consideration for the sale of this business, we received
6,000,000 shares and 100,000 warrants, which expire in 2017, to purchase shares
of Univision common stock, which were recognized at their fair value as of the
date of the agreement. As a result of this transaction, we recognized a gain on
disposition of the music recording business of Ps.1,062.7 million, net of
related costs, expenses and taxes, which were also reflected as discontinued
operations. We may have to pay certain adjustments to Univision in connection
with an audit of the Music Recording business by Univision, which is expected to
be resolved by the parties in 2003. While we believe that the outcome of this
audit will not have a material adverse effect on its financial position or
future operating results, we cannot give you any assurances in this regard. See
Note 23 to our year-end financial statements.
MINORITY INTEREST
The minority interest reflects the portion of the operating results
attributable to the interest held by third parties in the businesses which are
not wholly-owned by us, including our Cable Television, Radio and nationwide
paging businesses, through September 2000, Editorial Televisa, and since October
2001, Sistema Radiopolis.
Minority interest decreased by Ps.97.6 million to a gain of Ps.68.8 million
for the year ended December 31, 2002 from a loss of Ps.28.8 million for the year
ended December 31, 2001. This decrease primarily reflects a decrease in the net
income of our Cable Television and nationwide paging businesses for the year
ended December 31, 2002, as compared to the year ended December 31, 2001.
Minority interest decreased by Ps.164.1 million, or 85.1%, to Ps.28.8
million for the year ended December 31, 2001 from Ps.192.9 million for the year
ended December 31, 2000. This decrease primarily reflects a decrease in our
interest in the net income of our nationwide paging business, the results of
which are reflected in our Other Businesses segment. This decrease also reflects
our acquisition of the remaining 35% equity stake outstanding in Editorial
Televisa, the subsidiary through which we conduct the operations of our
Publishing segment, in October 2000. Minority interest for the year ended
December 31, 2001 primarily reflects that portion of the net income of our Cable
Television segment attributable to the 49% interest then held by America Movil
in this segment and that portion of the net income of our nationwide paging
business attributable to the 49% interest held by a subsidiary of Mobile
Telecommunications Technologies Corp. in this business. Beginning in October
2001, minority interest also reflects the portion of the operating results of
Sistema Radiopolis attributable to the 50% non-voting interest held by Grupo
Prisa in this subsidiary. See "Information on the Company -- Business Overview
-- Radio -- Joint Venture; Proposed Acquisition" and "Operating and Financial
Review and Prospects -- Results of Operations -- Radio."
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CUMULATIVE EFFECT OF ACCOUNTING CHANGE-NET
In the first quarter of 2001, we adopted the provisions of Mexican GAAP
Bulletin C-2, "Financial Instruments," issued by MIPA. Before adopting Bulletin
C-2, we recognized gain or losses on derivative financial instruments not
designated as a hedge upon settlement of the related contracts. As a result of
applying the provisions of Bulletin C-2, we accounted for our derivative
financial instruments at fair value as of January 1, 2001, and recognized a
cumulative loss in the amount of Ps.73.5 million (net of income tax benefit of
Ps.39.5 million) in the consolidated income statement for the first quarter of
2001, the impact being primarily in connection with forward contracts not
previously designated as a hedge. See Notes 1(p), 9 and 10 to our year-end
financial statements.
NET INCOME (LOSS)
We generated net income in the amount of Ps.737.8 million in 2002, as
compared to net income of Ps.1,422.4 million in 2001. The net decrease of
Ps.684.6 million reflected:
- a Ps.176.1 million increase in integral cost of financing;
- a Ps.267.5 million increase in restructuring and non-recurring
charges;
- a Ps.1,439.6 million increase in other expense-net; and
- a Ps.603.9 million increase in equity in losses from affiliates.
This change was partially offset by a Ps.310.7 million increase in
operating income, a Ps.272.1 million decrease in income taxes, a Ps.1,048.6
million increase in income from discontinued operations, a Ps.73.5 million
decrease in cumulative loss effect from change in accounting principle, and a
decrease of Ps.97.6 million in minority interest.
During the year ended December 31, 2002, we recognized certain significant
non-recurring charges that unfavorably affected net income for the year, as
follows:
- a non-cash charge of Ps.325.4 million in connection with the
write-off of exclusive rights letters for soccer players;
- a charge of Ps.163.4 million related to the drawdown by DirecTV
under a letter of credit posted by us in connection with certain
broadcast arrangements and related expenses;
- a non-cash charge of Ps.1,066.7 million in connection with the
write-down and write-off of unamortized goodwill related to certain
businesses acquired by us in prior years, which long-lived assets
were evaluated for recoverability; and
- a non-cash charge of Ps.465.0 million for the recognition of
additional equity losses to cover the total outstanding capital
lease debt balance of the Multi-Country DTH joint venture in South
America being guaranteed by us.
Had these significant non-recurring charges not been recognized by us in
the year ended December 31, 2002, the net income for the year after the related
income tax effect would have increased to Ps.2,590.8 million.
We generated net income in the amount of Ps.1,422.4 million in 2001, as
compared to a net loss in the amount of Ps.872.2 million in 2000. This change
reflected:
- a Ps.618.0 million decrease in integral cost of financing;
- a Ps.1,452.5 million decrease in restructuring and non-recurring
charges, which decrease primarily reflects a Ps.1,547.0 million
non-recurring charge taken in connection with our refinancing in
the second quarter of 2000;
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- a Ps.1,386.9 million decrease in equity in losses of affiliates,
which decrease primarily reflects our decision to discontinue the
recognition of additional losses with respect to our investment in
Innova, which resulted in a Ps.1,132.1 million decrease in equity
in losses of affiliates in 2001 as described above; and
- a Ps.164.1 million decrease in minority interest.
This change was partially offset by a Ps.871.0 million decrease in
operating income, a Ps.166.8 million increase in other expense, net, net
increases in the amount of Ps.204.5 million and Ps.73.5 million in provisions
for income taxes and the cumulative loss effect of the accounting change,
respectively, and a Ps.11.1 million decrease in income from discontinued
operations.
U.S. GAAP RECONCILIATION
For a discussion of the principal quantitative and disclosure differences
between Mexican GAAP and U.S. GAAP as they relate to us through December 31,
2002, see Note 27 to our year-end financial statements.
NEW U.S. ACCOUNTING STANDARDS
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In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 143, "Accounting for Asset Retirement Obligations." SFAS 143 requires the
recognition of a liability for the legal obligations associated with the
retirement of a tangible long-lived asset that results from the acquisition,
construction and/or normal operation of the asset. The liability is recognized
at fair value in the period in which it is incurred if a reasonable estimate of
fair value can be made. A corresponding asset retirement cost is added to the
carrying value of the long-lived asset and is depreciated to expense using a
systematic and rational method over its useful life. SFAS 143 is effective for
fiscal years beginning after June 15, 2002. We do not expect that the
application of the provisions of SFAS 143 will have a material impact on our
consolidated financial statements.
In April 2002, the FASB issued Statement of Financial Accounting Standards
No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections." As a result of these statements,
companies will no longer be allowed to classify gains and losses from
extinguishments of debt as extraordinary items unless such debt meets the
criteria of Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
provisions of this statement with regard to SFAS 4 will be effective for fiscal
years beginning after May 15, 2002. Consequently, losses from extinguishments of
debt that have been classified as extraordinary in 2000 and 2001 will be
reclassified upon the adoption of this standard in 2003.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS 146 nullifies the accounting
for restructuring costs provided in EITF Issue No. 94-3 "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)." SFAS 146 requires that a
liability associated with an exit or disposal activity be recognized and
measured at fair value only when incurred. In addition, one-time termination
benefits should be recognized over the period employees will render service, if
the service period required is beyond a minimum retention period. SFAS 146 is
effective for exit or disposal activities initiated after December 31, 2002. We
do not expect that the application of the provisions of SFAS 146 will have a
material impact our consolidated financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others." FIN 45 requires that a liability be
recorded in the guarantor's balance sheet upon the issuance of a guarantee at
its fair value. In addition, FIN 45 requires disclosures about the guarantees
that an entity has issued, including a reconciliation of changes in the entity's
product warranty liabilities. The initial recognition and initial measurement
provisions of FIN 45 are applicable on a prospective basis to guarantees issued
or modified after December 31, 2002, irrespective of the guarantor's fiscal
year-end. Management is currently evaluating the impact that the initial
recognition and initial measurement provisions of FIN 45 will have on our
consolidated financial statements. The disclosure requirements of FIN 45 are
effective for financial statements of interim or annual periods ending after
December 15, 2002; therefore, we have modified our disclosures herein as
required.
In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation
of Variable Interest Entities," which requires variable interest entities
(commonly referred to as SPEs) to be consolidated by the primary beneficiary of
the entity if certain criteria are met. FIN 46 is effective immediately for all
new variable interest entities created or acquired after January 31, 2003. For
variable interest entities created or acquired prior to February 1, 2003, the
provisions of FIN 46 become effective for us on January 1, 2003. Management is
currently evaluating the impact that the provisions of FIN 46 will have on our
consolidated financial statements.
In April 2003, the FASB issued Statement of Financial Accounting Standards
No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS 149 amends and clarifies financial accounting and reporting
for derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives) and for hedging
activities under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. The provisions of SFAS 149 that relate to Statement
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133 Implementation Issues that have been effective for fiscal quarters that
began prior to June 15, 2003 should continue to be applied in accordance with
their respective effective dates. In addition, paragraphs that relate to forward
purchases or sales of when-issued securities or other securities that do not yet
exist should be applied to both existing contracts and new contracts entered
into after June 30, 2003. We do not expect that the application of SFAS 149 will
have a material impact on our consolidated financial statements.
In May 2003, the FASB issued Statement of Financial Accounting Standards
No. 150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." SFAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. It requires that an issuer classify a financial
instrument that is within its scope as a liability (or an asset in some
circumstances). SFAS 150 is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of non-public entities. SFAS 150 is to be
implemented by reporting the cumulative effect of a change in an accounting
principle for financial instruments created before the issuance date of the SFAS
150 and still existing at the beginning of the interim period of adoption.
Restatement is not permitted. We do not expect that the application of SFAS 150
will have a material impact on our consolidated financial statements.
LIQUIDITY, FOREIGN EXCHANGE AND CAPITAL RESOURCES
LIQUIDITY. We generally rely on a combination of operating revenues,
borrowings and net proceeds from dispositions to fund our working capital needs,
capital expenditures, acquisitions and investments. Historically, we have
received, and continue to receive, most of our advertising revenues in the form
of upfront advertising deposits in the fourth quarter of a given year, which we
in turn used, and continue to use, to fund our cash requirements during the rest
of the quarter in which the deposits were received and for the first nine months
of the following year. We received Ps.11,304.7 million (nominal) and Ps.10,480.0
million (nominal) in upfront deposits in the last quarter of 2002 and 2001,
respectively. In addition, in the last quarter of 2002, the amount of upfront
deposits represented by cash decreased as compared to the amount represented by
non-interest bearing notes. See "Operating and Financial Review and Prospects --
Results of Operations -- Television Broadcasting."
We expect to fund our cash needs during 2003, other than cash needs in
connection with any potential investments and acquisitions, through a
combination of cash from operations and cash on hand. We intend to finance our
potential investments or acquisitions in 2003 through available cash from
operations, cash on hand and/or borrowings. The amount of borrowings required to
fund these cash needs in 2003 will depend upon the timing of cash payments from
advertisers under our advertising sales plan.
CASH BASIS INCOME. Our cash basis income is defined in our Consolidated
Statement of Changes in Financial Position in our year end financial statements
as "net income adjusted for non-cash items." Non-cash items represent primarily
depreciation and amortization, deferred income taxes and losses in affiliates,
exclusive of changes in working capital.
In 2002, we generated positive cash basis income of Ps.3,550.5 million, as
compared to a positive cash basis income of Ps.4,044.8 million during 2001. This
change was due primarily to the following decreases in cash basis income:
- a Ps.372.9 million increase in other expense, net;
- a Ps.267.6 million increase in restructuring and non-recurring
charges;
- a Ps.176.1 million increase in integral cost of financing, which
was due primarily to a decrease in interest income and an increase
in interest expense;
- a Ps.152.7 million increase in income and assets taxes and
employees' profit sharing; and
- a Ps.227.9 million loss in other items.
This change also reflects the following increases in cash basis income:
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- a Ps.310.4 million increase in operating income; and
- a Ps.392.5 million increase in non-cash items, which was due
primarily to equity in losses of affiliates, the provision for
doubtful trade accounts and deferred income taxes.
In 2001, we generated positive cash basis income of Ps.4,044.8 million, as
compared to a positive cash basis income of Ps.1,891.6 million during 2000. This
change was due primarily to the following increases in cash basis income:
- a Ps.1,452.5 million decrease in restructuring and non-recurring
charges;
- a Ps.618.0 million decrease in integral cost of financing, which
was due primarily to a decrease in interest expense and loss from
monetary position and a foreign exchange gain;
- a Ps.248.8 million decrease in income and assets taxes and
employees' profit sharing;
- a Ps.231.1 million increase in non-cash items, which was due
primarily to equity in losses of affiliates, disposition of
investments, the provision for doubtful trade accounts, write-offs
of doubtful accounts receivable and deferred income taxes; and
- a Ps.473.8 million increase in other income.
The increases in our cash basis income in 2001 were offset by a Ps.871.0
million decrease in operating income.
In 2000, we generated a positive cash basis income of Ps.1,891.6 million,
as compared to a positive cash basis income of Ps.2,680.4 million in 1999. This
change was due primarily to the following decreases in cash basis income:
- a Ps.1,486.0 million increase in non-recurring charges, which
primarily reflects a non-recurring charge in the amount of
Ps.1,547.0 million taken in connection with our refinancing;
- other expense, net of Ps.527.7 million in 2000, as compared to
other income, net of Ps.792.6 million in 1999; and
- a Ps.173.1 million loss in other items.
This change also reflects the following increases in cash basis income:
- a Ps.977.8 million increase in operating income; and
- a Ps.1,212.8 million increase in non-cash items, which was due
primarily to equity in losses of affiliates, disposition of
investments, the provision for doubtful trade accounts, write-offs
of doubtful accounts receivable and deferred income taxes.
CAPITAL EXPENDITURES, ACQUISITIONS AND INVESTMENTS, DISTRIBUTIONS AND OTHER
SOURCES OF LIQUIDITY.
During 2003, we expect to:
- make aggregate capital expenditures for property, plant and
equipment of approximately U.S.$110.0 million, which amount
includes capital expenditures in the amount of U.S.$30.0 million
for the expansion and improvement of our cable business;
- invest an aggregate of U.S.$35.0 million in our DTH joint ventures
in the form of capital contributions and/or long-term loans;
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- invest U.S.$4.8 million in OCEN, our live entertainment joint
venture in Mexico, in the form of a capital contribution;
- acquire all of the outstanding capital stock of Telespecialidades,
a company which is owned by all of the shareholders of Televicentro
in the same proportion that they own Televicentro, for an aggregate
amount of approximately U.S.$83.0 million; and
- invest approximately U.S.$5.0 million in our 50/50 programming for
pay television joint venture with Univision, which commenced
operations in the United States in the second quarter of 2003.
We may make additional expenditures in connection with acquisitions and
investments in 2002, including in connection with our radio joint venture with
Grupo Prisa. See "Information on the Company -- Business Overview -- Radio" and
"-- Television Broadcasting." For a description of commitments we have made in
connection with our joint venture with Endemol, see "Information on the Company
-- Business Overview -- Television -- Programming."
During 2002, we:
- made aggregate capital expenditures for property, plant and
equipment of approximately U.S.$135.2 million, which amount
included capital expenditures in the amount of U.S.$18.8 million
for the expansion and improvement of our cable business, which was
primarily funded by cash on hand and cash from operations at
Cablevision, in which we own a 51% stake;
- invested an aggregate of U.S.$32.5 million in our DTH joint
ventures in the form of long-term loans and/or capital
contributions;
- sold our music recording operations to Univision in exchange for
6,000,000 shares of Univision common stock and warrants to purchase
100,000 shares of Univision common stock, for an aggregate fair
value amount of U.S.$235.1 million;
- acquired a 40% stake of the capital stock of OCEN for U.S.$104.7
million, of which U.S.$37.7 million was paid in the first quarter
of 2003; and
- contributed Ps.103.0 million (nominal) to fund our pension and
seniority premium obligations.
During 2001, we:
- made an equity investment in Univision in the aggregate amount of
U.S.$375.0 million;
- made aggregate capital expenditures for property, plant and
equipment of approximately U.S.$141.8 million, which amount
included capital expenditures in the amount of U.S.$40.2 million
for the expansion and improvement of our Cable Television business;
- invested an aggregate of U.S.$115.9 million in our DTH joint
ventures in the form of long-term loans and/or capital
contributions and U.S.$15.0 million in our minority investment in a
programming production company; and
- invested approximately U.S.$11.4 million in connection with our
Internet-related business, including the digitalization of our
content and the costs associated with the establishment and
operation of EsMas.com.
REFINANCINGS. During 2000, we completed a refinancing of our indebtedness.
As a result of this refinancing, we reduced our borrowing costs, extended the
maturities of our indebtedness and replaced a portion of our U.S.
Dollar-denominated indebtedness with Peso-indexed denominated indebtedness. In
connection with this refinancing, on May 10, 2000, we completed:
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- an offer to purchase for cash our outstanding 11 3/8% Series A
Senior Notes due 2003, or the Series A Senior Notes, 11 7/8% Series
B Senior Notes due 2006, or the Series B Senior Notes, and 13 1/4%
Senior Discount Debentures due 2008, or the Senior Discount
Debentures; and
- a solicitation of consents of certain amendments to the related
indentures.
We purchased approximately 81% of the aggregate principal amount of our
Series A Senior Notes outstanding (excluding Series A Senior Notes held by or on
behalf of us or our affiliates), approximately 97% of the aggregate principal
amount of our Series B Senior Notes outstanding and approximately 94% of the
aggregate principal amount at maturity of our Senior Discount Debentures
outstanding. The total amount of funds paid by us as the total consideration for
all of the Series A Senior Notes, Series B Senior Notes and Senior Discount
Debentures repurchased pursuant to the tender offer was approximately U.S.$920.1
million, which amount included premiums, consent fees, accrued interest payable
and amounts payable in respect of certain Mexican withholding taxes in the
amount of approximately U.S.$125.9 million. After giving effect to the
amendments to the related indentures, substantially all of the restrictive
covenants and certain of the events of default had been eliminated. See Note 9
to our year-end financial statements. Following the completion of this tender
offer, in May 2001, we redeemed all of the remaining Senior Discount Debentures
outstanding and terminated the related indenture. In addition, in the second
quarter of 2003, we repaid all of the remaining Series A Senior Notes, which
matured in May 2003, with the net proceeds from a long-term credit agreement
that we entered into with a Mexican Bank for an aggregate principal amount of
Ps.800.0 million. See "--Indebtedness" below and Note 9 to our year-end
financial statements. For a description of the aggregate principal amount of
Series A Senior Notes and Series B Senior Notes outstanding as of December 31,
2002, see "-- Indebtedness" below.
On April 14, 2000, we issued Ps.3.0 billion (nominal) (approximately
U.S.$316.0 million using the Interbank Rate as of April 14, 2000) of
UDI-denominated notes pursuant to a medium-term note program in Mexico. For a
description of the terms of this program and the aggregate principal amount of
UDI-denominated notes outstanding as of December 31, 2002, see "-- Indebtedness"
below. In addition, on May 5, 2000, we entered into a three-year U.S.$400.0
million term loan facility. We borrowed U.S.$400.0 million in a single drawing
under this facility on May 8, 2000, the outstanding principal amount of which
was payable in one lump sum in three years. We used the borrowings under this
facility, together with the proceeds from the issuance of the UDI-denominated
notes and cash on hand, to repurchase the Series A Senior Notes, the Series B
Senior Notes and the Senior Discount Debentures pursuant to the tender offer. We
also terminated a U.S.$100.0 million committed working capital facility with a
syndicate of commercial banks on May 17, 2000. Finally, in August 2000, we
issued U.S.$200.0 million aggregate principal amount of 8 5/8% Senior Notes due
2005, which we registered through an exchange offer in the fourth quarter of
2000. For a description of the terms and the aggregate principal amount of 8
5/8% Senior Notes due 2005 outstanding as of December 31, 2002, see "--
Indebtedness" below. In connection with that refinancing, we recognized a
pre-tax loss of approximately Ps.1,547.0 million, which is classified as a
non-recurring charge in our income statement for the year ended December 31,
2000. See "-- Non-recurring Charges" and Notes 9 and 20 to our year-end
financial statements.
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INDEBTEDNESS. The following table sets forth a description of our
outstanding indebtedness as of December 31, 2002 on a historical, actual basis,
and as adjusted to reflect (i) the repayment of the Series A Senior Notes, which
matured in May 2003, and (ii) the prepayment in April 2003 of a long-term loan
for approximately 23.6 million Euros, which originally matured in June 2003, as
if such transactions occurred on December 31, 2002. Information in the following
table is presented in constant Pesos in purchasing power as of December 31,
2002.
DEBT OUTSTANDING(1)
---------------------------------------------------------------------------
DECEMBER 31, 2002
----------------- MATURITY OF
DESCRIPTION OF DEBT ACTUAL PRO FORMA INTEREST RATE(2) CURRENCY DEBT
------------------- ------- --------- ---------------- -------- -----------
LONG-TERM DEBT AND BRIDGE LOAN
Series A Senior Notes(3)............... Ps. 721(4) Ps. --(4) 11.38% U.S. Dollars 2003
Series B Senior Notes(3)............... 56 56 11.88% U.S. Dollars 2006
8 5/8% Senior Notes(5)(6).............. 2,093 2,093 8.625% U.S. Dollars 2005
8% Senior Notes(5)(7).................. 3,139 3,139 8.0% U.S. Dollars 2011
8.5% Senior Notes(5)(8)................ 3,139 3,139 8.5% U.S. Dollars 2032
UDIs(Peso-
UDI-denominated notes.................. 3,503 3,503 8.15% Indexed) 2007
U.S.$100.0 million five-year term loan London Interbank
facility(9).......................... 1,046 1,046 LIBOR + 0.875% U.S. Dollars 2005-2006
Banamex loan(10)....................... 267 267 TIIE Rate + .45% Mexican Pesos 2004
Banamex loan(11)....................... -- 800 8.925% Mexican Pesos 2004-2008
Serfin loan(12)........................ 224 224 TIIE Rate + .30% Mexican Pesos 2006
Other debt(13)......................... 397 138 4.28% Various 2003-2010
---------- ---------
Total debt (including current
maturities)...................... 14,585 14,405 -- -- 10.1(4)
December
Less: current maturities............... 1,240 260 -- Various 2003
---------- ---------
Total long-term debt................ Ps. 13,345 Ps.14,145
========== =========
(1) U.S. Dollar-denominated debt is translated into Pesos at an exchange rate
of Ps.10.464 per U.S. Dollar, the Interbank Rate, as reported by Banamex,
as of December 31, 2002.
(2) Excludes additional amounts payable in respect of Mexican withholding
taxes. See "Other Information--Taxation--Mexican Taxation--Interest and
Principal."
(3) Interest on the Series A Senior Notes and the Series B Senior Notes is
payable semi-annually. The Series A Notes bear interest at an effective
rate of 11.96% and the Series B Notes bear interest at and effective rate
of 12.49%. The Series A Senior Notes and the Series B Senior Notes are
redeemable by us in the event of certain changes in the law affecting the
Mexican withholding tax treatment of certain payments we make on the
Series A Senior Notes and the Series B Senior Notes, as well as at our
option in certain cases. See Note 9 to our year-end financial statements.
(4) Approximately U.S.$41.0 million of this indebtedness is effectively held
on our behalf pursuant to a total return bond swap which is described
under "Quantitative and Qualitative Disclosures About Market Risk --
Sensitivity and Fair Value Analyses." Following the completion of our
refinancing in 2000, we repurchased additional Series A Senior Notes in
the open market for approximately U.S.$4.0 million, which amount included
premiums and accrued interest payable as of the date of repurchase. See
Notes 9 and 10 to our year-end financial statements. In the second quarter
of 2003, we repaid all of the remaining Series A Senior Notes, which
matured in May 2003, with the net proceeds from a long-term credit
agreement that we entered into with a Mexican Bank for an aggregate
principal amount of Ps.800.0 million. See Note (11) below.
(5) Interest is payable semi-annually on each of the 8 5/8% Senior Notes due
2005, the 8.0% Senior Notes due 2011 and the 8.5% Senior Notes due 2032.
The 8 5/8% Senior Notes due 2005, the 8.0% Senior Notes due 2011 and the
8.5% Senior Notes due 2032 bear interest at an effective rate of 9.07%,
8.41% and 8.94%, respectively. The 8 5/8% Senior Notes due 2005, the 8.0%
Senior Notes due 2011 and the 8.5% Senior Notes due 2032 are redeemable by
us in the event of certain changes in the law affecting the Mexican
withholding tax treatment of certain payments we make in respect of these
notes, as well as at our option in certain cases. See Note 9 to our
year-end financial statements.
(6) As described below, we registered substantially all of our 8 5/8% Senior
Notes due 2005 through an exchange offer in January 2001.
(7) Reflects the issuance of U.S.$300.0 million aggregate principal amount of
8.0% Senior Notes due 2011 on September 13, 2001. We applied the net
proceeds from this issuance, together with cash on hand, to repay
approximately U.S.$300.0 million of the U.S.$400.0 million of indebtedness
then outstanding under our prior U.S.$400.0 million term loan facility. As
described below, we registered substantially all of these notes through an
exchange offer in March 2002.
(8) Reflects the issuance of U.S.$300.0 million aggregate principal amount of
8.5% Senior Notes due 2032 on March 1, 2002. We applied a substantial
portion of the net proceeds from this issuance to repay all of the
U.S.$276.0 million of indebtedness then outstanding under our
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bridge loan facility. In July 2002, we registered all of our 8.5% Senior
Notes due 2032 pursuant to an exchange offer. See Note 9 to our year-end
financial statements.
(9) Reflects the incurrence of U.S.$100.0 million of indebtedness under a new
U.S.$100.0 million five-year term loan facility on December 21, 2001, the
proceeds of which were used to refinance the remaining U.S.$100.0 million
of indebtedness then outstanding under our prior U.S.$400.0 million term
loan facility, which was subsequently terminated.
(10) Indebtedness outstanding under this loan as of December 31, 2002 reflects
the refinancing of this loan in July 2000. Before the refinancing, this
loan bore interest at the Mexican Interbank Rate basis plus additional
basis points, calculated monthly, the average of which was 1.50 for the
first six months of 2000. See "Major Shareholders and Related Party
Transactions -- Related Party Transactions -- Transactions and
Arrangements With Affiliates and Related Parties of Our Directors,
Officers and Principal Shareholders -- Loans from Banamex" and Note 9 to
our year-end financial statements.
(11) In the second quarter of 2003, we entered into a long-term credit
agreement with a Mexican bank for an aggregate principal amount of
Ps.800.0 million, with two tranches of Ps.400.0 million each. The annual
interest rate for the first tranche equals 9.35% plus additional basis
points from 0 to 45 based on the maintenance of certain financial coverage
ratios related to indebtedness (the "additional basis points"), and an
annual interest rate for the second tranche equal to the Mexican interbank
rate plus 40 basis points plus additional basis points. Interest due in
connection with this credit agreement is payable on a 28-day basis. This
indebtedness has two semiannual maturities of Ps.40.0 million each in
2004, two semiannual maturities of Ps.120.0 million each in 2006 and two
quarterly maturities of Ps.240.0 million each in 2008. This credit
agreement was subsequently amended to reflect a fixed annual interest rate
of 8.50% plus additional basis points for the second tranche beginning in
the third quarter of 2003.
(12) The aggregate principal amount of this loan is payable in 20 equal
quarterly installments beginning August 2001 and ending May 2006. Interest
on this loan is payable on a quarterly basis.
(13) Includes outstanding indebtedness in the aggregate amount of Ps.397.0
million under the following bank loans, capital leases and other notes
payable:
- a bank loan in the amount of 23.6 million Euros (the equivalent of
Ps.259.4 million), which was prepaid in the second quarter of 2003,
and bore interest at an annual rate of EURIBOR. This indebtedness was
incurred to finance the purchase of an additional 276,250 shares in
connection with the recapitalization of Via Digital, the Spanish DTH
venture in which we own an indirect interest, in January 2000;
- Ps.41.8 million in capital lease obligations. These obligations bear
interest at a variable annual rate between two and four basis points
above LIBOR and have maturities ranging from 2003 to 2006;
- Ps.93.3 million in other bank loans, which are denominated in U.S.
Dollars. These bank loans bear interest at a variable annual rate
between one and six points above LIBOR and have maturities ranging
from 2004 and 2010; and
- a bank loan, which is denominated in Colombian pesos, in the amount of
Ps.2.4 million. This bank loan bears an annual interest rate of 8.0%
and matures in 2003.
(14) Actual pro forma weighted average maturity of long-term debt as of
December 31, 2002. After giving effect to redemption of the Series A
Senior Notes in May 2003, as if such transaction occurred on December 31,
2002, the pro forma weighted average maturity of our long-term debt would
have been 10.5 years.
As described above under "-- Refinancings," on May 5, 2000, we entered into
a U.S.$400.0 million term loan facility with a group of banks. We borrowed
U.S.$400.0 million in a single drawing on May 8, 2000, the outstanding principal
of which was payable in three years. We repaid approximately U.S.$300.0 million
of the U.S.$400.0 million of indebtedness then outstanding under this term loan
facility with a combination of the net proceeds from the issuance of U.S.$300.0
million aggregate principal amount of 8% Senior Notes due 2011 in September
2001, which is described below, and cash on hand. On December 21, 2001, we
entered into a new U.S.$100.0 million five-year term loan facility, the terms of
which are described below. We used all of the net proceeds from this facility to
repay the remaining approximately U.S.$100.0 million of indebtedness then
outstanding under our three-year U.S.$400.0 million term loan facility, which
was subsequently terminated.
As described above under "-- Refinancings," on April 14, 2000, we issued
Ps.3.0 billion (nominal) of UDI-denominated notes pursuant to a medium-term note
program in Mexico. Our UDI-denominated notes mature in 2007 and bear interest at
an annual rate of 8.15%. The facility governing the medium-term note program
pursuant to which we issued our UDI-denominated notes does not contain any
financial or restrictive covenants.
In July 2000, we refinanced our loan with Banamex. Pursuant to the terms of
this refinanced loan, we are obligated to make principal payments on a quarterly
basis and interest payments on a monthly basis. The terms of this refinanced
loan require us to comply with certain covenants and maintain certain financial
ratios similar to those under the U.S.$100.0 million five-year term loan
facility summarized below. See Note 9 to our year-end financial statements.
On May 15, 2001, we redeemed all of the remaining Senior Discount
Debentures outstanding, which were originally due in 2008, following the
completion of our tender offer. Pursuant to the related indenture, we redeemed
these Senior Discount Debentures for U.S.$34.7 million, which amount represented
106.625% of their aggregate
- 88 -
principal amount of approximately U.S.$32.5 million, plus premiums and amounts
payable in respect of Mexican withholding taxes in the amount of approximately
U.S.$2.2 million. Following this redemption, we terminated the related
indenture. See Note 9 to our year-end financial statements.
In August 2000, we issued U.S.$200.0 million aggregate principal amount of
8 5/8% Senior Notes due 2005. Interest on the 8 5/8% Senior Notes due 2005 is
payable semi-annually in February and August of each year, commencing in
February 2001. In September 2001, we issued U.S.$300.0 million aggregate
principal amount of 8% Senior Notes due 2011. Interest on the 8.0% Senior Notes
due 2011 is payable semi-annually in March and September of each year,
commencing in March 2002. In March 2002, we issued U.S.$300.0 million aggregate
principal amount of 8.5% Senior Notes due 2032. Interest on the 8.5% Senior
Notes due 2032 is payable semi-annually in March and September of each year,
commencing in September 2002. The indenture related to the 8 5/8% Senior Notes
due 2005, the 8.0% Senior Notes due 2011 and the 8.5% Senior Notes due 2032
requires us to comply with certain covenants. The 8 5/8% Senior Notes due 2005,
the 8.0% Senior Notes due 2011 and the 8.5% Senior Notes due 2032 are unsecured
obligations, rank equally in right of payment with all of our future unsecured
and subordinated indebtedness and are junior in right of payments to all
existing and future liabilities of our subsidiaries. The 8 5/8% Senior Notes due
2005, the 8.0% Senior Notes due 2011 and the 8.5% Senior Notes due 2032 are
redeemable by us in the event of certain changes in the law affecting the
Mexican withholding tax treatment of certain payments we make on the these
notes. In the fourth quarter of 2000, we registered substantially all of the 8
5/8% Senior Notes due 2005 pursuant to an exchange offer. We registered
substantially all of the U.S. $300.00 million 8.0% Senior Notes due 2011
pursuant to an exchange offer in March 2002. In July 2002, we registered all of
the 8.5% Senior Notes due 2032 pursuant to an exchange offer. See Note 9 to our
year-end financial statements.
As described above under "-- Refinancings," on December 21, 2001, we
entered into a new U.S.$100.0 million five-year term loan facility. We borrowed
U.S.$100.0 million in a single drawing on December 21, 2001, the principal of
which is payable over five years in semi-annual installments, commencing on June
21, 2005. Borrowings under this facility bear interest at a rate of 0.875% per
annum over LIBOR prior to December 21, 2004, and at a rate of 1.125% per annum
over LIBOR thereafter. Interest in respect of principal amounts borrowed under
this facility is payable in semi-annual installments.
This facility contains restrictive covenants that limit our ability and the
ability of our subsidiaries through which we conduct our television
broadcasting, programming for pay television and program licensing businesses
to:
- incur indebtedness;
- consummate transactions with affiliates;
- make dividend payments;
- issue and sell capital stock of restricted subsidiaries;
- consummate capital expenditures or investments; and
- consummate mergers and consolidations, liquidations, dissolutions
or transfers of assets.
This facility also requires us to maintain: (a) total debt/EBITDA ratio not
greater than 4.00 to 1.00; (b) EBITDA/cash interest ratio not less than 2.50 to
1.00; and (c) net worth not less than 75% of net worth as at December 31, 2000
and provides for indemnification in respect of certain Mexican withholding
taxes, subject to customary exceptions and limitations.
In connection with our acquisition of shares of preferred stock of
Univision, as described under "Information on the Company -- Business Overview
-- Univision," on December 21, 2001, we entered into a U.S.$276.0 million bridge
loan facility. We borrowed U.S.$276.0 million in a single drawing on December
21, 2001, the principal of which was payable in one lump sum on December 20,
2002. We used all of the net proceeds from this bridge loan facility, together
with approximately U.S.$99.0 million of cash on hand, to finance our acquisition
of shares of
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preferred stock of Univision. See "Information on the Company -- Business
Overview -- Univision." We repaid all of the U.S.$276.0 million of indebtedness
outstanding under this bridge loan facility with a substantial portion of the
net proceeds from the issuance of U.S.$300.0 million aggregate principal amount
of 8.5% Senior Notes due 2032 in March 2002.
In the first quarter of 2002, we established a certificado bursatil
facility program for the issuance of up to Ps.4.0 billion in Peso- or
UDI-denominated debt securities. We currently anticipate that proceeds of any
issuance of debt securities under this facility would be used to refinance then
outstanding indebtedness.
In the second quarter of 2003, we repaid all of the remaining Series A
Senior Notes, which matured in May 2003, with the net proceeds from a long-term
credit agreement that we entered into with a Mexican Bank for an aggregate
principal amount of Ps.800.0 million. The principal amount is divided into two
tranches of Ps.400.0 million each, with an annual interest rate for the first
tranche of 9.35% plus additional basis points from 0 to 45 based on the
maintenance of certain financial coverage ratios related to indebtedness (the
"additional basis points"), and an annual interest rate for the second tranche
equal to the Mexican interbank rate plus 40 basis points plus additional basis
points. Interest due in connection with this credit agreement is payable on a
28-day basis. This indebtedness has two semiannual maturities of Ps.40.0 million
each in 2004, two semiannual maturities of Ps.120.0 million each in 2006 and two
quarterly maturities of Ps.240.0 million each in 2008. The terms of this credit
agreement require us to comply with certain covenants and maintain certain
financial ratios similar to those under the U.S.$100.0 million five-year term
loan facility summarized above. This credit agreement was subsequently amended
to reflect a fixed annual interest rate of 8.50% plus additional basis points
for the second tranche beginning in the third quarter of 2003.
In addition, in April 2003 we prepaid a long-term loan for approximately
23.6 million Euros, which originally matured in June 2003. The indebtedness was
incurred to finance the purchase of an additional 276,250 shares in connection
with the recapitalization of Via Digital in January 2000.
INTEREST EXPENSE. Interest expense for 2002 was Ps.1,371.2, Ps.189.6
million of which was attributable to the restatement of our UDI-denominated
notes due 2007.
The following table sets forth our interest expense for the years
indicated:
YEAR ENDED DECEMBER 31,(1)(2)
-----------------------------------------------
2000 2001 2002
------------- ------------ ------------
(MILLIONS OF U.S. DOLLARS)
Interest payable in U.S. Dollars.............................. U.S.$ 58.2 U.S.$ 59.7 U.S.$ 76.2
Interest capitalized under our Senior Discount
Debentures............................................... 25.0 1.5 --
Amounts currently payable under Mexican withholding
taxes(3)................................................. 2.3 1.5 3.9
------------ ------------ ------------
Total interest payable in U.S. Dollars........................ U.S.$ 85.5 U.S.$ 62.7 U.S.$ 80.1
============ ============ ============
Peso equivalent of interest payable in U.S. Dollars........... Ps. 942.5 Ps. 620.6 Ps. 797.8
Interest payable in Pesos..................................... 422.3 481.7 383.8
Restatement of UDI-denominated Notes due 2007................. 180.3 171.0 189.6
------------ ------------ ------------
Total interest expense(4)............................ Ps. 1,545.1 Ps. 1,273.3 Ps. 1,371.2
============ ============ ============
(1) U.S. Dollars are translated into Pesos at the rate prevailing when
interest was recognized as an expense for each period and restated to
Pesos in purchasing power as of December 31, 2002.
(2) Interest expense in these periods includes amounts effectively payable in
U.S. Dollars as a result of U.S. Dollar-Peso swaps.
(3) See "Other Information--Taxation--Mexican Taxation--Interest and
Principal."
(4) Total interest expense amounts in these periods exclude capitalized and
hedged interest expense.
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GUARANTEES. We guarantee our proportionate share of our DTH joint ventures'
minimum commitments for use on PanAmSat and other transponders for periods of up
to 15 years. The amount of these guaranteed commitments is estimated to be an
aggregate of approximately U.S.$276.5 million as of December 31, 2002, including
U.S.$156.1 million for Innova and U.S.$120.4 million for MCOP. See "Item 7 --
Major Shareholders and Related Party Transactions -- Related Party Transactions"
and Notes 5, 11 and 13 to our year end financial statements. In addition, we
have guaranteed obligations of TechCo, a partnership that provides technical
services to DTH joint ventures in Latin America in which we have a 30% interest
and other entities in which we own an interest for direct loans and capital
leases in an aggregate amount of approximately Ps.233.3 million, substantially
all of which relates to guarantees related to DTH technical facilities. See
"Item 3 -- Key Information -- Risk Factors -- Risk Factors Related to Our
Business -- MCOP, Our DTH Joint Venture in Latin America Outside of Mexico and
Brazil, May Not Be Able to Continue as a Going Concern and if It Ceases
Operations, It Would Have a Material Adverse Effect on Our Financial Condition"
and Notes 9 and 13 to our year end financial statements.
CONTRACTUAL OBLIGATIONS AND COMMERCIAL COMMITMENTS
Our contractual obligations and commercial commitments consist primarily of
long-term debt, as described above, guarantees related to our DTH joint venture
transponder obligations, as described in "Information on the Company -- Business
Overview -- DTH Joint Ventures" and "Major Shareholders and Related Party
Transactions -- Related Party Transactions," and transmission rights
obligations.
Contractual Obligations on the Balance Sheet
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------
LESS THAN 12 12-36 MONTHS 36-60 MONTHS AFTER 60
MONTHS JANUARY 1, JANUARY 1, MONTHS
JANUARY 1, 2003 2004 TO 2006 TO SUBSEQUENT
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER
TOTAL 2003 2005 2007 31, 2007
--------------- --------------- -------------- -------------- -------------
(THOUSANDS OF U.S. DOLLARS)
Long-term debt (1)............... U.S.$ 1,393,835 U.S.$ 118,490 U.S.$ 266,987 U.S.$ 405,512 U.S.$ 602,846
DTH joint ventures (2)........... 157,229 6,937 16,606 20,302 113,384
Transmission rights (3).......... 78,124 74,875 2,969 278 2
Total contractual obligations.... --------------- --------------- -------------- -------------- -------------
U.S.$ 1,629,188 U.S.$ 200,302 U.S.$ 286,562 U.S.$ 426,092 U.S.$ 716,232
=============== =============== ============== ============== =============
----------------
(1) See "Operating and Financial Review and Prospects -- Liquidity, Foreign
Exchange and Capital Resources -- Indebtedness" and Note 9 to our year-end
financial statements.
(2) This liability reflects guarantees provided by us in respect of our
proportionate share of the capital lease obligations (discounted) of
Innova and MCOP. See "Item 4. Information on the Company--Business
Overview--DTH Joint Ventures."
(3) This liability reflects our transmission rights obligations related to
programming acquired or licensed from third party producers and suppliers,
and special events, which are accounted for in our consolidated balance
sheet as trade accounts payable (current liabilities) and other long-term
liabilities.
- 91 -
Contractual Obligations off the Balance Sheet
The following table summarizes the DTH joint ventures' obligations to third
parties as of December 31, 2002:
PAYMENTS DUE BY PERIOD
-------------------------------------------------------------------------------
LESS THAN 12 12-36 MONTHS 36-60 MONTHS AFTER 60
MONTHS JANUARY 1, JANUARY 1, MONTHS
JANUARY 1, 2003 2004 TO 2006 TO SUBSEQUENT
TO DECEMBER 31, DECEMBER 31, DECEMBER 31, TO DECEMBER
TOTAL 2003 2005 2007 31, 2007
--------------- --------------- -------------- -------------- -------------
(THOUSANDS OF U.S. DOLLARS)
DTH joint ventures (1).............. U.S.$ 35,000 U.S.$ 35,000 U.S.$ -- U.S.$ -- U.S.$ --
Capital expenditures commitments (2) 31,434 31,434 -- -- --
Capital lease (3)................... 21,896 6,273 9,291 6,332 --
Guarantees (4)...................... 15,000 -- 15,000 -- --
Other (5)........................... 55,195 14,095 27,400 13,700 --
-------------- --------------- -------------- -------------- -------------
Total contractual obligations....... U.S.$ 158,525 U.S.$ 86,802 U.S.$ 51,691 U.S.$ 20,032 U.S.$ --
============== =============== ============== ============== =============
-----------
(1) We have commitments to make capital contributions or long-term loans in
2003 to Innova of up to U.S.$15 million and to our DTH joint ventures in
Latin America, excluding Mexico, for up to U.S.$20 million.
(2) Our commitments for capital expenditures include U.S.$23,271, which are
related to purchase commitments to acquire television technical equipment.
(3) We have guaranteed the obligations of certain capital leases of our DTH
technical facilities.
(4) In connection with the disposal of our investment in PanAmSat in 1997, we
granted collateral to secure certain indemnification obligations. After
the expiration of applicable tax statutes of limitations, the collateral
will be reduced a de minimus amount. The collateral agreement will
terminate in approximately five years.
(5) In September 2001, we entered into a 50/50 programming joint venture with
Endemol, a world leading content developer and producer for television and
online platforms based in the Netherlands, to produce and develop content
for television and the Internet. As of December 31, 2002, we have
commitments to acquire from Endemol programming formats through this
venture for up to U.S.$54.8 million through 2006.
- 92 -
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
BOARD OF DIRECTORS
The following table sets forth the names of our current directors and their
alternates, their dates of birth, their principal occupation, their business
experience, including other directorships, and their years of service as
directors or alternate directors. Each of the following directors and alternate
directors were elected or ratified for a one-year term by our shareholders at
our April 30, 2003 annual shareholders' meeting.
FIRST
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED
---------------------- ---------------------------------- ------------------------------- -------
Emilio Azcarraga Jean Chairman of the Board, President Member of the Boards of December
(02/21/68) and Chief Executive Officer and Telefonos de Mexico, S.A. de 1990
President of the Executive C.V. and Banco Nacional de
Committee of Grupo Televisa Mexico, S.A. and Vice
Chairman of the Board of
Univision
Maria Asuncion Vice Chairwoman of the Board and Chief Executive Officer of July 2000
Aramburuzabala Larregui Member of the Executive Tresalia Capital, S.A. de C.V.
(05/02/63) Committee of Grupo Televisa and and Member of the Boards of
Vice Chairwoman of the Board Grupo Financiero Banamex,
and Member of the Executive S.A. de C.V., Banco Nacional de
Committee of Grupo Modelo, S.A. Mexico, S.A. and America
de C.V. Movil, S.A. de C.V.
In alphabetical order:
Alfonso de Angoitia Noriega Executive Vice President and Chief Alternate Member of the Board April 1998
(01/17/62) Financial Officer and Member of of Univision and Partner,
the Executive Committee of Grupo Mijares, Angoitia, Cortes y
Televisa Fuentes, S.C. (1994 - 1999)
Pedro Aspe Armella Chairman of the Board and Chief Member of the Board of The April 2003
(07/07/50) Executive Officer of Protego McGraw Hill Companies and
Asesores, S.A. de C.V. Xigmux and former Member of
the Board of Vector Casa de
Bolsa, S.A. de C.V.
Julio Barba Hurtado Legal Advisor to the President and Former Legal Advisor to December
(05/20/33) Member of the Executive Televisa, S.A. de C.V. 1990
Committee of Grupo Televisa
Jose Antonio Baston Patino Corporate Vice President of Former Vice President of April 1998
(04/13/68) Television and Member of the Operations of Grupo Televisa,
Executive Committee of Grupo former General Director of
Televisa Programming of Grupo Televisa
and former Member of the Board
of Univision
Ana Patricia Botin O'Shea Private Investor Chairman of the Board of April 1999
(10/04/60) Banesto - Spain and Member of
the Board of Banco Santander
Central Hispano
Manuel Jorge Cutillas Covani Director of Bacardi Limited Member of the Board of Bacardi April 1994
(03/01/32) Limited and former Chairman of
the Board of Bacardi Limited
- 93 -
FIRST
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED
---------------------- ---------------------------------- ------------------------------- -------
Carlos Fernandez Gonzalez Chief Executive Officer and Vice Member of the Boards of July 2000
(09/29/66) Chairman of the Board of Grupo Anheuser Busch Co., Grupo
Modelo, S.A. de C.V. Financiero Santander Mexicano,
S.A. de C.V. and Emerson
Electric, Co.
Bernardo Gomez Martinez Deputy to the President of Grupo Former President of the Mexican April 1999
(07/24/67) Televisa and Member of the Chamber of Television and
Executive Committee of Grupo Radio Broadcasters
Televisa
Claudio X. Gonzalez Laporte Chairman of the Board and Chief Member of the Boards of April 1997
(05/22/34) Executive Officer of Kimberly- Kimberly-Clark Corporation,
Clark de Mexico, S.A. de C.V. General Electric Co., Kellogg
Company, Home Depot, Inc.,
Alfa, S.A. de C.V., Grupo Carso,
S.A. de C.V., America Movil,
S.A. de C.V. and Investment
Company of America, and
former President of the Mexican
Business Council
Roberto Hernandez Ramirez Chairman of the Board of Banco Former Chief Executive Officer April 1992
(03/24/42) Nacional de Mexico, S.A. of Banco Nacional de Mexico,
S.A. and Member of the Boards
of Citigroup, Inc., Empresas
ICA, Sociedad Controladora,
S.A. de C.V., Grupo Modelo,
S.A. de C.V., Gruma, S.A. de
C.V., Grupo Financiero
Banamex Accival, S.A. de C.V.,
Avantel, S.A. and Munchener de
Mexico, S.A. de C.V.
Enrique Krauze Kleinbort Chief Executive Officer of General Director of Editorial April 1996
(09/17/47) Editorial Clio Libros y Videos, Clio Libros y Videos, S.A. de
S.A. de C.V. C.V.
German Larrea Mota Velasco Chairman of the Board, Chief Chairman of the Board and April 1999
(10/26/53) Executive Officer and President of Chief Executive Officer of
Grupo Mexico, S.A. de C.V. Asarco Incorporated, Southern
Peru Copper Corporation, Grupo
Ferroviario Mexicano, S.A. de
C.V. and Empresarios
Industriales de Mexico, S.A. de
C.V. and former Member of the
Boards of Banco Nacional de
Mexico, S.A. and Bolsa
Mexicana de Valores, S.A. de
C.V.
Gilberto Perezalonso Private Advisor Member of the Boards of Grupo April 1998
Cifuentes Gigante, S.A. de C.V. and
(03/06/43) Southern Peru Copper
Corporation and Director of the
pension funds of Banco
Nacional de Mexico, S.A.
- 94 -
FIRST
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED
---------------------- ---------------------------------- ------------------------------- -------
Alejandro Quintero Iniguez Corporate Vice President of Sales Shareholder and Member of the April 1998
(02/11/50) and Marketing and Member of the board of Grupo TV Promo, S.A.
Executive Committee of Grupo de C.V. and former Advisor to
Televisa former Mexican President
Ernesto Zedillo
Fernando Senderos Mestre Chairman of the Board and Chief Member of the Boards of April 1992
(03/03/50) Executive Officer of Grupo Desc, Telefonos de Mexico, S.A. de
S.A. de C.V. C.V., Alfa, S.A. de C.V.,
Kimberly Clark de Mexico, S.A.
de C.V., Industrias Penoles, S.A.
de C.V. and Dana Corporation
Enrique F. Senior Hernandez Executive Vice President and Member of the Board of Pics April 2001
(08/03/43) Managing Director of Allen & Retail Networks
Company Incorporated
Lorenzo H. Zambrano Trevino Chairman of the Board and Chief Member of the Boards of Alfa, April 1999
(03/27/44) Executive Officer of Cemex, S.A. S.A. de C.V., Empresas ICA,
de C.V. Sociedad Controladora, S.A. de
C.V., Fomento Economico
Mexicano, S.A. de C.V. and
Vitro, S.A. de C.V.
ALTERNATE DIRECTORS:
In alphabetical order:
Herbert Allen III Executive Vice President and Member of the Boards of Coca April 2002
(06/08/67) Managing Director of Allen & Cola Femsa, S.A. de C.V.,
Company Incorporated Convera-Enterprise Software
and Global Education Network
Juan Pablo Andrade Frich Asset Manager of Tresalia Capital, Member of the Board of July 2000
(06/05/64) S.A. de C.V. and Member of the Televicentro
Executive Committee of Grupo
Televisa
Lucrecia Aramburuzabala Private Investor Employee of Tresalia Capital, July 2000
Larregui S.A. de C.V. and Member of the
(03/29/67) Boards of Grupo Modelo, S.A.
de C.V. and Televicentro
Felix Araujo Ramirez Vice President of Telesistema Former Private Investor in April 2002
(03/20/51) Mexicano Promocion y Programacion de la
Provincia, S.A. de C.V.,
Promocion y Programacion del
Valle de Lerma, S.A. de C.V.,
Promocion y Programacion del
Sureste, S.A. de C.V.,
Teleimagen Profesional del
Centro, S.A. de C.V. and
Estragia Satelite, S.C.
Maximiliano Arteaga Vice President of Operations, Former Vice President of April 2002
Carlebach Technical Service and Television Operations--Televisa
(12/06/42) Production Chapultepec, former Vice
President of Administration--
Televisa San Angel and
Chapultepec and former Vice
President of Administration and
Finance of Univisa, Inc.
- 95 -
FIRST
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED
---------------------- ---------------------------------- ------------------------------- -------
Joaquin Balcarcel Santa Cruz Director--Legal Department of Former associate at Martinez, April 2000
(01/04/69) Grupo Televisa Algaba, Estrella, De Haro y
Galvan-Duque, S.C.
Juan Fernando Calvillo Vice President of Internal Auditing Member of the Board of Private April 2002
Armendariz of Grupo Televisa Banking of Vanguardia, S.A. de
(12/27/41) C. V. and former Member of the
Boards of Grupo Financiero
Serfin, S.A. de C.V. and
Serpaprosa, S.A. de C.V.
Rafael Carabias Principe Vice President of Administration Former Member of the Boards of April 1999
(11/13/44) of Grupo Televisa Promecap, S.C., Grupo
Financiero del Sureste, S.A. and
former Director of Corporate
Finance of Scotiabank Inverlat,
S.A.
Francisco Jose Chevez Robelo Retired Partner of Chevez, Ruiz, Former Partner of Chevez, Ruiz, April 2003
(07/03/29) Zamarripa y Cia, S.C. Zamarripa y Cia, S.C.
Jose Luis Fernandez Partner of Chevez, Ruiz, Zamarripa Former Member of the Boards of April 2002
Fernandez y Cia., S.C. Alexander Forbes, S.A. de C.V.
(05/18/59) and Afore Bital, S.A.
Salvi Folch Viadero Vice President of Financial Former Chief Executive Officer April 2002
(08/16/67) Planning of Grupo Televisa and Chief Financial Officer of
Comercio MAS, S.A. de C.V.
and former Vice Chairman of
Banking Supervision of the
National Banking and Securities
Commission
Leopoldo Gomez Gonzalez Vice President of Newscasts of Former Director of Information April 2003
Blanco Grupo Televisa to the President of Grupo
(04/06/59) Televisa
Jose Antonio Lara del Olmo Vice President--Tax of Grupo Former Tax Director of Grupo April 2003
(09/02/70) Televisa Televisa and former Associate of
Chevez, Ruiz, Zamarripa y Cia,
S.C.
Jorge Lutteroth Echegoyen Controller and Vice President of Former Senior Partner of April 2000
(01/24/53) Grupo Televisa Coopers & Lybrand Despacho
Roberto Casas Alatriste, S.C.
Juan Sebastian Mijares Ortega Secretary of the Board, Secretary Partner, Mijares, Angoitia, July 2000
(10/04/59) of the Executive Committee and Cortes y Fuentes, S.C. (1994-
Vice President--Legal and 2000), Member and Secretary of
General Counsel of Grupo Televisa the Board of Bank of Tokyo-
Mitsubishi Bank-Mexico and
Member of the Boards of Afore
Banamex, S.A. de C.V. and
Union de Telecomunicaciones
de Iberoamerica, A.C.
Alberto Montiel Castellanos Director of Montiel Font y Former Tax Director of Wal- April 2002
(11/22/45) Asociados, S.C. Mart de Mexico, S.A. de C.V.
Raul Morales Medrano Senior Manager of Chevez, Ruiz, Senior Manager of Chevez, April 2002
(05/12/70) Zamarripa y Cia, S.C. Ruiz, Zamarripa y Cia, S.C.
- 96 -
FIRST
NAME AND DATE OF BIRTH PRINCIPAL OCCUPATION BUSINESS EXPERIENCE ELECTED
---------------------- ---------------------------------- ------------------------------- -------
Guillermo Nava Gomez Tagle Vice President of Administration Former Vice President of April 1999
(08/27/43) -- San Angel Corporate Finance of Grupo
Televisa, former Vice President
of Citibank-Colombia and
former Finance Director of
CIFRA
Alexandre Moreira Penna da Vice President of Corporate Former Managing Director of April 2002
Silva Finance of Grupo Televisa JPMorgan Chase
(12/25/54)
Maria Asuncion Aramburuzabala Larregui and Lucrecia Aramburuzabala Larregui
are sisters. Carlos Fernandez Gonzalez is the husband of Lucrecia Aramburuzabala
Larregui and the brother-in-law of Maria Asuncion Aramburuzabala Larregui.
Maria Asuncion Aramburuzabala Larregui and Carlos Fernandez Gonzalez
indirectly beneficially own 16.21% and 3.80%, respectively, of the outstanding
capital stock of Televicentro. They own their respective ownership stakes in
Televicentro through a trust, known as the Investor Trust. See "Major
Shareholders and Related Party Transactions -- Televicentro and the Principal
Shareholders." Pursuant to a shareholders' agreement among the Investor Trust
and the other shareholders of Televicentro, for so long as the Investor Trust
owns:
- at least 2.5% but less than 10% of the outstanding capital stock of
Televicentro, it will have the right to designate one member (and
the corresponding alternate member) of Televisa's Board;
- at least 10% but less than 20% of the outstanding capital stock of
Televicentro, it will have the right to designate two members (and
the corresponding alternate members) of Televisa's Board; or
- 20% or more of the outstanding capital stock of Televicentro, it
will have the right to designate three members (and the
corresponding alternate members) of Televisa's Board.
Pursuant to these provisions, at our 2003 annual shareholders' meeting, the
Investor Trust designated Maria Asuncion Aramburuzabala Larregui and Carlos
Fernandez Gonzalez as its representatives, and Juan Pablo Andrade Frich and
Lucrecia Aramburuzabala Larregui as its alternate representatives, respectively,
on Televisa's Board. See "Major Shareholders and Related Party Transactions --
Televicentro and the Principal Shareholders."
BOARD OF DIRECTORS
General. The management of our business is vested in our Board of
Directors. Our bylaws currently provide for a Board of Directors of at least
five and no more than twenty members, at least 25% of which must be "independent
directors" under Mexican law (as described below), and the same number of
alternate directors. See "Other Information -- Mexican Securities Market Law."
Under Mexican law, a person will not qualify as an "independent director" if he
or she is, among others:
- one of our employees or managers;
- a controlling shareholder, in our case, Televicentro;
- a partner or employee of a company which provides advisory services
to us or any company which is part of the same economic group as we
are, that receives 10% or more of its income from us;
- a significant client, supplier, debtor or creditor, or member of
the Board or executive officer of any such entities;
- 97 -
- an employee of any association, foundation, or partnership that
receives at least 15% of its total donations from us; or
- any high level executive officer of a corporation in which one of
our high level executives is a member of the Board of Directors of
that corporation.
Election of Directors. A majority of the members of our Board of Directors
must be Mexican nationals and must be elected by Mexican shareholders. A
majority of the holders of the A Shares voting together currently have the right
to elect up to sixteen of our directors and alternate directors, and a majority
of the holders of the L Shares and D Shares each have the right to elect two of
our directors and alternate directors, each of which must be an independent
director. Ten percent holders of L Shares or D Shares are also entitled to
nominate a director and corresponding alternate director. Each alternate
director may vote in the absence of a corresponding director. Directors and
alternate directors are elected for one-year terms by our shareholders at each
annual shareholders' meeting, and each serves until a successor is elected and
takes office. All of the current and alternate members of the Board of Directors
were elected by our shareholders at our 2003 annual shareholders' special and
general meetings, which were held on April 30, 2003.
Quorum; voting. In order to have a quorum for a meeting of the Board of
Directors, generally at least 50% of the directors or their corresponding
alternates must be present. However, in the case of a meeting of the Board of
Directors to consider certain proposed acquisitions of our capital stock, at
least 75% of the directors or their corresponding alternates must be present.
See "Other Information -- Bylaws -- Antitakeover Protections." In the event of a
deadlock of our Board, our Chairman will have the deciding vote.
Meetings; Actions Requiring Board Approval. Our bylaws provide that our
Board must meet at least once a quarter, and that our Chairman, 25% of the
Board, our Secretary or alternate Secretary or any statutory auditor may call
for a Board meeting. Pursuant to the Mexican Securities Market Law and our
bylaws, our Board of Directors must approve all transactions that deviate from
our ordinary course of business, and involve, among others, (i) a related party,
(ii) any purchase or sale of 10% or more of our assets, (iii) the grant by us of
guarantees in an amount or amounts exceeding 30% of our assets or (iv) other
transactions representing more than 1% of our assets, in addition to any
shareholder approval required by our bylaws or otherwise.
Committees of Our Board of Directors. Our Board of Directors has an
Executive Committee. Each member must also be a member or alternate member of
our Board of Directors and is appointed for a one-year term at each annual
general shareholders' meeting. Our bylaws provide that the Executive Committee
may generally exercise the powers of the Board of Directors, except those
expressly reserved for the Board in our bylaws or by applicable law. The
Executive Committee currently consists of Emilio Azcarraga Jean, Juan Pablo
Andrade Frich, Alfonso de Angotia Noriega, Maria Asuncion Aramburuzabala
Larregui, Julio Barba Hurtado, Jose Antonio Baston Patino, Bernardo Gomez
Martinez and Alejandro Quintero Iniguez. In accordance with the Mexican
Securities Market Law and our bylaws, we established an Audit Committee
consisting of the following members of our Board: Gilberto Perezalonso
Cifuentes, who is the Chairman of this Committee, Juan Pablo Andrade Frich, Juan
Fernando Calvillo Armendariz, Francisco Jose Chevez Robelo, Jorge Lutteroth
Echegoyen and Alberto Montiel Castellanos. Both the Chairman and a majority of
the members of the Audit Committee must be independent directors. Our statutory
auditors must be invited to attend all Audit Committee meetings. Among other
duties and responsibilities, the Audit Committee must:
- prepare an annual report regarding its activities for submission to
the Board and to our shareholders at our annual shareholders'
meeting;
- render an opinion as to transactions and arrangements with related
parties, which must be approved by our Board of Directors; and
- propose independent experts to render opinions in connection with
transactions that deviate from our ordinary course of business, and
which involve, among others, (i) a related party, (ii) any purchase
or sale of 10% or more of our assets, (iii) the grant by us of
guarantees in an amount or amounts exceeding 30% of our assets or
(iv) other transactions representing more than 1% of our assets.
- 98 -
EXECUTIVE OFFICERS
The following table sets forth the names of our executive officers, their
dates of birth, their current position, their prior business experience and the
year in which they were appointed to their current positions:
FIRST
NAME AND DATE OF BIRTH CURRENT POSITION BUSINESS EXPERIENCE APPOINTED
----------------------------- ---------------------------- --------------------------- ------------
Emilio Azcarraga Jean Chairman of the Board, Member of the Boards of March 1997
(02/21/68) President and Chief Telefonos de Mexico, S.A.
Executive Officer and de C.V. and Banco Nacional
President of the Executive de Mexico, S.A. and Vice
Committee of Grupo Televisa Chairman of the Board of
Univision
In alphabetical order:
Alfonso de Angoitia Noriega Executive Vice President and Member of the Board and of May 2000
(01/17/62) Chief Financial Officer the Executive Committee of
Grupo Televisa, Alternate
Member of the Board of
Univision and Partner,
Mijares, Angoitia, Cortes y
Fuentes, S.C. (1994 - 1999)
Felix Jose Araujo Ramirez Vice President of Former Private Investor in January 1993
(03/20/51) Telesistema Mexicano Promocion y Programacion de
la Provincia, S.A. de C.V.,
Promocion y Programacion
del Valle de Lerma, S.A. de
C.V., Promocion y
Programacion del Sureste,
S.A. de C.V., Teleimagen
Profesional del Centro,
S.A. de C.V. and Estragia
Satelite, S.C.
Maximiliano Arteaga Carlebach Vice President of Former Vice President of March 2002
(12/06/42) Operations, Technical Operations-- Televisa
Service and Television Chapultepec, former Vice
Production President of Administration
-- Televisa San Angel and
Chapultepec and former Vice
President of Administration
and Finance of Univisa, Inc.
Jose Antonio Baston Patino Corporate Vice President of Member of the Board and of February 2001
(04/13/68) Television the Executive Committee of
Grupo Televisa, former Vice
President of Operations of
Grupo Televisa, former
General Director of
Programming of Grupo
Televisa and former Member
of the Board of Univision
Jean Paul Broc Haro Chief Executive Officer of Former General Manager of February 2003
(08/08/62) Cablevision Programming for Pay
Television of Grupo Televisa
- 99 -
NAME AND DATE OF BIRTH CURRENT POSITION BUSINESS EXPERIENCE APPOINTED
---------------------------- ---------------------------- --------------------------- ------------
Bernardo Gomez Martinez Deputy to the President of Member of the Board and of July 1997
(07/24/67) Grupo Televisa the Executive Committee of
Televisa and former
President of the Mexican
Chamber of Television and
Radio Broadcasters
Eduardo Michelsen Delgado Chief Executive Officer of Former General Director-- January 2002
(03/03/71) Editorial Televisa Grupo Semana and former
Project Director-- McKinsey
& Co.
Jorge Eduardo Murguia Orozco Vice President of Production Former Administrative Vice March 1992
(01/25/50) President and former
Director -- Human Resources
-- Televisa, S.A. de C.V.
Alejandro Quintero Iniguez Corporate Vice President of Member of the Board and of April 1998
(02/11/50) Sales and Marketing of Grupo the Executive Committee of
Televisa Grupo Televisa, Shareholder
and Member of the Board of
Grupo TV Promo, S.A. de
C.V. and former advisor to
former Mexican President
Ernesto Zedillo
Raul Rodriguez Gonzalez Chief Executive Officer of Former Media Advisor of January 2002
(06/20/59) Radio Grupo Prisa and former
Chief Executive Officer of
Gerencia de Medios, S.A.
Pablo Abel Vazquez Oria Chief Executive Officer of Former Chief Executive May 2002
(06/29/67) Innova Officer of Cablevision,
former General Manager of
national subsidiaries of
Televisa and former General
Manager of AhorraSi, S.A.
de C.V.
COMPENSATION OF DIRECTORS AND OFFICERS
For the year ended December 31, 2002, we paid our directors, alternate
directors and executive officers for services in all capacities aggregate
compensation of approximately Ps.149.7 million (nominal) (U.S.$14.3 million
using the Interbank Rate, as reported by Banamex, as of December 31, 2002).
We made Ps.33.5 million in contributions to our pension and seniority
premium plans on behalf of our directors, alternate directors and executive
officers in 2002. Projected benefit obligations as of December 31, 2002 were
approximately Ps.44.7 million.
STOCK OPTION PLAN
In 1999, we adopted a stock option plan. Pursuant to the terms of our stock
option plan, as amended, we may grant eligible participants, which consist of
key executives and other personnel, rights to purchase CPOs and/or CPO
equivalents or we may conditionally sell CPOs and/or CPO equivalents to these
participants. Our shareholders' meeting has authorized the allocation of up to
8% of our capital stock to this and any other plans we may establish from time
to time for the benefit of our employees. See "-- Long Term Retention Plan."
Pursuant to the stock option plan, the exercise or sale prices of the CPOs
and/or CPO equivalents are based on then current market prices at the time the
options are granted or the conditional sale agreement is executed. We have
implemented the stock option plan by means of a special purpose trust. The CPOs,
CPO equivalents and underlying shares that are part of
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the stock option plan will be held by the special purpose trust and will be
voted with the majority of the CPOs, CPO equivalents and underlying shares
represented at the relevant meeting until these securities are transferred to
plan participants or otherwise sold in the open market. In accordance with the
stock option plan, our President and the technical committee of the special
purpose trust have broad discretion to make decisions related to the stock
option plan, including the ability to accelerate vesting terms, to release or
transfer CPOs and/or CPO equivalents, subject to conditional sale agreements, to
plan participants in connection with sales for purposes of making the payment of
the related purchase price, and to implement amendments to the stock option
plan, among others.
The stock option plan has consisted of a series of conditional sales to
plan participants of CPOs since its implementation in 1999. The conditional sale
agreements in respect of approximately 53 million CPOs entered into by plan
participants since the implementation of the stock option plan through the
fourth quarter of 2001 were terminated for several reasons, including the
failure of plan participants to pay the purchase price and the fact that the
average closing price per CPO on the Mexican Stock Exchange fell below certain
thresholds for a 15 trading day period.
The latest stage of the stock option plan, which was implemented in the
first quarter of 2003, consisted of conditional sales of approximately 57
million CPOs to plan participants. Conditional sale agreements currently in
effect from the previous and current stages of the stock option plan reflect
sales of approximately 87 million CPOs, generally at exercise prices ranging
from approximately Ps.11.21 - Ps.12.00 (or approximately U.S.$1.04 - U.S.$1.27)
per CPO (adjusted upwards by a specified percentage ranging from 2% - 10%,
depending upon whether the purchase price is paid in Pesos or in U.S. Dollars,
generally from the date of the relevant conditional sale agreement through the
date of payment(s)). Pursuant to the related conditional sale agreements, rights
to approximately 30 million CPOs vested in February 2003 and approximately 15
million CPOs will vest in March 2004. Rights to the remaining approximately 42
million CPOs currently vest during the period between 2005 and 2008. Rights to
purchase these CPOs currently expire during the period commencing in 2005 and
ending in 2013. Unless the technical committee of the special purpose trust or
our President determines otherwise, these CPOs will be held in the special
purpose trust until they are transferred to plan participants or otherwise sold
in the open market, subject to the conditions set forth in the related
conditional sale agreements. As of December 31, 2002, no CPOs had been
transferred to plan participants. Any CPOs not transferred to plan participants
pursuant to the relevant conditional sale agreement may be allocated to other
existing or future plan participants, provided that the rights of the original
plan participants to purchase these CPOs have expired. See Notes 14 and 27 to
our year-end financial statements.
In December 2002, we registered for sale CPOs by the special purpose trust
to plan participants pursuant to a registration statement on Form S-8 under the
Securities Act. The registration of these CPOs permit plan participants who are
not affiliates and/or the special purpose trust on behalf of these plan
participants to sell their CPOs that have vested into the Mexican and/or U.S.
markets through ordinary brokerage transactions without any volume or other
limitations or restrictions. Those plan participants who are affiliates may only
sell their vested CPOs either pursuant to an effective registration statement
under the Securities Act or in reliance on an exemption from registration. All
or a portion of the net proceeds from any such sales would be used to satisfy
the purchase price obligations of these plan participants pursuant to their
conditional sale agreements. While we anticipate that some of these sales will
take place during or after 2003, we cannot give you any assurances as to the
timing or terms of any such sales.
LONG TERM RETENTION PLAN
At our general extraordinary and ordinary shareholders' meeting held on
April 30, 2002, our shareholders authorized the creation and implementation of a
Long Term Retention Plan, which supplements our existing stock option plan. At
the meeting, our shareholders also authorized the issuance of A Shares in an
aggregate amount of up to 4.5% of our capital stock at the time the shares are
issued, a portion of the 8% of our capital stock previously authorized by our
shareholders for these plans, as well as the creation of one or more special
purpose trusts to implement the Long Term Retention Plan. Approximately 430.3
million A Shares, as to which preemptive rights were previously offered to
holders of our A Shares, are expected to be issued for subscription by one or
more of these special purpose trusts. We estimate that all of the shares
ultimately issued will become vested over a period of no less than 10 years. We
intend to grant the first awards under the Long Term Retention Plan as stock
options, conditional sales, restricted stock or other similar arrangements to
key personnel and/or company employees in the second half of 2003, with vesting
beginning no earlier than three years from the date of grant and expiration
dates of
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no less than two years thereafter. The price to be paid by the trustee of the
Trust will be Ps.9.35 per share. Pursuant to the resolutions adopted by our
shareholders' meeting, we have not, and do not intend to, register these A
Shares under the Securities Act. See "Key Information -- Risk Factors -- Risk
Factors Related to Our Securities -- The Interests of Our GDS Holders Will Be
Diluted if We Issue New Shares and These Holders Are Unable to Exercise
Preemptive Rights for Cash."
SHARE OWNERSHIP OF DIRECTORS AND OFFICERS
Share ownership of our directors, alternate directors and executive
officers is set forth in the table under "Major Shareholders and Related Party
Transactions." Except as set forth in this table, none of our directors,
alternate directors or executive officers is currently the beneficial owner of
more than 1% of any class of our capital stock or conditional sale agreements or
options representing the right to purchase more than 1% of any class of our
capital stock.
STATUTORY AUDITORS
Under our bylaws, the holders of a majority of the outstanding A Shares
elect a statutory auditor (comisario) and a corresponding alternate statutory
auditor at the Annual Ordinary Shareholders' Meeting. In accordance with the
Mexican Securities Market Law, holders of common stock or non-voting stock
representing at least 10% of a company's capital stock shall have the right to
appoint one statutory auditor. Mexican law requires that the statutory auditors
receive monthly reports from the Board of Directors regarding material aspects
of our affairs, including our financial condition, and that they be invited to
attend any meeting of the Board of Directors. The statutory auditors are also
required to report to the shareholders at the annual shareholders' meeting
regarding our financial statements and related matters, and must be invited to
all Board and Audit Committee meetings, where they can attend but not vote. At
our 2003 Annual Ordinary Shareholders' Meeting, Mario Salazar Erdmann was
elected to serve as our statutory auditor until the acceptance of the election
by his successor at the next annual shareholders' meeting and Jose Miguel
Arrieta Mendez was elected as alternate statutory auditor.
EMPLOYEES AND LABOR RELATIONS
The following table sets forth the number of employees and a breakdown of
employees by main category of activity and geographic location as of the end of
each year in the three-year period ended December 31, 2002:
DECEMBER 31,
-----------------------------------
2000 2001 2002
------ ------ ------
TOTAL NUMBER OF EMPLOYEES........................................ 14,603 13,684 12,550
CATEGORY OF ACTIVITY:
Employees...................................................... 14,523 13,621 12,514
Executives..................................................... 80 63 36
GEOGRAPHIC LOCATION:
Mexico......................................................... 13,573 12,544 11,169
Latin America (other than Mexico).............................. 640 729 999
United States.................................................. 379 401 371
Spain.......................................................... 11 10 11
As of December 31, 2000, 2001 and 2002, approximately half of our employees
were represented by unions. We believe that our relations with our employees are
good. Under Mexican law, the agreements between us and most of our television,
radio and cable television union employees are subject to renegotiation on an
annual basis in January of each year. We also have union contracts with artists,
musicians and other employees, which are also renegotiated on an annual basis.
As of December 31, 2000, 2001 and 2002, we did not have a significant number of
temporary employees.
As a result of new cost-cutting initiatives introduced in the first half of
2001, in April 2001 we further reduced our workforce by 750 personnel, which
personnel consisted of 684 employees and 66 independent contractors. In 2002, we
reduced our workforce by an additional 1,134 employees. As of December 31, 2002,
our total employee
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headcount was approximately 12,550 employees. See "Information on the Company --
Business Overview -- Business Strategy -- Improve Cash Flow Margins" and
"Operating and Financial Review and Prospects -- Non-recurring Charges."
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
The following table sets forth information about the beneficial ownership
of our capital stock by our directors, alternate directors, executive officers
and each person who is known by us to own more than 5% of the currently
outstanding A Shares, L Shares or D Shares as of May 31, 2003, unless otherwise
indicated. Except as set forth below, we are not aware of any holder of more
than 5% of any class of our shares.
SHARE BENEFICIALLY OWNED(1)(2) AGGREGATE
------------------------------------------------------------------------------- PERCENTAGE OF
A SHARES L SHARES D SHARES OUTSTANDING
------------------------------------------------------------------------------- SHARES
PERCENTAGE PERCENTAGE PERCENTAGE BENEFICIALLY
IDENTITY OF OWNER NUMBER OF CLASS NUMBER OF CLASS NUMBER OF CLASS OWNED
----------------------------------------------------------------------------------------------------------------------------
Grupo Televicentro, S.A.
de C.V. (3)............. 2,349,826,492 51.36% 54,397,510 2.41% 54,397,510 2.41% 27.05%
Janus Capital Management
LLC(4).................. 175,185,820 3.83% 175,185,820 7.77% 175,185,820 7.77% 5.78%
Capital Group
International Inc.(5)... 215,951,440 4.72% 215,951,440 9.57% 215,951,440 9.57% 7.13%
Capital Research and
Management Company(6)... 161,786,000 3.54% 161,786,000 7.17% 161,786,000 7.17% 5.34%
(1) Unless otherwise indicated, the information presented in this section and
"Key Information -- Risk Factors -- Risk Factors Related to Our Principal
Shareholders -- Televicentro Has Substantial Influence Over Our Management
and the Interests of Televicentro May Differ From Those of Other
Shareholders" is based on the number of shares authorized, issued and
outstanding as of May 31, 2003. As of this date, the total number of
authorized and issued shares was 4,579,699,213 A Shares, of which
2,260,106,096 were in the form of CPOs and 2,319,593,117 were additional A
Shares not in the form of CPOs. The number of shares authorized, issued and
outstanding as of May 31, 2003 was 2,255,962,096 A Shares, L Shares and D
Shares in the form of CPOs and an additional 2,319,593,117 A Shares not in
the form of CPOs. The number of shares authorized, issued and outstanding
reflects our repurchase in the open market of 4,144,000 CPOs as of May 31,
2003 pursuant to our share repurchase program. For financial reporting
purposes under Mexican GAAP only, the number of shares authorized, issued
and outstanding as of May 31, 2003 was 2,169,110,325 A Shares, L Shares and
D Shares in the form of CPOs and an additional 2,295,502,099 A Shares not
in the form of CPOs. The number of shares authorized, issued and
outstanding for financial reporting purposes under Mexican GAAP as of May
31, 2003 does not include 86,851,771 CPOs and an additional 24,091,018 A
Shares not in the form of CPOs acquired by one of our subsidiaries,
Televisa, S.A. de C.V., substantially all of which are currently held by
the trust we created to implement our stock option plan. See Notes 2, 14
and 24 to our year-end financial statements.
(2) Except indirectly through Televicentro, none of our directors and executive
officers currently beneficially owns more than 1% of our outstanding A
Shares, L Shares or D Shares. See "Directors, Senior Management and
Employees -- Share Ownership of Directors and Officers." This information
is based on information provided by directors and executive officers.
(3) Includes 1,591,283 CPOs owned by Telespecialidades, a company which is
owned by all of the shareholders of Televicentro in the same proportion
that they own Televicentro. On April 29, 2003, our Board of Directors
approved the acquisition of all the outstanding equity of
Telespecialidades. The completion of this acquisition is subject to a
number of conditions. See "-- Televicentro and the Principal Shareholders."
(4) Based solely on information included in Janus Capital Management LLC's
(formerly Janus Capital Corporation) Report on Form 13G, dated February 14,
2003. According to this Report, Janus Capital has an indirect 100%
ownership stake in Bay Isle Financial LLC (Bay Isle) and an indirect 50.1%
ownership stake in Enhanced Investment Technologies LLC (INTECH). As a
result of this ownership structure, holdings for Janus Capital, Bay Isle
and INTECH are aggregated for purposes of this filing. Janus Capital, Bay
Isle and INTECH are registered investment advisors, each furnishing
investment advice to various investment companies registered under Section
8 of the Investment Company Act of 1940 and to individual and institutional
clients. As a result of its role as investment adviser or subadviser to
these portfolios, Janus Capital may be deemed to be the beneficial owner of
these shares. However, Janus Capital does not have the right to receive any
dividends from, or the proceeds from the sale of, the securities held in
these portfolios and disclaim any ownership associated with such rights.
(5) Based solely on information included in the Report on Form 13F filed for
the period ending March 31, 2003 by Capital Group International Inc., the
parent company of Capital International Inc. ("CII"), Capital Guardian
Trust Company ("CGTC"), Capital International S.A. ("CISA") and Capital
International Limited ("CIL"). According to this report, CII has investment
discretion and sole voting authority over 10,160,636 GDSs (the equivalent
of 203,212,720 A Shares, L Shares and D Shares), CGTC has investment
discretion and sole voting authority over 458,600 GDSs (the equivalent of
9,172,000 A Shares, L Shares and D Shares), CISA has investment discretion
and sole voting authority over 68,700 GDSs (the equivalent of 1,374,000 A
Shares, L Shares and D Shares), and CIL has investment discretion and sole
voting authority over 109,636 GDSs (the equivalent of 2,192,720 A Shares, L
Shares and D Shares. Capital Group International Inc. is an affiliate of
Capital Research and Management Company.
(6) Based solely on information included in the Report on Form 13F for the
period ending March 31, 2003 filed by Capital Research and Management
Company, an affiliate of Capital Group International Inc.
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TELEVICENTRO AND THE PRINCIPAL SHAREHOLDERS
- BENEFICIAL OWNERSHIP OF OUR EQUITY SECURITIES. Televicentro is a
holding company, the only assets of which are cash and capital
stock. Televicentro currently beneficially owns 2,295,428,982 A
Shares and 52,806,227 A Shares, L Shares, and D Shares in the
form of CPOs. In addition, 1,591,283 CPOs previously owned by
Televicentro are currently owned by Telespecialidades, a company
which is owned by all of the shareholders of Televicentro in the
same proportion that they own Televicentro. As described below,
the Board of Directors approved the acquisition of all the
outstanding equity of Telespecialidades for approximately U.S.$83
million. See "--Acquisition of Telespecialidades."
- OWNERSHIP OF TELEVICENTRO'S EQUITY. The ownership of
Televicentro's equity is currently as follows: Emilio Azcarraga
Jean owns 55.29%, the SINCA Inbursa Trust owns 24.70% and the
Investor Trust owns 20.01%.
In March 2003, SINCA Inbursa transferred its rights and
obligations under the SINCA Inbursa Trust and other agreements
among Televicentro's shareholders to Promotora Inbursa, an
indirect subsidiary of Grupo Financiero Inbursa, S.A. de C.V.
Accordingly, Promotora Inbursa is currently the SINCA Inbursa
Trust's sole beneficiary. The SINCA Inbursa Trust has agreed to
vote its 24.70% stock interest in the same manner as Emilio
Azcarraga Jean votes, as long as Mr. Azcarraga Jean owns at least
27.0% of the capital stock of Televicentro.
Members of the Aramburuzabala family and the Fernandez family are
the Investor Trust's sole beneficiaries. Through the Investor
Trust, the Aramburuzabala family owns 16.21% and the Fernandez
family owns 3.80% of Televicentro's capital stock.
The investment by the SINCA Inbursa Trust in Televicentro was
authorized by a resolution of the Mexican Comision Federal de
Competencia in July 1999. Pursuant to this resolution, the SINCA
Inbursa Trust was required to withdraw its investment in
Televicentro within a three year term that expired in August
2002. In July 2002, the Mexican Comision Federal de Competencia
authorized an extension of the three year term until September
2005, provided that by September 2004, Promotora Inbursa
(formerly SINCA Inbursa) shall have entered into arrangements to
withdraw its investment in Televicentro on or prior to September
2005. No assurances can be given that the disposition of
Promotora Inbursa's interest, through the SINCA Inbursa Trust,
will be completed in a timely manner and, if not, the
consequences thereof. In addition, no assurances can be given
that additional conditions will not be imposed by the Comision
Federal de Competencia related to Promotora Inbursa's ownership
or disposition of its interest in Televicentro. See "Key
Information -- Risk Factors -- Risk Factors Related to Our
Principal Shareholders -- Televicentro Has Substantial Influence
Over Our Management and the Interests of Televicentro May Differ
From Those of Other Shareholders."
- ACQUISITION OF TELESPECIALIDADES. On April 29, 2003, our Board of
Directors approved the acquisition of all the outstanding equity
of Telespecialidades, a company which is owned by all of the
shareholders of Televicentro in the same proportion that they own
Televicentro. The total consideration to be paid in connection
with this acquisition will be approximately U.S.$83 million,
which will be financed with cash on hand. At the time of the
acquisition, Telespecialidades's net assets will consist
principally of 4,773,849 shares of our capital stock in the form
of 1,591,283 CPOs, which shares were previously owned by
Televicentro, and tax loss carryforwards of approximately
Ps.6,457 million. The terms of this acquisition have been
approved by our Audit Committee. The completion of this
acquisition is subject to a number of conditions.
- SALE OF MR. BURILLO'S INTEREST AND RELATED TRANSACTIONS. In July
2000, Alejandro Burillo Azcarraga, who resigned as an executive
officer of Televisa in October 1999, sold his equity stake in
Televicentro to a group of investors led by Maria Asuncion
Aramburuzabala Larregui. See Note 2 to our year end financial
statements. This sale was part of a series of transactions under
which:
- 105 -
- we sold our interest in Ovaciones to Mr. Burillo in exchange for
a U.S.$25 million short-term unsecured note;
- we repurchased 58,238,668 A Shares for U.S.$59.4 million
consisting of U.S.$34.4 million of cash and the U.S.$25 million
short-term note received in connection with the Ovaciones sale.
We canceled all of these A Shares in October 2000;
- Emilio Azcarraga Jean and the SINCA Inbursa Trust increased their
respective ownership positions in Televicentro, from 50.9% to
53.94% in the case of Emilio Azcarraga Jean, and from 24.0% to
25.44% in the case of the SINCA Inbursa Trust, and Mr. Burillo's
stake in Televicentro was reduced to 20.62%;
- Mr. Burillo sold his then 20.62% stake in Televicentro to the
Investor Trust, whose beneficial owners are Maria Asuncion
Aramburuzabala Larregui and Carlos Fernandez Gonzalez; and
- we sold our 12.1% equity interest in Pegaso to Mr. Burillo for
U.S.$126 million in short-term unsecured notes, which were paid
in full on August 28, 2000.
- OWNERSHIP POSITION OF EMILIO AZCARRAGA JEAN; VETO AND OTHER RIGHTS OF OTHER
SHAREHOLDERS. Mr. Azcarraga Jean owns and has voting control over a
majority of Televicentro's capital stock. An additional 24.70% of
Televicentro's capital stock is also voted in the same way as Emilio
Azcarraga Jean's votes. Pursuant to Televicentro's bylaws, Emilio Azcarraga
Jean has the ability to elect four of Televicentro's seven directors and
has the power to control the day-to-day operations of Televicentro.
However, under Televicentro's bylaws and a shareholders agreement among the
shareholders of Televicentro, certain actions require the approval of the
SINCA Inbursa Trust and/or the Investor Trust, or their designees on
Televicentro's Board of Directors or Executive Committee, as the case may
be, including the following:
- the acquisition or disposition by Televicentro of assets valued
in excess of U.S.$30 million in the aggregate in any fiscal year,
including our capital stock; and
- the voting of shares of our capital stock in connection with
certain actions to be taken by us, including public offerings of
our capital stock, the issuance of convertible securities,
issuing guarantees, certain acquisitions, asset sales and mergers
and spin-offs, capital reductions, bankruptcy filings or concurso
mercantil. See "Key Information -- Risk Factors -- Risk Factors
Related to Our Principal Shareholders -- Televicentro Has
Substantial Influence Over Our Management and the Interests of
Televicentro May Differ From Those of Other Shareholders."
For so long as the SINCA Inbursa Trust and the Investor Trust maintain
specified minimum percentage ownership interests in Televicentro, they will
be permitted to appoint some of Televisa's directors, certain members of
Televisa's Executive Committee and, if we do not meet certain performance
tests, certain other members of management.
- VOTING OF OUR SHARES. Televicentro beneficially owns a majority of the
outstanding A Shares, and Televicentro and its shareholders currently
beneficially own, directly and indirectly, CPOs representing approximately
2.3% of the outstanding CPOs. Under the CPO trust, until 2008, the L Shares
represented by CPOs held by Televicentro and our principal shareholders
will be voted in the same manner as the majority of the L Shares held by
others are voted at the relevant meeting.
- LIQUIDITY RIGHTS AND OTHER ARRANGEMENTS. Under Televicentro's bylaws and
a shareholders agreement among the shareholders of Televicentro, these
shareholders have agreed to the following arrangements:
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- Call option. If the minority shareholders exercise veto rights
concerning those actions over which they have such rights, as
described above, then Emilio Azcarraga Jean will have the ability
to exercise a call option in respect of the Televicentro shares
owned by the SINCA Inbursa Trust and the Investor Trust.
- Pre-emptive rights; right of first offer. Televicentro's
shareholders are given pre-emptive rights in connection with the
issuance of capital stock of Televicentro and a right of first
offer in connection with the sale of capital stock of
Televicentro by any other shareholder, subject to some
exceptions.
- Tag-along rights. If Emilio Azcarraga Jean sells to a third party
a sufficient number of shares of capital stock to reduce his
ownership interest below a majority of Televicentro's capital
stock, the SINCA Inbursa Trust and the Investor Trust will be
entitled to sell their shares to such third party, subject to
some exceptions.
- Put option. The SINCA Inbursa Trust and the Investor Trust will
have the ability to exercise a put option under which Emilio
Azcarraga Jean would be required to purchase their shares of
Televicentro capital stock under certain circumstances, which
include, among others:
- if debt of Televisa or Televicentro is accelerated
and remains unpaid, subject to some exceptions;
- if Emilio Azcarraga Jean ceases to control,
directly or indirectly, Televicentro or Televisa,
subject to some exceptions; or
- if Televicentro has not taken specified steps
prior to July 2005 to create a public market for
its capital stock.
- DRAG-ALONG RIGHTS. The SINCA Inbursa Trust and the Investor Trust will have
the power to force the sale of Televicentro to a third party in the event
that Emilio Azcarraga Jean does not repurchase their Televicentro shares
following the exercise of their put option, if any, described above, or if
Televicentro has not taken specified steps prior to July 2005 to create a
public market for its capital stock.
- REGISTRATION RIGHTS. We agreed to cooperate with Televicentro and its
shareholders to register any shares that they may wish to sell in
connection with any public offering. Under this arrangement, we have agreed
to indemnify Televicentro and its shareholders against some liabilities,
including some liabilities under the Securities Act, and to contribute to
payments Televicentro and its shareholders may be required to make in
respect of these liabilities.
- INDEBTEDNESS. Televicentro has informed us that it currently has
outstanding approximately U.S.$159.6 million of short-term secured debt
payable to Banco Inbursa, S.A. Televicentro has also informed us that it
has pledged 194,576,200 A Shares on a senior basis and an additional
54,397,510 A Shares, L Shares and D Shares in the form of CPOs (of which
1,591283 CPOs have been transferred to Telespecialidades and will be
released from collateral prior to or in connection with our purchase of
Telespecialidades) on a senior subordinated basis to secure this debt, but
continues to retain the right to vote these shares absent a default or
event of default. Televicentro intends to repay this debt through
refinancings, dividends from us, if any, loans, additional capital
contributions and/or the sale of CPOs. See "Key Information-- Risk
Factors-- Risk Factors Related to Our Principal Shareholders-- Televicentro
Has Substantial Influence Over Our Management and the Interests of
Televicentro May Differ From Those of Other Shareholders."
- 107 -
RELATED PARTY TRANSACTIONS
In 2000, 2001 and 2002 we engaged in, and we expect that we will continue
to engage in, transactions with related parties, including, without limitation,
the transactions described below. Exclusively for purposes of this discussion,
the term "related party" includes our affiliates, associates, directors,
officers and principal shareholders, as well as affiliates of our directors,
officers and principal shareholders, but does not include our consolidated
subsidiaries. Conflicts of interest are inherent in transactions with related
parties. See Note 18 to our year-end financial statements for all of the
information that we must make publicly available in Mexico regarding related
party transactions.
RELATED PARTY TRANSACTIONS COMMITTEE. In April 2000 we established a
Related Party Transactions Committee, whose functions were replaced by the Audit
Committee in May 2002. Transactions and arrangements with related parties
through April 2002 were subject to the prior approval of the Related Party
Transactions Committee, and thereafter have been subject to the prior approval
of the Audit Committee. In addition, any transaction or arrangement with a
related party shall be made at arm's length and at rates no less or at least as
favorable to those applicable to or offered by third parties. The current
members of the Audit Committee are Gilberto Perezalonso Cifuentes, who is the
Chairman of this Committee, Juan Pablo Andrade Frich, Juan Fernando Calvillo
Armendariz, Francisco Jose Chevez Robelo, Jorge Lutteroth Echegoyen and Alberto
Montiel Castellanos.
TRANSACTIONS AND ARRANGEMENTS WITH INNOVA. In 2000, 2001 and 2002 we
engaged in, and we expect that we will continue to engage in, transactions with
Innova, including, without limitation, the transactions described below. We hold
a 60% equity interest in Innova through a non-consolidated joint venture with
News Corp. and Liberty Media. Although we hold a majority of Innova's equity,
News Corp. has significant governance rights, including the right to block any
transaction between us and Innova. See Note 9 to Innova's year-end financial
statements for all of the information that Innova must make publicly available
in Mexico regarding transactions and arrangements with us.
Capital Contributions and Loans. From Innova's inception through December
2002, we have made approximately U.S.$89.4 million in capital contributions and
approximately U.S.$222.8 million in loans, which amount includes accrued
interest in the amount of U.S.$36.9 million. Each of these loans bears interest
at a fixed annual rate of 9.0% (excluding any applicable withholding taxes) and
matures ten years from the date of the initial loan. The principal amounts of,
plus any accrued interest in respect of, each of these loans is payable at
maturity. We can require Innova to make periodic payments of principal and/or
interest on any of these loans if we jointly agree with News Corp., Liberty
Media and Innova to modify or accelerate the related payment dates. We have
considered from time to time capitalizing a substantial portion of these loans,
and we may do so in the future.
Programming. Pursuant to an agreement between us and Innova, we have
granted Innova exclusive DTH rights to some program services in Mexico, subject
to some preexisting agreements with third parties. Innova paid us approximately
Ps.280.9 million for these rights in 2002. Innova currently pays the rates paid
by third party providers of cable television and MMDS services in Mexico for our
various programming services. In addition, pursuant to the agreement, we cannot
charge Innova higher rates than the rates that we charge third party providers
of cable television and MMDS services in Mexico for our various programming
services.
Advertising Services. In January 2001, we entered into an agreement with
Innova, pursuant to which Innova pools most of its advertising time with
advertising time on channels broadcast by us, Innova and Cablevision. Innova
pays us 18% of the revenues from any advertising sales we make on its behalf
pursuant to this agreement. Pursuant to this agreement, we also negotiate most
of Innova's advertising contracts with third party advertisers, as well as
provide other related and ancillary services, such as invoicing and collection
services.
Innova also purchased magazine advertising space and television and radio
advertising time from us in connection with the promotion of its DTH satellite
services in 2000, 2001 and 2002, and we expect that Innova will continue to do
so in the future. For television, radio and magazine advertising, Innova paid
and will continue to pay the rates applicable to third party advertisers. There
is no formal agreement relating to these advertising services.
Call Center Agreement. Through June 2001 we, through one of our
subsidiaries, operated a call center for, and provided customer services
operations to, Innova. Innova paid us approximately Ps.52.2 million for these
services
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through July 2001. Following the acquisition of the call center by Innova in
July 2001, we no longer provide these services to Innova.
Guarantees. We have guaranteed Innova's payments to PanAmSat for
transponder services on PAS-9 in proportion to our respective ownership interest
in Innova, which is currently 60%. Innova is obligated to pay a monthly service
fee of U.S.$1.7 million to PanAmSat for satellite signal reception and
retransmission service from transponders on the PAS-9 satellite through
September 2015. As of December 31, 2002, we had guaranteed payments in the
amount of U.S.$156.1 million. If Innova does not pay these fees in a timely
manner, we will be required to pay 60% of its obligations to PanAmSat.
Tax Sharing Agreement. We have a tax sharing agreement with Innova, which
sets forth certain of our rights and obligations, as well as those of Innova,
with respect to Innova's liability for federal income and assets taxes imposed
under Mexican tax laws. We received an authorization from Mexican tax
authorities to include Innova's results in our consolidated tax return for
purposes of determining our income and assets taxes. Tax profits or losses
obtained by Innova are consolidated with our tax profits or losses up to 60% of
our percentage ownership of Innova, which is currently 60%. Pursuant to the tax
sharing agreement, in no event shall Innova be required to remit to us an amount
in respect of its federal income and assets taxes that is in excess of the
product of (x) the amount that Innova would be required to pay on an individual
basis, as if Innova had filed a separate tax return, and (y) with respect to
asset taxes, our direct or indirect percentage ownership of Innova's capital
stock, and with respect to income taxes, 60% of our direct or indirect
percentage ownership in Innova's capital stock, as determined by applicable law.
For additional information concerning transactions with Innova, as well as
amounts paid to us by Innova pursuant to these transactions in 2002, see Note 18
to our year-end financial statements and Note 9 to Innova's year-end financial
statements. See also "Key Information -- Risk Factors -- Risk Factors Related to
Our Business -- We Have Experienced Substantial Losses, Primarily in Respect of
Our Investments in Innova and MCOP, and Expect to Continue to Experience
Substantial Losses as a Result of Our Participation in DTH Joint Ventures, Which
Would Adversely Affect Our Net Income" and "Information on the Company --
Business Overview -- DTH Joint Ventures -- Mexico."
TRANSACTIONS AND ARRANGEMENTS WITH MCOP. In 2000, 2001 and 2002 we engaged
in, and we expect that we will continue to engage in, transactions with MCOP,
including, without limitation, the transactions described below. We indirectly
hold a 30% equity interest in MCOP, our DTH non-consolidated joint venture in
Latin America outside of Mexico and Brazil. The balance of MCOP's equity is
owned by News Corp. and Globopar, each of which indirectly holds a 30% equity
interest, and Liberty Media, which indirectly holds a 10% equity interest. Each
of the partners also holds indirect interests, individually, in the same
proportion as their interests in MCOP, in two service entities: (i) ServiceCo, a
U.S. partnership formed to provide certain business and management services, and
(ii) TechCo, a U.S. partnership formed to provide certain technical services
from a main uplink facility in Miami Lakes, Florida and a redundancy site in
Port St. Lucie, Florida. Under an agreement among us, News Corp., Globopar and
Liberty Media, all decisions relating to the business and affairs of MCOP and
all decisions relating to MCOP's investment in any DTH platform must be approved
by 75% of the partners. In addition, representation on the board is proportional
to the parties' relative voting interests in MCOP.
Capital Contributions and Loans. From MCOP's inception through December
2002, we have made approximately U.S.$137.6 million in capital contributions.
Additionally, capital contributions of approximately U.S.$15.0 million were made
on our behalf by News Corp. in 2001, which amount was reflected as a liability
due to News Corp. in our consolidated balance sheets at December 31, 2001 and
2002. We currently do not intend to fund MCOP's operations other than the
amounts required to be paid under the transponder service agreement with
PanAmSat, which is expected to be made in the form of loans. In that connection,
from January 1, 2003 through May 31, 2003 we made approximately U.S.$5.9 million
in loans to MCOP.
Programming. Pursuant to an agreement between us, News Corp., Globopar and
Liberty Media, MCOP's initial programming line up was determined by a majority
vote of a programming committee with the representation on the committee
proportional to the parties' relative voting interest in MCOP. Each of the
partners is required to offer its program services to the extent contractually
available to MCOP on an exclusive basis. MCOP paid us approximately U.S.$0.9
million for these rights in 2002. MCOP currently pays the rates paid by third
party providers of cable television and MMDS services for our various
programming services. In addition, pursuant to the
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agreement, we cannot charge MCOP higher rates than the rates that we charge
third party providers of cable television and MMDS services for our various
programming services. In addition, each of the partners of MCOP has the right to
require MCOP to carry that partner's channels on MCOP's platform.
Guarantees. We have guaranteed MCOP's payments to PanAmSat for transponder
services on PAS-6B in proportion to our respective ownership interest in MCOP,
which is currently 30%. MCOP is obligated to pay a monthly service fee of
U.S.$3.0 million to PanAmSat for satellite signal reception and retransmission
service from transponders on the PAS-6B satellite through 2014. As of December
31, 2002, we had guaranteed payments in the aggregate amount of U.S.$120.4
million (undiscounted) over the life of the agreement, and we recognized a
liability up to the amount of these guarantees in our consolidated balance
sheet in an aggregate amount of approximately U.S.$75.7 million, which
represents the present value of these payments as of that date. In addition,
since Globopar's recent announcement that it will reorganize its financial debt
obligations in respect of its bank debt and bonds, MCOP has been and is
currently delinquent in respect of a portion of its obligations under the
transponder service agreement with PanAmSat and has been operating under a
forbearance agreement with PanAmSat which has been extended through July 31,
2003.
For additional information concerning transactions with MCOP, see Notes 5,
11 and 13 to our year-end financial statements. See also "Key Information --
Risk Factors -- Risk Factors Related to Our Business -- MCOP, Our DTH Joint
Venture in Latin America Outside of Mexico and Brazil, May Not Be Able to
Continue as a Going Concern and if It Ceases Operations, It Would Have a
Material Adverse Effect on Our Financial Condition" and "Information on the
Company -- Business Overview -- DTH Joint Ventures -- Mexico."
TRANSACTIONS AND ARRANGEMENTS WITH TECHCO. In 2000, 2001 and 2002 we
engaged in, and we expect that we will continue to engage in, transactions with
TechCo, including, without limitation, the transactions described below. We
indirectly hold a 30% equity interest in TechCo, our U.S. partnership formed to
provide certain technical services from a main uplink facility in Miami Lakes,
Florida and a redundancy site in Port St. Lucie, Florida. The balance of
TechCo's equity is owned by News Corp. and Globo, each of which indirectly holds
a 30% equity interest, and Liberty Media, which indirectly holds a 10% equity
interest. [Under an agreement among us, News Corp., Globo and Liberty Media, all
decisions relating to the business and affairs of TechCo and all decisions
relating to TechCo's investment in any DTH platform must be approved by 75% of
the partners. In addition, representation on the board is proportional to the
parties' relative voting interests in TechCo.]
Capital Contributions and Loans. From TechCo's inception through December
2002, we have made approximately U.S.$12.0 million in capital contributions. In
addition, as a result of Globo's recent announcement that it will reorganize its
financial debt obligations in respect of its bank debt and bonds, it has ceased
providing financial support to TechCo. We, News Corp. and Liberty Media have
been funding TechCo's operating cash shortfall through loans. In that
connection, in April 2003 we made a loan to TechCo for U.S.$5.5 million. We
currently intend continue to fund TechCo's shortfall in the form of loans.
Guarantees. We have guaranteed 36% of TechCo's payments in respect of its
capital lease obligations. TechCo is obligated to make payments under its
capital leases with various maturities between 2003 and 2007 for an aggregate
amount of U.S.$60.8 million in respect of its capital lease obligations. As of
December 31, 2002, we had guaranteed payments by TechCo in the aggregate amount
of U.S.$21.9 million.
For additional information concerning transactions with TechCo, see Notes 5
and 13 to our year-end financial statements. See also "Key Information -- Risk
Factors -- Risk Factors Related to Our Business -- MCOP, Our DTH Joint Venture
in Latin America Outside of Mexico and Brazil, May Not Be Able to Continue as a
Going Concern and if It Ceases Operations, It Would Have a Material Adverse
Effect on Our Financial Condition" and "Information on the Company -- Business
Overview -- DTH Joint Ventures -- Mexico."
TRANSACTIONS AND ARRANGEMENTS WITH UNIVISION. In 2000, 2001 and 2002, we
engaged in, and we expect that we will continue to engage in, transactions with
Univision. We currently own shares and warrants representing an approximate
14.8% equity stake in Univision, on a fully diluted basis. We currently have the
right to appoint a member of Univision's Board of Directors. For a description
of programming and other agreements between us and Univision, as well as
royalties paid to us by Univision pursuant to programming agreements, see
"Information on the
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Company -- Business Overview -- Programming Licensing," "-- Univision" and Note
18 to our year end financial statements.
As described under "Information on the Company -- Business Overview --
Univision," we appointed Emilio Azcarraga Jean, our Chairman of the Board, Chief
Executive Officer, President and President of the Executive Committee of our
Board, as our director, and Alfonso de Angoitia Noriega, our Executive Vice
President and Chief Financial Officer, as our alternate director, of Univision.
Univision appointed Mr. Azcarraga Jean as Vice-Chairman of its Board of
Directors.
TRANSACTIONS AND ARRANGEMENTS WITH OUR DIRECTORS AND OFFICERS
Transactions and Arrangements. In July 2000, we sold our interest in Pegaso
and our newspaper, Ovaciones, to Mr. Alejandro Burillo Azcarraga, a former
principal shareholder and executive officer. These sales were made pursuant to a
series of transactions under which Mr. Burillo sold his interest in
Televicentro, our controlling shareholder, to the Aramburuzabala and Fernandez
families. See "Major Shareholders and Related Party Transactions -- Televicentro
and the Principal Shareholders -- Sale of Mr. Burillo's Interest and Related
Transactions" and Note 2 to our year end financial statements for a description
of these transactions.
Loans. On February 5, 2000, we guaranteed a personal loan in the amount of
U.S.$280,000 made by California Commerce Bank to Maximiliano Arteaga Carlebach,
one of our executive officers. The aggregate principal amount of this loan,
together with accrued interest, was repaid in full by Mr. Arteaga in January
2002.
On May 31, 2000, we made a personal loan in the amount of U.S.$150,000 to
Jorge Eduardo Murguia Orozco, one of our executive officers. This loan currently
bears interest at the TIIE Rate plus 2%. The maturity date, after giving effect
to an amendment on June 15, 2002, is October 30, 2004. As of June 30, 2003,
approximately U.S.$70,000 of this loan was outstanding.
TRANSACTIONS AND ARRANGEMENTS WITH AFFILIATES AND RELATED PARTIES OF OUR
DIRECTORS, OFFICERS AND PRINCIPAL SHAREHOLDERS
Loans from Banamex. From time to time in the past and in 2000, 2001 and
2002, Banamex made loans to us, Televicentro and several other of our
affiliates, and we expect that this will continue to be the case in the future.
These loans were made to us, Televicentro and our affiliates on terms
substantially similar to those offered by Banamex to third parties. Emilio
Azcarraga Jean, our Chief Executive Officer, President and Chairman of the
Board, is a member of the Board of Banamex. One of our directors, Roberto
Hernandez Ramirez, is the Chairman of the Board of Banamex. Mr. Hernandez is
also a member of the Board of, and the beneficial owner of less than 1% of the
outstanding capital stock of, Citigroup, Inc., the entity that indirectly
controls Banamex. Lorenzo H. Zambrano Trevino, one of our directors, is also a
member of the Board of Banamex. For a description of amounts outstanding under,
and the terms of, our existing credit facility with Banamex, see "Operating and
Financial Review and Prospects -- Liquidity, Foreign Exchange and Capital
Resources -- Indebtedness."
Advertising Services. Two of our directors, Maria Asuncion Aramburuzabala
Larregui and Carlos Fernandez Gonzalez, and one of our alternate directors,
Lucrecia Aramburuzabala Larregui, are members of the Board and Executive
Committee of, as well as shareholders of, Grupo Modelo, S.A. de C.V., or Grupo
Modelo, the leading producer, distributor and exporter of beer in Mexico. Carlos
Fernandez Gonzalez also serves as the Chief Executive Officer of Grupo Modelo.
Grupo Modelo purchased advertising services from us in connection with the
promotion of its products from time to time in 2000, 2001 and 2002, and we
expect that this will continue to be the case in the future. Grupo Modelo paid
and will continue to pay rates applicable to third party advertisers for these
advertising services.
Several other members of our current Board serve as members of the Boards
and/or shareholders of other companies. See "Directors, Senior Management and
Employees." Some of these companies, including Banamex, Kimberly-Clark de
Mexico, S.A. de C.V., Grupo Financiero Santander, S.A. de C.V. and Telefonos de
Mexico, S.A. de C.V., among others, purchased advertising services from us in
connection with the promotion of their respective products and services from
time to time in 2000, 2001 and 2002, and we expect that this will continue to be
the case
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in the future. Similarly, Alejandro Quintero Iniguez, a member of the Board and
the Executive Committee and our Corporate Vice President of Sales and Marketing,
is a shareholder and member of the Boards of Grupo TV Promo, S.A. de C.V., or
Grupo TV Promo, and TV Promo, S.A. de C.V., or TV Promo, companies which produce
promotional campaigns and events for their and our clients. Grupo TV Promo and
TV Promo have purchased and will continue to purchase advertising services from
us in connection with these promotional campaigns. All of the companies
described above paid and will continue to pay rates applicable to third party
advertisers for these advertising services.
Legal and Advisory Services. During 2000, 2001 and 2002, Mijares, Angoitia,
Cortes y Fuentes, S.C., a Mexican law firm, provided us with legal and advisory
services, and we expect that this will continue to be the case in the future.
Alfonso de Angoitia Noriega, a partner on leave of absence from the law firm of
Mijares, Angoitia, Cortes y Fuentes, S.C., is one of our directors, a member of
our Executive Committee, the Alternate Secretary of our Board and of our
Executive Committee, an Executive Vice President and our Chief Financial Officer
and is a member of the Related Party Transactions Committee. Juan Sebastian
Mijares Ortega, another partner on leave of absence from the law firm of
Mijares, Angoitia, Cortes y Fuentes, S.C., serves as one of our alternate
directors, the Secretary of our Board and of our Executive Committee, our Vice
President -- General Counsel and is a member of the Related Party Transactions
Committee. Neither Alfonso de Angoitia Noriega nor Juan Sebastian Mijares Ortega
currently receives any form of compensation from, or participates in any way in
the profits of, Mijares, Angoitia, Cortes y Fuentes, S.C. Ricardo Maldonado
Yanez, a partner from the law firm of Mijares, Angoitia, Cortes y Fuentes, S.C.,
serves as the Alternate Secretary of our Board of Directors. We believe that the
fees we paid for these services were comparable to those that we would have paid
another law firm for similar services. See Note 18 to our year-end financial
statements.
Other Transactions and Arrangements. Through October 2000, we owned a 65%
interest in Editorial Televisa, the entity through which we conduct the
operations of our Publishing segment. In October 2000, we acquired the remaining
35% minority interest in Editorial Televisa from Laura Diez Barroso de Laviada,
the former President of our Publishing segment. Laura Diez Barroso de Laviada
and Emilio Azcarraga Jean are cousins. See Note 2 to our year-end financial
statements for a description of these transactions.
Financial Advisory Services. During 2000, 2001 and 2002, Allen & Company
Incorporated, an investment bank, provided us with financial advisory services,
including in connection with the series of transactions that we entered into
with Univision in December 2001, as described under "Information on the Company
-- Business Overview -- Univision." Enrique F. Senior Hernandez, one of our
directors, is an Executive Vice President and Managing Director of Allen &
Company Incorporated. Herbert Allen III, one of our alternate directors, is also
an Executive Vice President and Managing Partner of Allen & Company
Incorporated. We believe that the fees we paid for these services, including
those paid in connection with the transactions with Univision, were comparable
to those that we would have paid another investment bank for similar services.
During 2001 and 2002, Protego Asesores, S.A. de C.V., or Protego, an
investment bank, provided some of our subsidiaries, including Cablevision, with
financial advisory services. Pedro Aspe Armella, one of our directors, is the
Chairman and Chief Executive Officer of Protego, and owns 80% of the shares of
Protego. We believe that the fees we paid for these services were comparable to
those that we would have paid another invesment bank for similar services.
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ITEM 8. FINANCIAL INFORMATION
See "Item 18--Financial Statements" and pages F-1 through F-99, which are
incorporated herein by reference.
ITEM 9. OFFER AND LISTING DETAILS
TRADING HISTORY OF CPOs AND GDSs
Since December 1993, the GDSs have been traded on the NYSE and the CPOs
have been traded on the Mexican Stock Exchange. In July 2002, we removed
Citibank, N.A. as the depositary for the GDSs and appointed JPMorgan Chase Bank
pursuant to a new deposit agreement.
The table below shows, for the periods indicated, the high and low market
prices in nominal Pesos for the CPOs on the Mexican Stock Exchange, giving
effect to the March 1, 2000 10-for-1 stock split in all cases.
NOMINAL PESOS PER CPO(1)
------------------------
HIGH LOW
---- ---
1998..................................................... Ps. 18.74 Ps. 8.10
1999..................................................... Ps. 33.11 Ps. 10.00
2000..................................................... Ps. 40.50 Ps. 20.20
2001..................................................... Ps. 25.90 Ps. 12.63
First Quarter......................................... 25.90 15.50
Second Quarter........................................ 20.62 14.82
Third Quarter......................................... 19.34 12.63
Fourth Quarter........................................ 19.85 13.49
2002..................................................... Ps. 22.31 Ps. 12.44
First Quarter......................................... 22.00 17.35
Second Quarter........................................ 22.31 17.90
Third Quarter......................................... 18.41 12.69
Fourth Quarter........................................ 15.58 12.44
December........................................... 15.58 14.36
2003.....................................................
First Quarter......................................... Ps. 15.64 Ps. 12.63
January............................................ 15.64 13.61
February........................................... 13.88 12.70
March.............................................. 13.91 12.63
Second Quarter (through May 31, 2003)................. Ps. 16.07 Ps. 13.75
April.............................................. 15.66 13.75
May................................................ 16.07 14.76
-------------
(1) Source: Mexican Stock Exchange.
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The table below shows, for the periods indicated, the high and low market
prices in U.S. Dollars for the GDSs on the NYSE.
U.S. DOLLARS PER GDS(1)
------------------------
HIGH LOW
---- ---
1998..................................................... U.S.$42.69 U.S.$15.13
1999..................................................... U.S.$71.38 U.S.$18.50
2000..................................................... U.S.$86.25 U.S.$42.63
2001..................................................... U.S.$53.50 U.S.$26.83
First Quarter......................................... 53.50 32.47
Second Quarter........................................ 45.80 31.11
Third Quarter......................................... 42.65 26.83
Fourth Quarter........................................ 43.46 28.40
2002..................................................... U.S.$48.65 U.S.$24.30
First Quarter......................................... 48.52 38.40
Second Quarter........................................ 48.65 35.99
Third Quarter......................................... 37.00 25.20
Fourth Quarter........................................ 30.70 24.30
December........................................... 30.70 27.60
2003.....................................................
First Quarter......................................... U.S.$29.95 U.S.$23.26
January............................................ 29.95 25.00
February........................................... 25.45 23.35
March.............................................. 27.35 23.26
Second Quarter (through May 31, 2003)................. U.S.$31.10 U.S.$25.61
April.............................................. 30.34 25.61
May................................................ 31.10 28.79
--------------
(1) Source: NYSE.
Trading prices of the CPOs and the GDSs will be influenced by our results
of operations, financial condition, cash requirements, future prospects and by
economic, financial and other factors and market conditions. See "Key
Information -- Risk Factors -- Risk Factors Related to Mexico -- Economic and
Political Developments in Mexico and Elsewhere May Adversely Affect Our
Business." There can be no assurance that prices of the CPOs and the GDSs will,
in future, be within the ranges set forth above. We believe that as of May 31,
2003, approximately 90.5 million GDSs were held of record by 146 persons with
United States addresses. Substantially all of the outstanding A Shares not held
through CPOs are currently owned by Televicentro as described under "Major
Shareholders and Related Party Transactions" and "Item 6 -- Directors, Senior
Management and Employees -- Long Term Retention Plan."
TRADING ON THE MEXICAN STOCK EXCHANGE
OVERVIEW
The Mexican Stock Exchange, located in Mexico City, is the only stock
exchange in Mexico. Operating continuously since 1907, the Mexican Stock
Exchange is organized as a corporation with variable capital, or sociedad
anonima de capital variable. Securities trading on the Mexican Stock Exchange
occurs from 8:30 a.m. to 3:00 p.m., Mexico City time, each business day. Since
January 1999, all trading on the Mexican Stock Exchange has been effected
electronically. The Mexican Stock Exchange may impose a number of measures to
promote an orderly and transparent trading price of securities, including the
operation of a system of automatic suspension of trading in shares of a
particular issuer when price fluctuation exceeds certain limits. The Mexican
Stock Exchange may also suspend trading in shares of a particular issuer as a
result of the disclosure of a material event, or when the
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changes in the volume traded or share price are not consistent with either the
historic performance or information publicly available. The Mexican Stock
Exchange may resume trading in the shares when it deems that the material events
have been adequately disclosed to public investors or when it deems that the
issuer has adequately explained the reasons for the changes in the volume traded
or prevailing share price. Under current regulations, in certain cases when the
relevant securities are simultaneously traded on a stock exchange outside of
Mexico, the Mexican Stock Exchange may consider the measures adopted by the
other stock exhange in order to suspend and/or resume trading in the issuer's
shares.
Settlement is effected two business days after a share transaction on the
Mexican Stock Exchange. Deferred settlement, even by mutual agreement, is not
permitted without the approval of the CNBV. Most securities traded on the
Mexican Stock Exchange, including the CPOs, are on deposit with S.D. Indeval,
S.A. de C.V., Institucion para el Deposito de Valores, S.A. de C.V., or Indeval,
a privately owned securities depositary that acts as a clearinghouse, depositary
and custodian, as well as a settlement, transfer and registration agent for
Mexican Stock Exchange transactions, eliminating the need for physical transfer
of securities.
Although the Mexican Securities Market Law provides for the existence of an
over-the-counter market, no such market for securities in Mexico has been
developed.
MARKET REGULATION AND REGISTRATION STANDARDS
In 1946, the Comision Nacional de Valores, or the National Securities
Commission, commonly known as the CNV, was established to regulate stock market
activity. In 1995, the CNV and the Comision Nacional Bancaria, or the National
Banking Commission, were merged to form the CNBV. The Mexican Securities Market
Law, which took effect in 1975, introduced important structural changes to the
Mexican financial system, including the organization of brokerage firms as
corporations with variable capital, or sociedades anonimas de capital variable.
The Mexican Securities Market Law sets standards for authorizing companies to
operate as brokerage firms, which authorization is granted at the discretion of
the Ministry of Finance upon the recommendation of the CNBV. In addition to
setting standards for brokerage firms, the Mexican Securities Market Law
empowers the CNBV, among other things, to regulate the public offering and
trading of securities and to impose sanctions for the illegal use of insider
information. The CNBV regulates the Mexican securities market, the Mexican Stock
Exchange and brokerage firms through a board of governors composed of thirteen
members, five of which are appointed by the Ministry of Finance.
As of June 1, 2001, the Mexican Securities Market Law requires issuers to
increase the protections offered to minority shareholders and to impose
corporate governance controls on Mexican listed companies in line with
international standards. The Mexican Securities Market Law expressly permits
Mexican listed companies, with prior authorization from the CNBV, to include in
their bylaws anti-takeover defenses such as shareholder rights plans, or poison
pills. We amended our bylaws to include certain of these protections at our
general extraordinary shareholders' meeting, which was held on April 30, 2002.
See "Other Information -- Bylaws -- Other Provisions -- Approval Rights and
Other Minority Protections" and "-- Anti-takeover Protections."
To offer securities to the public in Mexico, an issuer must meet specific
qualitative and quantitative requirements, and generally only securities for
which an application for registration in the National Registry of Securities
maintained by the CNBV has been approved by the CNBV may be listed on the
Mexican Stock Exchange. This approval does not imply any kind of certification
or assurance related to the merits or the quality of the securities or the
solvency of the issuer.
In March 2003, the CNBV issued general rules, or General CNBV Rules,
applicable to issuers and other securities market participants. The General CNBV
Rules, which repealed several previously enacted rules, or circulares, of the
CNBV, now provide a single set of rules governing issuers and issuer activity,
among other things.
The General CNBV Rules have mandated that the Mexican Stock Exchange adopt
minimum requirements for issuers to be registered with the CNBV and have their
securities listed on the Mexican Stock Exchange. To be registered, issuers will
be required to have, among other things:
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- a minimum number of years of operating history;
- a minimum financial condition;
- a minimum number of shares or CPOs to be publicly offered to
public investors;
- a minimum price for the securities to be offered;
- a minimum of 15% of the capital stock placed among public
investors;
- a minimum of 200 holders of shares or of shares represented by
CPOs, who are deemed to be public investors under the General
CNBV Rules, upon the completion of the offering;
- the following distribution of the securities offered pursuant to
an offering in Mexico: (i) at least 50% of the total number of
securities offered must be placed among investors who acquire
less than 5% of the total number of securities offered; and (ii)
no investor may acquire more than 40% of the total number of
securities offered; and
- complied with certain corporate governance requirements.
To maintain its registration, an issuer will be required to have, among
other things:
- a minimum financial condition;
- minimum operating conditions, including a minimum number of
trades;
- a minimum trading price of its securities;
- a minimum of 12% of the capital stock held by public investors;
- a minimum of 100 holders of shares or of shares represented by
CPOs who are deemed to be public investors under the General CNBV
Rules; and
- complied with certain corporate governance requirements.
The CNBV has the authority to waive some of these requirements in some
circumstances. Also, some of these requirements are applicable for each series
of shares of the relevant issuer.
The Mexican Stock Exchange will review annually compliance with the
foregoing and other requirements, some of which may be further reviewed on a
quarterly or semi-annual basis. The Mexican Stock Exchange must inform the CNBV
of the results of its review and this information must, in turn, be disclosed to
investors. If an issuer fails to comply with any of the foregoing requirements,
the Mexican Stock Exchange will request that the issuer propose a plan to cure
the violation. If the issuer fails to propose such plan, if the plan is not
satisfactory to the Mexican Stock Exchange or if the issuer does not make
substantial progress with respect to the corrective measures, trading of the
relevant series of shares on the Mexican Stock Exchange will be temporarily
suspended until the situation is corrected. In addition, if the issuer fails to
propose the plan or ceases to follow such plan once proposed, the CNBV may
suspend or cancel the registration of the shares. In such event, the issuer must
evidence the mechanisms to protect the rights of public investors and market in
general.
Issuers of listed securities are required to file unaudited quarterly
financial statements and audited annual financial statements as well as various
periodic reports with the CNBV and the Mexican Stock Exchange. Pursuant to the
General CNBV Rules, the internal regulations of the Mexican Stock Exchange must
be amended to include, among other things, the implementation of the Sistema
Electronico de Envio y Difusion de Informacion, or the SEDI, an automated system
for the electronic transfer of the information required to be filed with the
Mexican Stock Exchange, which will be similar to, but will replace, the existing
EMISNET. Issuers of listed securities must
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prepare and disclose their financial information by a Mexican Stock
Exchange-approved system known as the Sistema de Informacion Financiera
Computarizada, or Computerized Financial Information System, commonly known as
the SIFIC. Immediately upon its receipt, the Mexican Stock Exchange makes that
information available to the public.
The General CNBV Rules and the internal regulations of the Mexican Stock
Exchange require issuers of listed securities to file through the SEDI
information on the occurrence of material events affecting the relevant issuer.
Material events include, but are not limited to:
- the entering into or termination of joint venture agreements or
agreements with key suppliers;
- the creation of new lines of businesses or services;
- significant deviations in expected or projected operating
performance;
- the restructuring or payment of significant indebtedness;
- material litigation or labor conflicts;
- changes in dividend policy;
- the commencement of any insolvency, suspension or bankruptcy
proceedings;
- changes in the directors; and
- any other event that may have a material adverse effect on the
results, financial condition or operations of the relevant
issuer.
If there is unusual price volatility of the securities listed, the Mexican
Stock Exchange must immediately request that the issuer inform the public as to
the causes of such volatility or, if the issuer is unaware of such causes, make
a statement to that effect. In addition, the Mexican Stock Exchange must
immediately request that issuers disclose any information relating to relevant
material events, when it deems the information currently disclosed to be
insufficient, as well as instruct issuers to clarify such information when it
deems the information to be confusing. The Mexican Stock Exchange may request
issuers to confirm or deny any material events that have been disclosed to the
public by third parties when it deems that the material event may affect or
influence the securities being traded. The Mexican Stock Exchange must
immediately inform the CNBV of any requests made to issuers. The CNBV may also
make any of these requests directly to issuers. An issuer may delay the
disclosure of material events under some circumstances, including where the
information being offered is not related to transactions that have been
completed.
The CNBV and the Mexican Stock Exchange may suspend the dealing in
securities of an issuer:
- if the issuer does not adequately disclose a material event; or
- upon price or volume volatility or changes in the offer or demand
in respect of the relevant securities, which are not consistent
with the historic performance of the securities and could not be
explained solely by the information made publicly available under
the General CNBV Rules.
The Mexican Stock Exchange must immediately inform the CNBV and the general
public of any such suspension. An issuer may request that the CNBV or the
Mexican Stock Exchange resume trading, provided it demonstrates that the causes
triggering the suspension have been resolved and that it is in full compliance
with the periodic reporting requirements under the applicable law. If its
request has been granted, the Mexican Stock Exchange will determine the
appropriate mechanism to resume trading in its securities. If trading of an
issuer is suspended for more than twenty business days and the issuer is
authorized to resume trading without conducting a
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public offering, the issuer must disclose through the SEDI, before trading
resumes, a description of the causes that resulted in the suspension and reasons
why it is now authorized to resume trading.
Likewise, if the securities of an issuer are traded on both the Mexican
Stock Exchange and a foreign securities market, that issuer must file with the
CNBV and the Mexican Stock Exchange on a simultaneous basis the information that
it is required to file pursuant to the laws and regulations of the relevant
other jurisdiction.
Pursuant to the Mexican Securities Market Law, shareholders of issuers
listed on the Mexican Stock Exchange must notify the CNBV before effecting
transactions outside of the Mexican Stock Exchange that result in a transfer of
10% or more of an issuer's capital stock. These shareholders must also inform
the CNBV of the results of these transactions within three days of their
completion, or, in the alternative, that these transactions have not been
consummated. The CNBV will notify the Mexican Stock Exchange of these
transactions, without specifying the names of the parties involved. In addition,
the Mexican Securities Market Law provides that the CNBV also has the ability to
determine whether purchasers in these types of transactions must effect these
transactions through a tender offer, as well as the minimum and maximum
percentages of capital stock that may be purchased through any such tender
offer. See "Other Information-- Mexican Securities Market Law."
In addition, the Mexican Securities Market Law requires shareholders
holding 10% or more of the capital stock of companies listed in the registry to
notify the CNBV of any ownership changes in shares of the company that results
in a transfer of shares representing a beneficial ownership interest of 10% or
more, within ten business days following the transaction in question.
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ITEM 10. OTHER INFORMATION
MEXICAN SECURITIES MARKET LAW
The Mexican Congress approved amendments to the Mexican Securities Market
Law, which became effective on June 2, 2001, and have been implemented by
governmental regulations. We amended our bylaws at our annual shareholders'
meeting, which was held on April 30, 2002, to reflect some of these amendments,
including amendments that:
- established a Board with at least five and not more than twenty
members and alternate members, of which 25% must qualify as
"independent directors" under Mexican law;
- adopted specified corporate governance measures, which require us
to establish, among other things, an audit committee, as well as
more stringent procedures for the approval of transactions and
arrangements with related parties and extraordinary corporate
transactions; and
- provide additional protections for minority shareholders.
For a further description of amendments we made to our bylaws in accordance
with the Mexican Securities Market Law, see "Directors, Senior Management and
Employees -- Board of Directors," "-- Committees of the Board of Directors," and
"-- Bylaws -- Other Provisions -- Share Repurchases" and "-- Appraisal Rights
and Other Minority Protections."
In addition, the Mexican Securities Market Law now permits issuers to
include anti-takeover defenses in their bylaws, provided that their bylaws also
include specified minority rights and protections, among other things, and we
have included such provisions in our bylaws. See "-- Bylaws -- Other Provisions
-- Appraisal Rights and Other Minority Protections" and "-- Antitakeover
Protections". The Mexican Securities Market Law does not permit issuers to
implement mechanisms where common shares and limited or non-voting shares are
jointly traded or offered to public investors, unless the limited or non-voting
shares are convertible into common shares within a term of up to five years, or
when as a result of the nationality of a given holder, the shares or the
securities representing the shares limit the right to vote in order to comply
with applicable foreign investment regulations. In addition, the aggregate
amount of shares with limited or non-voting rights may not exceed 25% of the
total shares held by public investors. As a result of applicable grandfathering
provisions, our existing CPO structure will not be affected by this aspect of
the Mexican Securities Market Law. However, in the case of primary issuances of
additional A Shares, L Shares and D Shares in the form of CPOs, any new L Shares
and D Shares must be convertible into A Shares or other voting stock within a
term specified by the CNBV, which in no event shall exceed five years.
The Mexican Securities Market Law imposes some restrictions on shareholders
of issuers listed on the Mexican Stock Exchange. Shareholders of issuers listed
on the Mexican Stock Exchange must notify the CNBV before effecting transactions
outside of the Mexican Stock Exchange that result in a transfer of 10% or more
of an issuer's capital stock. These shareholders must also inform the CNBV of
the results of these transactions within three days of their completion, or, in
the alternative, that these transactions have not been consummated. The CNBV
will notify the Mexican Stock Exchange of these transactions without specifying
the names of the parties involved. The CNBV also has the ability to determine
whether purchasers in these types of transactions must effect these transactions
through a tender offer, as well as the minimum and maximum percentages of
capital stock that may be purchased through any such tender offer.
On April 25, 2002, the CNBV issued general rules to regulate public tender
offers and the obligation to disclose share acquisitions above certain
thresholds, as well as share acquisitions of the capital stock of public
companies by related parties. Subject to certain exceptions, any acquisition of
shares of a public company which increases the acquiror's ownership to 10% or
more, but not more than 30%, of the company's outstanding capital stock must be
disclosed to the CNBV and the Mexican Stock Exchange by no later than the day
following the acquisition. Any acquisition of shares by a related party that
increases such party's ownership interest in a public company by 5% or more of
the company's outstanding capital stock must also be disclosed to the CNBV and
the Mexican Stock
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Exchange by no later than the day following the acquisition. In addition, any
intended acquisition of shares of a public company which increases the potential
acquiror's ownership to 30% or more, but not more than 50%, of the company's
voting shares requires the potential acquiror to make a tender offer for the
greater of (i) the percentage of the capital stock intended to be acquired or
(ii) 10% of the outstanding capital stock. Finally, any intended acquisition of
shares of a public company which increases the potential acquiror's ownership to
more than 50% of the company's voting shares requires the potential acquiror to
make a tender offer for 100% of the outstanding capital stock. Bylaw provisions
regarding mandatory tender offers in the case of these acquisitions may differ
from the requirements summarized above, provided that they are more protective
to minority shareholders than those afforded by law. See "-- Bylaws -- Other
Provisions -- Antitakeover Protections."
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BYLAWS
Set forth below is a brief summary of some significant provisions of our
bylaws and Mexican law. This description does not purport to be complete, and is
qualified by reference in its entirety to our bylaws, which have been filed as
an exhibit to this annual report and Mexican law. For a description of the
provisions of our bylaws relating to our Board of Directors, Executive Committee
and statutory auditors, see "Directors, Senior Management and Employees."
ORGANIZATION AND REGISTER
Grupo Televisa is a sociedad anonima, or limited liability stock
corporation, organized under the laws of Mexico in accordance with the Mexican
Companies Law. Grupo Televisa was incorporated under Public Deed Number 30,200,
dated December 19, 1990, granted before Notary Public Number 73 of Mexico City,
D.F., and registered with the Public Registry of Commerce of Mexico City, under
Commercial Page (folio mercantil) Number 142,164. We have a general corporate
purpose, the specifics of which can be found in Article Four of our bylaws.
We maintain a stock registry, and in accordance with Mexican law, we only
recognize those holders listed in our stock registry as our shareholders. Our
shareholders may hold their share in the form of physical certificates or
through book-entries with institutions that have accounts with Indeval. The CPO
Trustee is the holder of record for shares represented by CPOs. Accounts may be
maintained at Indeval by brokers, banks and other entities approved by the CNBV.
VOTING RIGHTS AND SHAREHOLDERS' MEETINGS
A SHARES, L SHARES AND D SHARES. Holders of A Shares have the right to vote
on all matters subject to shareholder approval at any general meeting of
shareholders and have the right to appoint a majority of the members of the
Board of Directors. Televicentro owns a majority of the A Shares and, for so
long as it continues to own a majority of the A Shares, it will have, as a
result of such ownership, the ability to determine the outcome of substantially
all actions requiring shareholder approval. See "Key Information -- Risk Factors
-- Risk Factors Related to Our Principal Shareholders -- Televicentro Controls
Our Company" and "Major Shareholders and Related Party Transactions --
Televicentro and the Principal Shareholders -- Ownership Position of Emilio
Azcarraga Jean; Veto and Other Rights of Other Shareholders" and "--Voting of
Our Shares." Holders of L Shares, voting as a class, are entitled to vote at
special meetings to elect two of the members of our Board of Directors and the
corresponding alternate directors, each of which must be an independent
director. Holders of L Shares are also entitled to vote at extraordinary general
meetings on the following matters, including:
- our transformation from one type of company to another;
- any merger in which we are not the surviving entity; and
- the cancellation from registration of the L Shares or the
securities that represent the L Shares with the special section
of the National Registry of Securities, or NRS.
Holders of D Shares, voting as a class, are entitled to vote at special
meetings to elect two of the members of our Board of Directors and the
corresponding alternate directors, each of which must be an independent
director. In addition, holders of D Shares are entitled to vote on the following
matters at extraordinary general meetings:
- our transformation from one type of company to another;
- any merger (even if we are the surviving entity);
- extension of our existence beyond our prescribed duration;
- our dissolution before our prescribed duration (which is
currently December 2089);
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- a change in our corporate purpose;
- a change in our nationality; and
- the cancellation from registration of the D Shares or the
securities which represent the D Shares with the securities or
special section of the NRS and with any other Mexican or foreign
stock exchange in which such shares or securities are registered.
Under Mexican law, holders of shares of any series are also entitled to
vote as a class in a special meeting governed by the same rules that apply to
extraordinary general meetings, as described below, on any action that would
prejudice the rights of holders of shares of such series, but not rights of
holders of shares of other series, and a holder of shares of such series would
be entitled to judicial relief against any such action taken without such a
vote. The Board of Directors determines whether a particular shareholder action
requires a class vote. Generally, the determination of whether a particular
shareholder action requires a class vote on these grounds could initially be
made by the Board of Directors or other party calling for shareholder action. In
some cases, under the Mexican Securities Market Law and the Mexican Companies
Law, the Board of Directors, the statutory auditors or a Mexican court on behalf
of those shareholders representing 10% of our capital stock could call a special
meeting. A negative determination would be subject to judicial challenge by an
affected shareholder, and the necessity for a class vote would ultimately be
determined by a court. There are no other procedures for determining whether a
particular proposed shareholder action requires a class vote, and Mexican law
does not provide extensive guidance on the criteria to be applied in making such
a determination.
General shareholders' meetings may be ordinary general meetings or
extraordinary general meetings. Extraordinary general meetings are those called
to consider specific matters specified in Article 182 of the Mexican Companies
Law and our bylaws, including, among others, amendments to our bylaws, our
dissolution, liquidation or split-up, our merger and transformation from one
form of company to another, increases and reductions in our capital stock, the
approval of certain acquisitions of shares, including a change of control, as
set forth in the antitakeover provisions in our bylaws and any action for civil
liabilities against the members of our Board of Directors, members of our Audit
Commitee or our statutory auditors. In addition, our bylaws require an
extraordinary general meeting to consider the cancellation of registration of
the D Shares or L Shares or the securities representing these shares with the
securities and/or special sections of the NRS, as the case may be, and in the
case of D Shares, with any other Mexican or foreign stock exchange in which such
shares or securities are registered. General meetings called to consider all
other matters are ordinary meetings which are held at least once each year
within four months following the end of each fiscal year. Shareholders may be
represented at any shareholders' meeting by completing a form of proxy provided
by us, which proxy is available within fifteen days prior to such meeting, and
designating a representative to vote on their behalf. The form of proxy must
comply with certain content requirements as set forth in the Mexican Securities
Market Law, as amended, and in our bylaws.
The two directors and corresponding alternate directors elected by each of
the holders of the L Shares and the D Shares are elected annually at a special
meeting of those holders. Special meetings of holders of L Shares and D Shares
must also be held to approve the cancellation from registration of the D Shares
or L Shares or the securities representing any of such shares with the
securities an/or special sections of the NRS, as the case may be, and in the
case of D Shares, with any other Mexican or foreign stock exchange in which such
shares or securities are registered. All other matters on which holders of L
Shares or D Shares are entitled to vote must be considered at an extraordinary
general meeting. Holders of L Shares and D Shares are not entitled to attend or
to address meetings of shareholders at which they are not entitled to vote.
Under Mexican law, holders of L Shares and D Shares are entitled to exercise
certain minority protections. See "-- Other Provisions -- Appraisal Rights and
Other Minority Protections."
CPOS. Mexican national holders of CPOs are entitled to exercise voting
rights with respect to the A Shares, L Shares and D Shares held in the CPO
Trust. The CPO Trustee will vote these shares as directed by such Mexican
nationals. Non-Mexican holders of CPOs may only vote the L Shares held in the
CPO Trust and are not entitled to exercise any voting rights with respect to the
A Shares and D Shares held in the CPO Trust. Voting rights in respect of the A
Shares and D Shares may only be exercised by the CPO Trustee, which must vote
such A Shares and D Shares in the same manner as the majority of the outstanding
A Shares and D Shares, as the case may be, held by Mexican nationals (directly,
or through the CPO Trust, as the case may be) are voted at the relevant meeting.
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The CPO Trustee will vote any A Shares and D Shares as to which it receives
no voting instructions in the same manner as the majority of the outstanding A
Shares and D Shares, as the case may be, are voted at the relevant meeting. The
CPO Trustee will vote any L Shares as to which it receives no voting
instructions in the same manner as the majority of the outstanding L Shares that
are voted in the relevant meeting. The CPO Trustee must receive voting
instructions five business days prior to the shareholders meeting.
Because the CPO Trustee must vote the A Shares and D Shares held by
non-Mexicans in the CPO Trust in the same manner as the majority of the A Shares
and D Shares held by Mexican nationals (directly, or through the CPO Trust, as
the case may be), the A Shares underlying CPOs held by non-Mexicans will not be
voted against any change that triggers the appraisal rights of the holders of
these A Shares or D Shares. Therefore, these appraisal rights will not be
available to holders of CPOs (and GDRs (as defined below)).
The majority of the outstanding A Shares are owned by Televicentro. Since
the CPO Trustee will be required to vote the A Shares held by non-Mexicans in
the same manner as the majority of shares held by Mexicans, the CPO Trustee will
vote the A Shares in the same manner as the A Shares held by Televicentro. See
"Key Information -- Risk Factors -- Risk Factors Related to Our Principal
Shareholders -- Televicentro Controls Our Company." The CPO Trustee will
exercise such other corporate rights with respect to the underlying A Shares as
may be directed by a technical committee which consists of members of the
executive committee.
Until December 2008, the L Shares represented by CPOs held by Televicentro
will be voted in the same manner as the majority of the L Shares held by other
holders of L Shares are voted at the relevant meeting. See "Major Shareholders
and Related Party Transactions--Televicentro and the Principal Shareholders."
GDRs. Global Depositary Receipts, or GDRs, evidencing GDSs are issued by
the Depositary pursuant to the Deposit Agreement we entered into with the
Depositary and all holders from time to time of GDRs. In July 2002, we removed
Citibank, N.A. as the Depositary for the GDSs and appointed JPMorgan Chase Bank
pursuant to a new Deposit Agreement. Each GDR evidences a specified number of
GDSs, each GDS representing the right to receive twenty CPOs which will be
credited to the account of Banco Inbursa, S.A., the Custodian, maintained with
Indeval for such purpose. Each CPO represents financial interests in, and
limited voting rights with respect to, one A Share, one L Share and one D Share
held pursuant to the CPO Trust (such CPOs, or rights thereto, together with any
securities, cash or property received by the Depositary or the Custodian in
respect of such A Shares, L Shares and D Shares, the Deposited Securities). A
GDR may represent any number of GDSs. Only persons in whose names GDRs are
registered on the books of the Depositary will be treated by us and the
Depositary as owners and holders of GDRs.
The Depositary will mail information on shareholders' meetings to all
holders of GDRs. At least six business days prior to the relevant shareholders'
meeting, GDR holders may instruct the Depositary as to the exercise of the
voting rights, if any, pertaining to the CPOs and the underlying A Shares, D
Shares and L Shares represented by their GDSs. Since the CPO Trustee must also
receive voting instructions five business days prior to the shareholders'
meeting, the Depositary will endeavor to vote the CPOs, A Shares, D Shares and L
Shares in accordance with any written instructions.
Holders who are Mexican nationals or Mexican corporations whose bylaws
exclude foreign ownership of their shares are entitled to exercise voting rights
with respect to the A Shares, L Shares and D Shares underlying the CPOs
represented by their GDSs. Non-Mexican holders may exercise voting rights only
with respect to L Shares underlying the CPOs represented by their GDSs. They may
not direct the CPO Trustee as to how to vote the A Shares or D Shares
represented by CPOs or attend shareholders' meetings. Under the terms of the CPO
Trust Agreement, the CPO Trustee will vote the A Shares and D Shares represented
by CPOs held by Non-Mexican holders in the same manner as the majority of the A
Shares and D Shares outstanding and held by Mexican holders (directly or through
the CPO Trust, as the case may be) are voted at the relevant meeting.
If the Depositary does not timely receive instructions from a non-Mexican
holder of GDRs regarding the underlying L Shares, or a Mexican holder of GDRs
regarding the underlying A Shares, L Shares and D Shares, in the case of CPO
Holders' Meetings, the Depositary will count these votes to satisfy quorum
requirements or, unless we in our sole discretion have given prior written
notice to the Depositary to the contrary, vote them in the same manner as the
majority of the CPOs are voted. In the case of shareholders' meetings, we may,
subject to United
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States securities laws, by written notice request the Depositary to give a
discretionary proxy to the CPO Trustee or us, as the case may be, to vote the
shares; provided, however, that no discretionary proxy shall be given if we do
not make such written request, and the Depositary will not represent or vote,
attempt to represent or exercise the right to vote that attaches to, or instruct
the CPO Trustee to represent or vote, the shares underlying the CPOs in the
relevant shareholders' meeting.
DIVIDEND RIGHTS
At our annual ordinary general shareholders' meeting, our Board of
Directors submits our financial statements from the previous fiscal year to the
holders of our A Shares for their approval. Once our shareholders approve these
financial statements, they must then allocate our net profits for the previous
fiscal year. Under Mexican law, at least 5% of our net profits must be allocated
to a legal reserve, until the amount of this reserve equals 20% of our paid-in
capital stock. Thereafter, our shareholders may allocate our net profits to any
special reserve, including a reserve for share repurchases. After this
allocation, the remainder of our net profits will be available for distribution
as dividends.`
Decisions regarding the payment and amount of dividends are subject to
approval by the holders of the A Shares, generally, but not necessarily, on the
recommendation of our Board of Directors. Televicentro owns a majority of the A
Shares, and for so long as it continues to own a majority of the A Shares, it
will have, as a result of such ownership, the ability to determine whether
dividends are to be paid and the amount of such dividends. See "Key
Information--Dividends" and "-- Risk Factors -- Risk Factors Related to Our
Principal Shareholders -- Televicentro Controls Our Company." As described
below, in the event that dividends are declared, holders of D Shares will have
preferential rights to dividends as compared to holders of A Shares and L
Shares, and until December 10, 2003 holders of D Shares will be entitled to a
premium over the dividends paid in respect of the A Shares and L Shares. Holders
of A Shares and L Shares have the same financial or economic rights, including
the participation in any of our profits.
PREFERENTIAL RIGHTS OF D SHARES
Holders of D Shares are entitled to receive a cumulative fixed preferred
annual dividend in the amount of Ps.0.0085443938 per D Share before any
dividends are payable in respect of A Shares and L Shares. In addition, until
December 10, 2003, annual dividends paid per D Share, including the D Share
fixed preferred annual dividend, must be at least 160% of the annual dividends
paid per A Share or per L Share. If we pay any dividends in addition to the D
Share fixed preferred dividend, then, after giving effect to the premium
dividend payable in respect of the D Shares, such dividends shall be allocated
as follows:
- first, to the payment of dividends with respect to the A Shares
and the L Shares, in an equal amount per share, up to the amount
of the D Share fixed preferred dividend (but not the premium
dividend payable until December 10, 2003); and
- second, to the payment of dividends with respect to the A Shares,
L Shares and D Shares, such that the dividend per share is equal.
Upon any dissolution or liquidation of our company, holders of D Shares are
entitled to a liquidation preference equal to:
- accrued but unpaid dividends in respect of their D Shares; plus
- the theoretical value of their D Shares as set forth in our
bylaws. See "--Other Provisions-- Dissolution or Liquidation."
LIMITATION ON CAPITAL INCREASES
Our bylaws require that any capital increase of a particular series of our
capital stock be represented by new shares of that series of our capital stock
in proportion to the number of such series outstanding. In addition, primary
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issuances of A Shares, D Shares and L Shares in the form of CPOs may be limited
under the Mexican Securities Market Law, as amended. As a result of
grandfathering provisions, our existing CPO structure will not be affected by
the amendments to the law. However, in the case of primary issuances of
additional A Shares, L Shares and D Shares in the form of CPOs, any new L Shares
and D Shares may be required to be converted into A Shares or other voting stock
within a term specified by the CNBV, which in no event shall exceed five years.
Moreover, under the Mexican Securities Market Law, as amended, the aggregate
amount of shares with limited or non-voting rights of an issuer may not exceed
25% of the total shares held by public investors. See "-- Mexican Securities
Market Law."
PREEMPTIVE RIGHTS
In the event of a capital increase, a holder of existing shares of a given
series has a preferential right to subscribe to a sufficient number of shares of
the same series in order to maintain the holder's existing proportionate
holdings of shares of that series. Shareholders must exercise their preemptive
rights within the time period fixed by our shareholders at the meeting approving
the issuance of additional shares. This period must continue for at least
fifteen days following the publication of notice of the issuance in the Diario
Oficial de la Federacion and in a newspaper of general circulation in Mexico
City. Under Mexican law, shareholders cannot waive their preemptive rights in
advance or be represented by an instrument that is negotiable separately from
the corresponding share. U.S. holders of GDSs may exercise preemptive rights
only if we register any newly issued shares under the Securities Act of 1933 or
qualify for an exemption from registration. We intend to evaluate at the time of
any offering of preemptive rights the costs and potential liabilities associated
with registering additional shares. In addition, if our shareholders' meeting
approves the issuance of shares of a particular series, holders of shares of
other series may be offered shares of that particular series. See "Key
Information -- Risk Factors -- Risk Factors Related to Our Securities --
Preemptive Rights May Be Unavailable to Holders of Our GDSs."
LIMITATIONS ON SHARE OWNERSHIP
Ownership by non-Mexicans of shares of Mexican enterprises is regulated by
the Foreign Investment Law and the accompanying Foreign Investment Regulations.
The Economics Ministry (formerly the Ministry of Commerce and Industrial
Development) and the Foreign Investment Commission are responsible for the
administration of the Foreign Investment Law and the Foreign Investment
Regulations.
The Foreign Investment Law reserves certain economic activities exclusively
for the Mexican State, certain other activities exclusively for Mexican
individuals or Mexican corporations and limits the participation of non-Mexican
investors to certain percentages in regard to other enterprises engaged in
activities specified therein. Foreign investors may freely participate in up to
100% of the capital stock of Mexican companies or entities except for those
existing companies engaged in specific activities, as described below and those
with assets exceeding specified amounts established annually by the Foreign
Investment Commission, in which case an approval from the Foreign Investment
Commission will be necessary in order for foreign investment to exceed 49% of
the capital stock.
The Foreign Investment Law reserves certain economic activities exclusively
for the Mexican state and reserves certain other activities (including
television and radio broadcasting) exclusively for Mexican nationals, consisting
of Mexican individuals and Mexican corporations the charters of which contain a
prohibition on ownership by non-Mexicans of the corporation's capital stock (a
"foreign exclusion clause"). However, the Foreign Investment Law grants broad
authority to the National Commission of Foreign Investment to allow foreign
investors to own specified interests in the capital of Mexican enterprises.
In order to comply with these restrictions, we have limited the ownership
of our A Shares to Mexican individuals, Mexican companies the charters of which
contain a foreign exclusion clause, credit institutions acting as trustees (such
as the CPO Trustee) in accordance with the Foreign Investment Law and the
Foreign Investment Regulations, and trusts or stock investment and retirement
plans for Mexican employees. The criteria for an investor to qualify as Mexican
under our By-laws are stricter than those generally applicable under the Foreign
Investment Law and Foreign Investment Regulations. A holder that acquires A
Shares in violation of the restrictions on non-Mexican ownership will have none
of the rights of a shareholder with respect to those A Shares and could also be
subject to monetary sanctions. The D Shares are subject to the same restrictions
on ownership as the A Shares.
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However, the foregoing limitations do not affect the ability of non-Mexican
investors to hold A Shares and D Shares through CPOs on the basis that such
shares constitute a "neutral investment" and do not affect control of the
issuing company, pursuant to the exceptions contained in the Foreign Investment
Law.
The total outstanding number of A Shares is required to exceed at all times
the sum of the total outstanding L Shares and D Shares.
The Foreign Investment Law and Foreign Investment Regulations also require
that we and the CPO Trust register with the National Registry of Foreign
Investments.
In addition to the limitations established by the Foreign Investment Law,
the Mexican Federal Radio and Television Law provides restrictions on ownership
by non-Mexicans of shares of Mexican enterprises holding concessions for radio
and television such as those held indirectly by us. Non-Mexican states and
governments are prohibited under our By-laws and Mexican Federal Radio and
Television Law from owning shares of Televisa and are, therefore, prohibited
from being the beneficial or record owners of the A Shares, L Shares, D Shares,
CPOs and GDSs. We have been advised by our Mexican counsel, Mijares, Angoitia,
Cortes y Fuentes, S.C., that ownership of the A Shares, L Shares, D Shares, CPOs
and GDSs by pension or retirement funds organized for the benefit of employees
of non-Mexican state, municipal or other governmental agencies will not be
considered as ownership by non-Mexican states or governments for the purpose of
our bylaws or the Radio and Television Law.
OWNERSHIP RESTRICTIONS
We may restrict transfers or, to the extent permitted under applicable law,
cause the mandatory sale or disposition of CPOs and GDRs where such transfer or
ownership, as the case may be, might result in ownership of CPOs or GDRs
exceeding the limits under applicable law or our bylaws, the CPO Trust Agreement
or the CPO Deed. Non-Mexican states and governments are prohibited under our
bylaws and Radio and Television Law from owning our shares and are, therefore,
prohibited from being beneficial or record owners of GDRs.
RESTRICTIONS ON CERTAIN TRANSACTIONS
Under Televicentro's bylaws and a shareholders' agreement among the
shareholders of Televicentro, the voting of shares of our capital stock in
connection with certain actions to be taken by us, including public offerings of
our capital stock, the issuance of convertible securities, the issuance of
guarantees, certain acquisitions, asset sales and mergers and spin-offs, capital
reductions, bankruptcy filings or reorganizations (concursos mercantiles) must
be approved by the SINCA Inbursa Trust and/or the Investor Trust, or their
designees on Televicentro's Board of Directors or Executive Committee. See
"Major Shareholders and Related Party Transactions -- Televicentro and the
Principal Shareholders -- Ownership Position of Emilio Azcarraga Jean; Veto and
Other Rights of Other Shareholders."
OTHER PROVISIONS
FORFEITURE OF SHARES. As required by Mexican law, our bylaws provide that
for L Shares and CPOs, our non-Mexican shareholders formally agree with the
Foreign Affairs Ministry:
- to be considered as Mexicans with respect to the L Shares and
CPOs that they acquire or hold, as well as to the property,
rights, concessions, participations or interests owned by us or
to the rights and obligations derived from any agreements we have
with the Mexican government; and
- not to invoke the protection of their own governments with
respect to their ownership of L Shares and CPOs. Failure to
comply is subject to a penalty of forfeiture of such a
shareholder's capital interests in favor of Mexico.
In the opinion of Mijares, Angoitia, Cortes y Fuentes, S.C., our Mexican
counsel, under this provision a non-Mexican shareholder is deemed to have agreed
not to invoke the protection of his own government by asking such government to
interpose a diplomatic claim against the Mexican government with respect to the
shareholder's rights
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as a shareholder, but is not deemed to have waived any other rights it may have,
including any rights under the United States securities laws, with respect to
its investment in Televisa. If the shareholder should invoke governmental
protection in violation of this agreement, its shares could be forfeited to the
Mexican government.
EXCLUSIVE JURISDICTION. Our bylaws provide that legal action relating to
the execution, interpretation or performance of the bylaws shall be brought only
in courts located in Mexico City.
DURATION. Our corporate existence under our bylaws continues until 2089.
DISSOLUTION OR LIQUIDATION. Upon any dissolution or liquidation of our
company, our shareholders will appoint one or more liquidators at an
extraordinary general shareholders' meeting to wind up our affairs. Upon a
dissolution or liquidation, holders of D Shares will be entitled to both accrued
but unpaid dividends in respect of their D Shares, plus the theoretical value of
their D Shares (as set forth in our bylaws). Thereafter, a payment per share
will be made to each of the holders of A Shares and L Shares equivalent to the
payment received by each of the holders of D Shares. The remainder will be
distributed equally among all shareholders in proportion to their number of
shares and amount paid.
REDEMPTION. Our bylaws provide that we may redeem our shares with
distributable profits without reducing our capital stock by way of a shareholder
resolution at an extraordinary shareholders' meeting. In accordance with Mexican
law:
- any redemption shall be made on a pro-rata basis among all of our
shareholders;
- to the extent that a redemption is effected through a public
tender offer on the Mexican Stock Exchange, the shareholders'
resolution approving the redemption may empower our Board to
specify the number of shares to be redeemed and appoint the
related intermediary or purchase agent; and
- any redeemed shares must be cancelled.
SHARE REPURCHASES. As required by Mexican law, our bylaws provide that we
may repurchase our shares on the Mexican Stock Exchange at then prevailing
market prices. The amount of capital stock allocated to share repurchases and
the amount of the corresponding reserve created for this purpose is determined
annually by our shareholders at a general ordinary shareholders' meeting. The
aggregate amount of resources allocated to share repurchases in any given year
cannot exceed the total amount of our net profits in any given year, including
retained earnings. Share repurchases must be charged to either our net worth if
the repurchased shares remain in our possession or our capital stock if the
repurchased shares are converted into treasury shares, in which case our capital
stock is reduced automatically in an amount equal to the theoretical value of
any repurchased shares. Any surplus is charged to the reserve for share
repurchases. If the purchase price of the shares is less than the theoretical
value of the repurchased shares, our capital stock account will be affected by
an amount equal to the theoretical value of the repurchased shares. Repurchased
shares are considered treasury shares.
Under Mexican law, we are not required to create a special reserve for the
repurchase of shares, nor do we need the approval of our Board to effect share
repurchases. In addition, any repurchased shares cannot be represented at any
shareholders' meeting.
Pursuant to the Mexican Securities Market Law, at our ordinary
shareholders' meeting, which was held on April 30, 2002, we appointed two
persons responsible for effecting share repurchases. This designation was
ratified at our ordinary and extraordinary shareholders' meeting, which was held
on April 30, 2003.
CONFLICTS OF INTEREST. Under the Mexican Securities Market Law, any
shareholder or director that votes on a transaction in which his, her or its
interests conflict with our interests may be liable for damages, but only if the
transaction would not have been approved without his, her or its vote. In
addition, any member of the Board of Directors that votes on a transaction in
which his, her or its interests conflict, with our interests may be liable for
damages. Our existing bylaws do not contain any provisions that govern or limit
the ability of our directors or shareholders to vote on transactions in which
their interests conflict with our interests. In addition, our existing
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bylaws do not contain any provisions that govern or limit the ability of our
directors, in the absence of an independent quorum, to borrow from us or to vote
compensation to themselves or any other member of our Board of Directors or any
committee of our Board of Directors. We have established a Related Party
Transactions Committee to review and approve transactions and arrangements with
our principal shareholders, directors, executive officers and other related
parties. In addition, pursuant to the Mexican Securities Market Law our Audit
Committee must prepare and render statements to the Board as to the fairness of
transactions and arrangements with related parties, and these transactions and
arrangements must be approved by our Board of Directors. Members of our Board,
members of our Audit Committee and our Statutory Auditor will be liable to our
stockholders for breach of their duty of loyalty to the corporation to the
extent that these persons approve transactions in which they have a conflict of
interest. See "Major Shareholders and Related Party Transactions -- Related
Party Transactions -- Related Party Transactions Committee."
APPRAISAL RIGHTS AND OTHER MINORITY PROTECTIONS. Whenever our shareholders
approve a change in our corporate purpose or jurisdiction of organization or our
transformation from one type of company to another, any shareholder entitled to
vote that did not vote in favor of these matters has the right to receive
payment for its A Shares, L Shares or D Shares in an amount calculated in
accordance with Mexican law. However, shareholders must exercise their appraisal
rights within fifteen days after the shareholders' meeting at which the matter
was approved. Because holders of L Shares and D Shares may only vote in limited
circumstances, appraisal rights are generally not available to them. See
"--Voting Rights and Shareholders' Meetings."
As described above under the caption "-- Mexican Securities Market Law," in
accordance with recent amendments to the Mexican Securities Market Law we
amended our bylaws to include a number of minority protections. These minority
protections include provisions that permit:
- holders of at least 10% of our outstanding capital stock to call
a shareholders' meeting in which they are entitled to vote;
- subject to the satisfaction of certain requirements under Mexican
law, holders of at least 15% of our outstanding capital stock to
bring an action for civil liabilities against our directors;
- holders of at least 10% of our shares who are entitled to vote
and are represented at a shareholders' meeting to request that
resolutions with respect to any matter on which they were not
sufficiently informed to be postponed; and
- subject to the satisfaction of certain requirements under Mexican
law, holders of at least 20% of our outstanding capital stock to
contest and suspend any shareholder resolution.
See "Key Information -- Risk Factors -- Risk Factors Related to Our
Securities -- The Protections Afforded to Minority Shareholders Under Mexican
Law Are Different From Those in the United States." In addition, in accordance
with the Mexican Securities Market Law, we are also subject to certain corporate
governance requirements, including the requirement to maintain an audit
committee and to elect independent directors. See "Directors, Senior Management
and Key Employees -- Board of Directors" and "-- Committees of the Board of
Directors."
The protections afforded to minority shareholders under Mexican law are
generally different from those in the United States and many other
jurisdictions. Substantive Mexican law concerning fiduciary duties of directors
has not been the subject of extensive judicial interpretation in Mexico, unlike
many states in the United States where duties of care and loyalty elaborated by
judicial decisions helped to shape the rights of minority shareholders. Mexican
civil procedure does not contemplate class actions or shareholder derivative
actions, which permit shareholders in U.S. courts to bring actions on behalf of
other shareholders or to enforce rights of the corporation itself. Shareholders
cannot challenge corporate actions taken at shareholders' meetings unless they
meet stringent procedural requirements. See "-- Voting Rights and Shareholders'
Meetings."
As a result of these factors, it is generally more difficult for our
minority shareholders to enforce rights against us or our directors or principal
shareholders than it is for shareholders of a U.S. issuer.
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In addition, under U.S. securities laws, as a foreign private issuer we are
exempt from certain rules that apply to domestic U.S. issuers with equity
securities registered under the U.S. Securities Exchange Act of 1934, including
the proxy solicitation rules. We are also exempt from some of the corporate
governance requirements of the New York Stock Exchange, including the
requirements concerning audit committees and independent directors.
ANTITAKEOVER PROTECTIONS
GENERAL. Our bylaws provide that, subject to certain exceptions, (i) any
person, entity or group of persons and/or entities that wishes to acquire
beneficial ownership of A Shares and/or CPOs which, when coupled with A Shares
and/or CPOs previously beneficially owned by such persons or their affiliates,
represent 10% or more of our outstanding A Shares (including A Shares underlying
CPOs), (ii) any competitor or group of competitors that wishes to acquire
beneficial ownership of A Shares and/or CPOs which, when coupled with A Shares
and/or CPOs previously beneficially owned by such competitor, group of
competitors or their affiliates, represent 5% or more of our outstanding capital
stock, (iii) any person, entity or group of persons and/or entities that wishes
to acquire beneficial ownership of A Shares and/or CPOs representing 10% or more
of our outstanding A Shares (including A Shares underlying CPOs), and (iv) any
competitor or group of competitors that wishes to acquire beneficial ownership
of A shares and/or CPOs representing 5% or more of our capital stock, must
obtain the prior approval of our Board of Directors and/or of our shareholders,
as the case may be, subject to certain exceptions summarized below. Holders that
acquire A Shares and/or CPOs in violation of these requirements will not be
considered the beneficial owners of such shares under our bylaws. Accordingly,
these holders will not be able to vote such A Shares and/or the capital stock
underlying such CPOs or receive any dividends, distributions or other rights in
respect of these shares. In addition, pursuant to our bylaws, these holders will
be obligated to pay us a penalty in an amount equal to the market value of the
shares so acquired.
Pursuant to our bylaws, a "competitor" is generally defined as any person
or entity who, directly or indirectly, is engaged in any of the following
businesses or activities: television production and broadcasting, pay television
production, program licensing, direct-to-home satellite services, publishing
(newspaper and/or magazine), publishing distribution, music recording, cable
television, the transmission of programming and/or other content by any other
means known or to be known, radio broadcasting and production, the promotion of
professional sports and other entertainment events, paging services, production,
feature film/motion picture production and distribution, dubbing and/or the
operation of an Internet portal. A "competitor" is also defined to include any
person, entity and/or group that is engaged in any type of business or activity
in which we may be engaged from time to time and from which we derive 5% or more
of our consolidated income.
BOARD NOTICES, MEETINGS, QUORUM REQUIREMENTS AND APPROVALS. To obtain the
prior approval of our Board, a potential acquiror must properly deliver a
written notice that states, among other things: (i) the number and class/type of
our shares it beneficially owns, (ii) the percentage of shares it beneficially
owns with respect to both our outstanding capital stock and the respective
class/type of our shares, (iii) the number and class/type of shares it intends
to acquire, (iv) the number and class/type of shares it intends to grant or
share a common interest or right, (v) its identity, or in the case of an
acquiror which is a corporation, trust or legal entity, its shareholders or
beneficiaries as well as the identity and nationality of each person effectively
controlling such corporation, trust or legal entity, (vi) its ability to acquire
our shares in accordance with our bylaws and Mexican law, (vii) its source of
financing the intended acquisition, (viii) if it has obtained any financing from
one of its related parties for the payment of the shares, (ix) the purpose of
the intended acquisition, (x) if it intends to acquire additional shares in the
future, which coupled with the current intended acquisition of shares and the A
Shares and/or CPOs previously beneficially owned by the potential acquiror,
would result in ownership of 20% or more of our voting shares, (xi) if it
intends to acquire control of us in the future, (xii) if the acquiror is our
competitor or if it has any direct or indirect economic interest in or family
relationship with one of our competitors, and (xiii) the identity of the
financial institution, if any, that will act as the underwriter or broker in
connection with any tender offer.
Either the Chairman, the Secretary or the Alternate Secretary of our Board
of Directors must call a Board meeting within 10 calendar days following the
receipt of the written notice and the Board meeting must be held within 45
calendar days following the call. Action by written consent is not permitted.
With the exception of acquisitions that must be approved by the general
extraordinary shareholder's meeting as described below in "Shareholder Notices,
Meetings, Quorum Requirements and Approvals," any acquisition of A
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Shares and/or CPOs representing at least 5% or 10%, as the case may be, of our
outstanding capital stock or A Shares (including A Shares underlying CPOs),
respectively, must be approved by at least the majority of the members of our
Board present at a meeting at which at least 75% of the members of our Board is
present. Such acquisitions must be approved by our Board within 60 calendar days
following the receipt of the written notice described above, unless the Board
determines that it does not have sufficient information upon which to base its
decision. In such case, the Board shall deliver a written request to the
potential acquiror for any additional information that it deems necessary to
make its determination. The 60 calendar days referred to above will commence
following the receipt of the additional information from the potential acquiror
to render its decision.
SHAREHOLDER NOTICES, MEETINGS, QUORUM REQUIREMENTS AND APPROVALS. In the
event (i) of a proposed acquisition of shares that would result in a "change of
control," (ii) our Board cannot hold a Board meeting for any reason, (iii) the
Board cannot reach a decision concerning an acquisition of A Shares and/or CPOs
representing at least 5% or 10%, as the case may be, of our outstanding capital
stock or A Shares (including A Shares underlying CPOs), (iv) the Board
determines that the proposed acquisition must be approved by our shareholders at
a general extraordinary shareholders' meeting, or (v) the potential acquiror is
our competitor which intends to acquire A Shares and/or CPOs representing 5% or
more of our capital stock and the Board fails to vote against the proposed
acquisition, then the proposed acquisition must be approved by the holders of at
least 75% of our outstanding A Shares at a general extraordinary shareholders'
meeting (both in the case of first and subsequent calls) at which the holders of
at least 85% of our outstanding A Shares are present. In addition, any proposed
merger, spin-off, or capital increase or decrease which results in a change of
control must also be approved by the holders of at least 75% of our outstanding
A Shares at a general extraordinary shareholders' meeting (both in the case of
first and subsequent calls) at which the holders of at least 85% of our
outstanding A Shares are present.
Pursuant to our bylaws, a "change of control" is defined as the occurrence
of any of the following: (i) the acquisition or transfer of ownership of a
majority of our outstanding A Shares, (ii) the ability of a person, entity or
group, other than the person who currently has the ability to, directly or
indirectly, elect a majority of the members of our Board of Directors, to elect
a majority of the members of our Board of Directors or (iii) the ability of a
person, entity or group, other than the person who currently has the ability to,
directly or indirectly, determine our administrative decisions or policies, to
determine our administrative decisions or policies.
In the event that the general extraordinary shareholders' meeting must
approve the proposed acquisition, either the Chairman, the Secretary or the
Alternate Secretary of our Board of Directors must publish a call for a general
extraordinary shareholders' meeting in the Official Gazette of the Federation
and two other newspapers of general circulation in Mexico City at least 30
calendar days prior to such meeting (both in the case of first and subsequent
calls). Once the call for the general extraordinary shareholders' meeting has
been published, all information related to the agenda for the meeting must be
available for review by the holders of the A Shares at the offices of our
Secretary.
MANDATORY TENDER OFFERS IN THE CASE OF CERTAIN ACQUISITIONS. If either our
Board of Directors or our shareholders at a general extraordinary shareholders'
meeting, as the case may be, authorize an acquisition of A Shares and/or CPOs
which increases the acquiror's ownership to 20% or more, but not more than 50%,
of our outstanding A Shares, without such acquisition resulting in a change of
control, then the acquiror must effect its acquisition by way of a cash tender
offer for a specified number of shares equal to the greater of (x) the
percentage of A Shares (including those A Shares underlying CPOs) intended to be
acquired or (y) 10% of our outstanding capital stock. In the event that our
shareholders approve an acquisition that would result in a change of control,
the acquiror must effect its acquisition by way of a cash tender offer for 100%
of our total outstanding capital stock at a price which cannot be lower than the
highest of the following:
(i) the book value of the A Shares and CPOs as reported on the last
quarterly income statement approved by the Board of Directors,
(ii) the highest closing price of the A Shares, CPOs and/or GDSs on
any stock exchange during any of the three hundred and sixty five
(365) days preceding the date of the shareholders' resolution
approving the acquisition; or
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(iii) the highest price paid for any A Shares, CPOs and/or GDSs at any
time by the acquiror.
All tender offers must be made in Mexico and the U.S. within 60 days
following the date on which the acquisition was approved by our Board of
Directors or shareholders' meeting, as the case may be. All holders must be paid
the same price for their A Shares and/or any shares underlying CPOs.
The provisions of our bylaws summarized above regarding mandatory tender
offers in the case of certain acquisitions are generally more stringent than
those provided for under the Mexican Securities Market Law. In accordance with
the Mexican Securities Market Law, bylaw provisions regarding mandatory tender
offers in the case of certain acquisitions may differ from the requirements set
forth in such law, provided that those provisions are more protective to
minority shareholders than those afforded by law. In these cases, the relevant
bylaw provisions, and not the relevant provisions of the Mexican Securities
Market Law, will apply to certain acquisitions specified therein. See "--
Mexican Securities Market Law."
EXCEPTIONS. The provisions of our bylaws summarized above will not apply to
(i) transfers of A Shares and/or CPOs by operation of the laws of inheritance,
(ii) acquisitions of A Shares and/or CPOs by any person who, directly or
indirectly, is entitled to appoint the greatest number of members to our Board
of Directors, as well as by (A) entities controlled by such person, (B)
affiliates of such person, (C) the estate of such person, (D) certain family
members of such person, and (E) such person, when such person acquires any A
Shares and/or CPOs from any entity, affiliate, person or family member referred
to in (A), (B) and (D) above, and (iii) acquisitions or transfers of A Shares
and/or CPOs by us, our subsidiaries or affiliates, or any trust created by us or
any of our subsidiaries.
AMENDMENTS TO THE ANTITAKEOVER PROVISIONS. Any amendments to these
antitakeover provisions must be authorized by the CNBV and registered before the
Public Registry of Commerce at our corporate domicile.
ENFORCEABILITY OF CIVIL LIABILITIES
We are organized under the laws of Mexico. Substantially all of our
directors, executive officers and controlling persons reside outside of the
United States, all or a significant portion of the assets of our directors,
executive officers and controlling persons, and substantially all of our assets,
are located outside of the United States and some of the experts named in this
annual report also reside outside of the United States. As a result, it may not
be possible for you to effect service of process within the United States upon
these persons or to enforce against them or us in U.S. courts judgments
predicated upon the civil liability provisions of the federal securities laws of
the United States. We have been advised by our Mexican counsel, Mijares,
Angoitia, Cortes y Fuentes, S.C., that there is doubt as to the enforceability,
in original actions in Mexican courts, of liabilities predicated solely on U.S.
federal securities laws and as to the enforceability in Mexican courts of
judgments of U.S. courts obtained in actions predicated upon the civil liability
provisions of U.S. federal securities laws. See "Key Information -- Risk Factors
-- Risks Factors Related to Our Securities -- It May Be Difficult to Enforce
Civil Liabilities Against Us or Our Directors, Executive Officers and
Controlling Persons
MATERIAL CONTRACTS
We have been granted a number of concessions by the Mexican government that
authorize us to broadcast our programming over our television and radio stations
and our cable and DTH systems, as well as operate our nationwide paging
business. These concessions are described under "Information on the Company
Business-- Overview--Regulation." If we are unable to renew, or if the Mexican
government revokes, any of the concessions for our significant television
stations, our business would be materially adversely affected. See "Key
Information -- Risk Factors -- Risk Factors Related to Our Business -- The
Operation of Our Business May Be Terminated or Interrupted if the Mexican
Government Does Not Renew or Revokes Our Broadcast or Other Concessions."
We operate our DTH satellite service in Mexico, Innova, through a joint
venture with News Corp. and Liberty Media, and our DTH joint ventures in Latin
America outside of Mexico and Brazil through a partnership with News Corp.,
Globopar and Liberty Media. See "Information on the Company Business Overview--
DTH Joint Ventures."
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We completed a refinancing of our indebtedness in 2000, which refinancing
involved a tender offer for our outstanding Series A Senior Notes, Series B
Senior Notes and Senior Discount Debentures and the amendment of the related
indentures, as well as the issuance of Ps.3.0 billion (nominal) as of April 14,
2000 of UDI-denominated notes. We also amended our working capital facility with
Banamex in July 2000. We issued U.S.$200.0 million aggregate principal amount of
8 5/8% Senior Notes due 2005 in August 2000, U.S.$300.0 million aggregate
principal amount of 8% Senior Notes due 2011 in September 2001, refinanced
approximately U.S.$100.0 million of our indebtedness through a five-year U.S.
$100 million term loan facility in December 2001and U.S. $300 million in
aggregate principal amount of 8.5% Senior Notes due 2002. We redeemed all of our
remaining Senior Discount Debentures and terminated the related indentures in
May 2001. In addition, in May 2003, we repaid all of the remaining Series A
Senior Notes, which matured in May 2003, with the net proceeds from a long-term
credit agreement that we entered into with a Mexican Bank for an aggregate
principal amount of Ps.800.0 million. For a description of the material terms of
the amended indentures related to the Series A Senior Notes and Series B Senior
Notes, the UDI-denominated notes, the indenture and supplemental indentures
related to our 8 5/8% Senior Notes due 2005, our 8% Senior Notes due 2011 and
our 8.5% Senior Notes due 2032, our working capital facility with Banamex, our
five-year term U.S. $100.0 million loan facility and our Ps.800 million
long-term credit agreement, see "Operating and Financial Review and Prospects --
Liquidity, Foreign Exchange and Capital Resources -- Refinancings" and "--
Indebtedness."
Our transactions and arrangements with related parties are described under
"Major Shareholders and Related Party Transactions -- Related Party
Transactions."
For a description of our material transactions and arrangements with
Univision, see "Information on the Company -- Business Overview -- Univision."
For a description of our joint venture agreement with Grupo Prisa, see
"Information on the Company -- Business Overview -- Radio -- Joint Venture;
Proposed Acquisition."
For a description of our recent acquisition of OCEN, see "Information on
the Company -- Business Overview -- Other Business -- Sports and Show Business
Promotions."
LEGAL PROCEEDINGS
Our United States music recording subsidiary, Fonovisa, Inc., made an
estimated U.S.$10.0 million in payments over a ten-year period in an apparent
violation of U.S. laws. As a result, we underreported taxable income. We have
taken action to assure that these payments have stopped. In connection with this
matter, we pled guilty to one count of filing a false corporate tax return for
the fiscal year ended December 31, 1992 and paid a U.S.$700,000 fine in 2000.
This matter did not have, and we do not expect that it will have, a material
adverse effect on our financial condition or results of operations. In addition,
we recently sold our music recording operations, including Fonovisa, to
Univision in April 2002. We may have to pay certain working capital adjustments
to Univision in connection with an audit of the music recording business, which
is expected to be resolved by the parties in 2003. We do not expect that this
matter will have a material adverse effect on our financial condition or results
of operations. As a result of this sale, we are no longer engaged in the music
recording business. See "Information on the Company -- Business Overview --
Music Recording."
On June 21, 2002, DirecTV WC, Inc., or DirecTV, drew down on a U.S.$10.0
million letter of credit that we issued in connection with our license agreement
with DirecTV relating to the 2002 Korea/Japan FIFA World Cup. DirecTV has
claimed that we have breached certain black-out obligations in connection with
our transmission of certain 2002 World Cup soccer matches. DirecTV
simultaneously filed an arbitration claim for damages as a result of the alleged
breach for an additional amount of U.S.$15.0 million. We believe that we have
not violated the license agreement, and we continue to oppose the arbitration
process and the claims asserted by DirecTV. Notwithstanding our opposition to
the arbitration process, we have consented to participate in the proceedings,
under objection, and we are currently in the process of discovery. We cannot
give you any assurances as to the outcome of the arbitration process.
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In June 2003, we were notified by the Secretaria de Hacienda y Credito
Publico, or the Mexican tax authority, of a federal tax claim made against us
for approximately Ps.302.0 million plus approximately Ps.658.7 million of
penalties and surcharges. The claim, which relates to an alleged assets tax
liability for the year ended December 31, 1994, was originally brought by the
Mexican tax authority in 1999, but was dismissed in 2002 on procedural grounds.
We believe that this claim is without merit, and we intend to vigorously defend
this claim, although no assurances can be given as to the outcome of this
dispute.
There are other various legal actions and other claims pending against us
that are incidental to our ordinary course of our business. Our management does
not consider these actions or claims to be material. See Note 13 to our year-end
financial statements.
EXCHANGE CONTROLS
For a description of exchange controls and exchange rate information, see
"Key Information -- Exchange Rate Information."
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TAXATION
U.S. TAXES
GENERAL. The following is a summary of the anticipated material U.S.
federal income tax consequences of the purchase, ownership and disposition of
GDSs, CPOs and the A Shares, L Shares and D Shares underlying the CPOs, in each
case, except as otherwise noted, by U.S. Holders (as defined below). This
discussion does not address all aspects of U.S. federal income taxation that may
be relevant to a particular holder based on the holder's particular
circumstances. For example, with respect to U.S. Holders, the following
discussion does not address the U.S. federal income tax consequences to a U.S.
Holder:
- that owns, directly, indirectly or through attribution, 2% or
more of the total voting power or value of our shares;
- that is a dealer in securities, insurance company, financial
institution, tax-exempt organization, U.S. expatriate,
broker-dealer or trader in securities; or
- whose functional currency is not the U.S. Dollar.
Also, this discussion does not consider:
- the tax consequences to the shareholders, partners or
beneficiaries of a U.S. Holder; or
- special tax rules that may apply to a U.S. Holder that holds
GDSs, CPOs or underlying A Shares, L Shares and D Shares, as part
of a "straddle," "hedge," "conversion transaction," "synthetic
security" or other integrated investment.
In addition, the following discussion does not address any aspect of state,
local or non-U.S. tax laws other than Mexican tax laws. Further, this discussion
generally applies only to U.S. Holders that hold the CPOs, GDSs or underlying A
Shares, L Shares and D Shares as capital assets within the meaning of Section
1221 of the Internal Revenue Code.
The discussion set forth below is based on the U.S. federal income tax laws
as in force on the date of this annual report, including:
- the Internal Revenue Code of 1986, as amended, applicable
Treasury regulations and judicial and administrative
interpretations, and
- the convention between the Government of the United States of
America and the Government of the United Mexican States for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion
with respect to Taxes on Income, including the applicable
protocol, collectively referred to herein as the "tax treaty,"
and is subject to changes to those laws and the tax treaty subsequent to the
date of this annual report, which changes could be made on a retroactive basis;
and
- is also based, in part, on the representations of the depositary
with respect to the GDSs and on the assumption that each
obligation in the deposit agreement relating to the GDSs in the
deposit agreement and any related agreements will be performed in
accordance with its terms.
As used in this section, the term "U.S. Holder" means a beneficial owner of
CPOs, GDSs or underlying A Shares, L Shares and D Shares that is, for U.S.
federal income tax purposes:
- a citizen or individual resident of the United States;
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- a corporation or partnership created or organized in or under the
laws of the United States or of any political subdivision of the
United States, other than a partnership treated as foreign under
U.S. treasury regulations;
- an estate the income of which is included in gross income for
U.S. federal income tax purposes regardless of source; or
- a trust, in general, if a U.S. court is able to exercise primary
supervision over its administration and one or more U.S. persons
have the authority to control all of its substantial decisions.
An individual may be treated as a resident of the United States in any
calendar year for U.S. federal income tax purposes by being present in the
United States on at least 31 days in that calendar year and for an aggregate of
at least 183 days during a three-year period ending at the close of that year.
For purposes of this calculation, all of the days present in the current year,
one-third of the days present in the immediately preceding year and one-sixth of
the days present in the second preceding year would be counted. Residents are
taxed for U.S. federal income purposes as if they were U.S. citizens.
The application of the tax treaty to U.S. Holders is conditioned upon,
among other things, the assumptions that the U.S. Holder:
- is not a resident of Mexico for purposes of the tax treaty;
- is an individual who has a substantial presence in the United
States;
- is entitled to the benefits of the tax treaty under the
limitation on benefits provision contained in Article 17 of the
tax treaty; and
- does not have a fixed place of business or a permanent
establishment in Mexico with which its ownership of CPOs, GDSs or
underlying A Shares, L Shares and D Shares is effectively
connected.
For U.S. federal income tax purposes, U.S. Holders of GDSs and CPOs will be
treated as the beneficial owners of underlying A Shares, L Shares and D Shares
represented by the GDSs and CPOs.
DIVIDENDS. Any distribution paid by us, including the amount of any Mexican
taxes withheld, will be included in the gross income of a U.S. Holder as
ordinary income to the extent that the distribution is paid out of our current
and/or accumulated earnings and profits, as determined under U.S. federal income
tax principles. A U.S. Holder who is an individual may be eligible for reduced
rates of taxation on any amount of such distributions treated as dividends. U.S.
Holders will not be entitled to claim a dividends received deduction for these
dividends. To the extent, if any, that the amount of a distribution exceeds our
current and/or accumulated earnings and profits, the distribution will first
reduce the U.S. Holder's adjusted tax basis in its CPOs, GDSs or underlying A
Shares, L Shares and D Shares and, to the extent the distribution exceeds the
U.S. Holder's adjusted tax basis, it will be treated as gain from the sale of
the U.S. Holder's CPOs, GDSs or the underlying A Shares, L Shares and D Shares.
The U.S. Dollar value of any dividends paid in Pesos, including the amount
of any Mexican taxes withheld, will be calculated by reference to the interbank
exchange rate in effect on the date of receipt by the U.S. Holder or, with
respect to the GDSs, JPMorgan Chase Bank, in its capacity as Depositary,
regardless of whether the payment is in fact converted into U.S. Dollars. U.S.
Holders should consult their own tax advisors regarding the treatment of any
foreign currency gain or loss on any dividends paid in Pesos that are not
converted into U.S. Dollars on the day the Pesos are received. Dividends
distributed by us on CPOs, GDSs or shares underlying the CPOs generally will
constitute foreign source "passive income" or, in the case of some U.S. Holders,
"financial services income," for foreign tax credit purposes.
Subject to certain limitations, a U.S. holder may be eligible to claim as a
credit or deduction for purposes of computing its U.S. federal income tax
liability the Mexican withholding tax properly withheld from dividend
distributions. The calculation and availability of foreign tax credits and, in
the case of a U.S. Holder that elects to
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deduct foreign taxes, of deductions, involves the application of complex rules
that depend on a U.S. Holder's particular circumstances. U.S. Holders should
consult their own tax advisors regarding the availability of foreign tax credits
or deductions.
Under rules enacted by the U.S. Congress in 1997 and other guidance
released by the U.S. Treasury Department, foreign tax credits will not be
allowed for withholding taxes imposed on some short-term or hedged positions in
securities or on arrangements in which a U.S. Holder's expected economic profit,
after non-U.S. taxes, is insubstantial. U.S. Holders should consult their own
advisors concerning the implications of these rules in light of their particular
circumstances.
Pro rata distributions of additional shares to our shareholders (including
U.S. Holders of GDSs) generally will not be subject to U.S. federal income tax.
Holders that are not U.S. Holders of CPOs, GDSs or underlying A Shares, L
Shares and D Shares will not be subject to U.S. federal income or withholding
tax on dividends paid with respect to the CPOs, GDSs or the underlying A Shares,
L Shares and D Shares, unless the income is effectively connected with the
conduct by the holder of a trade or business in the United States.
CAPITAL GAINS. Gain or loss recognized by a U.S. Holder on the sale or
other taxable disposition of CPOs, GDSs or underlying A Shares, L Shares and D
Shares will be subject to U.S. federal income taxation as capital gain or loss
in an amount equal to the difference between the amount realized on the sale or
other taxable disposition and the U.S. Holder's adjusted tax basis in the CPOs,
GDSs or underlying A Shares, L Shares and D Shares. Such capital gain or loss
generally will be long-term capital gain or loss if the CPOs, GDSs or underlying
A Shares, L Shares and D Shares have been held for more than one year at the
time of disposition.
Such capital gains generally will be U.S. source income, unless the gains
are subject to Mexican taxation, in which case such gains generally will be
treated as arising in Mexico under the tax treaty. If capital gains are subject
to Mexican taxation under the tax treaty, a U.S. Holder generally may elect to
treat such gains as foreign source income for U.S. foreign tax credit limitation
purposes. However, any such Mexican taxes may not be used to offset U.S. federal
income tax on any other item of income, and foreign taxes on any other item of
income cannot be used to offset U.S. federal income tax on such gains. U.S.
Holders should consult their tax advisors.
Capital losses recognized on the sale or other taxable disposition of CPOs,
GDSs or underlying A Shares, L Shares and D Shares generally will offset U.S.
source income. Deposits and withdrawals of CPOs for GDSs and of underlying A
Shares, L Shares and D Shares for CPOs by U.S. Holders will not be subject to
U.S. federal income tax.
A non-U.S. holder generally will not be subject to U.S. federal income tax
on gain recognized on a disposition of our CPOs, GDSs or underlying A Shares, L
Shares and D Shares unless:
- the gain is effectively connected with the non-U.S. holder's
conduct of a trade or business in the United States. In this
case, the gain will generally be taxed on a net income basis at
the regular graduated rates and in the manner applicable to U.S.
persons and, if the non-U.S. holder is a foreign corporation, the
"branch profits tax" may also apply; or
- the non-U.S. holder is an individual who holds CPOs, GDSs or
underlying A Shares, L Shares and D Shares as a capital asset, is
present in the United States for 183 days or more in the taxable
year of the disposition and meets other requirements.
U.S. BACKUP WITHHOLDING. A U.S. Holder may be subject to U.S. information
reporting and U.S. backup withholding on dividends paid on underlying A Shares,
L Shares and D Shares, and on proceeds from the sale or other disposition of
CPOs, GDSs or underlying A Shares, L Shares and D Shares, unless the U.S.
Holder:
- is a corporation or comes within an exempt category; or
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- provides a taxpayer identification number, certifies as to no
loss of exemption from backup withholding tax and otherwise
complies with the applicable requirements of the backup
withholding rules.
The amount of any backup withholding will be allowed as a credit against
the U.S. Holder's U.S. federal income tax liability and may entitle such holder
to a refund; provided, however, that certain required information is furnished
to the U.S. Internal Revenue Service. A Non-U.S. Holder may be required to
comply with certification and identification procedures in order to establish
its exemption from backup withholding.
MEXICAN TAXES
GENERAL. The following is a summary of the anticipated material Mexican tax
consequences of the purchase, ownership and disposition of CPOs, GDSs or
underlying A Shares, L Shares and D Shares by a person that is not a resident of
Mexico, as defined below.
U.S. Holders should consult with their own tax advisors as to their
entitlement to benefits afforded by the tax treaty between the United States and
Mexico. Mexico has also entered into and is negotiating with various countries
regarding other tax treaties that may have an effect on the tax treatment of
CPOs, GDSs or shares underlying the CPOs. Holders should consult with their tax
advisors as to their entitlement to the benefits afforded by these treaties.
This discussion does not constitute, and shall not be considered as, legal
or tax advice to holders. This discussion is for general information purposes
only and is based upon the federal tax laws of Mexico as in effect on the date
of this annual report, which are subject to change, including:
- the Income Tax Law, Federal Tax Code, and
- the tax treaty.
Holders should consult their own tax advisors as to U.S., Mexican or other
tax consequences of the purchase, ownership and disposition of CPOs, GDSs or
underlying A Shares, L Shares and D Shares.
For Mexican income tax purposes, the following principles apply regarding
residency:
- a natural person may be treated as a resident of Mexico if he or
she has established his or her home in Mexico, unless he or she
resided in another country for more than 183 calendar days during
a year and can demonstrate that he or she had become a resident
of that country for tax purposes;
- a legal entity is a resident of Mexico if it is established under
Mexican law, or it has established in Mexico its main place of
management;
- a Mexican citizen is presumed to be a resident of Mexico unless
he or she can demonstrate otherwise; and
- a permanent establishment in Mexico of a foreign individual or
entity shall be required to pay taxes for income attributable to
such permanent establishment.
DIVIDENDS. Dividends, either in cash or in any other form, paid with
respect to the shares underlying the CPOs, including those CPOs represented by
GDSs, will not be subject to Mexican withholding tax.
When dividends are paid from our "previously taxed net earnings account,"
or "cuenta de utilidad fiscal neta," we will not be required to pay any Mexican
corporate income tax on the dividends. When such dividends are paid from our
"reinvested net tax earnings account," or "cuenta de utilidad fiscal neta
reinvertida," we will be required to pay a 5% Mexican corporate tax on the
dividends multiplied by 1.5385. If dividends are not paid from either our
"previously taxed net earnings account" or our "reinvested net tax earnings
account" we will be required to pay a
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34% Mexican corporate income tax on the dividends multiplied by 1.5152. As of
January 1st, 2002, Mexican entities may no longer defer 5% of their corporate
income tax on reinvested earnings. However, under applicable transition rules,
when paying dividends, Mexican entities with a positive balance in their
"reinvested net tax earnings account" corresponding to taxes deferred for
earnings obtained in 1999, 2000 and 2001, must pay such deferred tax before
comparing the dividend to the "previously taxed net earnings account."
As a result of changes to the Mexican tax law effective January 1, 2002,
the corporate income tax rate will be gradually reduced to 32%. For 2003 the
applicable corporate income tax rate is 34% and will be reduced by 1% in each
year until reaching 32% in 2005.
SALES OR OTHER DISPOSITIONS. Deposits and withdrawals of CPOs for GDSs and
of underlying A Shares, L Shares and D Shares for CPOs will not give rise to
Mexican tax or transfer duties.
Generally, the sale or other disposition of CPOs, GDSs or underlying A
Shares, L Shares and D Shares will not be subject to any Mexican tax if:
- the sale is carried out through the Mexican Stock Exchange (or a
recognized securities market located in a country with which
Mexico has entered into a tax treaty); and
- the Ministry of Finance and Public Credit considers such
securities to be publicly held.
Sales or other dispositions of CPOs, GDSs or underlying A Shares, L Shares
and D Shares made in other circumstances would be subject to Mexican income tax.
However, under the tax treaty, any U.S. Holder that is eligible to claim the
benefits of the tax treaty may be exempt from Mexican tax on gains realized on a
sale or other disposition of CPOs and shares underlying the CPOs in a
transaction that is not carried out through the Mexican Stock Exchange or such
other approved securities markets. The U.S. Holder will be exempt under the tax
treaty if the U.S. Holder did not own directly or indirectly 25% or more of the
our outstanding shares within the 12-month period preceding such sale or
disposition. Gains realized by other Holders that are eligible to receive
benefits pursuant to other income tax treaties to which Mexico is a party may be
exempt from Mexican income tax in whole or in part. Non-U.S. Holders should
consult their own tax advisors as to their possible eligibility under such other
income tax treaties.
OTHER MEXICAN TAXES. There are no estate, gift, or succession taxes
applicable to the ownership, transfer or disposition of CPOs, GDSs or underlying
A Shares, L Shares and D Shares. However, a gratuitous transfer of CPOs, GDSs or
underlying A Shares, L Shares and D Shares may, in some circumstances, result in
the imposition of a Mexican federal tax upon the recipient. There are no Mexican
stamp, issuer, registration or similar taxes or duties payable by holders of
GDSs, CPOs, or underlying A Shares, L Shares and D Shares.
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DOCUMENTS ON DISPLAY
For further information with respect to us and our CPOs and GDSs, we refer
you to the filings we have made with the SEC. Statements contained in this
annual report concerning the contents of any contract or any other document are
not necessarily complete. If a contract or document has been filed as an exhibit
to any filing we have made with the SEC, we refer you to the copy of the
contract or document that has been filed. Each statement in this annual report
relating to a contract or document filed as an exhibit to any filing we have
made with the SEC is qualified in its entirety by the filed exhibit.
We are subject to the informational requirements of the Securities Exchange
Act of 1934 and, in accordance with these requirements, file reports and other
information with the SEC. These reports and other information, as well as any
related exhibits and schedules, may be inspected, without charge, at the public
reference facility maintained by the SEC at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the SEC's regional offices
located at the Woolworth Building, 233 Broadway, 13th Floor, New York, New York,
10007 and Citicorp Center, 500 West Madison Street, Suite 1400 Chicago, Illinois
60661-2511. Copies of these reports and other information may also be obtained
from the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. These reports and other information
may also be inspected at the offices of the New York Stock Exchange, 20 Broad
Street, New York, New York 10005.
We furnish JPMorgan Chase Bank, the depositary for our GDSs, with annual
reports in English. These reports contain audited consolidated financial
statements that have been prepared in accordance with Mexican GAAP, and include
reconciliations of net income and stockholders' equity to U.S. GAAP. These
reports have been examined and reported on, with an opinion expressed by, an
independent auditor. The depositary is required to mail our annual reports to
all holders of record of our GDSs. The deposit agreement for the GDSs also
requires us to furnish the depositary with English translations of all notices
of shareholders' meetings and other reports and communications that we send to
holders of our CPOs. The depositary is required to mail these notices, reports
and communications to holders of record of our GDSs.
As a foreign private issuer, we are not required to furnish proxy
statements to holders of our CPOs or GDSs in the United States.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK DISCLOSURES
Market risk is the exposure to an adverse change in the value of financial
instruments caused by interest rate changes, foreign currency fluctuations and
changes in the market value of investments. The following information includes
"forward-looking statements" that involve risks and uncertainties. Actual
results could differ from those presented. Unless otherwise indicated, all
information below is presented on a Mexican GAAP basis in constant Pesos in
purchasing power as of December 31, 2002.
RISK MANAGEMENT. We are exposed to market risks arising from changes in
interest rates and foreign currency exchange rates, in both the Mexican and
United States markets. Our risk management activities are monitored by our
treasury department and reported to our Executive Committee.
We monitor our exposure to interest rate risk by evaluating differences
between interest rates on our outstanding debt and short-term investments and
market interest rates on similar financial instruments. Foreign exchange risk is
monitored by assessing our net monetary liability position in U.S. Dollars and
our forecasted cash flow needs for anticipated U.S. Dollar investments and
servicing our U.S. Dollar-denominated debt. Equity price risk is assessed by
evaluating the long-term value of our investment in both domestic and foreign
affiliates, versus comparable investments in the marketplace. We do not use
derivative financial instruments to manage equity risk. We classify our equity
investments, consisting primarily of investments in both domestic and foreign
affiliates, as long-term assets.
Historically, we have not undertaken any specific actions to cover our
exposure to interest rate risk and, at December 31, 2000, 2001 and 2002, we were
not a party to any interest rate risk management transactions. Over the years,
we have selectively entered into contracts in order to manage our exposure to
changes in the U.S. Dollar to Peso exchange rate, including the forward
contracts discussed below. Even though our objective in managing foreign
currency fluctuations is to reduce earnings and cash flow volatility associated
with foreign exchange rate changes, we nonetheless incurred losses in connection
with the forward exchange contracts described below as a result of the
appreciation of the Peso as compared to the U.S. Dollar in 2001. We do not enter
into foreign currency transactions for trading or speculative purposes.
In June 1999, we entered into forward exchange contracts for notional
amounts of U.S.$100.0 million and Ps.1,253.5 million (nominal) to hedge the U.S.
Dollar semi-annual interest payments in respect of our Series A Senior Notes and
Series B Senior Notes. Following the completion of the tender offer and consent
solicitations for these notes, these forward exchange contracts hedged our U.S.
Dollar semi-annual interest payments on our three-year U.S.$400.0 million term
loan facility through 2001. As of December 31, 2001, no forward exchange
contracts were outstanding. See Notes 1(p) and 9 to our year-end financial
statements.
In the third quarter of 1999, we entered into a total return bond swap
agreement in respect of our Series A Senior Notes. Pursuant to this agreement,
as amended, a financial institution purchased, in the open market at a premium,
U.S.$41.0 million of our Series A Senior Notes. We received an up-front fee in
an amount equal to 5.4% of the face amount of these securities. Depending upon
market conditions, upon maturity, we are required to pay or receive an amount
equal to the difference between the market value paid by the financial
institution for these securities and the respective market value of Mexican
Federal Government Bonds with an annual interest of 9.875% due in 2007. See Note
9 to our year-end financial statements.
In July 1999, we entered into forward exchange contracts for notional
amounts of U.S.$45.0 million and Ps.585.7 million (nominal) for purposes of
hedging our anticipated investments in our DTH joint ventures. The terms of
these contracts were for periods ranging from 14 to 26 months. As of December
31, 2001, none of these contracts were outstanding. See Notes 1(p) and 5 to our
year-end financial statements.
We did not enter into any new financial instruments during 2001. In
connection with the Senior Notes due 2005, in the third quarter of 2002 we
entered into currency option agreements with a financial institution on a
notional amount of U.S.$100 million. Under these agreements and subject to the
exercise of the options by us and
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the financial institution, as well as the payment of related premiums by us for
approximately U.S.$5.9 million in April 2004, the parties will exchange related
U.S. dollars and Mexican pesos at fixed exchange rates in October 2005. We have
recorded the change in fair value of these agreements from inception through
December 31, 2002 in the integral cost of financing (foreign exchange gain or
loss). In addition, in October 2002 we entered into option agreements to
exchange interest rates with a financial institution on a notional amount of
U.S.$200 million, and received premiums in cash for an amount of approximately
U.S.$1.7 million which are being amortized through the maturity of these Senior
Notes. We have recorded the change in fair value of these agreements, together
with the amortization of related premiums, from inception through December 31,
2002 in the integral cost of financing (interest expense). In February 2003, the
financial institution declined to exercise these options and we recognized the
benefit of unamortized premiums.
In connection with the Senior Notes due 2011, in the fourth quarter of 2002
we entered into interest rate swap agreements with a financial institution on a
notional amount of U.S.$100 million. These agreements involve the exchange of
amounts based on a fixed interest rate for amounts based on variable interest
rates over the life of the agreement, without an exchange of the notional amount
upon which the payments are based. We have recorded the change in fair value of
these agreements from inception through December 31, 2002 in the integral cost
of financing (interest expense).
In the third quarter of 2002, we entered into agreements to sell share put
options to a financial institution and received premiums in cash for
approximately U.S.$1.4 million. Under these agreements and depending on market
conditions we have a remaining potential obligation to purchase the equivalent
of 30,006,360 shares of our common stock for an aggregate amount of
approximately U.S.$12.9 million. These put options were exercisable only in
April 2003. The financial institution may settle the put options by physical
settlement of the options or by cash at our option. We have recorded the change
in fair value of these agreements, together with related premiums, from
inception through December 31, 2002 in other income or expense. These agreements
were settled down by the financial institution in April 2003.
Effective March 1, 2002, we designated our equity investment in Univision
as an effective hedge of the U.S. Dollar semi-annual interest payment with
respect to both our 8% Senior Notes due in 2011 and our 8.5% Senior Notes due
2032 (see Notes 1(c) and 9). For so long as we maintain our net investment in
Univision as an effective hedge against these interest payment obligations, any
foreign exchange gain or loss attributable to our 8% Senior Notes due 2011 and
8.5% Senior Notes due 2032 will be credited or charged directly to equity
(foreign currency translation) for Mexican GAAP purposes.
SENSITIVITY AND FAIR VALUE ANALYSES. The sensitivity analyses that follow
are intended to present the hypothetical change in fair value or loss in
earnings due to changes in interest rates, inflation rates, foreign exchange
rates and debt and equity market prices as they affect our financial instruments
at December 31, 2001 and 2002. These analyses address market risk only and do
not present other risks that we face in the ordinary course of business,
including country risk and credit risk. The hypothetical changes reflect our
view of changes that are reasonably possible over a one-year period. During
2002, interest rates in Mexico and the United States steadily declined and the
Peso has significantly appreciated against the U.S. Dollar. Nevertheless, for
purposes of the following sensitivity analyses, we have made conservative
assumptions of expected near term future changes in U.S. interest rates, Mexican
interest rates, inflation rates and Peso to U.S. Dollar exchange rates of 10%,
10%, 10% and 5%, respectively. The results of the analyses do not purport to
represent actual changes in fair value or losses in earnings that we will incur.
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FAIR VALUE AT DECEMBER 31,
-------------------------------------------------
2001 2002 2002
------------- ----------- ---------------
(MILLIONS OF PESOS IN PURCHASING POWER OF
DECEMBER 31, 2002 OR
MILLIONS AS OF U.S. DOLLARS)(a)
ASSETS:...................................................
Temporary investments(b)............................. Ps. 5,432.4 Ps. 7,173.6 U.S.$ 685.6
LIABILITIES:..............................................
U.S. DOLLAR-DENOMINATED DEBT:........................
Long-term debt securities(c)................... Ps. 750.6 Ps. 804.9 U.S.$ 76.9
Five-year U.S.$100.0 million term loan(d)...... 970.1 1,046.4 100.0
Senior Notes due 2005(e)....................... 2,080.5 2,247.7 214.8
Senior Notes due 2011(f)....................... 2,924.0 3,150.8 301.1
Senior Notes due 2032(g) ...................... -- 3,032.2 289.8
MEXICAN PESO-DENOMINATED DEBT:.......................
UDI-denominated long-term loan facility(h)..... 3,742.5 3,764.9 359.8
Long-term notes payable to Mexican Bank(i)..... 748.0 491.1 46.9
(a) Peso amounts have been converted to U.S. Dollars solely for the convenience
of the reader at a nominal exchange rate of Ps.10.464 per U.S. Dollar, the
Interbank Rate as of December 31, 2002.
(b) At December 31, 2002, our temporary investments consisted of fixed rate
short-term deposits in commercial banks (primarily Peso- and U.S.
Dollar-denominated in 2001 and 2002). Given the short-term nature of these
investments, an increase in U.S. and/or Mexican interest rates would not
significantly decrease the fair value of these investments.
(c) At December 31, 2002, fair value exceeded the carrying value of those debt
securities by approximately Ps.28.6 million (U.S.$2.7 million). The
increase in the fair value of a hypothetical 10% increase in the estimated
market price of those debt securities would amount to Ps.80.5 million
(U.S.$7.7 million) at December 31, 2002.
(d) At December 31, 2002, fair value approximates the carrying value of amounts
outstanding under this loan. A hypothetical 10% increase in U.S. interest
rates would decrease the fair value of amounts outstanding under this loan
by approximately Ps.5.3 million (U.S.$0.5 million) at December 31, 2002.
(e) At December 31, 2002, fair value exceeded carrying value of these notes by
approximately Ps.154.9 million (U.S.$14.8 million). The increase in the
fair value of these notes of a hypothetical 10% increase in the quoted
market price of these notes would amount to approximately Ps.224.8 million
(U.S.$21.5 million) at December 31, 2002.
(f) At December 31, 2002, fair value exceeded carrying value of these notes by
approximately Ps.11.6 million (U.S.$1.1 million). The increase in the fair
value of these notes of a hypothetical 10% increase in the quoted market
price of these notes would amount to approximately Ps.315.1 million
(U.S.$30.1 million) at December 31, 2002.
(g) At December 31, 2002, carrying value exceeded fair value of these notes by
approximately Ps.107.0 million (U.S.$10.2 million). The increase in the
fair value of these notes of a hypothetical 10% increase in the quoted
market price of these notes would amount to approximately Ps.303.2 million
(U.S.$29.0 million) at December 31, 2002.
(h) At December 31, 2002, fair value exceeded carrying value of amounts
outstanding under this loan by approximately Ps.261.7 million (U.S.$25.0
million). At December 31, 2002, a hypothetical 10% increase in the Mexican
inflation rate to 6.27% for the year 2003 would increase principal amounts
outstanding under this UDI-denominated long term loan facility by
approximately Ps.219.7 million. An inflation rate of 3.00% is forecasted by
the Mexican government for 2003.
(i) At December 31, 2002, fair value approximates carrying value of these
notes. At December 31, 2002, a hypothetical 10% increase in Mexican
interest rates would decrease the fair value of these notes by
approximately Ps.3.2 million (U.S.$0.3 million).
We are also subject to the risk of foreign currency exchange rate
fluctuations, resulting from the net monetary position in U.S. Dollars of our
Mexican operations, as follows:
YEAR ENDED DECEMBER 31,
-------------------------------------
2001 2002
-------------- --------------
(IN MILLIONS OF U.S. DOLLARS)
U.S. Dollar-denominated short-term investments and long-term notes
receivable................................................. U.S.$ 567.8 U.S.$ 577.3
U.S. Dollar-denominated senior debt securities and other notes
payable.................................................... 1,169.5 1,239.9
-------------- --------------
601.7 662.6
Derivative instruments, net..................................... -- 1.2
-------------- --------------
Net liability position..................................... U.S.$ 601.7 U.S.$ 663.8
============== ==============
At December 31, 2002, a hypothetical 5.0% depreciation in the U.S. Dollar
to Peso exchange rate would result in a loss in earnings of Ps.33.4 million and
an increase in other comprehensive loss of Ps.313.9 million. This depreciation
rate is based on the December 31, 2003 forecast of the U.S. Dollar to Peso
exchange rate for 2003 by the Mexican government for such year.
- 142 -
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
OF PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
Within the 90-day period prior to the date of this Form 20-F, we carried
out an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Rule 13a-14(c) and 15d-14(c) of the Exchange Act. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed in our periodic filings under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
There have been no significant changes in our internal controls or other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any significant deficiencies or material weaknesses
of internal controls that would require corrective action.
PART III
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Not applicable.
ITEM 16B. CODE OF ETHICS
Not applicable.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Not applicable.
PART IV
ITEM 17. FINANCIAL STATEMENTS
Grupo Televisa has responded to Item 18 in lieu of Item 17.
ITEM 18. FINANCIAL STATEMENTS
See pages F-1 through F-99, which are incorporated herein by reference.
ITEM 19. EXHIBITS
Documents filed as exhibits to this registration statement appear on the
following page.
- 143 -
(a) Exhibits.
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
1.1-- English translation of Amended and Restated Bylaws (Estatutos
Sociales) of the Registrant, dated as of April 30, 2003.
2.1-- Indenture relating to the 11 3/8% Series A Senior Notes, dated as of
May 13, 1996, between the Registrant, as Issuer, and Fleet National
Bank, as Trustee (previously filed with the Securities and Exchange
Commission as Exhibit 4.6 to the Registrant's Registration Statement
on Form F-3 (File number 333-11310), as amended (the "Form F-3"), and
incorporated herein by reference).
2.2-- Indenture relating to the 11 7/8% Series B Senior Notes, dated as of
May 13, 1996, between the Registrant, as Issuer, and Fleet National
Bank, as Trustee (previously filed with the Securities and Exchange
Commission as Exhibit 4.7 to the Form F-3 and incorporated herein by
reference).
2.3-- Supplemental Indenture relating to the 11 3/8% Series A Senior Notes,
dated as of April 11, 2000, between the Registrant, as Issuer, and
State Street Bank and Trust (as successor in interest to Fleet
National Bank), as Trustee (previously filed with the Securities and
Exchange Commission as Exhibit 2.4 to the Registrant's Annual Report
on Form 20-F for the year ended December 31, 1999 (the "1999 Form
20-F") and incorporated herein by reference).
2.4-- Supplemental Indenture relating to the 11 7/8% Series B Senior Notes,
dated as of April 11, 2000, between the Registrant, as Issuer, and
State Street Bank and Trust (as successor in interest to Fleet
National Bank), as Trustee (previously filed with the Securities and
Exchange Commission as Exhibit 2.5 to the 1999 Form 20-F and
incorporated herein by reference).
2.5-- Indenture relating to Senior Debt Securities, dated as of August 8,
2000, between the Registrant, as Issuer, and The Bank of New York, as
Trustee (previously filed with the Securities and Exchange Commission
as Exhibit 4.1 to the Registrant's Registration Statement on Form F-4
(File number 333-12738), as amended (the "2000 Form F-4"), and
incorporated herein by reference).
2.6-- First Supplemental Indenture relating to the 8 5/8% Senior Notes due
2005, dated as of August 8, 2000, between the Registrant, as Issuer,
and The Bank of New York and Banque Internationale a Luxembourg, S.A.
(previously filed with the Securities and Exchange Commission as
Exhibit 4.2 to the 2000 Form F-4 and incorporated herein by
reference).
2.7-- Second Supplemental Indenture relating to the 8 5/8% Senior Exchange
Notes due 2005, dated as of January 19, 2001, between the Registrant,
as Issuer, and the Bank of New York and Banque Internationale a
Luxembourg, S.A. (previously filed with the Securities and Exchange
Commission as Exhibit 4.3 to the 2000 Form F-4 and incorporated herein
by reference).
E-1
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.8-- Third Supplemental Indenture relating to the 8% Senior Notes due 2011,
dated as of September 13, 2001, between the Registrant, as Issuer, and
The Bank of New York and Banque Internationale a Luxembourg, S.A.
(previously filed with the Securities and Exchange Commission as
Exhibit 4.4 to the Registrant's Registration Statement on Form F-4
(File number 333-14200) (the "2001 Form F-4") and incorporated herein
by reference).
2.9-- Fourth Supplemental Indenture relating to the 8.5% Senior Exchange
Notes due 2032 between the Registrant, as Issuer, and The Bank of New
York and Dexia Banque Internationale a Luxembourg (previously filed
with the Securities Exchange Commission as Exhibit 4.5 to the
Registrant's Registration Statement on Form F-4 (the "2002 Form F-4")
and incorporated herein by reference).
2.10-- Fifth Supplemental Indenture relating to the 8% Senior Notes due 2011
between Registrant, as Issuer, and The Bank of New York and Dexia
Banque Internationale a Luxembourg (previously filed with the
Securities and Exchange Commission as Exhibit 4.5 to the 2001 Form F-4
and incorporated herein by reference).
2.11-- Form of Deposit Agreement between the Registrant, JPMorgan Chase Bank,
as depositary and all holders and beneficial owners of the Global
Depositary Shares, evidenced by Global Depositary Receipts (previously
filed with the Securities and Exchange Commission as an Exhibit to the
Registrant's Registration Statement on Form F-6 (File number
333-99195) (the "Form F-6") and incorporated herein by reference).
4.1-- Form of Indemnity Agreement between the Registrant and its directors
and executive officers (previously filed with the Securities and
Exchange Commission as Exhibit 10.1 to the Registrant's Registration
Statement on Form F-4 (File number 33-69636), as amended, (the "1993
Form F-4") and incorporated herein by reference).
4.2-- Agreement of General Partnership of Sky Multi-Country Partners, dated
as of October 24, 1997, among DTH USA, Inc., SESLA, Inc., Televisa
MCOP Holdings, Inc. and TCI Multicountry DTH, Inc (previously filed
with the Securities and Exchange Commission as Exhibit 10.3 to the
Form F-3 and incorporated herein by reference).
4.3-- Amended and Restated Collateral Trust Agreement, dated as of June 13,
1997, as amended, among PanAmSat Corporation, Hughes Communications,
Inc., Satellite Company, LLC, the Registrant and IBJ Schroder Bank and
Trust Company (previously filed with the Securities and Exchange
Commission as an Exhibit to the Registrant's Annual Report on Form
20-F for the year ended December 31, 2001 (the "2001 Form 20-F") and
incorporated herein by reference).
4.4-- Amended and Restated Program License Agreement, dated as of December
19, 2001, by and between Productora de Teleprogramas, S.A. de C.V. and
Univision Communications Inc. ("Univision") (previously filed with the
Securities and Exchange Commission as Exhibit 10.7 to the 2001 Form
F-4 and incorporated herein by reference).
E - 2
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
4.5-- Participation Agreement, dated as of October 2, 1996, by and among
Univision, Perenchio, the Registrant, Venevision and certain of their
respective affiliates (previously filed with the Securities and
Exchange Commission as Exhibit 10.8 to Univision's Registration
Statement on Form S-1 (File number 333-6309) (the "Univision Form
S-1") and incorporated herein by reference).
4.6-- Amended and Restated International Program Rights Agreement, dated as
of December 19, 2001, by and among Univision, Venevision and the
Registrant (previously filed with the Securities and Exchange
Commission as Exhibit 10.9 to the 2001 Form F-4 and incorporated
herein by reference).
4.7-- Co-Production Agreement, dated as of March 27, 1998, between the
Registrant and Univision Network Limited Partnership (previously filed
with the Securities and Exchange Commission as an Exhibit to
Univision's Annual Report on Form 10-K for the year ended December 31,
1997 and incorporated herein by reference).
4.8-- Summary of Termination of Joint Venture Agreement between the
Registrant and America Movil, S.A. de C.V. (successor in interest to
Telefonos de Mexico, S.A. de C.V.), dated as of April 7, 2002
(previously filed with the Securities and Exchange Commission as
Exhibit 4.8 to the 2001 Form 20-F and incorporated herein by
reference).
4.9-- Amended and Restated Bylaws (Estatutos Sociales) of Innova, S. de R.L.
de C.V., dated as of December 22, 1998 (previously filed with the
Securities and Exchange Commission as an Exhibit to the 1998 Form 20-F
and incorporated herein by reference).
4.10-- English translation of a summary of the provisions of Letter Agreement
between Registrant and Grupo Televicentro, S.A. de C.V., dated as of
December 10, 1993 (previously filed with the Securities and Exchange
Commission as an Exhibit to the Form F-3 and incorporated herein by
reference).
4.11-- U.S.$100,000,000 Credit Agreement, dated as of December 21, 2001,
among the Registrant, JPMorgan Chase Bank, J.P. Morgan Securities Inc.
and Salomon Smith Barney Inc. (previously filed with the Securities
and Exchange Commission as Exhibit 10.4 to the 2001 Form F-4 and
incorporated herein by reference).
4.12-- Summary of Joint Venture Agreement between the Registrant and
Promotora de Informaciones, S.A., dated as of October 14, 2001
(previously filed with the Securities and Exchange Commission as
Exhibit 4.13 to the 2001 Form 20-F and incorporated herein by
reference).
8.1-- List of Subsidiaries of Registrant.
12.1-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
12.2-- Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
E - 3
(b) Financial Statement Schedules
All financial statement schedules relating to the Registrant are omitted
because they are not required or because the required information, if material,
is contained in the audited year-end financial statements or notes thereto.
E - 4
SIGNATURE
The Registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
Date: June 30, 2003 GRUPO TELEVISA, S.A.
By: /s/ RAFAEL CARABIAS PRINCIPE
--------------------------------
Name: Rafael Carabias Principe
Title: Vice President of Administration
By: /s/ JORGE LUTTEROTH ECHEGOYEN
-------------------------------
Name: Jorge Lutteroth Echegoyen
Title: Controller and Vice President
CERTIFICATIONS
I, Emilio Azcarraga Jean, certify that:
1. I have reviewed this annual report on Form 20-F of Grupo Televisa, S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (and persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 30, 2003
By: /s/ EMILIO AZCARRAGA JEAN
-----------------------------------
Name: Emilio Azcarraga Jean
Title: Chairman, President and Chief Executive Officer
I, Alfonso de Angoitia Noriega, certify that:
1. I have reviewed this annual report on Form 20-F of Grupo Televisa, S.A.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (and persons performing
the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: June 30, 2003
By: /s/ ALFONSO DE ANGOITIA NORIEGA
----------------------------------------
Name: Alfonso de Angoitia Noriega
Title: Executive Vice President and Chief Financial Officer
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
GRUPO TELEVISA, S.A.
PAGE
----
Report of Independent Accountants................................................................................. F-2
Consolidated Balance Sheets as of December 31, 2001 and 2002...................................................... F-3
Consolidated Statements of Income for the Years Ended December 31, 2000, 2001 and 2002............................ F-5
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 2000, 2001 and 2002... F-6
Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 2000, 2001 and 2002..... F-7
Notes to Consolidated Financial Statements for the Years Ended December 31, 2000, 2001 and 2002................... F-9
Schedule II - Consolidated Valuation and Qualifying Accounts for the Years Ended December 31, 2000, 2001 and 2002.. F-66
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF
INNOVA, S. DE R.L. DE C.V.
PAGE
----
Report of Independent Accountants.................................................................................. F-67
Consolidated Balance Sheets as of December 31, 2002 and 2001....................................................... F-68
Consolidated Statements of Loss for the Years Ended December 31, 2002, 2001 and 2000............................... F-69
Consolidated Statements of Changes in Stockholders' Deficit for the Years Ended December 31, 2002,
2001 and 2000................................................................................................. F-70
Consolidated Statements of Changes in Financial Position for the Years Ended December 31, 2002, 2001 and
2000.......................................................................................................... F-71
Notes to Consolidated Financial Statements for the Years Ended December 31, 2002, 2001 and 2000.................... F-72
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico, D.F., February 26, 2003
To the Stockholders of Grupo Televisa, S.A.:
We have audited the accompanying consolidated balance sheets of Grupo Televisa,
S.A. and subsidiaries as of December 31, 2001 and 2002, and the related
consolidated statements of income, changes in stockholders' equity and changes
in financial position for the years ended December 31, 2000, 2001 and 2002, and
the financial statement schedule included in this Form 20-F. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and in Mexico. These standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 (p) to the consolidated financial statements, effective
January 1, 2001, Grupo Televisa, S.A. and subsidiaries adopted the guidelines of
the Bulletin C-2 "Financial Instruments", issued by the Mexican Institute of
Public Accountants.
In our opinion, the financial statements and financial statement schedule
referred to above present fairly, in all material respects, the consolidated
financial position of Grupo Televisa, S.A. and subsidiaries at December 31, 2001
and 2002, and the consolidated results of their operations, changes in their
stockholders' equity and changes in their financial position for the years ended
December 31, 2000, 2001 and 2002, in conformity with accounting principles
generally accepted in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
the consolidated net income for each of the three years ended December 31,
2000, 2001 and 2002, and the determination of consolidated stockholders' equity
at December 31, 2001 and 2002, to the extent summarized in Note 27 to the
consolidated financial statements.
PRICEWATERHOUSECOOPERS
/s/ FELIPE PEREZ CERVANTES, C.P.C.
------------------------------------
by: Felipe Perez Cervantes, C.P.C.
F-2
GRUPO TELEVISA, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002)
(NOTES 1 AND 2)
2001 2002
-------------- --------------
ASSETS
Current:
Available:
Cash....................................................... Ps. 513,376 Ps. 1,613,176
Temporary investments...................................... 5,432,399 7,173,633
-------------- --------------
5,945,775 8,786,809
Trade notes and accounts receivable - net....................... (Note 3) 9,268,759 9,563,636
Other accounts and notes receivable - net....................... 952,628 867,851
Due from affiliated companies - net............................. (Note 18) 435,247 -
Transmission rights, programs, production talent advances and
films ........................................................ (Note 4) 2,700,553 3,420,102
Inventories..................................................... 562,871 508,684
Other current assets............................................ 944,108 430,170
Current assets of discontinued operations....................... (Note 23) 729,650 -
-------------- --------------
Total current assets....................................... 21,539,591 23,577,252
Transmission rights, programs, literary works and films......... (Note 4) 5,215,428 4,837,440
Investments..................................................... (Note 5) 5,342,799 3,033,092
Property, plant and equipment - net............................. (Note 6) 14,736,497 15,343,222
Goodwill and trademarks - net................................... (Note 7) 3,053,495 7,966,199
Deferred costs - net............................................ (Note 8) 1,726,481 1,357,716
Other assets.................................................... (Note 12) 350,102 358,550
Non-current assets of discontinued operations................... (Note 23) 40,837 -
-------------- --------------
Total assets............................................... Ps. 52,005,230 Ps. 56,473,471
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
GRUPO TELEVISA, S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002)
(NOTES 1 AND 2)
2001 2002
-------------- --------------
LIABILITIES
Current:
Current portion of long-term debt............................ (Note 9) Ps. 353,889 Ps. 1,239,880
Trade accounts payable....................................... 2,083,571 2,228,507
Customer deposits and advances............................... 11,416,678 11,549,427
Taxes payable................................................ 285,787 886,387
Accrued interest............................................. 220,092 307,468
Other accrued liabilities.................................... 656,364 817,329
Due to affiliated companies - net............................ (Note 18) - 58,712
Current liabilities of discontinued operations............... (Note 23) 179,824 -
-------------- --------------
Total current liabilities.................................. 15,196,205 17,087,710
Long-term debt.................................................. (Note 9) 13,550,537 13,345,215
Customer deposits and advances.................................. - 203,668
Other long-term liabilities..................................... 482,452 760,451
Deferred taxes.................................................. (Note 22) 1,830,814 2,035,860
DTH joint ventures.............................................. (Note 11) 1,109,246 1,645,242
Pension plans and seniority premiums............................ (Note 12) 39,477 70,838
-------------- --------------
Total liabilities.......................................... 32,208,731 35,148,984
-------------- --------------
Commitments and contingencies................................... (Note 13)
STOCKHOLDERS' EQUITY
Contributed capital:
Capital stock, no par value: (Note 14)
Issued..................................................... 7,613,820 7,613,827
Repurchased................................................ (238,529) (245,121)
-------------- --------------
Outstanding................................................ 7,375,291 7,368,706
Additional paid-in capital................................... 216,056 216,458
-------------- --------------
7,591,347 7,585,164
-------------- --------------
Earned capital:
Retained earnings: (Note 15)
Legal reserve.............................................. 1,112,925 1,184,044
Reserve for repurchase of shares........................... 5,516,855 5,516,855
Unappropriated earnings.................................... 8,876,211 10,196,964
-------------- --------------
15,505,991 16,897,863
Accumulated other comprehensive loss......................... (Note 16) (5,754,643) (5,035,952)
Net income for the year...................................... (Note 15) 1,422,375 737,836
-------------- --------------
11,173,723 12,599,747
-------------- --------------
Total majority interest.................................... 18,765,070 20,184,911
Minority interest............................................... (Note 17) 1,031,429 1,139,576
-------------- --------------
Total stockholders' equity................................. 19,796,499 21,324,487
-------------- --------------
Total liabilities and stockholders' equity................. Ps. 52,005,230 Ps. 56,473,471
============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
GRUPO TELEVISA, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002,
EXCEPT PER CPO AMOUNTS)
(NOTES 1 AND 2)
2000 2001 2002
-------------- -------------- --------------
Net sales................................... (Note 26) Ps. 21,581,836 Ps. 20,785,582 Ps. 21,559,269
Cost of sales............................... 12,052,840 12,094,542 12,418,087
-------------- -------------- --------------
Gross profit............................. 9,528,996 8,691,040 9,141,182
-------------- -------------- --------------
Operating expenses:
Selling.................................. 1,561,791 1,574,068 1,685,546
Administrative........................... 1,444,955 1,423,332 1,355,619
-------------- -------------- --------------
3,006,746 2,997,400 3,041,165
-------------- -------------- --------------
Depreciation and amortization............... 1,311,655 1,354,040 1,449,687
-------------- -------------- --------------
Operating income......................... (Note 26) 5,210,595 4,339,600 4,650,330
Integral cost of financing - net............ (Note 19) 1,054,852 436,918 612,972
Restructuring and non-recurring charges..... (Note 20) 2,026,787 574,337 841,863
Other expense - net......................... (Note 21) 527,656 694,486 2,134,077
-------------- -------------- --------------
Income before taxes...................... 1,601,300 2,633,859 1,061,418
-------------- -------------- --------------
Income tax and assets tax................... (Note 22) 310,424 548,711 295,251
Employees' profit sharing................... (Note 22) 56,529 22,722 4,096
-------------- -------------- --------------
366,953 571,433 299,347
-------------- -------------- --------------
Income before equity in losses of affiliates,
income from discontinued operations and
cumulative loss effect of accounting
change ................................ 1,234,347 2,062,426 762,071
Equity in losses of affiliates.............. (Note 5) (1,938,734) (551,871) (1,155,818)
Income from discontinued operations - net... (Note 23) 25,121 14,063 1,062,750
Cumulative loss effect of accounting
change - net........................... (Note 1 (p)) - (73,402) -
-------------- -------------- --------------
Consolidated net (loss) income........... (679,266) 1,451,216 669,003
Minority interest........................... (Note 17) (192,989) (28,841) 68,833
-------------- -------------- --------------
Net (loss) income........................ (Note 15) Ps. (872,255) Ps. 1,422,375 Ps. 737,836
============== ============== ==============
Net (loss) income per CPO................ (Note 24) Ps. (0.30) Ps. 0.48 Ps. 0.24
============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
GRUPO TELEVISA, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002)
(NOTES 1 AND 2)
CONTRIBUTED CAPITAL EARNED CAPITAL
---------------------------- ----------------------------------------------
ACCUMULATED
OTHER NET
CAPITAL ADDITIONAL RETAINED COMPREHENSIVE INCOME
STOCK PAID-IN EARNINGS (LOSS) INCOME (LOSS)
(NOTE 14) CAPITAL (NOTE 15) (NOTE 16) (NOTE 15)
----------------------------------------------------------------------------
BALANCE AT JANUARY 1, 2000 Ps. 7,369,077 Ps. 7,117 Ps.16,469,608 Ps.(1,854,129) Ps. 1,279,476
Appropriation of net income for 1999 -- -- 1,279,476 -- (1,279,476)
Repurchase of capital stock (46,252) -- (584,866) -- --
Capital stock repurchased by subsidiary
(Note 2) (48,550) -- (594,771) -- --
Capital stock issued (Note 2) 144,158 208,939 -- -- --
Decrease in minority interest -- -- -- -- --
Comprehensive loss -- -- -- (3,081,693) (872,255)
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2000 7,418,433 216,056 16,569,447 (4,935,822) (872,255)
Appropriation of net loss for 2000 -- -- (872,255) -- 872,255
Capital stock repurchased by subsidiary (43,142) -- (191,201) -- --
Increase in minority interest -- -- -- -- --
Comprehensive (loss) income -- -- -- (818,821) 1,422,375
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2001 7,375,291 216,056 15,505,991 (5,754,643) 1,422,375
Appropriation of net income for 2001 -- -- 1,422,375 -- (1,422,375)
Shares issued 7 402 -- -- --
Capital stock repurchased by subsidiary (6,592) -- (30,503) -- --
Increase in minority interest -- -- -- -- --
Comprehensive income -- -- -- 718,691 737,836
----------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2002 Ps. 7,368,706 Ps. 216,458 Ps.16,897,863 Ps.(5,035,952) Ps. 737,836
============================================================================
TOTAL MINORITY TOTAL
MAJORITY INTEREST STOCKHOLDERS'
INTEREST (NOTE 17) EQUITY
------------------------------------------------
BALANCE AT JANUARY 1, 2000 Ps.23,271,149 Ps. 1,591,362 Ps.24,862,511
Appropriation of net income for 1999 -- -- --
Repurchase of capital stock (631,118) -- (631,118)
Capital stock repurchased by subsidiary
(Note 2) (643,321) -- (643,321)
Capital stock issued (Note 2) 353,097 (446,614) (93,517)
Decrease in minority interest -- (63,740) (63,740)
Comprehensive loss (3,953,948) (69,501) (4,023,449)
------------------------------------------------
BALANCE AT DECEMBER 31, 2000 18,395,859 1,011,507 19,407,366
Appropriation of net loss for 2000 -- -- --
Capital stock repurchased by subsidiary (234,343) -- (234,343)
Increase in minority interest -- 19,922 19,922
Comprehensive (loss) income 603,554 -- 603,554
------------------------------------------------
BALANCE AT DECEMBER 31, 2001 18,765,070 1,031,429 19,796,499
Appropriation of net income for 2001 -- -- --
Shares issued 409 -- 409
Capital stock repurchased by subsidiary (37,095) -- (37,095)
Increase in minority interest -- 108,147 108,147
Comprehensive income 1,456,527 -- 1,456,527
------------------------------------------------
BALANCE AT DECEMBER 31, 2002 Ps.20,184,911 Ps. 1,139,576 Ps.21,324,487
================================================
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
GRUPO TELEVISA, S.A. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002)
(NOTES 1 AND 2)
2000 2001 2002
-------------- -------------- --------------
Operating activities:
Net (loss) income.......................................... Ps. (872,255) Ps. 1,422,375 Ps. 737,836
Adjustments to reconcile net income to resources provided by
(used for) operating activities:
Equity in losses of affiliates........................... 1,938,734 551,871 1,155,818
Minority interest........................................ 192,989 28,841 (68,833)
Depreciation and amortization............................ 1,311,655 1,354,040 1,449,687
Amortization and write-off of goodwill................... 222,741 425,104 1,504,505
Other amortization....................................... 399,272 135,127 85,901
Write-down of investment in Videovisa.................... 28,650 - -
Deferred income tax and employees' profit sharing........ (631,876) (178,572) (603,357)
Gain on disposition of affiliates........................ (970,496) - 12,499
Provision for doubtful accounts and write-off of
receivables............................................ 297,257 246,692 339,224
Cumulative effect of accounting change................... - 73,402 -
Income from discontinued operations...................... (25,121) (14,063) (1,062,750)
-------------- -------------- --------------
1,891,550 4,044,817 3,550,530
-------------- -------------- --------------
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade notes and accounts receivable - net................ (18,970) (730,595) (567,648)
Transmission rights, programs, films and production talent
advances............................................... 119,352 649,081 (148,627)
Inventories.............................................. 16,971 (156,199) 54,187
Other accounts and notes receivable and other current
assets................................................. (294,642) (554,782) 532,262
Increase (decrease) in:
Customer deposits and advances........................... 1,245,476 475,628 336,417
Trade accounts payable................................... (60,645) (149,264) 144,936
Other liabilities, taxes payable and deferred taxes...... (771,778) (744,425) 1,207,940
Pension plans and seniority premiums..................... 25,386 29,562 18,310
-------------- -------------- --------------
261,150 (1,180,994) 1,577,777
-------------- -------------- --------------
Resources provided by continuing operations.............. 2,152,700 2,863,823 5,128,307
Resources provided by discontinued operations............ 83,345 10,752 -
-------------- -------------- --------------
Resources provided by operating activities............... 2,236,045 2,874,575 5,128,307
-------------- -------------- --------------
Financing activities:
Issuance of Senior Notes................................... 2,121,027 2,910,366 3,139,200
Other decrease in debt-net................................. (1,160,983) (1,386,472) (2,458,532)
Capital stock repurchased.................................. (1,274,440) (234,343) (37,095)
Shares issued.............................................. 353,097 - 409
Minority interest.......................................... (703,342) (8,919) 176,980
Translation effect......................................... (163,363) (336,016) (243,960)
-------------- -------------- --------------
Resources (used for) provided by financing activities...... (828,004) 944,616 577,002
-------------- -------------- --------------
F-7
2000 2001 2002
-------------- -------------- --------------
Investing activities:
Due from affiliated companies-- net........................ 120,116 (17,588) 493,959
Investments and goodwill................................... (503,035) (5,128,349) (4,807,845)
Disposition of investments................................. 1,588,204 243,098 721,381
Investments in property, plant and equipment and deferred
costs.................................................... (2,585,631) (1,953,721) (1,535,762)
Disposition of property, plant and equipment and deferred
costs.................................................... 859,473 547,820 140,576
Disposition of discontinued operations..................... - - 2,189,977
Trademarks and other assets................................ 232,400 107,494 (66,561)
-------------- -------------- --------------
Resources used for investing activities.................... (288,473) (6,201,246) (2,864,275)
-------------- -------------- --------------
Net increase (decrease) in cash and temporary investments.. 1,119,568 (2,382,055) 2,841,034
Cash and temporary investments at beginning of year........ 7,208,262 8,327,830 5,945,775
-------------- -------------- --------------
Cash and temporary investments at end of year.............. Ps. 8,327,830 Ps. 5,945,775 Ps. 8,786,809
============== ============== ==============
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
GRUPO TELEVISA, S.A. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002,
EXCEPT PER CPO, PER SHARE AND EXCHANGE RATE AMOUNTS)
1. ACCOUNTING POLICIES
The principal accounting policies followed by Grupo Televisa, S.A. (the
"Company") and its consolidated subsidiaries (collectively, the "Group") and
observed in the preparation of these financial statements are summarized below.
a) Basis of presentation
The financial statements of the Group are presented on a consolidated basis
and in accordance with accounting principles generally accepted in Mexico
("Mexican GAAP"), and accordingly, include the recognition of the effects of
inflation on financial information. The consolidated financial statements
include the net assets and results of operations of all companies in which the
Company has a controlling interest (subsidiaries). All significant intercompany
balances and transactions have been eliminated from the financial statements.
The preparation of financial statements in conformity with Mexican GAAP
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Actual results could differ
from those estimates.
b) Members of the Group
At December 31, 2002, the Group consisted of the Company and various
subsidiaries, including the following:
COMPANY'S
OWNERSHIP (1) BUSINESS SEGMENTS (2)
------------- ---------------------
Telesistema Mexicano, S.A. de C.V. and subsidiaries 100% Television broadcasting
Programming for pay television
Programming licensing
Television Independiente de Mexico, S.A. de C.V. and
subsidiaries 100% Television broadcasting
Televisa Comercial, S.A. de C.V. 100% Television broadcasting
Editorial Televisa, S.A. de C.V. and subsidiaries 100% Publishing
Grupo Distribuidoras Intermex, S.A. de C.V. and subsidiaries 100% Publishing distribution
Empresas Cablevision, S.A. de C.V. and subsidiaries 51% Cable television (3)
Sistema Radiopolis, S.A. de C.V. and subsidiaries 50% Radio (see Note 2)
Corporativo Vasco de Quiroga, S.A. de C.V. and subsidiaries 100% Other businesses
CVQ Espectaculos, S.A. de C.V. and subsidiaries 100% Other businesses
Galavision DTH, S. de R.L. de C.V. 100% DTH (4)
------------------
(1) Percentage of equity interest directly held by the Company in the holding
subsidiary.
(2) See Note 26 for a description of each of the Company's business segments.
(3) In April 2002, the minority shareholder of Empresas Cablevision, S.A. de
C.V. ("Cablevision"), the subsidiary through which the Group's cable
television business is conducted, sold its 49% equity interest in
Cablevision in connection with an offering of CPOs of Cablevision on the
Mexican Stock Exchange.
(4) The Group has investments in joint ventures engaged in direct-to-home
("DTH") broadcast satellite pay television.
F-9
The Group's television broadcasting, cable television, radio and nationwide
paging businesses require concessions (licenses) granted by the Mexican Federal
Government for a fixed term, subject to renewal in accordance with Mexican law.
At December 31, 2002, the expiration dates of the Group's concessions were as
follows:
CONCESSIONS EXPIRATION DATES
----------- ----------------
Television broadcasting.............................. Various from 2003 to 2012
Cable television..................................... In 2029
Radio................................................ Various from 2003 to 2009
Nationwide paging.................................... In 2006 and 2019
The Group's management expects that concessions expiring in 2003 will be
renewed or granted by the Mexican Federal Government.
c) Foreign currency translation
Monetary assets and liabilities of Mexican companies denominated in foreign
currencies are translated at the prevailing exchange rate at the balance sheet
date. Resulting exchange rate differences are recognized in income for the year,
within integral cost of financing.
Assets, liabilities and results of operations of non-Mexican subsidiaries
are first converted to Mexican GAAP, including restating to recognize the
effects of inflation based on the inflation of each foreign country, and then
translated to Mexican pesos utilizing the exchange rate as of the balance sheet
date at year-end. Resulting translation differences are recognized in equity as
part of the other comprehensive income or loss. Financial statements of
non-Mexican operations that are integral to Mexican operations are converted to
Mexican GAAP and translated to Mexican pesos by utilizing the exchange rate of
the balance sheet date at year-end for monetary assets and liabilities, with the
related adjustment included in net income, and historical exchange rates for
non-monetary items.
Effective March 1, 2002, the Company designated its net investment in
Univision as an effective hedge of its U.S.$300 million (Ps.3,139,200) Senior
Notes due 2011 and its U.S.$300 million (Ps.3,139,200) Senior Notes due 2032
(see Note 9). Consequently, beginning March 2002, any foreign exchange gain or
loss attributable to this U.S. dollar long-term debt, being hedged by the
Company's net investment in shares of Univision, is credited or charged directly
to equity (other comprehensive income or loss).
d) Temporary investments
The Group considers all highly liquid investments with original maturities
of one year or less, consisting primarily of short-term promissory notes of
Mexican financial institutions, to be temporary investments. Temporary
investments are valued at market value.
As of December 31, 2001 and 2002, temporary investments consisted of fixed
short-term deposits in commercial banks (primarily Mexican Pesos and U.S.
dollars), with an average yield of approximately 3.97% for U.S. dollar deposits
and 12.55% for Mexican Peso deposits in 2001, and approximately 1.99% for U.S.
dollar deposits and 7.56% for Mexican Peso deposits in 2002.
e) Transmission rights, programs, literary works, production talent advances,
films and inventories
Transmission rights, literary works and inventories of paper, materials and
supplies are valued at the lesser of acquisition cost or net realizable value.
Programs, films and inventories of magazines are valued at the lesser of
production cost, which consists of direct production costs and production
overhead, or net realizable value.
Transmission rights, programs, literary works, production talent advances,
films and inventories are restated by using the National Consumer Price Index
("NCPI") factors, and specific costs for some of these assets, which are
determined by the Group on the basis of last purchase price or production cost,
or replacement cost whichever is more representative. Cost of sales is
determined based on restated costs, and calculated for the month in which such
F-10
transmission rights, programs, literary works, production talent advances, films
and inventories are matched with related revenues.
Transmission rights and literary works are amortized over the lives of the
contracts. Transmission rights in perpetuity, are amortized on a straight-line
basis over the period of the expected benefit as determined based upon past
experience, but not for more than 25 years.
The Group's policy is to capitalize the production costs of programs which
benefit more than one period and amortize them over the expected period of
program revenues based on the Company's historic revenue patterns for similar
productions.
The Group makes payments to artists, producers, writers and actors for
exclusive rights to their services in the Group's future programs for specified
periods (production talent advances). Such payments will be included as direct
or indirect costs of program production to be amortized starting with
transmission.
f) Investments
Investments in companies in which the Group exercises significant influence
or joint control are accounted for by the equity method. The Group recognizes
equity in losses of affiliated companies up to the amount of its initial
investment and subsequent capital contributions, or beyond that when guaranteed
commitments have been made by the Group in respect of obligations incurred by
investees, but not in excess of such guarantees. If an affiliated company for
which the Group had recognized equity losses up to the amount of its guarantees
generates net income in the future, the Group would not recognize its
proportionate share of this net income until the Group first recognizes its
proportionate share of previously unrecognized losses. Other investments are
accounted for at cost.
g) Property, plant and equipment
Property, plant and equipment are recorded at acquisition cost, and
thereafter are restated using the NCPI, except for equipment of non-Mexican
origin, which is restated using an index which reflects the inflation in the
respective country of origin and the exchange rate of the Mexican Peso against
the currency of such country at the balance sheet date ("Specific Index").
Depreciation of property, plant and equipment is based upon the restated
carrying value of the assets in use and is computed using the straight-line
method over the estimated useful lives of the assets ranging principally from 20
to 65 years for buildings, 5 to 25 years for technical equipment and 5 to 20
years for other equipment.
h) Goodwill, trademarks and other deferred costs
Goodwill, trademarks and certain deferred costs are recognized at cost, and
thereafter restated using the NCPI. They are amortized using the straight-line
method over the following periods:
YEARS
---------------------------------
Goodwill............................................................................ 20
Trademarks.......................................................................... 40
Television network concession....................................................... 15
Licenses and software............................................................... Various from 3 to 10
Internet development costs.......................................................... 3
Financing costs .................................................................... Over the life of the related debt
i) Evaluation of long-lived assets
The Group evaluates the recoverability of its long-lived assets to
determine whether current events or circumstances warrant adjustment to the
carrying value. Such evaluation may be based on current and projected income and
cash flows from operations as well as other economic and market variables (see
Notes 7 and 21).
F-11
j) Exclusive rights letters and players signing bonuses
Through December 31, 2001, exclusive rights letters for soccer players,
which entitled the holder to the players exclusive participation, were valued at
cost, and gain or loss was recognized at the time the exclusive right was
canceled, usually when a player was transferred. During 2002, in conjunction
with new international regulations issued precluding the use of exclusive rights
letters for hiring soccer players, the Group wrote-off all of its related assets
which were previously accounted for as other non-current assets (see Note 20).
Signing bonuses are valued at cost and are amortized over the short-term
contract period.
k) Customer deposits and advances
Deposit and advance agreements for television advertising services provide
that customers receive volume discounts, that are fixed for the contract period,
for television broadcast advertising time based on rates established by the
Group. Such rates vary depending on when the advertisement is aired, including
the season, hour, day and type of programming.
Customer deposits and advances are considered non-monetary items since they
are non-refundable and are applied at rates in effect when they were received.
Accordingly, these deposits and advances are restated to recognize the effects
of inflation by using the NCPI.
l) Stockholders' equity
The capital stock and other stockholders' equity accounts (other than the
result from holding non-monetary assets and the foreign currency translation
adjustments) include the effect of restatement, determined by applying the
change in the NCPI between the dates capital was contributed or net results were
generated to the most recent period end. The restatement represents the amount
required to maintain the contributions, share repurchases and accumulated
results in Mexican Pesos in purchasing power as of December 31, 2002.
m) Revenue recognition
The Group derives the majority of its revenues from media and entertainment
related business activities both domestically and internationally. Revenues
generally are recognized when the service is provided and collectibility is
probable. A summary of revenue recognition policies by activity is as follows:
- Advertising revenues, including deposits from customers for future
advertising, are recognized at the time the advertising services
are rendered.
- Revenues from program services for pay television and licensed
television programs are recognized when the programs are sold and
become available for broadcast.
- Revenues from magazine subscriptions are deferred and recognized
proportionately as products are delivered to subscribers. Revenues
from the sales of magazines and books are recognized when the
merchandise is delivered, net of a provision for estimated
returns.
- Cable television subscription, pay per view and installation fees
are recognized in the period in which the services are rendered.
- Revenues from attendance to soccer games, including revenues from
advance ticket sales for soccer games and other promotional
events, are recognized on the date of the relevant event.
- Revenues from nationwide paging are recognized when the paging
services are rendered.
- Motion picture production and distribution revenues are recognized
as the films are exhibited.
- Revenues from dubbing services are recognized in the period in
which the services are rendered.
- Advertising revenues from Internet operations are recognized based
on the number of times in which such advertisement is shown on the
Group's Internet portal and the number of times such advertisement
is visited by a user.
F-12
n) Pension plans, seniority premiums and indemnities
Plans exist for pension and retirement payments for substantially all of
the Group's Mexican employees, funded through irrevocable trusts. Payments to
the trusts are determined in accordance with actuarial computations of funding
requirements. Pension payments are made by the trust administrators.
Increases or decreases in the seniority premium liability are made by the
Group and are based upon actuarial calculations.
Severance obligations to dismissed personnel are charged to income in the
year in which they are incurred.
o) Income tax
The recognition of deferred income tax is made by using the comprehensive
asset and liability method. Under this method, deferred income taxes are
calculated by applying the respective income tax rate to the temporary
differences between the accounting and tax values of assets and liabilities at
the date of the financial statements. The cumulative effect of recognizing
deferred taxes under the comprehensive asset and liability method at January 1,
2000, increased the deferred tax liability and decreased stockholders' equity by
Ps.2,712,043 (of which Ps.2,642,542 impacted majority stockholders' equity).
p) Derivative financial instruments
The Group uses from time to time derivative financial instruments for the
purpose of reducing its exposure to adverse fluctuations in foreign exchange
rates and interest. All derivative financial instruments are recorded in the
balance sheet at their fair value and changes in their fair value are recorded
in each period in the income statement. The Group started accounting for all of
its derivative financial instruments at fair value as of January 1, 2001, and
recognized a cumulative effect loss of Ps.73,402 (net of income tax benefit of
Ps.39,525) in the consolidated income statement for the year ended December 31,
2001.
q) Comprehensive income
Comprehensive income includes the net income for the period presented in
the income statement plus other results for the period reflected in the
stockholders' equity which are from non-owner sources (see Note 16).
r) New accounting bulletins
In December 2001, the MIPA issued Bulletin C-9, "Liability, Provisions,
Contingent Assets and Liabilities, and Commitments". Bulletin C-9 provides
guidance for the valuation, presentation and disclosure of liabilities and
provisions (other than income taxes, employee benefit plans, financial
instruments to be valued on a fair value basis and asset allowances), including
contingent assets and liabilities, as well as disclosure guidelines for
commitments incurred by an entity as a part of its operations. Bulletin C-9
became effective as of January 1, 2003. The Group estimates that adoption of
Bulletin C-9 in 2003 will not have a significant impact on its consolidated
financial statements.
In January 2002, the MIPA issued Bulletin C-8, "Intangible Assets," which
defines intangible assets as costs incurred and rights or privileges acquired
that will generate a future economic benefit. Bulletin C-8 provides a definition
of research and development costs requiring that only development costs can be
deferred to future period. Furthermore, Bulletin C-8 states that preoperating
costs should be expensed as a period cost, unless they can be classified as
development costs. Bulletin C-8 requires that intangible assets, with indefinite
useful lives should not be amortized, but should be tested for impairment
annually. Intangible assets with finite useful lives should be amortized over
their useful lives. The provisions of Bulletin C-8 are effective as of January
1, 2003; however, in accordance with Bulletin C-8, the specific procedures for
testing impairment of intangible assets will be provided by the Mexican GAAP
Bulletin C-15, which is expected to be issued by the MIPA in March 2003. Because
the impairment test guidelines under Mexican GAAP have not been issued yet, the
Group continues evaluating the impact that adoption of Bulletin C-8 will have on
its consolidated financial statements.
F-13
s) Prior years' financial statements
The Group's financial statements for prior years have been restated to
Mexican pesos in purchasing power as of December 31, 2002, by using a
restatement factor derived from the change in the NCPI, which for 2000 and 2001
was 1.1036 and 1.0570, respectively. Had the alternative weighted average factor
allowed under Mexican GAAP been applied to restate the Group's financial
statements for prior years, which included the results of Mexican and
non-Mexican subsidiaries, the restatement factor for 2000 and 2001 would have
been 1.1026 and 1.0597, respectively.
The NCPI at the following dates was:
December 31, 1999 85.581
December 31, 2000 93.248
December 31, 2001 97.354
December 31, 2002 102.904
Certain reclassifications have been made in prior years' financial
statements to conform to classifications used in the most recent year.
2. ACQUISITIONS AND DISPOSITIONS
In July 2000, in conjunction with a series of related transactions intended
to change the shareholder structure of the Group's controlling company, the
Group (i) sold to a former shareholder of the Group's controlling company its
equity interest in Pegaso Telecomunicaciones, S.A. de C.V. ("Pegaso") for
U.S.$126 million (Ps.1,364,824) in the form of short-term unsecured notes which
matured and were paid in full on August 28, 2000, and its interest in the net
assets related to the operations of its newspaper "Ovaciones" in exchange for a
U.S.$25 million (Ps.270,799) short-term unsecured note; and (ii) through a
subsidiary repurchased from its controlling company 58,238,668 Series A Shares,
not traded as CPO units, for U.S.$59.4 million in the form of U.S.$34.4 million
in cash and the U.S.$25 million note received in connection with the Ovaciones
sale. As a result of the disposition of Pegaso and Ovaciones, the Group
recognized a pre-tax gain on such disposals of Ps.99,159 as other income in the
consolidated income statement for the year ended December 31, 2000 (see Note
21).
In August 2000, the Company reached an agreement to acquire a 35% interest
owned by a minority shareholder in Editorial Televisa, S.A. de C.V. ("Editorial
Televisa"), the major subsidiary of the Group's publishing segment. This
acquisition was completed on October 19, 2000, and was effected through a series
of related transactions which included the merger of Editorial Televisa into the
Company, pursuant to which the Company issued 172,922,325 shares of capital
stock, in the form of 57,640,775 CPOs, for the benefit of such minority
shareholder. This acquisition was accounted for as a purchase, recognizing a
related goodwill of Ps.74,847 and an additional paid-in capital of Ps.208,939.
In June 2001, the Group acquired a 30% equity interest in Argos
Comunicacion, S.A. de C.V. ("Argos"), a company engaged in the production of
television programming, for an aggregate cash purchase price of Ps.147,739, and
recognized related goodwill in the amount of Ps.110,755 resulting from the
excess of the purchase price over the carrying value of the net assets of Argos
(see Note 7).
In October 2001, the Company sold a 50% equity stake, with limited voting
rights, in the Group's radio subsidiary, Sistema Radiopolis, S.A. de C.V., to
Grupo Prisa, a Spanish communications group, for an aggregate purchase price of
U.S.$50 million (Ps.492,503), (U.S.$15 million (Ps.147,751) of which was in the
form of cash and U.S.$35 million (Ps.344,753) of which was in the form of notes
receivable due in July 2002), and a U.S.$10 million (Ps.97,012) capital
contribution made in July 2002. The Group recognized a pre-tax gain on this sale
of approximately Ps.288,512, which represented the excess of the cash and
non-cash proceeds over the 50% carrying value of the net assets of this radio
subsidiary at the transaction date (see Note 21).
In December 2001, the Group entered into a series of transactions with
Univision Communications Inc. ("Univision") by which, among other things, the
Group (i) acquired 375,000 non-voting preferred shares of Univision stock, for
U.S.$375 million (Ps. 3,637,957) in cash, which converted upon the receipt of
required U.S. regulatory approvals in February 2002, into 10,594,500 shares of
Univision Class "A" Common Stock; (ii) received warrants (which expire in
December 2017) to purchase, at an exercise price of U.S.$38.261 per share,
6,274,864
F-14
shares of Univision Class "A" Common Stock and 2,725,136 shares of Univision
Class "T" Common Stock which expire in December 2017, as a consideration for
surrendering certain governance rights previously held by the Group in
Univision; (iii) agreed to sell its music recording business to Univision, which
sale was consummated in April 2002, in exchange for 6,000,000 shares of
Univision Class "A" Common Stock and warrants (which expire in December 2017) to
purchase, at an exercise price of U.S.$38.261 per share, 100,000 shares of
Univision Class "A" Common Stock; and (iv) amended its program license agreement
to provide Univision with exclusive rights to broadcast substantially all of the
Group's programming in the United States solely over the Univision, Galavision
and Telefutura networks, subject to some exceptions, in exchange for increased
royalties. Following the conversion of the preferred shares described above into
shares of Univision common stock, the Group recognized an excess of the purchase
price of U.S.$375.0 million paid by the Group over the carrying value of the
Univision stock acquired of approximately U.S.$321.8 million (Ps.3,366,916).
Also, in connection with the sale of the music recording business described
above, the Group recognized (i) an excess of the purchase price of U.S.$233.1
million (Ps.2,459,040) assigned to the shares of Univision common stock at the
transaction date over the carrying value of the Univision stock acquired of
approximately U.S.$197.6 million (Ps.2,055,601); (ii) an acquisition cost of
U.S.$2.0 million (Ps.20,928) for the warrants to purchase 100,000 shares of
Univision common stock, as being the fair value assigned to this investment at
the transaction date; and (iii) a gain on disposal of the music recording
business of Ps.1,061,057, net of related costs, expenses and income taxes. Any
shares of Univision common stock owned by the Group and those shares of
Univision common stock that may be purchased by the Group in connection with
related warrants and warrant purchase agreements are intended to be held as
equity securities accounted for under the equity method (see Notes 5, 10, 13, 23
and 26).
In April 2002, the Group and Clear Channel Entertainment ("Clear Channel"),
a leading producer and marketer of live entertainment, completed a series of
transactions and agreements to formalize a live entertainment joint venture in
the United States (Cardenas-Fernandez & Associates), in which each company had a
50% interest. The Group acquired a 50% interest of the businesses comprising
Cardenas-Fernandez & Associates for an aggregate consideration of U.S.$4.0
million in cash, subject to working capital adjustments (as defined) and
additional payments to be made by the Group under certain circumstances (see
Note 13). As a result, beginning the second quarter of 2002, the Group accounts
for its interest in Cardenas-Fernandez & Associates by applying the equity
method to the results of operations and net assets of this joint venture. Also,
the Group recognized related goodwill as a result of this acquisition in the
amount of Ps.25,163 resulting from the excess of the purchase price over the
carrying value of the related net assets.
In April 2002, the Group acquired an additional 50% interest in the capital
stock of certain publishing distribution companies in Chile and Argentina, which
were 50% owned by the Group before this acquisition, for an aggregate amount of
U.S.$3.6 million (U.S.$2.7 million in cash and U.S.$0.9 million through an
account payable due in April 2003), of which U.S.$3.1 million is related to the
acquisition in Chile. Accordingly, beginning May 2002, these businesses became
wholly-owned subsidiaries of the Company. The Group recognized related goodwill
as a result of this acquisition in the amount of Ps.26,942 resulting from the
excess of the purchase price over the carrying value of the related net assets
of such companies.
In August 2002, the Group sold all of its 21.99% minority interest in the
capital stock of Red Televisiva Megavision, S.A. ("Megavision"), a broadcasting
television company in Chile, for an aggregate amount of U.S.$4.2 million, of
which U.S.$2.1 million were paid in cash and U.S.$2.1 million in the form of a
receivable due in August 2003 and collateralized with the shares of Megavision
previously owned by the Group. The Group recognized a pre-tax gain on this sale
of approximately Ps.4,996, which represented the excess of the proceeds over the
carrying value of the net investment in Megavision at the transaction date.
On October 18, 2002, the Group and Corporacion Interamericana de
Entretenimiento, S.A. de C.V. ("CIE"), the leading live entertainment company in
Latin America, Spain and the Latin U.S. market, announced an agreement to form a
strategic alliance under which the Group acquired a 40% interest in Ocesa
Entretenimiento, S.A. de C.V. ("OCEN"), a newly formed subsidiary of CIE, which
owns all the assets related to CIE's live entertainment business unit in Mexico,
for a gross amount of approximately U.S.$107.2 million, of which approximately
U.S.$67.0 million (Ps.676,823) was paid in cash in the fourth quarter of 2002,
and the remaining balance of U.S.$40.2 million (Ps.420,653) will be paid in the
first quarter of 2003. The Group recognized preliminary goodwill as a result of
this minority interest acquisition in the amount of Ps.716,565 resulting from
the excess of the purchase price over the estimated carrying value of the
related net assets of OCEN. Under this agreement, the purchase price of this
acquisition is subject to be adjusted based on a formula of EBITDA generated by
OCEN (as defined) in a three-year period which will end on December 31, 2005.
This acquisition was approved by the Mexican Antitrust Commission
F-15
in December 2002. In the first quarter of 2003, the Group made an additional
capital contribution to OCEN related to its 40% interest in this company for the
amount of Ps.93,882 (see Notes 5 and 18).
During 2002, the Group sold certain non-strategic businesses of the
television broadcasting and publishing segments for an aggregate amount of
Ps.8,715, which included a sale transaction with a Company's director for an
amount of Ps.1,755, and recognized in other expense a pre-tax loss in
disposition of these businesses of Ps.30,645 (see Note 21).
3. TRADE NOTES AND ACCOUNTS RECEIVABLE
Trade notes and accounts receivable as of December 31, 2001 and 2002,
consisted of:
2001 2002
-------------- --------------
Non-interest bearing notes received as customer deposits and advances..... Ps. 7,070,940 Ps. 7,158,371
Accounts receivable, including value-added tax receivables related to
advertising services................................................... 2,726,892 3,090,017
Allowance for doubtful accounts........................................... (529,073) (684,752)
-------------- --------------
Ps. 9,268,759 Ps. 9,563,636
============== ==============
4. TRANSMISSION RIGHTS, PROGRAMS, LITERARY WORKS, PRODUCTION TALENT ADVANCES
AND FILMS
At December 31, 2001 and 2002, transmission rights, programs, literary
works, production talent advances and films consisted of:
2001 2002
--------------- ---------------
Transmission rights ................................................... Ps. 3,361,180 Ps. 3,819,337
Transmission rights in perpetuity...................................... 590,116 548,066
Programs .............................................................. 2,729,383 2,464,227
Literary works......................................................... 991,809 1,163,737
Production talent advances ............................................ 188,926 199,632
Films.................................................................. 54,567 62,543
--------------- ---------------
7,915,981 8,257,542
--------------- ---------------
Non-current portion of :
Transmission rights ................................................... 2,224,427 1,881,270
Transmission rights in perpetuity...................................... 590,116 548,066
Programs .............................................................. 1,382,700 1,197,189
Literary works......................................................... 991,809 1,163,737
Films.................................................................. 26,376 47,178
--------------- ---------------
5,215,428 4,837,440
--------------- ---------------
Current portion of transmission rights, programs, films and production
talent advances..................................................... Ps. 2,700,553 Ps. 3,420,102
=============== ===============
F-16
5. INVESTMENTS
At December 31, 2001 and 2002, the Group had the following investments:
OWNERSHIP %
AS OF DECEMBER
2001 2002 31, 2002
-------------- -------------- --------------
ACCOUNTED FOR BY THE EQUITY METHOD:
DTH TechCo Partners (1)..................... Ps. 158,568 Ps. 175,413 30%
OCEN (see Note 2)........................... -- 401,161 40%
Megavision (see Note 2)..................... 32,837 -- --
Univision (2)............................... 529,270 2,112,723 13.23%
Other....................................... 148,022 165,267
-------------- --------------
868,697 2,854,564
-------------- --------------
OTHER INVESTMENTS:
Deposits in escrow (3)...................... 835,439 156,960
Univision (2)............................... 3,637,957 20,928
Other....................................... 706 640
-------------- --------------
4,474,102 178,528
-------------- --------------
Ps. 5,342,799 Ps. 3,033,092
============== ==============
------------------
(1) General partnership engaged in providing technical services to DTH
ventures in Latin America.
(2) The Group accounts for this investment under the equity method due to the
Group's continued ability to exercise significant influence over
Univision's operations. As of December 31, 2001 and 2002, the Group owned
the following shares, share equivalents and warrants to acquire shares of
Univision (see Note 2):
2001 2002
---------- ----------
Class "T" common stock....................................... 13,593,034 13,593,034
Class "A" common stock....................................... -- 16,594,500
---------- ----------
13,593,034 30,187,534
---------- ----------
Preferred shares convertible into Class "A" common stock..... 10,594,500 --
---------- ----------
Warrants to acquire Class "T" common stock (a)............... 2,727,136 2,727,136
Warrants to acquire Class "A" common stock (a)............... 6,274,864 6,374,864
---------- ----------
9,002,000 9,102,000
---------- ----------
33,189,534 39,289,534
========== ==========
------------------
(a) Substantially all of these warrants to acquire common stock of
Univision at an exercise price of U.S.$38.261 per share, expire in
December 2017. In 2002, the Group recognized the acquisition cost
of 100,000 warrants for an amount of Ps.20,928 as other
investments since the shares that may be purchased through these
instruments are intended to be held by the Group as an equity
investment in Univision (see Notes 2 and 10).
Assuming the exercise of warrants at a price of U.S.$38.261 per
share, the Group's ownership stake in Univision as of December 31,
2002, would have been approximately of 15.0% on a fully diluted basis.
The quoted market price of Univision's common stock at December 31,
2002, was U.S.$24.50 per share.
(3) In connection with the disposal of the Group's investment in PanAmSat
Corporation in 1997, the Group granted collateral to secure certain
indemnification obligations which consisted, at December 31, 2001 and
2002, of short-term securities of U.S.$86.1 million (Ps.835,439) and
U.S.$15.0 million (Ps.156,960), respectively. In December 2001, the Group
applied approximately U.S.$14.0 million (Ps.136,137) of this investment to
make certain tax payments (see Note 13). In August 2002, approximately
U.S.$71.1 million of collateral was released to the Group and the amount
required to be held in escrow was reduced to a minimum of U.S.$15.0
million, in cash or cash equivalents. After the expiration of applicable
tax statutes of limitations, the collateral will be reduced to diminimus.
The collateral agreement will terminate in approximately five years.
F-17
In 2000, 2001 and 2002, the Group recognized in the consolidated statements
of income equity in losses of affiliates of Ps.1,938,734, Ps.551,871 and
Ps.1,155,818, respectively, and in the consolidated other comprehensive income
or loss (see Note 16): equity in the loss from holding non-monetary assets of
affiliates of Ps.16,655, Ps.1,368 and Ps.15, respectively, equity in the
translation (gain) loss effect of affiliates of (Ps.131,322), Ps.190,646 and
Ps.106,969, respectively, and in 2002, equity in the gain on issuance of shares
of associates of Ps.489,951.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31, 2001 and 2002, consists
of:
2001 2002
-------------- -------------
Buildings.................................................... Ps. 6,500,145 Ps. 6,519,940
Buildings improvements....................................... 1,528,861 1,701,388
Technical equipment.......................................... 9,155,196 9,737,672
Furniture and fixtures....................................... 528,668 518,847
Transportation equipment..................................... 460,405 949,051
Computer equipment........................................... 675,679 788,565
-------------- -------------
18,848,954 20,215,463
Accumulated depreciation..................................... (8,034,916) (9,296,469)
-------------- -------------
10,814,038 10,918,994
Land......................................................... 3,471,500 3,457,256
Construction in progress..................................... 450,959 966,972
-------------- -------------
Ps. 14,736,497 Ps.15,343,222
============== =============
At December 31, 2001 and 2002, the Group's Mexican subsidiaries had
technical equipment, transportation equipment and computer equipment of
non-Mexican origin totaling Ps.2,600,321 and Ps.3,197,969, respectively, net of
accumulated depreciation (see Note 1(g)).
Had the NCPI been applied to restate all of the Group's net equipment, the
net balance of property, plant and equipment as of December 31, 2001 and 2002
would have been Ps.15,874,578 and Ps.16,154,041 respectively.
Depreciation charged to income in 2000, 2001 and 2002 was Ps.1,028,951,
Ps.974,821 and Ps.1,006,216 respectively.
Included in property, plant and equipment are assets held under capital
leases, net of accumulated depreciation, of Ps.95,914 and Ps.83,759 as of
December 31, 2001 and 2002, respectively.
7. GOODWILL AND TRADEMARKS
The balances of goodwill and trademarks as of December 31, 2001 and 2002,
were as follows:
GOODWILL TRADEMARKS
----------------------------------- -----------------------------------
2001 2002 2001 2002
---------------- ----------------- ---------------- ----------------
Cost (1)............................ Ps. 3,824,899 Ps. 8,982,080 Ps. 454,283 Ps. 547,278
Accumulated amortization............ (1,120,493) (1,421,394) (105,194) (141,765)
---------------- ---------------- ---------------- ----------------
Ps. 2,704,406 Ps. 7,560,686 Ps. 349,089 Ps. 405,513
================ ================ ================ ================
----------------------
(1) As of December 31, 2002, includes goodwill recognized in connection with
acquisitions of minority stakes in Univision and OCEN (see Note 2).
Amortization of goodwill in 2000, 2001 and 2002 was Ps.229,426, Ps.202,615
and Ps.437,805, respectively, which was recorded in other expense, net (see Note
21).
In 2001 and 2002, a write-off of unamortized goodwill for the amount of
Ps.222,711 and Ps.1,066,700, respectively, was recognized in connection with the
recoverability evaluation of certain long-lived assets of the
F-18
Group (see Note 21), primarily related to the operations of a television
broadcasting subsidiary in San Diego and the Group's investment in Argos (see
Note 2).
Amortization of trademarks in 2000, 2001 and 2002 was Ps.12,319, Ps.11,078
and Ps.14,740, respectively.
8. DEFERRED COSTS
The balance of deferred costs as of December 31, 2001 and 2002, consisted
of:
2001 2002
-------------- --------------
Television network concession................................... Ps. 1,116,045 Ps. 1,116,045
Licenses and software........................................... 697,000 723,352
Internet........................................................ 438,314 449,481
Deferred financing costs........................................ 266,088 317,915
Other........................................................... 277,485 218,060
-------------- --------------
2,794,932 2,824,853
Accumulated amortization........................................ (1,068,451) (1,467,137)
-------------- --------------
Ps. 1,726,481 Ps. 1,357,716
============== ==============
Amortization of deferred costs charged to income in 2000, 2001 and 2002,
was Ps.669,657, Ps.503,267 and Ps.514,632, respectively, of which Ps.69,528,
Ps.60,332 and Ps.46,771, respectively, were recorded as other costs and expense,
net (see Note 21), Ps.42,792, Ps.42,630 and Ps.32,340, respectively, were
recorded as interest expense (see Note 19), and Ps.286,951, Ps.32,165 and
Ps.6,790, respectively, were recorded as non-recurring charges in connection
with the extinguishment of long-term debt (see Note 20).
9. DEBT
As of December 31, 2001 and 2002, debt outstanding was as follows:
2001 2002
--------------- ---------------
U.S. dollars:
11.375% Series "A" Senior Notes due 2003 (1) (5)................. Ps. 667,900 Ps. 720,415
11.875% Series "B" Senior Notes due 2006 (1) (5) ................ 51,833 55,909
8.625% Senior Notes due 2005 (2) (5) (6)......................... 1,940,244 2,092,800
8% Senior Notes due 2011 (3) (5) (6)............................. 2,910,366 3,139,200
8.50% Senior Notes due 2032 (4) (5) (6) ......................... -- 3,139,200
U.S.$100 million syndicated loan (7) ............................ 970,122 1,046,400
U.S.$276 million bridge loan facility (4) ....................... 2,677,537 --
Other, including capital leases (8).............................. 198,829 109,449
--------------- ---------------
9,416,831 10,303,373
--------------- ---------------
Mexican pesos:
UDI-denominated Notes due 2007 (9) .............................. 3,507,205 3,503,220
Bank loans (10) ................................................. 778,012 515,363
--------------- ---------------
4,285,217 4,018,583
--------------- ---------------
Other currency debt (11)........................................... 202,378 263,139
--------------- ---------------
Total debt.................................................. 13,904,426 14,585,095
Less: long-term maturities......................................... 13,550,537 13,345,215
--------------- ---------------
Current portion of long-term debt........................... Ps. 353,889 Ps. 1,239,880
=============== ===============
------------------------
(1) These securities are unsecured, unsubordinated obligations of the Company,
rank pari passu in right of payment with all existing and future unsecured,
unsubordinated obligations of the Company, and are senior in right of
payment to all future subordinated indebtedness of the Company, and are
effectively subordinated to all existing and future liabilities of the
Company's subsidiaries. Interest on the Series "A" and Series "B" Senior
Notes, including additional amounts payable in respect of certain Mexican
withholding taxes, is 11.96% and 12.49% per annum, respectively, and is
payable semi-annually. In the second quarter of 2000, as a result of
consummated tender offers and consent solicitations for securities
representing Series "A" Senior Notes, Series "B" Senior Notes and Senior
Discount Debentures for an amount of
F-19
approximately U.S.$924.1 million (Ps.10,235,924), which included premiums,
consent fees, and accrued liabilities payable as of that date of
approximately U.S.$126.1 million (Ps.1,397,245), the Company (a)
extinguished approximately 89% of these securities outstanding; (b)
eliminated substantially all of the restrictive covenants in connection
with this debt; and (c) recognized a pre-tax loss of approximately
Ps.1,546,945 which was classified as a non-recurring charge in the
consolidated income statement for the year ended December 31, 2000. In the
second quarter of 2001, the Company redeemed all of the remaining Senior
Discount Debentures outstanding, which were originally due in 2008, at
106.625% of their principal amount of approximately U.S.$32.5 million, and
the premiums for redeeming this debt together with related costs, were
accounted for as a non-recurring charge of Ps.60,712 in the consolidated
income statement for the year ended December 31, 2001 (see Note 20).
(2) In the third quarter of 2000, the Company issued these Senior Notes.
Interest on these Senior Notes, including additional amounts payable in
respect of certain Mexican withholding taxes, is 9.07% per annum, and is
payable semi-annually. In the fourth quarter of 2000, substantially all of
these Senior Notes were exchanged for Senior Notes registered under the
U.S. Securities Act.
(3) In the third quarter of 2001, the Company issued these Senior Notes, which
were priced at 98.793% for a yield to maturity of 8.179%. Interest on these
Senior Notes, including additional amounts payable in respect of certain
Mexican withholding taxes, is 8.41% per annum, and is payable
semi-annually.
(4) In the first quarter of 2002, the Company issued these Senior Notes, which
were priced at 99.431% for a yield to maturity of 8.553%. A portion of the
net proceeds of this offering were used to repay all of the amounts then
outstanding under a U.S.$276 million (Ps.2,677,537) bridge loan facility
with an original maturity in December 2002; consequently, the outstanding
balance of this bridge loan facility as of December 31, 2001 was classified
as "long-term" in the consolidated balance sheet as of that date. Interest
on these Senior Notes, including additional amounts payable in respect of
certain Mexican withholding taxes, is 8.94% per annum, and is payable
semi-annually.
(5) These Senior Notes may not be redeemed prior to maturity, except in the
event of certain changes in law affecting the Mexican withholding tax
treatment of certain payments on the securities, in which case the
securities will be redeemable, as a whole but not in part, at the option of
the Company.
(6) These Senior Notes are unsecured obligations of the Company, rank equally
in right of payment with all existing and future unsecured and
unsubordinated indebtedness of the Company, and are junior in right of
payment to all of the existing and future liabilities of the Company's
subsidiaries. The agreement of these Senior Notes contains certain
covenants that limit the ability of the Company and its restricted
subsidiaries engaged in television broadcasting, programming for pay
television and programming licensing, to incur or assume liens, perform
sale and leaseback transactions, and consummate certain mergers,
consolidations and similar transactions. Substantially all of these Senior
Notes are registered with the U.S. Securities and Exchange Commission.
(7) In the third quarter of 2001, the Company refinanced all of the amounts
outstanding under a syndicated term loan agreement for the amount of
U.S.$400 million, which was entered into by the Company in the second
quarter of 2000 to fund, together with the net proceeds of the
UDI-denominated Notes described below and cash on hand, the tender offers
and related fees and expenses described above. This refinancing was made
through a combination of the net proceeds from the issuance of U.S.$300
million Senior Notes due 2011 described above and, in December 2001, a
U.S.$100 million syndicated term loan with international commercial banks.
Amounts outstanding under this U.S.$100 million term loan are payable in
four consecutive semi-annual installments beginning in June 2005 and ending
in December 2006 (the first two installments of U.S.$20 million each and
the last two installments of U.S.$30 million each), and bear an annual
interest rate of LIBOR plus 0.875% for the first three years and 1.125% for
the last two years (excluding the effect of the related Mexican withholding
tax). Under the terms of this credit agreement, the Company and its
restricted subsidiaries engaged in television broadcasting, programming for
pay television and programming licensing are required to maintain (a)
certain financial coverage ratios related to indebtedness, interest expense
and stockholders' equity; and (b) certain restrictive covenants on
indebtedness, dividend payments, issuance and sale of capital stock,
capital expenditures or investments and liens.
(8) Includes notes payable to third parties other than banks of Ps.156,743 and
Ps.109,448 as of December 31, 2001 and 2002, respectively, bearing annual
interest rates which vary between one and eight points above LIBOR. The
maturities of this debt at December 31, 2002 are various from 2003 to 2010.
At December 31, 2001, also included U.S.$4.3 million (Ps.42,086) of
long-term indebtedness which amount was fully paid at maturity in 2002.
(9) In the second quarter of 2000, the Company issued in the Mexican market
Notes denominated in Mexican Investment Units ("Unidades De Inversion" or
"UDIs") for an amount of Ps.$3,000,000 (nominal), representing
1,086,007,800 UDIs, with an annual interest rate of 8.15% and maturity in
2007. Interest on these notes is payable semi-annually. The balance as of
December 31, 2001 and 2002 includes restatement of Ps.336,181 and
Ps.503,220, respectively. The UDI value as of December 31, 2002, was of
Ps.3.225778 per one UDI.
(10) Includes a long-term loan payable to a Mexican bank of Ps.443,646 and
Ps.267,094 at December 31, 2001 and 2002, respectively, which was
originally due in August 2000, and was refinanced by the Group in July
2000. Under such refinancing, the Company agreed to pay the principal
amount of this loan in 16 equal quarterly installments beginning October
2000 and ending July 2004, bearing an annual interest rate of the Mexican
interbank rate plus 45 basis points,
F-20
payable on a monthly basis. The terms of this loan include certain
financial ratios and covenants to be complied with by the Company and
certain restricted subsidiaries similar to the covenants and financial
ratios under the Company's U.S.$100 million term loan facility described
above. Before this refinancing, this loan bore annual interest at the
Mexican interbank rate plus 150 basis points for the first six months of
2000. The 2001 and 2002 balance also includes a long-term loan of
Ps.304,418 and Ps.224,000, respectively, granted by a commercial Mexican
bank in 2001 to refinance the redemption of the Senior Discount Debentures
as described in Notes (2) and (3) above, with principal and interest
thereof payable on a quarterly basis through May 2006, and annual interest
rate equal to the Mexican interbank rate plus 30 basis points. The terms of
this loan include certain financial ratios and covenants. The maturities of
these loans at December 31, 2002 are various from 2003 to 2006.
(11) Includes at December 31, 2001 and 2002, a long-term loan for approximately
23.6 million Euros (Ps.201,737 and Ps.259,381, respectively) with an annual
interest rate of EURIBOR plus 0.80% payable on a quarterly basis, and a
maturity in June 2003. This loan is collateralized by shares representing
approximately 42% of the Group's minority interest in a DTH venture in
Spain.
In February 2000, the Company entered into arrangements under which it may
issue unsecured short-term debt up to U.S.$200 million as a part of a
Euro-Commercial Paper Program. As of December 31, 2002, no debt had been
incurred by the Company under this program.
MATURITIES OF DEBT
Debt maturities for the years subsequent to December 31, 2002, excluding
capital lease obligations, are as follows:
2003....................................................... Ps. 1,222,574
2004....................................................... 193,919
2005....................................................... 2,587,298
2006....................................................... 725,990
2007....................................................... 3,512,392
Thereafter................................................. 6,308,185
----------------
Ps. 14,550,358
================
Future minimum payments under capital leases for the years subsequent to
December 31, 2002, are as follows:
2003...................................................... Ps. 17,306
2004...................................................... 6,546
2005...................................................... 5,991
2006...................................................... 4,894
----------------
Present value of net minimum payments (1)................. Ps. 34,737
================
----------------------
(1) Net of amount representing interest of Ps.5,539.
10. FINANCIAL INSTRUMENTS
The Group's financial instruments recorded on the balance sheet include
cash, temporary investments, accounts and notes receivable, accounts payable,
debt and derivative instruments. For cash, temporary investments, accounts
receivable and payable, and short-term notes payable due to banks and other
financial institutions, the carrying amounts approximate fair value due to the
short maturity of these instruments. The fair value of the Group's long-term
debt securities and foreign currency contracts are based on quoted market
prices. Escrow deposits (see Note 5) bear interest at market rates and the
carrying value approximates fair value. Other investments carried at cost in
2001 included preferred shares of Univision, and the carrying value of such
shares approximated fair value. The fair value of warrants to purchase shares of
Univision was based upon an option pricing model. The fair value of the
long-term loans that the Group borrowed from leading Mexican banks (see Note 9)
was estimated using the borrowing rates currently available to the Group for
bank loans with similar terms and average maturities. The fair value of currency
option, interest rate swap and share put option agreements is based on quotes
obtained from financial institutions.
In 1999, the Company entered into forward exchange contracts for a notional
amount of U.S.$145 million and Ps.1,839,175 (nominal) for purposes of hedging
both its U.S. dollar semi-annual interest payments on certain long-
F-21
term debt for up to U.S.$100 million and its anticipated investment in DTH joint
ventures for up to U.S.$45 million (see Note 11). As of December 31, 2001, none
of these contracts were outstanding (see Note 19).
In 1999, the Company entered into a total return bond swap agreement in
respect of U.S.$41 million (Ps.429,024) of its Series "A" Senior Notes (see Note
9), which were purchased by a financial institution in the open market pursuant
to this agreement. Under the terms of such agreement, the Company received an
up-front fee of 5.4% of the amount of the purchased notes which is being
amortized through the maturity of the Series "A" Senior Notes. Depending on
market conditions, the total return bond swap calls for the Company to pay or
receive, upon maturity of the notes, the difference between the price paid by
the financial institution for the notes and the then market value of the Mexican
Federal Government Bonds with an annual interest of 9.825% and due in 2007.
In connection with the Senior Notes due 2005, in the third quarter of 2002,
the Company entered into currency option agreements with a financial institution
on a notional amount of U.S.$100 million. Under such agreements, and subject to
the exercise of the options by the Company and the financial institution, as
well as the payment of related premiums by the Company for an amount of
approximately U.S.$5.9 million in April 2004, the parties will exchange related
U.S. dollars and Mexican pesos at fixed exchange rates in October 2005. The
Company has recorded the change in fair value of these agreements from inception
to December 31, 2002, in the integral cost of financing (foreign exchange gain
or loss). Also, in October 2002, the Company entered into option agreements to
exchange interest rates with a financial institution on a notional amount of
U.S.$200 million, and received premiums in cash for an amount of approximately
U.S.$1.7 million which are being amortized through the maturity of these Senior
Notes. The Company has recorded the change in fair value of these agreements
together with the amortization of related premiums, from inception to December
31, 2002, in the integral cost of financing (interest expense). In February
2003, the financial institution declined to exercise these options and the
Company recognized the benefit of unamortized premiums.
In connection with the Senior Notes due 2011, in the fourth quarter of
2002, the Company entered into interest rate swap agreements with a financial
institution on a notional amount of U.S.$100 million. These agreements involve
the exchange of amounts based on a fixed interest rate for amounts based on
variable interest rates over the life of the agreement, without an exchange of
the notional amount upon which the payments are based. The Company has recorded
the change in fair value of these agreements from inception to December 31,
2002, in the integral cost of financing (interest expense).
In the third quarter of 2002, the Company entered into agreements to sell
share put options to a financial institution, and received premiums in cash for
an amount of approximately U.S.$1.4 million. Under these agreements and
depending on market conditions the Company has a remaining potential obligation
to purchase the equivalent of 30,006,360 shares of the Company's common stock
for an aggregate amount of approximately U.S.$12.9 million. These put options
are exercisable only in April 2003. The financial institution may settle the put
options by physical settlement of the options or by cash at the option of the
Company. The Company has recorded the change in fair value of these agreements
together with related premiums, from inception to December 31, 2002, in other
income or expense.
F-22
The estimated fair values of the Group's financial instruments at December
31, 2001 and 2002 were as follows:
2001 2002
------------------------------ ------------------------------
CARRYING CARRYING
VALUE FAIR VALUE VALUE FAIR VALUE
-------------- -------------- -------------- --------------
ASSETS:
Univision preferred shares (see Note 5)....... Ps. 3,637,957 Ps. 3,637,957 Ps. -- Ps. --
Univision warrants (see Note 5)............... -- 2,457,804 20,928 1,181,710
LIABILITIES:
Senior Notes due 2005, 2011 and 2032.......... 4,850,610 5,004,568 8,371,200 8,430,636
Other long-term debt securities............... 719,734 750,603 776,324 804,875
UDI-denominated long-term securities.......... 3,507,205 3,742,539 3,503,220 3,764,908
Long-term notes payable to Mexican banks...... 748,065 748,065 491,094 491,094
U.S.$100 million term loan.................... 970,122 970,122 1,046,400 1,046,400
DERIVATIVE FINANCIAL INSTRUMENTS:
ASSETS:
Interest rate swaps........................... -- -- 1,104 1,104
Share put options............................. -- -- 4,495 4,495
LIABILITIES:
Foreign currency options...................... -- -- 3,123 3,123
11. DTH JOINT VENTURE LIABILITIES
DTH joint venture liabilities as of December 31, 2001 and 2002 included the
liability positions resulting from the Group's investments in Innova, S. de R.L.
de C.V. ("Innova") and Sky Multi-Country Partners ("SMCP"), and the equity in
losses of these joint ventures recognized by the Group in excess of such
investments and up to the amount of the guarantees made by the Group in
connection with certain capital lease obligations of Innova and SMCP (see Notes
1 (f) and 13), as follows:
2001 2002
--------------- ----------------
Innova (1) .............................................................. Ps. 1,028,285 Ps. 852,993
SMCP (2) ................................................................ 80,961 792,249
--------------- ----------------
Ps. 1,109,246 Ps. 1,645,242
=============== ================
------------------------
(1) Joint venture engaged in providing DTH broadcast satellite pay television
services in Mexico, in which the Group has a 60% non-consolidated interest.
The concession granted by the Mexican Federal Government for operating this
joint venture expires in 2026. The Group's liability position in Innova as
of December 31, 2001 and 2002, was net of long-term notes and interest
receivable due from Innova of approximately U.S.$199.4 million
(Ps.1,829,793) and U.S.$222.9 million (Ps.2,332,093), respectively, with
principal and interest maturities between 2008 and 2012, bearing annual
interest rate of 9.0%. Long-term loans provided to Innova by the Group in
2001 and 2002 amounted to approximately U.S.$79.7 million (Ps.833,772) and
U.S.$17.7 million (Ps.185,213), respectively.
(2) General partnership engaged in providing DTH broadcast satellite pay
television services in Latin America outside of Mexico and Brazil, in which
the Group has a 30% interest. The concessions for operating the current
SMCP operations in Colombia and Chile do not have expiration dates. In the
fourth quarter of 2002, as a result of economic difficulties of this joint
venture, which included the closing of the DTH operations in Argentina, the
Group recognized the outstanding debt incurred by SMCP being guarantees by
the Group. Capital contributions made to SMCP by the Group in 2001 and 2002
amounted to U.S.$36.2 million (Ps.360,266) and U.S.$14.8 million
(Ps.154,920), respectively. Also, in 2001, News Corp. made equity
contributions in this partnership on behalf of the Group of U.S.$15.0
million (Ps.145,518) (see Note 18).
12. PENSION PLANS AND SENIORITY PREMIUMS
Certain companies in the Group have collective bargaining contracts which
include defined benefit pension plans for substantially all of their employees.
Additionally, the Group has a defined benefit pension plan for executives. All
pension benefits are based on salary and years of service rendered.
F-23
Under the provisions of the Mexican labor law, seniority premiums are
payable, based on salary and years of service, to employees who resign or are
terminated prior to reaching retirement age. Some companies in the Group have
seniority premium benefits which are greater than the legal requirement. After
retirement age, employees are no longer eligible for seniority premiums.
Pension and seniority premium amounts are actuarially determined by using
real assumptions (net of inflation) and attributing the present value of all
future expected benefits proportionately over each year from date of hire to age
65. The Group has used a 4% discount rate, 2% salary scale, and 5% return on
assets rate for 2000, 2001 and 2002. The Group makes voluntary contributions
from time to time to trusts for the pension and seniority premium plans which
are generally deductible for tax purposes. No cash contributions to the trusts
were made by the Group in 2000 and 2001. In the fourth quarter of 2002, the
Group made a cash contribution of approximately Ps.103,046 to its pension and
seniority premium plans. Plan assets were invested in a portfolio that primarily
consisted of equity and debt securities (including shares of the Company) as of
December 31, 2001 and 2002. Pension and seniority premium benefits are paid when
they become due.
The pension and seniority premium plan liability as of December 31, 2001
and 2002, was as follows:
2001 2002
--------------- ---------------
Actuarial present value of benefit obligations:
Vested benefit obligations............................................ Ps. 280,203 Ps. 318,110
Nonvested benefit obligations......................................... 504,042 448,488
--------------- ---------------
Accumulated benefit obligation........................................ 784,245 766,598
Benefit attributable to projected salaries............................ 169,384 160,119
--------------- ---------------
Projected benefit obligation.......................................... 953,629 926,717
Plan assets........................................................... (744,768) (695,760)
---------------- ---------------
Projected benefit obligation in excess of plan assets................. 208,861 230,957
--------------- ---------------
Items to be amortized over a 18-year period:
Transition obligation................................................. 332,162 296,710
Unrecognized prior service cost....................................... 38,882 26,551
Unrecognized net loss from experience differences..................... 104,304 155,873
--------------- ---------------
475,348 479,134
--------------- ---------------
Net projected asset...................................................... (266,487) (248,177)
Adjustment needed to recognize minimum liability (with the recognition of
an intangible asset included in other assets)........................ 305,964 319,015
--------------- ---------------
Balance sheet liability ................................................. Ps. 39,477 Ps. 70,838
=============== ===============
The net pension and seniority premium cost for 2000, 2001 and 2002 was
Ps.89,247, Ps.106,031 and Ps.118,830, respectively.
13. COMMITMENTS AND CONTINGENCIES
At December 31, 2002, the Group's commitments for capital expenditures were
approximately Ps.328,922, of which Ps.243,510 were related to purchase
commitments to acquire television technical equipment.
At December 31, 2002, the Group had commitments for making capital
contributions in 2003 to Innova of up to U.S.$15 million and to its DTH ventures
in Latin America, excluding Mexico, for up to U.S.$20 million.
In September 2001, the Company entered into a 50/50 programming joint
venture with Endemol, a world leading content developer and producer for
television and online platforms based in The Netherlands, to produce and develop
content for television and the Internet. As of December 31, 2002, the Group has
commitments to acquire from Endemol programming formats through this venture for
up to U.S.$54.8 million through 2006.
The Company has guaranteed the obligations of certain consolidated
subsidiaries for direct loans and capital leases in an aggregate amount of
Ps.276,573, which are reflected in the December 31, 2002 balance sheet as
liabilities. The Group has granted collateral in connection with certain
indemnification obligations (see Note 5), which includes a deposit of U.S.$15.0
million of short-term securities as of December 31, 2002.
F-24
Furthermore, the Company has guaranteed the obligations of certain related
parties for direct loans in an aggregate amount of approximately Ps.233,258,
approximately 98% of which relates to guarantees related to DTH technical
facilities.
Payments to be made by certain Mexican companies in the Group to employees
in case of dismissal and under certain circumstances provided by the Mexican
labor law will be expensed as incurred.
At December 31, 2002, the Group had the following aggregate minimum annual
commitments for the use of satellite transponders (other than transponders for
DTH television services described below):
THOUSANDS OF
U.S. DOLLARS
---------------
2003.............................................. U.S.$ 18,543
2004.............................................. 17,735
2005.............................................. 17,667
2006.............................................. 15,642
2007 and thereafter............................... 43,240
---------------
U.S.$ 112,827
===============
The Group has guaranteed its 60% proportionate share of Innova's minimum
commitment for use of transponders over a period ending in 2015, which is
estimated to be an aggregate of approximately U.S.$156.1 million (undiscounted)
as of December 31, 2002.
The Group has also guaranteed its 30% proportionate share of SMCP's minimum
commitments for use of transponders over a period ending in 2014, which is
estimated to be an aggregate of approximately U.S.$120.4 million (undiscounted)
as of December 31, 2002.
In connection with the Group's acquisition of its 50% interest in
Cardenas-Fernandez & Associates (see Note 2), the Group is required, under
certain circumstances, to make additional payments to the sellers of such
interest of up to U.S.$3.5 million (Ps.36,624) during a three-year period which
will end in April 2005.
In conjunction with the Group's disposal of its former music recording
business (see Note 2), the Group may have to pay certain adjustments to
Univision in connection with an audit of the music recording business by
Univision, which is expected to be resolved by the parties in 2003. While the
Group's management believes that the outcome of this audit will not have a
material adverse effect on its financial position or future operating results,
no assurance can be given in this regard.
The Company's former United States music recording subsidiary, Fonovisa,
Inc. ("Fonovisa"), made an estimated U.S.$10 million in payments over a ten-year
period in apparent violation of applicable U.S. laws. As a result, the Group
underreported taxable income in prior years. In 2000, the Group pled guilty to
one court in connection with this matter and paid a U.S.$0.7 million fine. Also,
in the fourth quarter of 2001, Univisa, Inc. ("Univisa"), a former parent
company of Fonovisa and a former U.S. subsidiary of the Company, received final
proposed adjustments in connection with U.S. Internal Revenue Service audits for
fiscal periods ended in 1995, 1996 and 1997. As a result of these audits, in
December 2001, the Group made U.S. federal income tax and interest payments of
approximately U.S.$14.0 million (Ps.136,137) related to taxes attributable to
Univisa and Fonovisa (see Note 5). As of December 31, 2002, the Group has
accrued Ps.74,209 representing the Group's estimate of state and other tax
liabilities in connection with these matters. These matters did not have, and
the Group does not expect that they will have, a material adverse effect on its
financial condition or results of operations.
There are other various legal actions and other claims pending against the
Group incidental to its businesses and operations. In the opinion of the Group's
management, none of these proceedings will have a material adverse effect on the
Group's financial position or results of operations.
F-25
14. CAPITAL STOCK AND STOCK OPTION PLAN
CAPITAL STOCK
At December 31, 2002, shares of capital stock consisted of:
SERIES "D"
SHARES
SERIES "A" SERIES "L" (DIVIDEND TOTAL
SHARES SHARES PREMIUM SHARES) SHARES
-------------- -------------- ---------------- ----------------
Authorized............................ 5,021,050,671 2,271,150,000 2,271,150,000 9,563,350,671
Unissued.............................. 430,307,554 -- -- 430,307,554
-------------- -------------- ---------------- ----------------
Issued................................ 4,590,743,117 2,271,150,000 2,271,150,000 9,133,043,117
Repurchased by the Company............ (804) (804) (804) (2,412)
Acquired by a subsidiary of the
Company............................. (110,942,789) (86,851,771) (86,851,771) (284,646,331)
-------------- -------------- ---------------- ----------------
Outstanding........................... 4,479,799,524 2,184,297,425 2,184,297,425 8,848,394,374
============== ============== ================ ================
At December 31, 2001, there were 8,856,259,557 shares of capital stock
outstanding, consisting of 4,482,392,507 Series "A" Shares, 2,186,933,525 Series
"L" Shares and 2,186,933,525 Series "D" Shares.
Series "L" Shares and Series "D" Shares have limited voting rights. The
shares of capital stock issued include 2,271,150,000 Series "A" Shares,
2,271,150,000 Series "L" Shares and 2,271,150,000 Series "D" Shares that are
represented, until at least December 2008, by 2,271,150,000 Ordinary
Participation Certificates ("CPOs"), each CPO representing one Series "A" Share,
one Series "L" Share and one Series "D" Share. Non-Mexican holders of CPOs do
not have voting rights with respect to the Series "A" and "D" Shares.
Under the Company's bylaws, the Company's Board of Directors consists of a
minimum of five and a maximum of 20 members, of which the holders of Series "L"
Shares and Series "D" Shares, each voting as a class, are entitled to elect two
members and two members, respectively.
Holders of Series "D" Shares are entitled to receive an annual, cumulative
and preferred dividend equivalent to 5% of the nominal capital attributable to
those Shares (nominal Ps.0.0085443938 per share) before any dividends are
payable in respect of Series "A" Shares or Series "L" Shares. Until at least
December 10, 2003, holders of Series "D" Shares are also entitled to a premium
preference consisting of annual dividends per Series "D" Share of at least 160%
of any annual dividend payable per Series "A" Share and Series "L" Share,
including the preferred dividend.
The Series "A", "L" and "D" Shares are perpetual in duration, and are not
subject to be exchanged for shares of any other class of equity securities. If
the Company is liquidated, Series "D" Shares are entitled to a liquidation
preference equal to the nominal capital attributable to those Shares (nominal
Ps.0.1708878756 per share) before any distribution is made in respect of Series
"A" and Series "L" Shares.
In September 2002, in connection with the approval of the Company's
shareholders on April 30, 2002 to issue additional Series "A" Shares for a Long
Term Retention Plan, which supplements the Company's existing stock option plan,
in an aggregate amount of up to 4.5% of the Company's outstanding capital stock
(430,350,671 Series "A" Shares) at the time the shares were issued (a portion of
the 8% of the Company's capital stock previously authorized by the shareholders
for these plans), and in conjunction with preemptive rights exercised by certain
existing holders of Series "A" Shares, the Company increased its capital stock
in the amount of Ps.409 by issuing additional 43,117 Series "A" Shares (not in
the form of CPOs), of which Ps.402 were recognized as additional
paid-in-capital. Following this capital stock increase, the remaining
430,307,554 unissued authorized Series "A" Shares may be subscribed and paid for
by, or offered to plan participants through, one or more special purpose trusts.
At December 31, 2002, the restated tax value of the Company's common stock
was Ps.15,163,104.
F-26
STOCK OPTION PLAN
The Company adopted a stock option plan (the "Plan") that provides for the
grant and sale of up to 8% of the Company's capital stock to key Company
management. Pursuant to this Plan, through December 31, 2002 the Company had
assigned approximately 83 million CPOs at market prices, subject to certain
conditions, including vesting periods within five years from the time the awards
are granted. The shares sold pursuant to the Plan, which have been registered
pursuant to a registration statement on Form S-8 under the Securities Act, can
only be transferred to the plan participants when the conditions set forth in
the Plan are satisfied. As of December 31, 2002, no shares of capital stock had
been transferred to the plan participants.
15. RETAINED EARNINGS
In accordance with Mexican law, the legal reserve must be increased by 5%
of annual net profits until it reaches 20% of the capital stock amount. In 2000
and 2002, the Company's stockholders approved increases to the legal reserve
amounting to Ps.63,972 and Ps.71,119, respectively. This reserve is not
available for dividends, but may be used to reduce a deficit or may be
transferred to stated capital. Other appropriations of profits require the vote
of the stockholders.
Dividends, either in cash or in other forms, paid by the Mexican companies
in the Group will be subject to income tax if the dividends are paid from
earnings that have not been subject to Mexican income taxes computed on an
individual company basis under the provisions of the Mexican Income Tax Law. In
this case, dividends will be subject to a 34% income tax to be paid by the
companies paying the dividends and applied to the result of multiplying the
dividends paid by a factor of 1.5152.
At December 31, 2002 cumulative earnings that have been subject to income
tax and can be distributed by the Company free of Mexican withholding tax were
approximately Ps.5,215,876. In addition, the payment of dividends is restricted
under certain circumstances by the terms of the U.S. dollar loan facility
agreement (see Note 9).
As of December 31, 2002 the Company's stockholders had approved
appropriating from retained earnings a reserve amounting to Ps.6,363,359 for the
repurchase of shares, at the discretion of management. As of December 31, 2001
and 2002, this reserve has been used for an amount of Ps.261,639 and Ps.584,865,
respectively, in connection with repurchases of shares made by the Company in
prior years.
In September 2002, the Company announced a share repurchase program of up
to U.S.$400 million (Ps.4,185,600) over the next three years. Under the terms of
the program, the Company may, at the discretion of management, acquire stock
subject to legal, market and other conditions at the time of purchase. The
Company started repurchasing shares in 2003, and as of February 26, 2003,
20,680,200 shares in the form of 6,893,400 CPOs had been repurchased by the
Company under this program for an aggregate amount of Ps.91,440.
In February 2003, the Board of Directors proposed a payment of dividends
for an amount of approximately Ps.550,000, which is subject to the approval of
the Company's stockholders in April 2003.
16. COMPREHENSIVE (LOSS) INCOME
Comprehensive (loss) income related to the majority interest for the years
ended December 31, 2000, 2001 and 2002, was as follows:
2000 2001 2002
----------------- ----------------- -----------------
Net (loss) income ....................................... Ps. (872,255) Ps. 1,422,375 Ps. 737,836
----------------- ----------------- -----------------
Other comprehensive loss, net:
Foreign currency translation adjustments, net (1)... (32,040) (526,663) (136,991)
Result from holding non-monetary assets, net (2).... (407,111) (292,158) 365,731
Cumulative effect of deferred taxes................. (2,642,542) -- --
Gain on issuance of shares of associates............ -- -- 489,951
----------------- ----------------- -----------------
Total other comprehensive (loss) gain, net............... (3,081,693) (818,821) 718,691
----------------- ------------------ -----------------
Comprehensive (loss) income.............................. Ps. (3,953,948) Ps. 603,554 Ps. 1,456,527
================= ================= =================
F-27
-------------------------
(1) In 2002 include the foreign exchange loss of Ps.795,225 which was hedged by
the Group`s net investment in Univision (see Note 1(c)).
(2) Represents the difference between specific costs (net replacement cost or
Specific Index) of non-monetary assets and the restatement of such assets
using the NCPI, net of deferred tax benefit (provision) of Ps.219,216,
Ps.171,167 and (Ps.190,839) for the years ended December 31, 2000, 2001 and
2002, respectively.
The changes in components of accumulated other comprehensive loss for the
years ended December 31, 2000, 2001 and 2002, were as follows:
CUMULATIVE CUMULATIVE CUMULATIVE
GAIN ON RESULT FROM RESULT FROM EFFECT OF ACCUMULATED
ISSUANCE OF HOLDING FOREIGN DEFERRED OTHER
SHARES OF ACCUMULATED NON-MONETARY CURRENCY TAXES COMPREHENSIVE
ASSOCIATES MONETARY RESULT ASSETS TRANSLATION (NOTE 1(O)) (LOSS) INCOME
-------------- --------------- -------------- -------------- -------------- --------------
Balance at December 31, 1999 Ps. 215,039 Ps. (28,837) Ps. (1,457,496) Ps. (582,835) Ps. -- Ps. (1,854,129)
Current year change......... -- -- (407,111) (32,040) (2,642,542) (3,081,693)
-------------- --------------- -------------- -------------- -------------- --------------
Balance at December 31, 2000 215,039 (28,837) (1,864,607) (614,875) (2,642,542) (4,935,822)
Current year change......... -- -- (292,158) (526,663) -- (818,821)
-------------- --------------- -------------- -------------- -------------- --------------
Balance at December 31, 2001 215,039 (28,837) (2,156,765) (1,141,538) (2,642,542) (5,754,643)
Current year change......... 489,951 -- 365,731 (136,991) -- 718,691
-------------- --------------- -------------- -------------- -------------- --------------
Balance at December 31, 2002 Ps. 704,990 Ps. (28,837) Ps. (1,791,034) Ps. (1,278,529) Ps. (2,642,542) Ps. (5,035,952)
============== =============== ============== ============== ============== ==============
Cumulative result from holding non-monetary assets as of December 31, 2000,
2001 and 2002 is net of a deferred income tax benefit of Ps.219,216, Ps.390,383
and Ps.199,544, respectively.
17. MINORITY INTEREST
Minority interest at December 31, 2001 and 2002, consisted of:
2001 2002
------------- --------------
Capital stock............................................................. Ps. 971,237 Ps. 1,026,175
Retained earnings......................................................... 376,077 461,607
Cumulative result from holding non-monetary assets........................ (272,886) (212,144)
Accumulated monetary result............................................... (6,926) (4,388)
Cumulative effect of deferred income tax.................................. (64,914) (62,841)
Net income (loss) for the year............................................ 28,841 (68,833)
------------- --------------
Ps. 1,031,429 Ps. 1,139,576
============= ==============
F-28
18. TRANSACTIONS WITH RELATED PARTIES
The principal transactions that the Group carried out with affiliated
companies, including equity investees, stockholders and entities in which
stockholders have an equity interest, were as follows:
2000 2001 2002
----------------- ----------------- -----------------
Revenues:
Royalties (Univision) (a)..................... Ps. 830,581 Ps. 754,146 Ps. 778,906
Soccer transmission rights (Univision)........ 50,624 98,938 47,278
Programming production and transmission
rights (Innova)........................... 266,066 285,200 289,455
Administrative services (b)................... 97,062 68,265 115,594
Interest income............................... 58,984 122,039 170,878
Advertising (c)............................... 221,337 240,797 214,724
----------------- ----------------- -----------------
Ps. 1,524,654 Ps. 1,569,385 Ps. 1,616,835
================= ================= =================
Customer deposits and advances (d)............ Ps. 485,176 Ps. 283,996 Ps. 270,359
================= ================= =================
Costs:
Donations..................................... Ps. 3,240 Ps. 63,645 Ps. 55,389
Advertising and transmission rights (Club de
Futbol Atlante, S.A. de C.V. in 2000 (e),
and Editorial Clio, Libros y Videos, S.A.
de C.V. in 2000 and 2001).................. 48,323 54,071 --
Administrative services (b)................... 8,924 24,314 41,460
Other......................................... 11,904 1,890 51,517
----------------- ----------------- -----------------
Ps. 72,391 Ps. 143,920 Ps. 148,366
================= ================= =================
-------------------------
(a) The Group receives royalties from Univision for programming provided
pursuant to program license agreements, as amended, through December 2001,
that expire in December 2017. Royalties are determined based upon a
percentage of combined net sales of Univision, which was 9% as of December
31, 2000, 2001 and 2002.
(b) The Group receives revenue from and is charged by affiliates for various
services, such as equipment rental, security and other services, at rates
which are negotiated. The Group provides management services to affiliates,
which reimburse the Group for the incurred payroll and related expenses.
(c) Advertising services rendered to Pegaso in 2000 through the consummation of
the sale of Pegaso and Ovaciones (see Note 2), to Innova in 2000, 2001 and
2002, and to Univision in 2002.
(d) Deposits and advances from Univision, Innova and Editorial Clio, Libros y
Videos, S.A. de C.V. as of December 31, 2000, 2001 and 2002.
(e) Through the consummation of the sale of Pegaso and Ovaciones (see Note 2),
following which Club de Futbol Atlante, S.A. de C.V. was no longer an
affiliate of the Group.
During 2000, 2001 and 2002, a professional services firm in which a current
director and two alternate directors maintain interest provided legal advisory
services to the Group in connection with various corporate matters. Total fees
for such services amounted to Ps.9,874, Ps.13,221 and Ps.9,406, respectively.
During 2000, the Group consummated the sale of Pegaso and Ovaciones and the
acquisition of a minority interest in its publishing business segment (see Note
2) with related parties who were terminated as executives and/or directors of
the Group following these transactions.
F-29
The balances of receivables, advances, deposits and (payables) between the
Group and affiliates as of December 31, 2001 and 2002, were as follows:
2001 2002
------------- -------------
CIE (see Note 2).................................. Ps. -- Ps. (420,653)
Coyoacan Films, S.A. de C.V....................... 14,626 10,411
Editorial Clio, Libros y Videos, S.A. de C.V...... 39,767 30,903
Grupo Televicentro, S.A. de C.V................... 5,003 4,746
Grupo Triple C, S.A. de C.V....................... 31,040 29,418
Innova (see Note 11).............................. 282,593 377,682
News Corp. (see Note 11).......................... (145,518) (156,960)
Telemercado Alameda, S. de R.L. de C.V............ 36,062 14
Univision (see Note 5)............................ 67,844 11,795
Other............................................. 103,830 53,932
------------- -------------
Ps. 435,247 Ps. (58,712)
============= =============
All significant account balances included in amounts due from affiliates
bear interest. In 2000, 2001 and 2002, average interest rates of 17.92%, 19.55%
and 14.56% were charged, respectively. Advances and receivables are short-term
in nature; however, these accounts do not have specific due dates.
19. INTEGRAL COST OF FINANCING
Integral cost of financing for the years ended December 31, consisted of:
2000 2001 2002
-------------- -------------- --------------
Interest expense (1).............................. Ps. 1,545,175 Ps. 1,273,308 Ps. 1,371,153
Interest income................................... (970,802) (978,417) (589,627)
Foreign exchange loss (gain), net (2)............. 180,824 (37,340) (210,829)
Loss from monetary position (3)................... 299,655 179,367 42,275
-------------- -------------- --------------
Ps. 1,054,852 Ps. 436,918 Ps. 612,972
============== ============== ==============
-------------------------
(1) Interest expense in 2000, 2001 and 2002 includes Ps.180,363, Ps.171,040 and
Ps.189,649, respectively, derived from the restatement of the Ps.3.0
billion (nominal) UDI-denominated debt securities issued in April 2000 (see
Note 9).
(2) Net foreign exchange loss or gain in 2000 and 2001, includes losses of
Ps.209,097 and Ps.106,268, respectively, derived from forward exchange
contracts (see Note 10). Net foreign exchange gain in 2002 includes a net
gain from foreign currency option contracts of Ps.2,898, and the gain of
Ps.795,225 from foreign exchange loss attributable to certain long-term
debt securities which are hedged by the Group's net investment in Univision
(see Note 1(c)).
(3) The gain or loss from monetary position represents the effects of
inflation, as measured by the NCPI in the case of Mexican companies, or the
general inflation index of each country in the case of foreign
subsidiaries, on the monetary assets and liabilities at the beginning of
each month. Includes monetary loss in 2000, 2001 and 2002 of Ps.463,186,
Ps.197,398 and Ps.179,741, respectively, arising from temporary differences
of non-monetary items in calculating deferred income tax.
20. RESTRUCTURING AND NON-RECURRING CHARGES
The restructuring charges in 2000, 2001 and 2002 consisted principally of
severance costs in connection with employees who were terminated. All associated
costs have been expensed as incurred.
In 2000 and 2001, the Company early extinguished a significant amount of
its long-term debt outstanding (see Note 9), and recognized related premiums,
consent fees, unamortized financing costs (see Note 8) and other expenses of
Ps.1,546,945 and Ps.60,712, respectively, as non-recurring charges in the
consolidated income statements.
In 2002 the Company recognized a non-recurring charge of Ps.325,383 taken
in connection with the write-off of exclusive rights letters for soccer players,
as well as a Ps.163,431 non-recurring charge related to the drawdown by
F-30
DirecTV under a letter of credit posted by the Company in connection with
certain arrangements between DirecTV and the Company to broadcast the 2002 World
Cup, which amount is in dispute by the parties.
21. OTHER EXPENSE - NET
Other (income) expense is analyzed as follows:
2000 2001 2002
-------------- -------------- --------------
(Gain) loss on disposition of investments, net
(see Note 2)................................... Ps. (98,906) Ps. (294,619) Ps. 36,172
Amortization of goodwill (see Note 7)............. 229,426 202,615 437,805
Costs incurred in DTH investments (1)............. 103,769 28,930 28,930
Provision for doubtful non-trade accounts and
write-off of other receivables ................ -- 184,334 66,453
Write-off of goodwill (see Notes 2 and 7)......... -- 222,711 1,066,700
Donations (see Note 18)........................... 59,140 125,593 113,466
Financial advisory and professional services (2).. 153,945 105,489 106,040
Loss on disposition of fixed assets............... 39,395 96,567 132,807
Penalties and surcharges.......................... -- -- 69,771
Uncredited foreign income tax..................... -- -- 46,250
Miscellaneous other expense -- net................ 40,887 22,866 29,683
-------------- -------------- --------------
Ps. 527,656 Ps. 694,486 Ps. 2,134,077
============== ============== ==============
-----------------------
(1) In 2000, these costs include lease payments of Ps.70,744, for unused
satellite transponders intended for proposed DTH ventures, net of sublease
payments received for transponders which were used by the Group's other DTH
businesses; administrative costs and expenses of Ps.4,100, resulting from
the Group's equity investment in DTH ventures in Spain and Latin America;
and the amortization of DTH development costs of Ps.28,930 for each year.
(2) In 2000, 2001 and 2002, includes financial advisory services in connection
with contemplated dispositions and strategic planning projects and
professional services in connection with certain litigation and other
matters (see Notes 2, 13 and 18).
22. INCOME TAX, ASSET TAX AND EMPLOYEES' PROFIT SHARING
The Company is authorized by the Mexican tax authorities to compute its
income tax and assets tax on a consolidated basis. Mexican controlling companies
are allowed to consolidate, for income tax purposes, income or losses of their
Mexican subsidiaries up to 60% of their share ownership in such subsidiaries.
The assets tax is computed on a fully consolidated basis.
The Mexican corporate income tax rate in 2000, 2001 and 2002 was 35%. In
accordance with the new Mexican Income Tax Law effective January 1, 2002, the
35% corporate income tax rate applicable to Mexican companies will be reduced
annually starting in 2003, and continue to decrease until the corporate rate is
32% in 2005. Consequently, the effect of this gradual decrease in the income tax
rate reduced the Group's deferred income tax liability in 2002.
In 2000 and 2001, companies were allowed to pay the income tax liability
computed at a 30% rate with the remaining 5% of the liability due when the
taxable income of the year is distributed to shareholders.
The income tax provision for the years ended December 31, 2000, 2001 and
2002, is comprised as follows:
2000 2001 2002
-------------- -------------- --------------
Income tax and assets tax - current............... Ps. 978,971 Ps. 727,283 Ps. 898,608
Income tax and assets tax - deferred.............. (668,547) (178,572) (603,357)
-------------- -------------- --------------
Ps. 310,424 Ps. 548,711 Ps. 295,251
============== ============== ==============
The following items represent the principal differences between income
taxes computed at the statutory rate and the Group's provision for income tax
and the assets tax.
F-31
%
--------------------------
2000 2001 2002
---- ---- ----
Tax at the statutory rate on income before provisions...................... 35 35 35
Differences in restatement (a) ............................................ 4 (5) 7
Hedge...................................................................... -- -- (26)
Non-deductible items....................................................... 4 2 7
Special tax consolidation items............................................ (18) 9 2
Unconsolidated income tax.................................................. (11) (30) 38
Minority interest.......................................................... (8) 9 (2)
Excess in tax provision of prior years..................................... -- (4) (17)
Changes in valuation allowances:
Goodwill............................................................... 5 2 42
Assets tax............................................................. 18 1 (7)
Tax loss carryforwards................................................. (30) -- 26
Effect of change in income tax rates....................................... -- -- (25)
Foreign operations......................................................... 23 3 (51)
Discontinued operations.................................................... (3) (3) (1)
Cumulative effect of accounting change..................................... -- 2 --
--- --- ---
Provision for income tax and the assets tax................................ 19 21 28
=== === ===
---------------------
(a) This amount represents the effect of using different methods of calculating
inflation adjustments for tax purposes and book purposes, which includes
the net effect of differences between tax and accounting practices in
calculating the inflation effects of customer deposits, interest expense
and interest income.
The Group has tax loss carryforwards at December 31, 2002, as follows:
AMOUNT EXPIRATION
-------------- -----------------
Operating tax loss carryforwards:
Consolidated (1)............................................ Ps. -- --
Unconsolidated:
Mexican subsidiaries (2)................................. 473,351 From 2003 to 2011
Non-Mexican subsidiaries (3)............................. 1,191,481 From 2003 to 2022
--------------
1,664,832
Capital tax loss carryforwards:
Unconsolidated Mexican subsidiary (4)....................... 343,143 From 2004 to 2007
--------------
Ps. 2,007,975
==============
---------------------
(1) During 2000, the Group used all of its consolidated operating tax loss
carryforwards of Ps.1,009,706.
(2) During 2000, 2001 and 2002, certain Mexican subsidiaries utilized
unconsolidated operating tax loss carryforwards of Ps.1,954,924, Ps.535,897
and Ps.1,048,295, respectively.
(3) Approximately the equivalent of U.S.$113.9 million for subsidiaries in
Spain, South America and the United States.
(4) These carryforwards can only be used in connection with capital gains to be
generated by such subsidiary.
The assets tax rate is 1.8%. The assets tax paid in excess of the income
tax in the previous ten years can be credited in future years if the amount of
the income tax in subsequent years is in excess of the assets tax. As of
December 31, 2002, the Company had Ps.1,314,102 of assets tax subject to be
credited and expiring between 2007 and 2010.
The Mexican companies in the Group are required by law to pay employees, in
addition to their agreed compensation and benefits, employee profit sharing at
the statutory rate of 10% based on their respective taxable incomes (calculated
without reference to inflation adjustments and tax loss carryforwards).
F-32
The deferred taxes as of December 31, 2001 and 2002, were principally
derived from the following temporary differences:
2001 2002
-------------- --------------
ASSETS:
Accrued liabilities............................. Ps. 535,897 Ps. 610,400
Goodwill........................................ 392,172 837,976
Tax loss carryforwards.......................... 573,982 285,773
Allowance for doubtful accounts................. 189,839 281,584
Customer advances............................... 843,831 1,188,965
Other items..................................... 14,343 --
LIABILITIES:
Inventories..................................... (2,004,062) (1,788,335)
Property, plant and equipment -- net............ (1,034,562) (1,121,653)
Other items..................................... (372,171) (507,246)
Innova.......................................... (1,037,293) (1,317,797)
-------------- --------------
Deferred-income taxes of Mexican companies...... (1,898,024) (1,530,333)
Deferred tax of foreign subsidiaries............ 99,480 (356,272)
Assets tax...................................... 1,314,102 1,545,106
Valuation allowances............................ (1,318,286) (1,963,339)
-------------- --------------
Deferred income tax liability................... (1,802,728) (2,304,838)
Deferred tax asset of discontinued operations... (28,086) --
Effect of change of income tax rates............ -- 268,978
-------------- --------------
Deferred tax liability of continuing operations. Ps. (1,830,814) Ps. (2,035,860)
============== ==============
The change in the deferred income tax liability for the years ended
December 31, 2000, 2001 and 2002, representing a charge (credit) Ps.652,843,
Ps.241,716 and Ps.(205,046), respectively, was recorded against the following
accounts:
2000 2001 2002
------------- -------------- --------------
Credits to the gain from monetary position......... Ps. 220,955 Ps. 85,800 Ps. 98,742
Credits (charges) to the result from holding 219,216 171,167 (190,839)
non-monetary assets ............................
Credits (charges) to the provision for deferred 205,361 (18,826) 423,616
income tax .....................................
Credits (charges) to the discontinued operations... 7,311 3,575 (536,565)
------------- -------------- --------------
Ps. 652,843 Ps. 241,716 Ps. (205,046)
============= ============== ==============
Additionally, the provision for deferred income tax for the years ended
December 31, 2000, 2001 and 2002 was credited by Ps.463,186, Ps.197,398 and
Ps.179,741, respectively, representing the effect on restatement of the
non-monetary items included in the deferred tax calculation, which was
originally accounted for in the result from monetary position and then
reclassified to the provision for deferred income tax. Consequently, the
provision for deferred tax for the years ended December 31, 2000, 2001 and 2002,
was a benefit of Ps.668,547, Ps.178,572 and Ps.603,357, respectively.
The provision for employees' profit sharing for the years ended December
31, 2000, 2001 and 2002, is comprised as follows:
2000 2001 2002
-------------- -------------- --------------
Employees' profit sharing - current............... Ps. 19,858 Ps. 22,722 Ps. 4,096
Employees' profit sharing - deferred.............. 36,671 -- --
-------------- -------------- --------------
Ps. 56,529 Ps. 22,722 Ps. 4,096
============== ============== ==============
The deferred employees' profit sharing asset as of December 31, 1999, of
Ps.36,671, was reversed in 2000, since the employees of Mexican companies in the
Group were assigned to companies which provide administrative
F-33
services beginning January 1, 2001, and these companies do not have significant
temporary differences between the carrying values of assets and liabilities and
their related tax values.
23. DISCONTINUED OPERATIONS
In December 2001, in connection with a series of transactions the Group
reached an agreement with Univision to sell its music recording business in the
United States and Latin America, which sale was consummated in April 2002 (see
Note 2). Accordingly, the results of operations of the music recording business
are reported as discontinued operations for all periods presented in these
consolidated financial statements.
Discontinued operations of the music recording segment are presented as
follows:
2000 2001 2002
------------- -------------- --------------
Income from music recording operations............ Ps. 25,121 Ps. 14,063 Ps. 1,693
Gain on disposal of music recording operations, net
of income taxes of Ps. 536,565 (1)............. -- -- 1,061,057
------------- -------------- --------------
Ps. 25,121 Ps. 14,063 Ps. 1,062,750
============= ============== ==============
-------------------------
(1) The costs and expenses related to the disposal of the Group's music
recording operations, amounted to approximately Ps.861,418, which included
fees of Ps.86,151 for financial advisory services provided to the Group by
a professional services firm in which a current director of the Company
maintains an interest, and advertising time for an aggregate amount of
Ps.156,960 rendered and to be provided to Univision by the Group in a
three-year period following this disposal (see Note 18).
Summarized information on results of the discontinued music recording
operations for the years ended December 31, 2000 and 2001, and for the period
from January 1, 2002 through the closing date in March 2002, is as follows:
2000 2001 2002
-------------- -------------- --------------
Net sales......................................... Ps. 1,372,251 Ps. 1,044,488 Ps. 207,338
Cost of sales..................................... 1,025,817 773,635 151,394
Operating expenses................................ 208,204 177,369 36,050
Depreciation and amortization..................... 4,666 4,226 769
Operating income.................................. 133,564 89,258 19,125
Income before income tax.......................... 84,828 75,150 11,844
Income taxes...................................... 59,707 61,087 10,151
Net income from discontinued operations........... 25,121 14,063 1,693
The results of the music recording segment reflected revenues, costs and
expenses related to the production and distribution (in Mexico and abroad) of
cassettes, compact disc recordings and records of Mexican and Latin American
artists, principally under three record labels which were wholly-owned by the
Group. Music recording segment revenues were derived primarily from sales of
recorded music and royalty revenues from the licensing of recordings to third
parties.
F-34
The net assets of the discontinued music recording operations as of
December 31, 2001 include:
2001
--------------
Accounts receivable............................... Ps. 498,576
Inventories....................................... 48,306
Other current assets.............................. 182,768
--------------
Current assets of discontinued operations......... 729,650
--------------
Property and equipment - net...................... 8,396
Deferred costs - net.............................. 31,873
Other assets...................................... 568
--------------
Non-current assets of discontinued operations..... 40,837
--------------
Trade accounts payable............................ 23,995
Other current liabilities......................... 155,806
Long-term liabilities............................. 23
--------------
Liabilities of discontinued operations............ 179,824
--------------
Net assets of discontinued operations............. Ps. 590,663
==============
24. EARNINGS PER CPO/SHARE
During the years ended December 31, 2000, 2001 and 2002, the weighted
average of outstanding shares, CPOs and Series "A" Shares (not in the form of
CPO units) was as follows:
2000 2001 2002
------------- ------------- -------------
Shares............................................ 8,825,436,712 8,877,087,751 8,853,846,396
CPOs.............................................. 2,166,316,311 2,193,876,256 2,186,138,824
Series "A" Shares (not in the form of CPO units).. 2,326,487,781 2,295,458,982 2,295,458,982
(Loss) earnings per CPO and per Series "A" Share (not in the form of a CPO
unit) for the years ended December 31, 2000, 2001 and 2002, are presented as
follows:
2000 2001 2002
------------------------- -------------------------- -------------------------
PER SERIES PER SERIES PER SERIES
PER "A" PER "A" PER "A"
CPO SHARE CPO SHARE CPO SHARE
----------- ---------- ----------- ------------ ------------ ----------
Continuing operations......... Ps. (0.30) Ps. (0.10) Ps. 0.51 Ps. 0.17 Ps. (0.12) Ps. (0.04)
Discontinued operations....... -- -- -- -- 0.36 0.12
Cumulative loss effect of
accounting change......... -- -- (0.03) (0.01) -- --
----------- ---------- ----------- ------------ ------------ ----------
Net (loss) income............. Ps. (0.30) Ps. (0.10) Ps. 0.48 Ps. 0.16 Ps. 0.24 Ps. 0.08
=========== ========== =========== ============ ============ ==========
F-35
25. FOREIGN CURRENCY POSITION
The foreign currency position of monetary items of the Group at December
31, 2002, was as follows:
FOREIGN CURRENCY YEAR-END
AMOUNTS EXCHANGE RATE MEXICAN PESOS
---------------- ------------- -------------
(THOUSANDS)
ASSETS:
U.S. dollars............................... 637,477 Ps. 10.4640 Ps. 6,670,559
Swedish crown.............................. 161,050 7.6200 1,227,201
Euros...................................... 16,342 11.0050 179,844
Chilean pesos.............................. 8,780,069 0.0145 127,311
Colombian pesos............................ 31,895,278 0.0036 114,823
Other currencies........................... -- -- 66,896
LIABILITIES:
U.S. dollars............................... 1,290,434 Ps. 10.4640 Ps.13,503,101
Euros...................................... 25,074 11.0050 275,939
Chilean pesos.............................. 7,901,793 0.0145 114,576
Colombian pesos............................ 20,594,722 0.0036 74,141
Other currencies........................... -- -- 48,656
The foreign currency position of non-monetary items as of December 31,
2002, was as follows:
FOREIGN CURRENCY YEAR-END
AMOUNTS EXCHANGE RATE MEXICAN PESOS
---------------- ------------- -------------
(THOUSANDS)
PROPERTY, PLANT AND EQUIPMENT:
U.S. dollars................................... 227,930 Ps. 10.4640 Ps. 2,385,060
Japanese yen................................... 9,188,226 0.0899 826,022
Spanish pesetas................................ 4,255,538 0.0560 238,310
French francs.................................. 37,997 1.4100 53,576
Colombian pesos................................ 7,723,881 0.0036 27,806
Pounds sterling................................ 19,964 17.0000 339,388
Other currencies............................... -- -- 70,164
TRANSMISSION RIGHTS, PROGRAMS, LITERARY WORKS,
PRODUCTION TALENT ADVANCES AND FILMS:
U.S. dollars................................... 323,913 Ps. 10.4640 Ps. 3,389,426
Colombian pesos................................ 6,288,289 0.0036 22,638
Chilean pesos.................................. 3,094,158 0.0145 44,865
Peruvian nuevo sol............................. 4,601 2.9769 13,697
Other currencies............................... -- -- 11,121
F-36
Transactions incurred during 2002 in foreign currencies were as follows:
U.S. DOLLAR
EQUIVALENT OF
OTHER FOREIGN
CURRENCY TOTAL U.S. MEXICAN
U.S. DOLLAR TRANSACTIONS DOLLAR PESOS(1)
------------ ------------- ------------- ------------
(THOUSANDS) (THOUSANDS) (THOUSANDS)
INCOME:
Revenues................................. $ 348,950 $ 85,117 $ 434,067 Ps.4,542,077
Other income............................. 22,148 796 22,944 240,086
Interest income.......................... 25,580 749 26,329 275,507
------------ ------------ ------------- ------------
$ 396,678 $ 86,662 $ 483,340 Ps.5,057,670
============ ============ ============= ============
PURCHASES, COSTS AND EXPENSES:
Purchases of inventories................. $ 228,731 $ 8,114 $ 236,845 Ps.2,478,346
Purchases of property and equipment...... 56,203 13,814 70,017 732,658
Other investments........................ 147,523 -- 147,523 1,543,681
Other costs and expenses................. 215,727 85,757 301,484 3,154,728
Interest expense......................... 82,300 1,166 83,466 873,388
------------ ------------ ------------- ------------
$ 730,484 $ 108,851 $ 839,335 Ps.8,782,801
============ ============ ============= ============
------------------------
(1) Income statement amounts translated at the year-end exchange rate of
Ps.10.4640 for reference purposes only; does not indicate the actual
amounts accounted for in the financial statements (see Note 1(c)).
As of December 31, 2002, the exchange rate was Ps.10.4640 per U.S. dollar,
which represents the interbank free market exchange rate on that date as
reported by Banco Nacional de Mexico, S.A.
As of February 26, 2003, the exchange rate was Ps.11.0290 per U.S. dollar,
which represents the interbank free market exchange rate on that date as
reported by Banco Nacional de Mexico, S.A.
26. SEGMENT DATA
The Group's segment data is prepared in accordance with International
Accounting Standard No. 14 (revised). Reportable segments are those that are
based on the Group's method of internal reporting.
The Group is organized on the basis of services and products. The Group's
segments are strategic business units that offer different entertainment
services and products. The Group's reportable segments are as follows:
TELEVISION BROADCASTING
The television broadcasting segment includes the production of television
programming and nationwide broadcasting of Channels 2, 4, 5 and 9 (television
networks), and the production of television programming and broadcasting for
local television stations in Mexico and the United States. The broadcasting of
television networks is performed by television repeater stations in Mexico which
are wholly-owned, majority- or minority-owned by the Group or otherwise
affiliated with the Group's networks. Revenues are derived primarily from the
sale of advertising time on the Group's television network and local television
station broadcasts.
PROGRAMMING FOR PAY TELEVISION
The programming for pay television segment includes programming services
for cable and pay-per-view television companies in Mexico, other countries in
Latin America, the United States and Europe. The programming services consist of
both programming produced by the Group and programming produced by others.
Programming for pay television revenues are derived from domestic and
international programming services provided to the independent cable television
systems in Mexico and the Group's DTH satellite and cable television businesses,
and from the sale of advertising time on programs provided to pay television
companies in Mexico.
F-37
PROGRAMMING LICENSING
The programming licensing segment consists of the domestic and
international licensing of television programming. Programming licensing
revenues are derived from domestic and international program licensing fees.
PUBLISHING
The publishing segment primarily consists of publishing Spanish-language
magazines in Mexico, the United States and Latin America and, through June 2000,
a newspaper in Mexico. Publishing revenues include subscriptions, sales of
advertising space and magazine and newspaper sales to distributors.
PUBLISHING DISTRIBUTION
The publishing distribution segment consists of distribution of
Spanish-language magazines, owned by either the Group or independent publishers,
and other consumer products in Mexico and Latin America. Publishing distribution
revenues are derived from magazine and other consumer products sales to
retailers.
CABLE TELEVISION
The cable television segment includes the operation of a cable television
system in the Mexico City metropolitan area and derives revenues principally
from basic and premium services subscription and installation fees from cable
subscribers, pay-per-view fees, and local and national advertising sales.
RADIO
The radio segment includes the operation of six radio stations in Mexico
City and eleven other domestic stations owned by the Group. Revenues are derived
by advertising and by the distribution of programs to nonaffiliated radio
stations.
OTHER BUSINESSES
The other businesses segment includes the Group's domestic operations in
sports and show business promotion, soccer, nationwide paging, feature film
production and distribution, Internet and dubbing services for Mexican and
multinational companies.
F-38
The table below presents information by segment for the years ended
December 31, 2000, 2001 and 2002.
OPERATING
INCOME
(LOSS)
BEFORE DEPRECIATION
DEPRECIATION AND OPERATING
TOTAL INTERSEGMENT CONSOLIDATED AND AMORTIZATION INCOME
REVENUES REVENUES REVENUES AMORTIZATION EXPENSE (LOSS)
------------- ------------ ------------- ------------ ------------ ------------
2000:
Television broadcasting... Ps.14,060,732 Ps. 112,072 Ps.13,948,660 Ps.5,749,187 Ps. 883,184 Ps.4,866,003
Programming for pay
television.............. 529,485 67,693 461,792 (60,594) 35,210 (95,804)
Programming licensing..... 1,614,281 -- 1,614,281 397,098 13,440 383,658
Publishing................ 1,831,432 -- 1,831,432 384,273 42,347 341,926
Publishing distribution... 954,984 14,750 940,234 57,055 13,380 43,675
Cable television.......... 981,207 623 980,584 240,836 84,151 156,685
Radio..................... 361,947 2,649 359,298 70,239 24,261 45,978
Other businesses.......... 1,652,386 206,831 1,445,555 (171,289) 215,682 (386,971)
Eliminations and corporate
expenses................ (404,618) (404,618) -- (144,555) -- (144,555)
------------- ------------ ------------- ------------ ------------ ------------
Consolidated total........ Ps.21,581,836 Ps. -- Ps.21,581,836 Ps.6,522,250 Ps.1,311,655 Ps.5,210,595
============= ============ ============= ============ ============ ============
2001:
Television broadcasting... Ps.13,445,481 Ps. 148,820 Ps.13,296,661 Ps.5,102,620 Ps. 850,627 Ps.4,251,993
Programming for pay
television................ 543,553 73,974 469,579 42,404 39,684 2,720
Programming licensing..... 1,484,983 -- 1,484,983 321,997 14,844 307,153
Publishing................ 1,695,725 18,954 1,676,771 295,214 47,383 247,831
Publishing distribution... 948,231 16,173 932,058 21,584 13,040 8,544
Cable television.......... 1,143,932 566 1,143,366 350,146 99,532 250,614
Radio..................... 249,151 14,625 234,526 6,729 22,658 (15,929)
Other businesses.......... 1,824,197 276,559 1,547,638 (304,177) 266,272 (570,449)
Eliminations and corporate
expenses................ (549,671) (549,671) -- (142,877) -- (142,877)
------------- ------------ ------------- ------------ ------------ ------------
Consolidated total........ Ps.20,785,582 Ps. -- Ps.20,785,582 Ps.5,693,640 Ps.1,354,040 Ps.4,339,600
============= ============ ============= ============ ============ ============
2002:
Television broadcasting... Ps.14,038,272 Ps. 100,658 Ps.13,937,614 Ps.5,482,451 Ps. 918,083 Ps.4,564,368
Programming for pay
television................ 608,031 57,011 551,020 103,335 43,075 60,260
Programming licensing..... 1,405,174 -- 1,405,174 229,457 11,468 217,989
Publishing................ 1,683,111 14,658 1,668,453 271,160 27,565 243,595
Publishing distribution... 1,343,765 11,269 1,332,496 14,902 16,756 (1,854)
Cable television.......... 1,108,200 480 1,107,720 324,350 122,886 201,464
Radio..................... 187,062 41,978 145,084 (29,269) 16,469 (45,738)
Other businesses.......... 1,548,807 137,099 1,411,708 (152,854) 293,385 (446,239)
Eliminations and corporate
expenses................ (363,153) (363,153) -- (143,515) -- (143,515)
------------- ------------ ------------- ------------ ------------ ------------
Consolidated total........ Ps.21,559,269 Ps. -- Ps.21,559,269 Ps.6,100,017 Ps.1,449,687 Ps.4,650,330
============= ============ ============= ============ ============ ============
ACCOUNTING POLICIES
The accounting policies of the segments are the same as those described in
the Group's summary of significant accounting policies (see Note 1). The Group
evaluates the performance of its segments and allocates resources to them based
on operating income before depreciation and amortization.
In April 2001, the Group ceased production of ECO, an international news
program that was produced and licensed by the Group's pay television segment.
Following the discontinuation of ECO, fixed costs of ECO related to production
studios and technical equipment in the amount of approximately Ps.300,693 and
Ps.107,625 for the years ended December 31, 2000 and 2001, respectively, were
reallocated, together with subsequent operations
F-39
related to those fixed costs, to the segment where those assets are subsequently
being utilized, the television broadcasting segment. Accordingly, the results of
the Television broadcasting and Programming for pay television segments for the
years ended December 31, 2000 and 2001 have been reclassified to conform to this
presentation.
INTERSEGMENT REVENUE
Intersegment revenue consists of revenues derived from each of the segments
principal activities as provided to other segments.
The Group accounts for intersegment revenues as if the revenues were from
third parties, that is, at current market prices.
ALLOCATION OF GENERAL AND ADMINISTRATIVE EXPENSES
Non-allocated corporate expenses include payroll for certain executives,
related employee benefits and other general expenses.
The table below presents segment information about assets, liabilities, and
additions to property, plant and equipment as of and for the years ended
December 31, 2000, 2001 and 2002.
SEGMENT ADDITIONS TO
SEGMENT ASSETS LIABILITIES PROPERTY, PLANT
AT YEAR-END AT YEAR-END AND EQUIPMENT
----------------- ----------------- -----------------
2000:
Continuing operations:
Television operations(1)....................... Ps. 36,405,449 Ps. 17,223,602 Ps. 1,160,056
Publishing..................................... 1,378,416 281,432 3,379
Publishing distribution........................ 807,305 294,701 6,185
Cable television............................... 2,038,536 146,155 318,199
Radio.......................................... 975,092 22,606 4,284
Other businesses............................... 4,008,474 2,320,565 132,582
----------------- ----------------- -----------------
45,613,272 20,289,061 1,624,685
Discontinued operations:
Music recording (see Note 23).................. 820,097 229,170 640
----------------- ----------------- -----------------
Total................................... Ps. 46,433,369 Ps. 20,518,231 Ps. 1,625,325
================= ================= =================
2001:
Continuing operations:
Television operations(1)....................... Ps. 34,174,074 Ps. 16,142,545 Ps. 956,484
Publishing..................................... 1,437,974 304,299 11,016
Publishing distribution........................ 909,318 235,610 7,526
Cable television............................... 1,813,860 273,694 403,444
Radio.......................................... 1,062,715 33,769 2,392
Other businesses............................... 3,782,758 1,565,612 34,206
----------------- ----------------- -----------------
43,180,699 18,555,529 1,415,068
Discontinued operations:
Music recording (see Note 23).................. 770,487 179,824 617
----------------- ----------------- -----------------
Total.................................... Ps. 43,951,186 Ps. 18,735,353 Ps. 1,415,685
================= ================= =================
2002:
Continuing operations:
Television operations(1)....................... Ps. 37,070,853 Ps. 16,692,334 Ps. 1,103,693
Publishing..................................... 1,512,407 133,069 3,504
Publishing distribution........................ 927,755 358,132 14,839
Cable television............................... 2,106,196 576,244 183,196
Radio.......................................... 396,579 46,072 10,806
Other businesses............................... 3,860,188 2,895,514 37,885
----------------- ----------------- -----------------
Total.................................... Ps. 45,873,978 Ps. 20,701,365 Ps. 1,353,923
================= ================= =================
F-40
----------------------
(1) Segment assets and liabilities information is not maintained by the Group
for each of the television broadcasting, programming for pay television and
programming licensing segments. In management's opinion, there is no
reasonable or practical basis to make allocations due to the
interdependence of these segments. Consequently, management has presented
such information on a combined basis as television operations.
Segment assets reconcile to total assets as follows:
2000 2001 2002
-------------- -------------- --------------
Segment assets.................................... Ps. 46,433,369 Ps. 43,951,186 Ps. 45,873,978
Non trade long-term receivables................... 35,731 6,839 5,715
Investments attributable to:
Television operations(1)....................... 1,588,866 1,406,568 7,565,604
Other segments................................. 200,336 3,729,799 453,652
DTH ventures(2)................................ 448,647 267,684 362,175
Goodwill - net attributable to:
Television operations.......................... 2,387,651 2,208,008 1,215,761
Cable television............................... -- 107,659 --
Publishing distribution........................ 310,861 262,525 263,895
Other segments................................. 117,221 64,962 732,691
-------------- -------------- --------------
Total assets...................................... Ps. 51,522,682 Ps. 52,005,230 Ps. 56,473,471
============== ============== ==============
------------------------
(1) Includes goodwill attributable to equity investments of Ps.2,428, Ps.2,207
and Ps.5,266,965 in 2000, 2001 and 2002, respectively.
(2) Includes goodwill attributable to investments in DTH ventures of Ps.71,564,
Ps.59,044 and Ps.81,374 in 2000, 2001 and 2002, respectively.
Equity method income (loss) for the years ended December 31, 2000, 2001 and
2002 attributable to television operations, equity investments approximated
Ps.96,719, Ps.37,893 and Ps.54,935, respectively.
Segment liabilities reconcile to total liabilities as follows:
2000 2001 2002
---------------- ---------------- ----------------
Segment liabilities............................... Ps. 20,518,231 Ps. 18,735,353 Ps. 20,701,365
Notes payable and long-term debt not attributable
to segments..................................... 11,597,086 13,473,378 14,447,619
---------------- ---------------- ----------------
Total liabilities................................. Ps. 32,115,317 Ps. 32,208,731 Ps. 35,148,984
================ ================ ================
F-41
GEOGRAPHICAL SEGMENT INFORMATION
ADDITIONS TO
SEGMENT PROPERTY,
TOTAL NET ASSETS AT PLANT AND
SALES YEAR-END EQUIPMENT
---------------- --------------- ----------------
2000:
Mexico......................................... Ps. 18,433,326 Ps. 43,940,068 Ps. 1,606,448
Other countries................................ 3,148,510 2,493,301 18,877
---------------- --------------- ----------------
Ps. 21,581,836 Ps. 46,433,369 Ps. 1,625,325
================ =============== ================
2001:
Mexico......................................... Ps. 17,927,532 Ps. 41,690,608 Ps. 1,383,568
Other countries................................ 2,858,050 2,260,578 32,117
---------------- --------------- ----------------
Ps. 20,785,582 Ps. 43,951,186 Ps. 1,415,685
================ =============== ================
2002:
Mexico......................................... Ps. 18,224,236 Ps. 41,384,834 Ps. 1,328,714
Other countries................................ 3,335,033 4,489,144 25,209
---------------- --------------- ----------------
Ps. 21,559,269 Ps. 45,873,978 Ps. 1,353,923
================ =============== ================
Net sales are attributed to countries based on the location of customers.
F-42
27. DIFFERENCES BETWEEN MEXICAN GAAP AND U.S. GAAP
The Group's consolidated financial statements are prepared in
accordance with Mexican GAAP, which differs in certain significant respects from
accounting principles generally accepted in the United States ("U.S. GAAP"). The
principal differences between Mexican GAAP and U.S. GAAP are presented below,
together with explanations of certain adjustments that affect net income (loss)
and shareholders' equity as of and for the years ended December 31:
RECONCILIATION OF NET INCOME (LOSS)
2000 2001 2002
---------- ------------ -------------
Net (loss) income under Mexican GAAP ........................ Ps.(872,255) Ps.1,422,375 Ps. 737,836
U.S. GAAP adjustments:
(a) Capitalization of financing costs, net of depreciation.. 29,009 66,780 16,846
(b) Deferred costs, net of amortization .................... (77,052) 16,164 23,202
(c) Equipment restatement, net of amortization ............. (103,410) (113,556) (101,824)
(d) Purchase accounting adjustments:
Amortization of broadcast license and network
affiliation agreements ................................. (94,475) (91,474) --
Depreciation of fixed assets ........................... (6,914) (8,423) (9,931)
Amortization of other assets ........................... (3,961) (3,962) (3,962)
Amortization of goodwill on acquisition of Bay City .... 88,784 88,786 --
Amortization of goodwill on acquisition of minority
interest in Editorial Televisa ......................... (9,190) (55,137) --
Amortization of negative goodwill on acquisition of
additional interest in Univision ....................... 17,395 17,395 --
(e) Goodwill and other intangible assets:
Reversal of Mexican GAAP goodwill amortization ......... -- -- 437,805
Reversal of Mexican GAAP impairment of goodwill related
to Bay City ............................................ -- -- 784,800
Reversal of Mexican GAAP amortization of intangible
assets with indefinite lives ........................... -- -- 90,140
(f) Equity method investees ................................ 254,301 (558,827) (695,803)
(g) Adjustment to gain on sale of music recording business -- -- (265,542)
(h) Derivative financial instruments ....................... (27,126) 2,561,894 (1,176,984)
(i) Pension plan costs and seniority premiums .............. (4,491) (2,482) 1,294
(j) Employee stock option plan ............................. (99,810) 62,937 5,202
(k) Production and film costs .............................. -- (713,730) (333,791)
(l) Deferred income taxes and employee profit sharing:
Deferred income taxes (1) .............................. 93,314 (636,801) 569,992
Deferred employees profit sharing (1) .................. 764,332 42,759 23,542
(m) Minority interest ...................................... -- -- 8,052
(n) Effects of inflation accounting on U.S. GAAP
adjustments ............................................ 251,062 111,598 (10,694)
----------- ------------ -------------
Net income before cumulative effect of change in
accounting principles ....................................... 199,513 2,206,296 100,180
Cumulative effect of change in accounting principles
(In 2001: SoP 00-2(k), Ps.830,804 net of tax benefit of
Ps.447,355; and in 2002: SFAS 141(d) and SFAS 142(e),
Ps.1,232,761, net of write off of negative goodwill of
Ps.313,090 and tax benefit of Ps.418,370) .............. -- (830,804) (1,232,761)
----------- ------------ -------------
Net income (loss) under U.S. GAAP .......................... Ps. 199,513 Ps.1,375,492 Ps.(1,132,581)
=========== ============ =============
(1) Net of inflation effects.
F-43
RECONCILIATION OF SHAREHOLDERS' EQUITY
2001 2002
-------------- --------------
Total stockholders' equity under Mexican GAAP ......................... Ps. 19,796,499 Ps. 21,324,487
-------------- --------------
U.S. GAAP adjustments:
(a) Capitalization of financing costs, net of depreciation ........... (817,945) (801,099)
(b) Deferred costs, net of amortization .............................. (359,009) (335,807)
(c) Equipment restatement, net of depreciation ....................... 1,039,444 574,000
(d) Purchase accounting adjustments:
Broadcast license and network affiliation agreements ............. 1,326,376 131,032
Fixed assets ..................................................... 94,340 84,409
Other assets ..................................................... 55,574 51,741
Goodwill on acquisition of Bay City .............................. (1,304,095) (1,810,447)
Goodwill on acquisition of minority interest in Editorial Televisa 1,113,281 1,113,281
Goodwill on acquisition of additional interests in Univision ..... (313,090) (539,137)
(e) Goodwill and other intangible assets:
Reversal of Mexican GAAP goodwill amortization ................... -- 437,805
Reversal of Mexican GAAP impairment of goodwill related to
Bay City.......................................................... -- 784,800
Reversal of Mexican GAAP amortization of intangible assets with
indefinite lives ................................................. -- 90,140
Impairment of goodwill of distribution segment ................... -- (335,392)
(f) Equity method investees .......................................... (172,422) (868,225)
(g) Adjustment to gain on sale of music recording business ........... -- (265,542)
(h) Derivative financial instruments ................................. 2,457,804 1,181,970
(i) Pension plan and seniority premiums .............................. (936) 358
(j) Employee stock option plan ....................................... (135,460) (123,101)
(k) Production and film costs ........................................ (1,991,889) (2,325,680)
(l) Deferred income taxes and employee profit sharing:
Deferred income taxes ............................................ (631,316) 600,952
Deferred employees' profit sharing ............................... (205,725) (182,183)
(m) Minority interest ................................................ (1,031,429) (1,131,524)
-------------- --------------
Total U.S. GAAP adjustments, net ...................................... (876,497) (3,667,649)
-------------- --------------
Total stockholders' equity under U.S. GAAP ............................ Ps. 18,920,002 Ps. 17,656,838
============== ==============
The reconciliation to U.S. GAAP includes a reconciling item for the
effect of applying the option provided by the Mexican GAAP Modified Fifth
Amendment to Bulletin B-10, "Recognition of the Effects of Inflation on
Financial Information" for the restatement of equipment of non-Mexican origin
because, as described below, this provision of inflation accounting under
Mexican GAAP does not meet the consistent reporting currency requirement of
Regulation S-X of the Securities and Exchange Commission ("SEC").
The reconciliation to U.S. GAAP does not include the reversal of the
other adjustments to the financial statements for the effects of inflation
required under Mexican GAAP Bulletin B-10, because the application of Bulletin
B-10 represents a comprehensive measure of the effects of price level changes in
the inflationary Mexican economy and, as such, is considered a more meaningful
presentation than historical, cost-based financial reporting for both Mexican
and U.S. accounting purposes.
Mexican GAAP Bulletin B-15, "Foreign Currency Transactions and
Translation of Financial Statements of Foreign Operations" requires restating
the financial statements for all periods prior to the most recent period by
using a weighted-average factor which considers the inflation in Mexico and the
other countries in which the Group and its subsidiaries operate and the currency
exchange rate for the currency of each country as of the date of the most recent
balance sheet. The consistent reporting currency requirements of the SEC rules
require restatement of prior periods for general price level changes only,
utilizing the NCPI, and supplemental condensed financial statements utilizing
the NCPI are required for U.S. GAAP purposes. The Group utilized the NCPI to
restate its financial statements for prior years because the use of the
weighted-average factor prescribed by B-15 would not have produced a materially
different result.
F-44
(A) CAPITALIZATION OF FINANCING COSTS, NET OF DEPRECIATION
Mexican GAAP allows, but does not require, capitalization of financing
costs as part of the cost of assets under construction. Financing costs
capitalized include interest costs, gains from monetary position and foreign
exchange losses.
U.S. GAAP requires the capitalization of interest during construction
on qualifying assets. In an inflationary economy, such as Mexico, acceptable
practice is to capitalize interest net of the monetary gain on the related
Mexican Peso debt, but not on U.S. dollar or other stable currency debt. U.S.
GAAP does not allow the capitalization of foreign exchange losses.
(B) DEFERRED COSTS, NET OF AMORTIZATION
Under Mexican GAAP, preoperating costs and certain development costs
(including those related to web site development) are capitalized and
subsequently amortized on a straight-line basis once the related venture
commences operations, defined as the period when revenues are generated. In
addition, other expenditures which are expected to generate significant and
identifiable future benefits are also capitalized and amortized over the
expected future benefit period.
Under U.S. GAAP, preoperating, development and other deferred costs are
generally expensed as incurred given that the assessment of future economic
benefit is uncertain. In the case of web site development costs, certain costs
are capitalized and others expensed in accordance with EITF Issue No. 00-2,
"Accounting for Web Site Development Costs". Consequently, the U.S. GAAP net
income reconciliation reflects the write-off, for U.S. GAAP purposes, of the
preoperating and other deferred costs (including certain web site development
costs) capitalized under Mexican GAAP, net of the reversal of any amortization
which is reflected under Mexican GAAP.
(C) EQUIPMENT RESTATEMENT, NET OF DEPRECIATION
The Group restates equipment of non-Mexican origin using the Specific
Index for determining the restated balances under Mexican GAAP. Under Regulation
S-X of the SEC, the restatement of equipment of non-Mexican origin by the
Specific Index under the provisions of the Modified Fifth Amendment to Bulletin
B-10 is a deviation from the historical cost concept. The NCPI factors applied
to restate equipment of non-Mexican origin were 8.96%, 4.40% and 5.70% in 2000,
2001 and 2002, respectively. The U.S. GAAP net income and stockholders' equity
reconciliations reflect adjustments to restate equipment of non-Mexican origin
by the NCPI and recalculate the depreciation expense on this basis.
Consequently, the deficit from restatement adjustment recognized under Mexican
GAAP related to fixed assets totaling Ps.343,984 and Ps.(363,620) for the years
ended December 31, 2001 and 2002, respectively, has been reserved for U.S. GAAP
purposes.
(D) PURCHASE ACCOUNTING ADJUSTMENTS
Under Mexican GAAP, the excess of the purchase price over the adjusted
net book value of enterprises acquired is recorded as goodwill and amortized
over a period not to exceed twenty years.
Under U.S. GAAP, the purchase method of accounting, for acquisitions
prior to June 1, 2001, requires the acquiring Group to record at fair value the
assets acquired and liabilities assumed, including deferred income taxes on
existing temporary differences. The difference between the purchase price and
the sum of the fair values of tangible and identifiable intangible assets less
liabilities assumed, whether or not previously recorded by the acquired
enterprise, is recorded as goodwill. The U.S. GAAP adjustments for the years
ended December 31, 2000 and 2001 reflect the difference in the amortization
expense of goodwill and other purchase price adjustments resulting from the
application of the purchase method for U.S. GAAP and the accounting under
Mexican GAAP described above related to the acquisition of Bay City Television,
Inc. ("Bay City") and Radio Television, S.A. de C.V. in July 1996. For U.S. GAAP
purposes, the purchase price has been allocated, based on fair values primarily
to the broadcast license and network affiliation agreement (Ps.2,197,910),
programming and advertising contracts (Ps. 210,267), fixed assets (Ps.124,319),
other assets (Ps.92,090) and goodwill (Ps.890,188). Such purchase price
adjustments are amortized over the remaining estimated useful lives of the
respective assets, which is 15 years for
F-45
fixed assets and 3 years for programming contracts. Upon the adoption of the new
accounting standard on goodwill and other intangible assets (described below) on
January 1, 2002, the Group ceased amortizing the broadcast license and network
affiliation agreement, as they are considered to have indefinite lives, and the
amount allocated to goodwill. In addition, on January 1, 2002, the Group
recorded a non-cash impairment charge relating to the broadcast license and
network affiliation agreement (Ps.776,974, net of tax benefit of Ps.418,370)
and the goodwill in Bay City (Ps.506,352) (described below).
On October 19, 2000, the Group acquired all of the interest owned by a
minority shareholder in its majority-owned subsidiary, Editorial Televisa, by
issuing 172,922,325 shares of capital stock in the form of 57,640,775 CPOs.
Under Mexican GAAP, this acquisition was accounted for as a purchase, and the
related purchase price was determined using the carrying value of the Group's
treasury shares at the acquisition date, with a related goodwill of Ps.74,847
and an additional paid-in capital of Ps.208,939 being recognized. Under U.S.
GAAP, this acquisition was accounted for by the purchase method, and the related
purchase price was determined by using the fair value of the shares issued by
the Group as consideration for the minority interest acquired. The additional
purchase price adjustment under U.S. GAAP was allocated to goodwill and
amortized through December 31, 2001. Upon the adoption of the new accounting
standard on goodwill and other intangible assets effective January 1, 2002
(described below), this amount is no longer amortized, but subject to an annual
impairment test.
In 1999, the Group exercised warrants to acquire an additional interest
in Univision. The Group's influence and participation in the activities of
Univision did not change. Under Mexican GAAP, the Group recognized the excess of
its underlying equity in the net assets of Univision over the cost of the
investment in income. Under U.S. GAAP, the additional investment in Univision
was accounted for as a purchase with the difference between the investors'
cost and underlying equity in the net assets of the investee at the date of
acquisition being accounted for in a manner similar to a consolidated subsidiary
and amortized over the remaining estimated useful lives of the underlying
assets. The unamortized balance of negative goodwill that arose on this
transaction was written off on January 1, 2002 and was reflected as part of
"Cumulative effect of change in accounting principle" in the accompanying U.S.
GAAP reconciliation, pursuant to the provisions of Statement of Financial
Accounting Standard No. 141, "Business Combinations" ("SFAS 141").
In addition, as described in Note 2, the Group also entered into a
series of transactions with Univision in December 2001, by which, among other
things, the Group acquired 375,000 non-voting preferred shares of Univision
stock, which converted upon the receipt of required U.S. regulatory approval in
February 2002, into 10,594,500 shares of Univision Class "A" Common Stock and
2,725,136 shares of Univision Class "B" Common Stock, and 6,000,000 shares of
Univision Class "A" Common Stock as partial consideration for the sale of its
music recording business. Under Mexican GAAP, the Group recognized the excess of
its underlying equity in the net assets of Univision over the cost of the
additional investments as goodwill. Under U.S. GAAP, the additional investments
were each accounted for as a purchase with the difference between the investors'
cost and underlying equity in the net assets of the investee at the date of
acquisition being accounted for in a manner similar to a consolidated
subsidiary. Accordingly, under U.S. GAAP, the Group recognized goodwill on
these acquisitions amounting to Ps.4,617,838, which is not amortized, but
tested for impairment on an annual basis in accordance with new accounting
standard on goodwill and other intangible assets (described below).
Business combinations consummated after June 30, 2001, are accounted
for under the provisions of SFAS 141. SFAS 141 requires separate recognition of
intangible assets if they meet the legal or separability criteria and prescribes
the initial recognition and measurement of goodwill and negative goodwill. The
impact of applying SFAS 141 to business combinations consummated after June 30,
2001 is not significant.
(E) GOODWILL AND OTHER INTANGIBLE ASSETS
During 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142 "Goodwill and Other
Intangible Assets" ("SFAS 142"), which requires that, effective January 1, 2002,
goodwill, including the goodwill included in the carrying value of investments
accounted for using the equity method of accounting, and certain other
intangible assets deemed to have an indefinite useful life, cease amortizing.
The new rules also require that goodwill and certain intangible assets be
assessed for impairment using fair value measurement techniques.
SFAS 142 requires that goodwill and certain intangible assets be
assessed for impairment using fair value measurement techniques. Specifically,
goodwill impairment is determined using a two-step process. The first step of
the goodwill impairment test is used to identify potential impairment by
comparing the fair value of a reporting unit
F-46
with its carrying amount, including goodwill. If the fair value of a reporting
unit exceeds its carrying amount, goodwill of the reporting unit is considered
not impaired and the second step of the impairment test is unnecessary. If the
carrying amount of a reporting unit exceeds its fair value, the second step of
the goodwill impairment test is performed to measure the amount of impairment
loss, if any. The second step of the goodwill impairment test compares the
implied fair value of the reporting unit's goodwill with the carrying amount of
that goodwill. If the carrying amount of the reporting unit's goodwill exceeds
the implied fair value of that goodwill, an impairment loss is recognized in an
amount equal to that excess. The implied fair value of goodwill is determined in
the same manner as the amount of goodwill recognized in a business combination.
That is, the fair value of the reporting unit is allocated to all of the assets
and liabilities of that unit (including any unrecognized intangible assets) as
if the reporting unit had been acquired in a business combination, and the fair
value of the reporting unit was the purchase price paid to acquire the reporting
unit. The impairment test for other intangible assets not subject to
amortization consists of a comparison of the fair value of the intangible asset
with its carrying value. If the carrying value of the intangible asset exceeds
its fair value, an impairment loss is recognized in an amount equal to that
excess. For intangible assets subject to amortization, to the extent the fair
value of the intangible asset, determined based upon the estimated future cash
inflows on a discounted basis attributable to the asset less estimated future
cash outflows on a discounted basis, are less than the carrying amount, an
impairment loss is recognized.
The Group recorded a Ps.1,232,761 non-cash charge (net of a write off
of negative goodwill of Ps.313,090 and tax benefit of Ps.418,370) for the
impairment of goodwill and other intangible assets upon completion of its
initial impairment reviews pursuant to the adoption of SFAS 142 on January 1,
2002. The charge is reflected as a cumulative effect of an accounting change in
the accompanying U.S. GAAP reconciliation. The charge reduced the carrying value
of goodwill in the Group's television broadcasting and publishing distribution
segments by Ps.506,352 and Ps.262,525, respectively. The impairment in the
Group's television broadcasting segment relates to the operations of Bay City,
which have been adversely affected by an increase in operational costs resulting
from the renewal of television network affiliation contract. The impairment in
the Group's publishing distribution segment related primarily to the operations
of Grupo Distribuidoras Intermex, S.A. de C.V. ("Distribuidoras Intermex"), as a
result of increased competition and decreasing margins of its South-American
operations. The fair value of Bay City and Distribuidoras Intermex, as separate
reporting units, were determined using expected present value of future cash
flows.
The Company also performed its annual impairment review for goodwill
and recorded an additional non-cash charge of Ps.281,900 to reduce the carrying
value of goodwill in its television broadcasting segment (Ps.51,857), cable
television segment (Ps.107,659) and other segments (Ps.122,384). These charges
were recorded as a component of operating income (loss) in the accompanying U.S.
GAAP reconciliation.
The impairment charges are all non-cash in nature and do not affect the
Group's liquidity or result in the non-compliance with respect to any debt
covenants. The changes in the carrying amount of goodwill under U.S. GAAP for
the year ended December 31, 2002, are as follows:
BALANCE AS WRITE-OFF BALANCE AS OF
OF JANUARY 1, OF NEGATIVE ALLOCATED IMPAIRMENT DECEMBER 31,
2002 GOODWILL GOODWILL LOSSES 2002
---- -------- --------- ------ ----
Consolidated subsidiaries:
Television broadcasting .......... Ps. 903,914 Ps. -- Ps. 51,825 Ps. (558,209)(3) Ps. 397,530
Publishing distribution .......... 262,525 -- -- (262,525)(3) --
Publishing ....................... 1,113,281 -- -- -- 1,113,281
Cable television ................. 107,659 -- -- (107,659) --
Other segments ................... 124,006 -- 97,011 (122,384) 98,633
Equity-method investees ............ (310,883) 313,090(1) 5,366,221(2) -- 5,368,428
------------ ---------- ------------ ------------- ------------
Total .............................. Ps.2,200,502 Ps.313,090 Ps.5,515,057 Ps.(1,050,777) Ps.6,977,872
============ ========== ============ ============= ============
(1) Represents the write-off of negative goodwill in Univision on January
1, 2002 - refer to (d) and (e) above.
(2) Represents the goodwill arising on acquisition of additional interests
in Univision (Ps.4,617,838) and OCEN (Ps.748,383) - refer to Note 2 and
(d) above.
(3) Relates mainly to the impairment of goodwill in Bay City and
Distribuidoras Intermex (described above).
F-47
The following disclosure of what the Group's income before
extraordinary items and cumulative change in accounting principle, net income,
earnings per CPO and earnings per share would have been under U.S. GAAP,
adjusted to exclude the amortization expense recognized in 2001 and 2000 related
to goodwill, negative goodwill and intangible assets with indefinite lives, is
required by SFAS 142:
YEAR ENDED DECEMBER 31,
---------------------------------------------
2000 2001 2002
------------- -------------- -------------
Reported income before extraordinary items and cumulative effect
of change in accounting principle.................................. Ps. 1,205,036 Ps. 2,245,759 Ps. 100,180
Add back: Goodwill amortization.................................... 149,832 168,966 --
Deduct: Negative goodwill amortization............................. (17,395) (17,395) --
Add back: Amortization of acquired television network
concession, broadcast license, network affiliation agreements
and trademarks, net of deferred tax of Ps.63,977 and Ps.62,718,
respectively....................................................... 118,814 116,476 --
------------- -------------- -------------
Adjusted income before extraordinary items and cumulative change
in accounting principle............................................ Ps. 1,456,287 Ps. 2,513,806 Ps. 100,180
============= ============== =============
Reported net income (loss)......................................... Ps. 199,513 Ps. 1,375,492 Ps.(1,132,581)
Add back: Goodwill amortization.................................... 149,832 168,966 --
Deduct: Negative goodwill amortization............................. (17,395) (17,395) --
Add back: Amortization of acquired television network
concession, broadcast license, network affiliation agreements
and trademarks, net of deferred tax of Ps.63,977 and Ps.62,718,
respectively....................................................... 118,814 116,476 --
------------- -------------- -------------
Adjusted net income (loss)......................................... Ps. 450,764 Ps. 1,643,539 Ps.(1,132,581)
============= ============== =============
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2000 2001 2002
------------------------- -------------------------- ------------------------
PER PER PER
(in constant pesos) PER SERIES "A" PER SERIES "A" PER SERIES "A"
CPO SHARE CPO SHARE CPO SHARE
----------- ----------- ----------- ----------- ----------- -----------
Reported earnings (loss) per
CPO and per share ........... Ps. 0.06 Ps. 0.02 Ps. 0.48 Ps. 0.16 Ps. (0.39) Ps. (0.13)
Add back: Goodwill
amortization................. 0.06 0.02 0.06 0.02 -- --
Add back: Amortization of
acquired television network
concession, broadcast
license, network
affiliation agreements and
trademarks, net of deferred
tax of Ps.63,977 and
Ps.62,718, respectively...... 0.06 0.02 0.06 0.02 -- --
----------- ----------- ----------- ----------- ----------- -----------
Adjusted earnings (loss) per
CPO and per share............ Ps. 0.18 Ps. 0.06 Ps. 0.60 Ps. 0.20 Ps. (0.39) Ps. (0.13)
=========== =========== =========== =========== =========== ===========
The carrying value of intangible assets with indefinite lives as of
December 31, 2002 amounted to Ps.608,591 (acquired television network
concession), Ps.131,032 (broadcast license and network affiliation agreements)
and Ps.420,252 (trademarks) under U.S. GAAP. The aggregate amortization expense
for intangible assets, subject to amortization under U.S. GAAP, is estimated at
Ps.99,846 for each of the next five fiscal years.
F-48
(F) EQUITY METHOD INVESTEES
The effect of applying U.S. GAAP to the Group's equity investees,
particularly as it relates to Innova, SMCP, Univision and OCEN (acquired in
2002), has been included in the Group's U.S. GAAP reconciliation.
The schedules below present, under U.S. GAAP, summarized statements of
operations for the years ended December 31, 2002, 2001 and 2002, and balance
sheet information as of December 31, 2002 and 2001 for the significant
investments that were accounted for under the equity method.
STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002
--------------------------------------------------------------------------------
TOTAL
OTHER EQUITY EQUITY
INNOVA UNIVISION SMCP INVESTMENTS INVESTMENTS
------------ ------------- ------------- ------------- ------------
Net sales ..................................... Ps. 3,315,976 Ps.11,419,289 Ps. 583,420 Ps. 6,890,211 Ps.22,208,896
Total expenses ................................ 5,040,247 9,870,282 1,919,296 9,949,605 26,779,430
-------------- ------------- ----------------- -------------- -------------
(Loss) income before income taxes and
minority interest ............................. (1,724,271) 1,549,007 (1,335,876) (3,059,394) (4,570,534)
Income taxes ................................ 75,530 643,578 21 12,145 731,274
-------------- ------------- ----------------- -------------- -------------
(Loss) income before minority interest ........ (1,799,801) 905,429 (1,335,897) (3,071,539) (5,301,808)
Minority interest ........................... -- -- -- (2,185) (2,185)
-------------- ------------- ----------------- -------------- -------------
U.S. GAAP net (loss) income ................... Ps.(1,799,801) Ps. 905,429 Ps.(1,335,897) Ps.(3,073,724) Ps.(5,303,993)
============== ============= ================= ============== =============
Televisa's average percentage ownership in
investee ...................................... 60% 13.07% 30%
Televisa's equity in net (losses) income of
equity investees, under U.S. GAAP ............. Ps.(1,079,881) Ps. 118,358 Ps. (873,859)(1) Ps. (16,239) Ps.(1,851,621)
============== ============= ================= ============== =============
(1) Includes corporate consolidation adjustments of Ps.(473,090).
YEAR ENDED DECEMBER 31, 2001
----------------------------------------------------------------
TOTAL
OTHER EQUITY EQUITY
INNOVA SMCP INVESTMENTS INVESTMENTS
------------ ------------- -------------- -------------
Net sales .................................................... Ps.3,140,996 Ps. 754,056 Ps.13,049,690 Ps.16,944,742
Total expenses ............................................... 4,025,372 2,296,705 11,743,580 18,065,657
------------ ------------- ------------- -------------
(Loss) income before income taxes and minority
interest ..................................................... (884,376) (1,542,649) 1,306,110 (1,120,915)
Income taxes ............................................... 46,283 3,250 1,897,696 1,947,229
------------ ------------- ------------- -------------
Loss before minority interest ................................ (930,659) (1,545,899) (591,586) (3,068,144)
Minority interest .......................................... -- -- 940 940
------------ ------------- ------------- -------------
U.S. GAAP net loss ........................................... Ps. (930,659) Ps.(1,545,899) Ps. (590,646) Ps.(3,067,204)
============ ============= ============= =============
Televisa's percentage ownership in investee .................. 60% 30%
Televisa's equity in net losses of equity investees, under
U.S. GAAP .................................................... Ps. (558,395) Ps. (463,770) Ps. (71,138) Ps.(1,093,303)
============ ============= ============= =============
F-49
YEAR ENDED DECEMBER 31, 2000
-------------------------------------------------------------------
TOTAL
OTHER EQUITY EQUITY
INNOVA SMCP INVESTMENTS INVESTMENTS
------------- -------------- ------------- -------------
Net sales................................................. Ps. 2,559,520 Ps. 483,413 Ps. 13,390,512 Ps. 16,433,445
Total expenses............................................ 3,968,107 1,767,790 16,474,415 22,210,312
-------------- --------------- --------------- --------------
Loss before income taxes ................................. (1,408,587) (1,284,377) (3,083,903) (5,776,867)
Income taxes............................................ (131) - (122,306) (122,437)
-------------- --------------- --------------- --------------
U.S. GAAP net loss........................................ Ps.(1,408,456) Ps.(1,284,377) Ps. (2,961,597) Ps. (5,654,430)
============== =============== =============== ==============
Televisa's percentage ownership in investee............... 60% 30%
Televisa's equity in net losses of equity
investees, under U.S. GAAP................................ Ps. (845,074) Ps. (385,313) Ps. (436,651) Ps. (1,667,038)
============== =============== =============== ==============
BALANCE SHEETS
DECEMBER 31, 2002
-------------------------------------------------------------------------------------
TOTAL
OTHER EQUITY EQUITY
INNOVA UNIVISION SMCP INVESTMENTS INVESTMENTS
------------- ------------- ------------- ------------- -------------
Current assets ........................... Ps. 550,713 Ps. 4,028,200 Ps. 233,546 Ps.1,846,590 Ps. 6,659,049
Non-current assets ....................... 3,129,053 31,787,832 2,142,316 1,749,925 38,809,126
----------------- -------------- ----------------- -------------- --------------
Total assets ............................. Ps. 3,679,766 Ps.35,816,032 Ps.2,375,862 Ps.3,596,515 Ps.45,468,175
================= ============== ================= ============== ==============
Current liabilities ...................... Ps. 1,311,253 Ps. 2,335,795 Ps. 784,162 Ps. 951,380 Ps. 5,382,590
Non-current liabilities .................. 9,219,266 16,963,044 2,655,564 508,159 29,346,033
Stockholders' (deficit) equity ........... (6,850,753) 16,517,193 (1,063,864) 2,136,976 10,739,552
----------------- -------------- ----------------- -------------- --------------
Total liabilities and stockholders'
(deficit) equity ......................... Ps. 3,679,766 Ps.35,816,032 Ps.2,375,862 Ps.3,596,515 Ps.45,468,175
================= ============== ================= ============== ==============
Televisa's investment in and advances
to equity investees at cost plus equity
in undistributed (losses) earnings since
acquisition (net) ........................ Ps.(1,778,359)(2) Ps. 2,185,830 Ps. (792,249)(3) Ps. 715,554 Ps. 330,776
================= ============== ================= ============== ==============
Televisa's percentage ownership in investee 60% 13.23% 30%
(2) Includes long-term notes and interest receivable of Ps.2,332,093
(3) Includes corporate consolidation adjustments of Ps.(473,090)
DECEMBER 31, 2001
--------------------------------------------------------------------
TOTAL
OTHER EQUITY EQUITY
INNOVA SMCP INVESTMENTS INVESTMENTS
-------------- ------------- ------------- -------------
Current assets Ps. 434,026 Ps. 317,938 Ps. 6,923,335 Ps. 7,675,299
Non-current assets........................................... 3,665,113 2,689,727 25,724,721 32,079,561
----------------- ------------- ---------------- -------------
Total assets................................................. Ps. 4,099,139 Ps.3,007,665 Ps.32,648,056 Ps.39,754,860
================= ============= ================ =============
Current liabilities.......................................... Ps. 1,039,616 Ps. 695,985 Ps. 3,162,368 Ps. 4,897,969
Non-current liabilities...................................... 8,110,356 2,581,553 20,434,835 31,126,744
Stockholders' (deficit) equity............................... (5,050,833) (269,873) 9,050,853 3,730,147
----------------- ------------- ---------------- -------------
Total liabilities and stockholders' (deficit) equity......... Ps. 4,099,139 Ps.3,007,665 Ps.32,648,056 Ps.39,754,860
================= ============= ================ =============
Televisa's investment in and advances to equity investees
at cost plus equity in undistributed (losses) earnings
since acquisition (net)...................................... Ps.(1,200,707)(4) Ps. (80,962) Ps. 4,507,360(5) Ps. 3,225,691
================= ============= ================ =============
Televisa's percentage ownership in investee................. 60% 30%
(4) Includes long-term notes and interest receivable of Ps.1,829,793.
(5) Includes investment in preferred shares convertible into Univision
Class "A" common stock amounting to Ps.3,637,957.
F-50
The Group owns a 60% interest in Innova. Despite the Group's majority
interest, the investment is accounted for under the equity method due to the
fact that one of the other venture partners has significant governance rights,
including the right to block any transaction between the Group and Innova.
The primary differences between Innova's Mexican GAAP and U.S. GAAP net
earnings is due to satellite transponder and reorientation cost adjustments.
Under Mexican GAAP, Innova established an accrual and recognized non-recurring
losses for the redundant use of transponders as well as antenna reorientation
costs in 2000. Under U.S. GAAP, the redundant satellite costs would not be
accrued and along with the antenna reorientation costs, would be expensed as
incurred. In 2001 and 2002, these expenditures were incurred. Under Mexican
GAAP, there was no impact to net income as the accruals had been established the
previous year. Under U.S. GAAP, the expenses were recognized when incurred in
2001 and 2002.
In addition, in 2001 and 2002 for Mexican GAAP purposes, the Group
decided to discontinue the recognition of equity losses with respect to its
investment in Innova. Under U.S. GAAP, the Group will continue to equity account
Innova's results of operations since the Group has guaranteed certain of its
obligations and is committed to provide further financial support for Innova.
In addition, under Mexican GAAP, the convertible preference shares of
Univision were initially accounted for at cost, with the equity method applied
from the date of conversion into Univision Class "A" and Class "B" Common Stock.
Under U.S. GAAP, the equity method was applied retroactively to these shares
upon conversion, in a manner consistent with the accounting for a "step"
acquisition of a subsidiary.
As described in Note 2, the Group acquired a 40% interest in OCEN
during October 2002. The excess of the purchase price over the net book value of
the assets acquired was allocated to goodwill under Mexican GAAP and is
amortized over a period not to exceed twenty years. Under U.S. GAAP, the
difference between the cost of the investment and the amount of underlying
equity in net assets of the investee should be accounted as if the investee were
a consolidated subsidiary. Accordingly, under U.S. GAAP, the Group reduced the
total carrying value of fixed assets and other assets in OCEN by Ps.64,837 and
Ps.13,727, respectively, and allocated the difference to goodwill (Ps.748,383).
Such adjustments are amortized over the remaining estimated useful lives of the
respective assets. The amount allocated to goodwill is not amortized but is
reviewed for impairment in accordance with Accounting Principles Board Opinion
No. 18, "The Equity Method of Accounting for Investments in Common Stock".
(G) ADJUSTMENT TO GAIN ON SALE OF MUSIC RECORDING BUSINESS
As described in Note 2 and in (d) above, the Group disposed of its
music recording business to Univision in exchange for 6,000,000 shares of
Univision Class "A" Common Stock and warrants to purchase, at an exercise price
of U.S.$38.261 per share, 100,000 shares of Univision Class "A" Common Stock.
The sale, which was consummated in April 2002, was accounted for at fair value
under both Mexican and U.S. GAAP. The fair value of the proceeds exceeded the
carrying value of music recording business and, under Mexican GAAP, the Group
recognized 100% of the gain arising from the disposal of the business. Under
U.S. GAAP however, although the fair value of the proceeds exceeded the carrying
value of the assets by the same amount, the Group only recognized the portion of
the gain that has effectively been sold to third parties. The U.S. GAAP
adjustment therefore eliminates a portion of the gain recognized under Mexican
GAAP attributable to the Group's interest in Univision, immediately after the
transaction.
F-51
(H) DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Group's activities expose it to a variety of market risks,
including risks related to the effects of changes in foreign-currency exchange
rates and interest rates. These financial exposures are monitored and managed by
the Group as an integral part of its overall risk management program. The
Group's risk management program focuses on the unpredictability of financial
markets and seeks to reduce the potentially adverse effects that the volatility
of these markets may have on its operating results.
The Group uses currency option agreements to protect its exposure to
changes in the exchange rates created by its U.S. dollar-denominated debt. The
Group also uses derivative instruments to minimize significant, unanticipated
earnings fluctuations that may arise from volatility in interest rates. The
Group's specific goals are to (1) manage interest rate sensitivity by modifying
the repricing or maturity characteristics of some of its debt and (2) lower
(where possible) the cost of its borrowed funds. Fluctuations in interest rates
create an unrealized appreciation or depreciation in the market value of the
Group's fixed-rate debt when that market value is compared with the cost of the
borrowed funds.
By using derivative financial instruments to hedge exposures to changes
in exchange rates and interest rates the Group exposes itself to credit risk and
market risk. Credit risk is the risk that the counterparty might fail to fulfill
its performance obligations under the terms of the derivative contract. When the
fair value of a derivative contract is positive, the counterparty owes the
Group, which creates repayment risk for the Group. When the fair value of a
derivative contract is negative, the Group owes the counterparty and, therefore,
does not assume repayment risk. The Group minimizes its credit (or repayment)
risk in derivative instruments by (1) entering into transactions with
high-quality counterparties (2) limiting the amount of its exposure to each
counterparty, and (3) monitoring the financial condition of its counterparties.
Market risk is the risk that the value of a financial instrument might be
adversely affected by a change in interest rates and currency exchange rates.
The Group manages the market risk associated with interest rate and
foreign-exchange contracts by establishing and monitoring parameters that limit
the types and degree of market risk that may be undertaken.
Derivative Financial Instruments
Under Mexican GAAP, effective January 1, 2001 and in accordance with
Bulletin C-2, "Financial Instruments", all financial instruments are recorded on
the balance sheet at fair value and subsequent changes in fair value are
recognized in current period earnings (see Note 1(p)). Prior to the adoption of
Bulletin C-2, the accounting for forward contracts depended on whether they were
for hedging purposes or speculative. For hedging transactions, unrealized gains
or losses were deferred and included in the basis of the related hedged item.
Gains or losses on speculative contracts were not recognized until settled.
For U.S. GAAP reconciliation purposes only, as of January 1, 2001 the
Group adopted SFAS 133 "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS 137 and SFAS 138 on the same matter
(collectively referred to herein as "SFAS 133"). SFAS 133 establishes accounting
and reporting standards for derivative instruments, including certain
derivatives instruments embedded in other contracts, and for hedging activities.
It requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as a
hedge. Changes in the fair value of derivatives are recorded each period in
current earnings or in other comprehensive income, depending on the intended use
of the derivative and the resulting designation. SFAS 133 requires that a Group
formally document, designate and assess the effectiveness of the transactions
that receive hedge accounting.
Prior to the issuance of SFAS 133, there was no single authoritative
source of accounting guidance for derivative financial instruments. The
accounting for derivatives was influenced by the Group's motivation, the risks
being managed, products being used, and the type of market for the product.
Generally, derivatives were required to be marked-to-market unless they
qualified for hedge accounting or synthetic instrument accounting.
F-52
Since the Group did not designate the derivative instruments in effect at
December 31, 2000 as a hedge upon the adoption of SFAS 133, there was no
significant cumulative effect (transition adjustment) in either earnings or
other comprehensive income during 2001. The U.S. GAAP net income adjustment for
the year ended December 31, 2001 primarily reflects the reversal into earnings
of the U.S. GAAP difference outstanding as of December 31, 2000 for speculative
forward contracts upon the adoption of Bulletin C-2.
As disclosed in Note 5, the Group received warrants for 9,000,000 Class A
Common Shares of Univision in 2001 in exchange for the relinquishing of certain
governance rights related to its investment in Univision. Under Mexican GAAP,
the warrants have not been assigned a value since they are related to an equity
investee and it is management's intent not to dispose of such warrants, but
rather to exercise such warrants prior to their expiration. Under U.S. GAAP,
SFAS 133, due to the cashless exercise feature of the warrants, the warrants are
considered derivative financial instruments. In accordance with EITF 00-8,
"Accounting by a Grantee for an Equity Instrument to Be Received in Conjunction
with providing Goods or Services", they must be recorded at their fair value
from the date of performance commitment.
As disclosed in Note 10, in 2002, the Group entered into currency option
agreements, option agreements to exchange interest rates, interest rate swap
agreements and written put option agreements on its own shares. Under Mexican
GAAP, the Group recorded these derivative instruments on the balance sheet at
their fair value with changes in fair values taken directly to the income
statement. The Group has not undertaken to qualify these contracts as hedges for
U.S. GAAP purposes. Accordingly, no differences in accounting for derivative
financial instruments under Mexican and U.S. GAAP have been included in the
accompanying U.S. GAAP reconciliation.
Hedge of Net Investment in Foreign Operation
The Group manages the currency exposure related to the net assets of
Univision through the U.S. dollar-denominated debt agreements that the Group
enters into (its U.S.$300 million Senior Notes due 2011 and its U.S.$300 million
Senior Notes due 2032). The Group generally hedges the total beginning-period
amount of the net investment up to the total amount of hedging U.S.
dollar-denominated debt and measures ineffectiveness of such hedge based upon
the change in the spot foreign exchange rate. Gains and losses in Televisa's net
investment in Univision are offset by exchange losses and gains in the Group's
debt obligations, which are charged or credited to other comprehensive loss or
income.
As described in Note 1(c), under Mexican GAAP the Group designated its net
investment in Univision as being a hedge of the U.S. dollar-denominated debt.
However, this different designation has no significant effect in the U.S. GAAP
reconciliation.
For the year ended December 31, 2002, Ps.795,225 of net losses related to
the foreign-currency-denominated debt agreements were included in the Group's
cumulative translation adjustment.
(I) PENSION PLAN AND SENIORITY PREMIUMS
For U.S. GAAP purposes, pension plan costs and seniority premiums have
been determined in accordance with SFAS No. 87, "Employers' Accounting for
Pensions" ("SFAS 87"), which became effective for the Group on January 1, 1989,
whereas, for Mexican GAAP purposes, the Group adopted Bulletin D-3, "Labor
Obligations," effective January 1, 1993.
F-53
Therefore, the difference between Mexican GAAP and U.S. GAAP is due to the
difference in implementation dates. Such difference is determined by separate
actuarial computations for each year under both SFAS 87 and Bulletin D-3.
The components of net periodic pension and seniority premium plan cost as
of December 31, calculated in accordance with SFAS 87, consist of the following:
2000 2001 2002
-------------- -------------- --------------
Service cost.............................................. Ps. 75,985 Ps. 72,934 Ps. 73,857
Interest cost............................................. 35,705 36,704 36,296
Expected return on plan assets............................ (41,057) (40,844) (34,930)
Net amortization and deferral............................. 23,155 39,719 42,313
-------------- -------------- --------------
Net cost under U.S. GAAP.................................. 93,788 108,513 117,536
Net cost under Mexican GAAP............................... 89,297 106,031 118,830
-------------- -------------- --------------
Reduction (increase) of net cost that would be recognized
under U.S. GAAP........................................... Ps. 4,491 Ps. 2,482 Ps. (1,294)
============== ============== ==============
Assumptions used in calculations of the pension obligation and seniority
premiums as of year-end and net costs in the ensuing year were:
2000 2001 2002
-------------- -------------- --------------
Weighted average discount rates........................... 4% 4% 4%
Rates of increase in compensation levels.................. 2% 2% 2%
Expected long-term rates of return on assets.............. 5% 5% 5%
The pension and seniority premium plan liability as of December 31, 2001
and 2002, under SFAS 87, is as follows:
2001 2002
-------------- --------------
Projected benefit obligation............................... Ps. 954,565 Ps. 934,732
Plan assets................................................ (744,768) (695,760)
-------------- --------------
Funded status.............................................. 209,797 238,972
-------------- --------------
Unrecognized prior service cost............................ 153,132 112,876
Unrecognized net loss...................................... 137,400 240,331
-------------- --------------
290,532 353,207
-------------- --------------
Prepaid pension asset...................................... (80,735) (114,235)
Additional minimum liability............................... 121,148 184,715
-------------- --------------
Balance sheet liability.................................... Ps. 40,413 Ps. 70,480
============== ==============
Change in benefit obligation:
Projected benefit obligation at beginning of year.......... Ps. 950,316 Ps. 954,565
Service cost............................................... 72,934 73,857
Interest cost.............................................. 36,704 36,296
Actuarial gain............................................. (633) (52,354)
Benefits paid.............................................. (104,756) (77,632)
-------------- --------------
Benefit obligation at end of year.......................... Ps. 954,565 Ps. 934,732
============== ==============
Change in plan assets:
Fair value of plan assets at beginning of year............. Ps. 849,549 Ps. 744,768
Actual return on plan assets............................... (83,825) (114,422)
Plan asset contribution.................................... -- 103,046
Benefits paid.............................................. (20,956) (37,632)
-------------- --------------
Fair value of plan assets at end of year................... Ps. 744,768 Ps. 695,760
============== ==============
Included within plan assets at December 31, 2001 and 2002 are shares held
by the trust in the Group with a fair value of Ps.439,316 and Ps.310,744,
respectively.
F-54
Under U.S. GAAP, SFAS No. 106, "Employers' Accounting for Postretirement
Benefits other than Pensions" ("SFAS 106"), requires accrual of postretirement
benefits, other than pensions, (such as health care benefits) during the years
an employee provides services. The Group does not and is not required to provide
postretirement benefits.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits" ("SFAS
112"), requires the accrual of certain employee benefits provided after
employment but before retirement. The Group does not and is not required to
provide postemployment benefits, which would be required to be accrued under
SFAS 112.
(J) EMPLOYEE STOCK OPTION PLAN
As described in Note 14, in 1999, the Group adopted a stock option plan
(the "Plan"), under which a specific number of awards to purchase CPOs are
granted and sold to eligible employees. Pursuant to the Plan, ownership of the
CPOs is not transferred until certain conditions are met. In accordance with the
Plan, a trust administered by a Mexican financial institution is being used to
implement the Plan (the "Trust"). Pursuant to each award granted, the
participant could have purchased a number of CPOs, at prices ranging from Ps.11
to Ps.24. The technical committee of the Trust may also authorize anticipated
sales in the open market by the trustee of a portion of the CPOs granted and
sold to employees in order to settle the purchase price (a "cashless
transaction").
As of December 31, 2002, all of the CPOs assigned to eligible employees
had been transferred to the Trust. During 2001 and 2002, the market price of the
CPOs had not appreciated enough to make a cashless transaction attractive to
employees and consequently, the Group amended the Plan (the "Amended Plan") in
October 2001. Under the Amended Plan, all awards are granted at an exercise
price ranging from approximately Ps.11.21 to Ps.12.00 or from U.S.$1.04 to
U.S.$1.27 (Initial Price) per CPO, to be adjusted by a rate ranging from 2% to
10% per annum (depending upon whether the purchase price is paid in pesos or
U.S. dollars) (Adjusted Price) accruing from the date of the contract to the
date of exercise.
Under the terms of the Plan, the awards vest within five years depending
on certain variables. The Group will transfer the CPOs to the participant at the
end of each vesting period if the participant settles the payment of the Initial
Price or the Adjusted Price and continues as an employee of the Group or any of
its subsidiaries.
Under Mexican GAAP, the Group recognizes no compensation expense for their
purchase plan. For U.S. GAAP purposes, the Group applies Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees", and its related
interpretations to account for stock-based compensation, accruing the cost over
the vesting/performance periods and adjusting costs for subsequent changes in
fair market value of the shares from the measurement date. At December 31, 2002,
the Group had granted approximately 82.8 million CPOs. Compensation cost charged
(credited) against income was Ps.99,810, Ps.(62,937) and Ps.(5,202) in 2000,
2001 and 2002, respectively. Had the compensation cost of these plans been based
on the fair value at date of grant using the provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Group's net income and earnings
per share would be the pro forma amounts shown in the following table:
YEAR ENDED DECEMBER 31,
----------------------------------------------
2000 2001 2002
-------------- ------------ --------------
Net income (loss) under U.S. GAAP
As reported.................................... Ps. 199,513 Ps.1,375,492 Ps. (1,132,581)
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects..... (107,468) (144,959) (98,439)
-------------- ------------ --------------
Pro forma...................................... Ps. 92,045 Ps.1,230,533 Ps. (1,231,020)
============== ============ ==============
Earnings (loss) per CPO under U.S. GAAP
(constant pesos)
As reported.................................. Ps. 0.06 Ps. 0.48 Ps. (0.39)
Pro forma.................................... Ps. 0.03 Ps. 0.41 Ps. (0.42)
The results may not be representative of the effects on the pro forma net
income for the future.
F-55
The Group determined the pro forma amounts using the Black-Scholes
option-pricing model based on the following weighted-average assumptions:
DECEMBER 31,
---------------------------------------
2000 2001 2002
------ ------ ------
Dividend yield.................................. 0% 0% 0%
Expected volatility............................. 52% 52% 52%
Risk-free interest rate......................... 21% 21% 21%
Expected life of options (in years)............. 3.5 1.7 3.2
A summary of the changes of the stock awards for employees for the years
ended December 31, is presented below (in constant pesos, except share amounts):
2000 2001 2002
-------------------------- ---------------------------- --------------------------
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
---------- ------------ ----------- ------------- --------- -------------
Outstanding at beginning of year........ 62,300 Ps. 14.14 62,300 Ps. 14.14 83,812 Ps. 11.61
Granted................................. -- -- 21,512 12.68 20 11.21
Exercised............................... -- -- -- -- -- --
Forfeited............................... -- -- -- -- (1,056) --
---------- ----------- ---------
Outstanding at the end of the year...... 62,300 10.69 83,812 12.78 82,776 11.41
========== =========== =========
Options exercisable at end of year...... -- -- -- -- -- --
========== =========== =========
The weighted-average remaining contractual life of the awards is 4.8
years.
(K) PRODUCTION AND FILM COSTS
Effective January 1, 2001, the Group adopted the provisions of the
American Institute of Certified Public Accountants Statements of Position 00-2,
"Accounting by Producers or Distributors of Films" ("SoP 00-2"). SoP 00-2
supersedes SFAS 53. Although SoP 00-2 carries forward many of the requirements
of SFAS 53, it differs in the areas of revenue recognition, costs for abandoned
projects, limitations on ultimate revenues used, impairment guidance and
advertising costs, as well as expanded disclosures. The Group recorded a
one-time after-tax charge for the initial adoption of SoP 00-2 totaling
approximately Ps.830,804, net of related tax benefit of Ps.447,355 in its
cumulative effect of accounting change in the consolidated statement of income
for the year ended December 31, 2001.
The Group expects to amortize all of its unamortized film costs over the
next year.
Under Mexican GAAP, the Group capitalizes production costs related to
programs, which benefit more than one period, and amortizes them proportionately
over the projected program revenues that are based on the Group's historic
revenue patterns for similar types of production. For Mexican GAAP purposes,
royalty agreements that are not individual film-specific are considered in
projecting program revenues to capitalize related production costs.
Under U.S. GAAP, production costs related to programs are also capitalized
and amortized over the period in which revenues are expected to be generated
(ultimate revenues). In evaluating ultimate revenues, the Group uses projected
program revenue on a program-by-program basis, taking into consideration
secondary market revenue only for those programs where a firm commitment or
licensing arrangement exists related to specific individual programs. For U.S.
GAAP purposes, royalty agreements that are not individual film-specific are not
considered in the ultimate revenues. Exploitation costs are expensed as
incurred.
In addition, Mexican GAAP allows the capitalization of artist exclusivity
contracts and literary works, whereas U.S. GAAP is generally more restrictive.
F-56
(L) DEFERRED INCOME TAXES
Under Mexican GAAP, the Group applies the provisions of Bulletin D-4,
"Accounting for Income Tax, Assets Tax and Employees' Profit Sharing", which
uses the comprehensive asset and liability method for the recognition of
deferred income taxes for existing temporary differences.
Under U.S. GAAP, SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"),
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns. Under this method, deferred tax liabilities and
assets are determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse.
The components of the net deferred tax liability applying SFAS 109 consist
of the following:
DECEMBER 31,
----------------------------------------
2001 2002
------------------- -----------------
Net deferred income tax liability recorded under Mexican Ps. (1,830,814) Ps. (2,035,860)
GAAP (see Note 22) ................................................. ------------------- -----------------
Impact of U.S. GAAP adjustments:
Capitalization of financing costs................................ 286,281 280,384
Deferred costs .................................................. 125,654 117,533
Equipment restatement .......................................... (363,805) (200,900)
Purchase accounting adjustments ................................. (516,704) (93,513)
Adjustment of gain on sale of music recording business .......... -- 92,940
Pension plan and seniority premiums ............................. 328 (125)
Gain from Univision warrants..................................... (860,231) (413,689)
Production and film costs........................................ 697,161 818,322
Employee stock option plan ...................................... 47,411 43,085
Valuation allowance ............................................. (47,411) (43,085)
------------------- -----------------
(631,316) 600,952
------------------- -----------------
Net deferred income tax liability under U.S. GAAP................... (2,462,130) (1,434,908)
Less:
Deferred income tax liability under Mexican GAAP.................... (1,830,814) (2,035,860)
------------------- -----------------
Net deferred income tax adjustment required under U.S. GAAP......... Ps. (631,316) Ps. 600,952
=================== =================
Under U.S. GAAP, Ps.809,145 and Ps.1,857,669 of the net deferred income
tax liability would have been reflected as a current asset at December 31,
2001 and 2002, respectively.
F-57
The components of net deferred employees' profit sharing ("EPS")
liability applying SFAS 109 consist of the following:
DECEMBER 31,
-------------------------------
2001 2002
-------------- --------------
DEFERRED EPS LIABILITY:
Current:
Inventories................................................ Ps. (2,298) Ps. (1,809)
Noncurrent:
Property, plant and equipment.............................. (134,769) (124,896)
Deferred costs............................................. (63,314) (58,002)
Pension plan and seniority premiums........................ (8,940) 4,446
Other...................................................... -- (1,922)
-------------- --------------
Total deferred EPS liability............................. (209,321) (182,183)
-------------- --------------
DEFERRED EPS ASSET:
Current:
Accrued expenses........................................... 3,596 --
-------------- --------------
Total deferred EPS asset................................. 3,596 --
-------------- --------------
Net deferred EPS liability under U.S. GAAP................... Ps. (205,725) Ps. (182,183)
============== ==============
The provisions for income tax and assets tax from continuing
operations, on a U.S. GAAP basis, by jurisdiction as of December 31 are as
follows:
2000 2001 2002
-------------- -------------- --------------
Current:
Mexican....................................... Ps. 891,560 Ps. 669,626 Ps. 892,157
Foreign....................................... 87,411 57,657 6,451
-------------- -------------- --------------
978,971 727,283 898,608
-------------- -------------- --------------
Deferred:
Mexican....................................... (679,580) 113,423 (589,251)
Foreign....................................... (22,588) (41,462) (455,752)
-------------- -------------- --------------
(702,168) 71,961 (1,045,003)
-------------- -------------- --------------
Ps. 276,803 Ps. 799,249 Ps. (146,395)
============== ============== ==============
For purposes of the U.S. GAAP reconciliations, the Group has charged
Ps.1,099,877, Ps.35,089 and Ps.1,255,810 of the change for the years ended
December 31, 2000, 2001 and 2002, respectively, in SFAS 109 deferred income tax
and EPS liabilities to income, and has charged Ps.80,650 and Ps.162,906,
respectively, of deferred income tax liability and deferred EPS directly to
stockholders' equity relating to the result from holding non-monetary assets and
translation effect of foreign subsidiaries.
A roll-forward of the Group's Mexican GAAP valuation allowance for 2002
is as follows:
Balance at December 31, 2001.......................................... Ps. (1,318,286)
Utilization of carryforwards....................................... 366,903
Increase in valuation allowance.................................... (1,011,956)
--------------
Balance at December 31, 2002.......................................... Ps. (1,963,339)
==============
(M) MINORITY INTEREST
This adjustment represents the minority interest in the U.S. GAAP
adjustment described in (k) above.
F-58
In addition, under Mexican GAAP, the minority interest in consolidated
subsidiaries is presented as a separate component within the stockholders'
equity section in the consolidated balance sheet. For U.S. GAAP purposes, the
minority interest is not included in stockholders' equity.
(N) EFFECTS OF INFLATION ACCOUNTING ON U.S. GAAP ADJUSTMENTS
In order to determine the net effect on the consolidated financial
statements of recognizing the adjustments described above, it is necessary to
recognize the effects of applying the Mexican GAAP inflation accounting
provisions (described in Note 1) to such adjustments.
In addition, as disclosed in Notes 19 and 22, under Mexican GAAP
Bulletin D-4, effective 2000, the monetary gain or loss generated by the
monetary temporary differences are reflected within the integral cost of
financing while those related to the non-monetary items are reflected within the
deferred tax provision. For U.S. GAAP purposes, the Group has historically
followed the provisions of EITF No. 93-9 and reflected the entire monetary gain
or loss within the provision for deferred taxes. Consequently for 2001 and 2002,
the Ps.111,598 and Ps.80,999, respectively, of monetary gain reflected within
integral result of financing under Mexican GAAP has been reclassified to the
deferred tax provision under U.S. GAAP.
(O) OTHER
Under U.S. GAAP, the cost of exclusive rights letters of soccer players
would be amortized over the period of the expected benefit. The Group has not
adjusted its net income reconciliation for 2000 and 2001 for this item because
the impact would not be material. As noted in Note 20, the balance was written
off under Mexican GAAP in 2002.
ADDITIONAL DISCLOSURE REQUIREMENTS
Presentation in the financial statements - Operating income
Under Mexican GAAP, the Group recognizes various costs as non-operating
expenses, which would be considered operating expenses under U.S. GAAP. Such
costs include primarily amortization of goodwill, the write-off of certain
receivables, the write-off of program inventories, write-off of exclusive rights
letters for soccer players, disputed or contractual letters of credit, certain
financial advisory and professional fees, restructuring charges and employees'
profit sharing expense (see Notes 20, 21 and 23). The differences relate
primarily to the Television Broadcasting and Publishing segments. Operating
income of the Television Broadcasting segment would have been Ps.4,381,756,
Ps.3,277,307 and Ps.3,462,282 and operating income of the Publishing segment
would have been Ps.290,417, Ps.201,694 and Ps.224,626 for the years ended
December 31, 2000, 2001 and 2002, respectively.
Presentation in the financial statements - Loss on extinguishment of
debt
As more fully explained in Notes 9 and 20, during 2000 and 2001, the
Group extinguished a significant amount of its long-term debt securities
outstanding and recognized related premiums, consent fees and other expenses of
approximately Ps.1,546,957 and Ps.60,712, respectively, which under Mexican
GAAP, are included within non-recurring charges. Under U.S. GAAP, such
extinguishment net of a tax benefit of Ps.541,434 and Ps.21,249 respectively,
would have been reflected as an extraordinary item in the consolidated income
statement.
F-59
Presentation in the financial statements - Discontinued operations
As more fully disclosed in Note 23, under Mexican GAAP, the Group has
reflected as a discontinued operation the Music Recording segment that it sold
to Univision, its equity investee. Under U.S. GAAP, pursuant to Staff Accounting
Bulletin 5-Z, the disposition of a business in which the seller retains an
interest, either directly or indirectly, and over which it has continuing
significant influence, is not presented as a discontinued operation. Summarized
condensed balance sheet and results of operation information for the Music
recording business is reflected in Note 23.
To provide a better understanding of the differences in accounting
standards, the table below presents the Group's condensed consolidated
statements of operations for the three years ended December 31, 2000, 2001 and
2002 in a format consistent with the presentation of U.S. GAAP consolidated
statements of operations, as if the music recording business were presented as
continuing operations, and after processing the adjustments in (a) to (o) above:
YEAR ENDED DECEMBER 31,
------------------------------------------------
2000 2001 2002
-------------- -------------- --------------
Net sales.................................................... Ps. 22,954,087 Ps. 21,830,070 Ps. 21,766,607
-------------- -------------- --------------
Cost of providing services (exclusive of depreciation
and amortization).......................................... 13,182,426 13,581,907 13,392,083
Selling and administrative expenses.......................... 3,489,204 3,954,297 3,620,777
Depreciation and amortization................................ 1,667,121 1,858,779 1,742,378
-------------- -------------- --------------
Income from operations....................................... 4,615,336 2,435,087 3,011,369
Integral cost of financing - net............................. 791,547 (2,157,135) 1,798,090
Other income - net ........................................ 59,511 43,529 933,613
-------------- -------------- --------------
Income before income taxes, minority interest, equity in
losses of affiliates and cumulative effect of change in
accounting principle....................................... 3,883,300 4,635,751 2,146,892
Income tax and assets tax.................................. 818,237 1,267,848 271,976
-------------- -------------- --------------
Income before minority interest, equity in losses of
affiliates and cumulative effect of change in accounting
principle.................................................... 3,065,063 3,367,903 1,874,916
Minority interest............................................ (192,989) (28,841) 76,885
Equity in losses of affiliates............................... (1,667,038) (1,093,303) (1,851,621)
-------------- -------------- --------------
Income before extraordinary items and cumulative effect of
change in accounting principle............................... 1,205,036 2,245,759 100,180
Extraordinary items (in 2000 and 2001: loss on
extinguishment of debt of Ps.1,546,957 and
Ps.60,712, net of tax benefit of Ps.541,434 and
Ps.21,249, respectively)............................... (1,005,523) (39,463) --
-------------- -------------- --------------
Income before cumulative effect of change in accounting
principle.................................................... 199,513 2,206,296 100,180
Cumulative effect of change in accounting principles
(In 2001: SoP 00-2, Ps.830,804 net of tax benefit of
Ps.447,355; and in 2002: SFAS 141 and SFAS 142,
Ps.1,232,761, net of write-off of negative goodwill
of Ps.313,090 and tax benefit of Ps.418,370 in 2002)... -- (830,804) (1,232,761)
-------------- -------------- --------------
Net income (loss)............................................ Ps. 199,513 Ps. 1,375,492 Ps. (1,132,581)
============== ============== ==============
Weighted average common shares outstanding (in millions)..... 8,825 8,877 8,854
============== ============== ==============
F-60
Presentation in the financial statements - Earnings per CPO and per
share
As disclosed in Note 14, the Group has three classes of common stock,
Series A, L and D. The Group's publicly traded securities are CPOs, which
represent one share of each class of stock. All of the authorized and issued
Series L and D shares and 227,115,000 of the Series A shares trade as CPO units.
Holders of the Series D shares, and therefore holders of the CPOs, are entitled
to an annual, cumulative and preferred dividend of approximately nominal
Ps.0.009 per D share before any dividends are payable on the Series A and L
shares. For purposes of U.S. GAAP, the "two-class" method, which first reduces
net income by the amount of the dividend preference to the D shares, has been
applied to calculate earnings per share.
Earnings (loss) per CPO and per share under U.S. GAAP is presented in
constant pesos for the years ended December 31, 2000, 2001 and 2002, as follows:
2000 2001 2002
------------------------- -------------------------- --------------------------
PER PER PER
PER SERIES "A" PER SERIES "A" PER SERIES "A"
CPO SHARE CPO SHARE CPO SHARE
----------- ----------- ----------- ----------- ----------- -----------
Continuing
operations........................ Ps. 0.39 Ps. 0.13 Ps. 0.93 Ps. 0.31 Ps. 0.03 Ps. 0.01
Cumulative effect of
change in accounting principles... -- -- (0.45) (0.15) (0.42) (0.14)
Discontinued operations............ -- -- -- -- -- --
Extraordinary item................... (0.33) (0.11) -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Net income (loss) per CPO/
share............................. Ps. 0.06 Ps. 0.02 Ps. 0.48 Ps. 0.16 Ps. (0.39) Ps. (0.13)
=========== =========== =========== =========== =========== ===========
Presentation in the financial statements - Consolidated balance sheets
To provide a better understanding of the differences in accounting
standards, the table below presents the condensed consolidated balance sheets
as of December 31, 2001 and 2002, in a format consistent with the presentation
of condensed consolidated balance sheets under U.S. GAAP, and after processing
the adjustments in (a) and (o) above.
F-61
DECEMBER 31,
------------------------------
2001 2002
-------------- -------------
ASSETS
Current assets:
Cash and cash equivalents.................................................... Ps. 5,945,775 Ps. 8,786,809
Trade notes and accounts receivable - net.................................... 9,767,335 9,563,636
Other accounts and notes receivable - net.................................... 952,628 867,851
Due from affiliated companies - net.......................................... 435,247 -
Transmission rights, programs, production talent advances and films.......... 2,700,553 3,420,102
Inventories.................................................................. 611,177 508,684
Deferred taxes............................................................... 809,145 1,857,669
Other current assets......................................................... 1,126,876 430,170
-------------- -------------
Total current assets.................................................... 22,348,736 25,434,921
Non-current assets:
Transmission rights, programs, literary works and films...................... 3,223,539 2,511,760
Investments.................................................................. 4,507,360 2,901,384
Property, plant and equipment - net.......................................... 15,060,732 15,200,532
Goodwill - net............................................................... 2,200,503 6,977,872
Intangible assets............................................................ 2,283,058 1,159,875
Deferred costs - net......................................................... 759,877 488,719
Other assets................................................................. 3,731,362 1,749,292
-------------- -------------
TOTAL ASSETS........................................................... Ps. 54,115,167 Ps.56,424,355
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt............................................ 353,889 1,239,880
Trade accounts payable....................................................... 2,107,566 2,228,507
Customer deposits and advances............................................... 11,416,678 11,549,427
Taxes payable................................................................ 285,787 886,387
Accrued interest............................................................. 220,092 307,468
Other accrued liabilities.................................................... 812,193 817,329
Due to affiliated companies - net............................................ - 58,712
-------------- -------------
Total current liabilities.............................................. 15,196,205 17,087,710
Non-current liabilities:
Long-term debt............................................................... 13,550,537 13,345,215
Customer deposits and advances............................................... - 203,668
Other long-term liabilities.................................................. 482,452 760,451
Deferred taxes............................................................... 3,477,000 3,474,760
DTH joint ventures........................................................... 1,281,669 2,570,608
Pension plans and seniority premiums......................................... 175,873 193,581
-------------- -------------
Total liabilities...................................................... 34,163,736 37,635,993
-------------- -------------
Commitments and contingencies
Minority interest............................................................ 1,031,429 1,131,524
-------------- -------------
Shareholders' equity
Capital stock................................................................ 7,375,291 7,368,706
Additional paid-in capital................................................... 216,056 216,458
Comprehensive income:
Retained earnings.......................................................... 14,994,434 16,339,423
Other comprehensive income................................................. (5,041,271) (5,135,168)
Net income (loss).......................................................... 1,375,492 (1,132,581)
-------------- -------------
Total shareholders' equity............................................. 18,920,002 17,656,838
-------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................. Ps. 54,115,167 Ps.56,424,355
-------------- -------------
F-62
Cash flow information
Mexican GAAP Bulletin B-12 issued by the MIPA specifies the appropriate
presentation of the statements of changes in financial position. Under Bulletin
B-12, the sources and uses of resources are determined based upon the
differences between beginning and ending financial statement balances in Mexican
Pesos of constant purchasing power. In addition, the inflation-adjusted
statement of changes in financial position includes certain non-cash items such
as monetary gains and losses, unrealized foreign currency translation gains or
losses and net effect of foreign investment hedges. Under U.S. GAAP, Statement
of Financial Accounting Standard No. 95, "Statement of Cash Flows" ("SFAS 95"),
a statement of cash flows is required, which presents only cash movements and
excludes non-cash items.
The Group considers all highly liquid temporary cash investments with
original maturities of three months or less, consisting primarily of short-term
promissory notes (Mexican pesos and U.S. dollars in 2000, 2001 and 2002) of
Mexican financial institutions, to be cash equivalents.
The following is a cash flow statement on a U.S. GAAP basis in constant
Mexican Pesos with the effects of inflation on cash and cash equivalents stated
separately in a manner similar to the concept of presenting the effects of
exchange rate changes on cash and cash equivalents as prescribed by SFAS 95.
F-63
2000 2001 2002
------------ ------------ ------------
Operating activities:
Net income (loss) under U.S. GAAP........................................... Ps.199,513 Ps.1,375,492 Ps.(1,132,581)
Adjustments to reconcile net income to cash provided by operating
activities:
Equity in losses of affiliates........................................... 1,667,038 1,093,303 1,851,621
Minority interest from continuing operations............................. 192,989 28,841 (76,885)
Depreciation and amortization............................................ 1,667,121 1,858,779 1,742,378
Provision for doubtful accounts and write-off of receivables............. 297,257 246,692 339,224
Cumulative loss effect of accounting change.............................. -- 830,804 1,232,761
Deferred income tax and employees' profit sharing........................ (1,466,486) 476,557 (650,175)
Derivative financial instruments......................................... 184,635 (2,561,894) 1,176,984
Gain on disposal of investment........................................... (98,906) (294,619) (759,343)
Unrealized foreign exchange loss, net.................................... (129,716) (250,958) 494,521
Loss from monetary position.............................................. (580,887) (290,965) (158,999)
------------ ------------ ------------
1,932,558 2,512,032 4,059,506
------------ ------------ ------------
Changes in operating assets and liabilities:
Decrease (increase) in:
Trade notes and accounts receivable and customer deposits and
advances, net............................................................ 505,262 (690,243) (779,110)
Inventories.............................................................. (17,212) (155,246) 54,187
Transmission rights, programs and films and production talent advances... (271,477) 2,619,244 167,415
Other accounts and notes receivable and other current assets............. (439,577) (645,972) 438,807
(Decrease) increase in:
Trade accounts payable................................................... 186,596 (29,497) 277,322
Other liabilities and taxes payable...................................... (348,973) (1,739,969) 1,645,913
Pension plans and seniority premiums..................................... 104,302 (326,942) (258,762)
------------ ------------ ------------
(281,079) (968,625) 1,545,772
------------ ------------ ------------
Cash provided by operating activities....................................... 1,651,479 1,543,407 5,605,278
------------ ------------ ------------
Financing activities:
Issuance of Senior Notes................................................. 2,121,027 2,910,366 3,139,200
Other changes in notes payable........................................... (91,373) (517,263) (2,906,292)
Shares issued............................................................ 353,097 -- 409
Repurchase of shares..................................................... (1,274,440) (234,343) (37,095)
Minority interest........................................................ (703,343) (8,919) 176,980
------------ ------------ ------------
Cash provided by financing activities....................................... 404,968 2,149,841 373,202
------------ ------------ ------------
Investing activities:
Due from affiliated companies, net....................................... 198,322 23,438 637,878
Proceeds from dispositions of investments................................ 1,364,824 492,503 2,519,321
Equity investments and other advances.................................... (1,138,602) (5,181,758) (5,302,356)
Investments in property, plant and equipment............................. (444,340) (944,379) (1,217,636)
Deferred costs and other assets.......................................... (835,749) (193,927) 603,014
------------ ------------ ------------
Cash used for investing activities.......................................... (855,545) (5,804,123) (2,759,779)
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents........................ 1,200,902 (2,110,875) 3,218,701
Translation effect on cash and cash equivalents............................. (35,876) (99,140) (65,832)
Effect of inflation on cash and cash equivalents............................ (45,458) (172,040) (311,835)
Cash and cash equivalents at beginning of year.............................. 7,208,262 8,327,830 5,945,775
------------ ------------ ------------
Cash and cash equivalents at end of year.................................... Ps.8,327,830 Ps.5,945,775 Ps.8,786,809
============ ============ ============
F-64
Net cash provided by (used for) operating activities reflects cash
payments for interest and income taxes as follows:
2000 2001 2002
------------- ------------- ------------
Interest..................................................... Ps. 825,867 Ps. 994,334 Ps.1,081,897
Prepayment premium related to tender offers and consent
solicitations.............................................. 1,199,870 -- --
Prepayment of amortized discount related to tender offers.... 1,987,398 -- --
Income taxes and/or assets tax............................... 944,879 555,422 694,189
Supplemental disclosures about non-cash activities:
2000 2001 2002
------------- ------------- ------------
Notes receivable related to customer deposits.......... Ps.6,421,210 Ps.7,070,947 Ps.7,158,341
Acquisition of minority interest....................... 1,199,870 -- --
Recently issued accounting standards
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 requires the recognition of a
liability for the legal obligations associated with the retirement of a tangible
long-lived asset that results from the acquisition, construction and (or) normal
operation of the asset. The liability is recognized at fair value in the period
in which it is incurred if a reasonable estimate of fair value can be made. A
corresponding asset retirement cost is added to the carrying value of the
long-lived asset and is depreciated to expense using a systematic and rational
method over its useful life. SFAS 143 is effective for fiscal years beginning
after June 15, 2002. Management does not expect that the application of the
provisions of SFAS 143 will have a material impact on the Group's consolidated
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections". As a result of these statements, companies will no longer be
allowed to classify gains and losses from extinguishments of debt as
extraordinary items, unless such debt meets the criteria of APB 30. The
provisions of this statement with regard to SFAS 4 will be effective for fiscal
years beginning after May 15, 2002. Consequently, losses from extinguishments of
debt that have been classified as extraordinary in 2000 and 2001 will be
reclassified upon the adoption of this standard in 2003.
In July 2002, the FASB issued Statement No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS 146"). SFAS 146 nullifies
the accounting for restructuring costs provided in EITF Issue No. 94-3
"Liability Recognition for Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS
146 requires that a liability associated with an exit or disposal activity be
recognized and measured at fair value only when incurred. In addition, one-time
termination benefits should be recognized over the period employees will render
service, if the service period required is beyond a minimum retention period.
SFAS 146 is effective for exit or disposal activities initiated after December
31, 2002. Management does not expect that the application of the provisions of
SFAS 146 will have a material impact on the Group's consolidated financial
statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires that a
liability be recorded in the guarantor's balance sheet upon issuance of a
guarantee at its fair value. In addition, FIN 45 requires disclosures about the
guarantees that an entity has issued, including a reconciliation of changes in
the entity's product warranty liabilities. The initial recognition and initial
measurement provisions of FIN 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantor's fiscal year-end. Management is currently evaluating the impact that
the recognition and initial measurement provisions of FIN 45 will have on the
Group's consolidated financial statements. The disclosure requirements of FIN 45
are effective for financial statements of interim or annual periods ending after
December 15, 2002; therefore, the Group has modified its disclosures herein as
required.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"), which requires
variable interest entities (commonly referred to as SPEs) to be consolidated by
the primary beneficiary of the entity if certain criteria are met. FIN 46 is
effective immediately for all new variable interest entities created or acquired
after January 31, 2003. For variable interest entities created or acquired prior
to February 1, 2003, the provisions of FIN 46 become effective for the Group on
January 1, 2003. Management is currently evaluating the impact that the
provisions of FIN 46 will have on the Group's consolidated financial statements.
F-65
SCHEDULE II
GRUPO TELEVISA, S.A.
CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(IN THOUSANDS OF MEXICAN PESOS IN PURCHASING POWER AS OF DECEMBER 31, 2002)
BALANCE AT BALANCE AT
BEGINNING OF END
DESCRIPTION PERIOD ADDITIONS DEDUCTIONS OF PERIOD
------------------------------------------ ------------ ------------ ------------ ------------
CONTINUING OPERATIONS:
Reserve for damage, obsolescence or
deterioration of inventory:
Year ended December 31, 2000..... Ps. 21,873 Ps. 2,347 Ps. (11,326) Ps. 12,894
Year ended December 31, 2001..... 12,894 -- (2,626) 10,268
Year ended December 31, 2002..... 10,268 1,739 (3,604) 8,403
Allowances for doubtful accounts(1):
Year ended December 31, 2000..... Ps. 690,302 Ps. 206,014 Ps. (163,053) Ps. 733,263
Year ended December 31, 2001..... 733,263 207,875 (194,018) 747,120
Year ended December 31, 2002..... 747,120 315,101 (145,513) 916,708
DISCONTINUED OPERATIONS:
Reserve for damage, obsolescence or
deterioration of inventory:
Year ended December 31, 2000..... Ps. 20,597 Ps. 26,464 Ps. (10,959) Ps. 36,102
Year ended December 31, 2001..... 36,102 21,802 (52,156) 5,748
Year ended December 31, 2002..... 5,748 -- (5,748) --
Allowances for doubtful accounts(1):
Year ended December 31, 2000..... Ps. 28,206 Ps. 15,927 Ps. (6,125) Ps. 38,008
Year ended December 31, 2001..... 38,008 3,186 (4,775) 36,419
Year ended December 31, 2002..... 36,419 -- (36,419) --
(1) Include allowances for trade and non-trade doubtful accounts.
F-66
REPORT OF INDEPENDENT ACCOUNTANTS
Mexico, D. F., January 31, 2003, except for Note 13.c,
for which the date is March 19, 2003.
To the Stockholders of
Innova, S. de R. L. de C. V.:
We have audited the accompanying consolidated balance sheets of Innova, S. de R.
L. de C. V. and its subsidiaries (collectively the "Group") as of December 31,
2002 and 2001, and the related consolidated statements of loss, of changes in
stockholders' (deficit) and of changes in financial position for each of the
three years in the period ended December 31, 2002 all expressed in Mexican
pesos. These financial statements are the responsibility of the Group's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America and Mexico. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Innova, S. de R. L.
de C. V. and its subsidiaries at December 31, 2002 and 2001, and the results of
their operations, the changes in their stockholders' (deficit) and the changes
in their financial position for each of the three years in the period ended
December 31, 2002, in conformity with accounting principles generally accepted
in Mexico.
Accounting principles generally accepted in Mexico vary in certain significant
respects from accounting principles generally accepted in the United States of
America. The application of the latter would have affected the determination of
the consolidated net loss for each of the three years in the period ended
December 31, 2002, and the determination of consolidated stockholders' (deficit)
at December 31, 2002 and 2001 to the extent summarized in Note 21 to the
consolidated financial statements.
PricewaterhouseCoopers
/s/ FELIPE PEREZ CERVANTES, C.P.C.
----------------------------------
Felipe Perez Cervantes, C.P.C.
F-67
INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of Mexican Pesos in
purchasing power as of December 31, 2002)
December 31,
------------
2002 2001
---- ----
Assets
------
CURRENT ASSETS:
Cash and cash equivalents Ps. 266,631 Ps. 45,180
Trade accounts receivable, net (Note 4) 103,782 128,123
Value added tax credit and other 1,230 9,362
Spare parts 13,019 8,441
Prepaid advertising (Note 9) 122,035 159,741
Other current assets 44,016 37,989
------------- -------------
Total current assets 550,713 388,836
Property and equipment, net (Note 5) 1,544,905 1,952,176
Satellite transponders, net (Note 6) 1,240,997 1,215,450
Deferred costs, net (Note 7) 82,398 106,633
Intangible assets, net (Note 8) 12,956 110,462
Other non-current assets 9,574 770
------------- -------------
Total assets Ps. 3,441,543 Ps. 3,774,327
============= =============
Liabilities and Stockholders' Deficit
-------------------------------------
CURRENT LIABILITIES:
Trade accounts payable Ps. 99,585 Ps. 85,956
Accrued expenses 268,498 252,474
Satellite reorientation reserve - 51,881
Satellite transponders obligation (Note 6) 52,812 44,085
Due to affiliated companies and other related parties (Note 9) 433,420 349,626
Accrued interest 132,812 117,096
Asset tax 31,551 46,380
Deferred income 109,498 108,411
------------- -------------
Total current liabilities 1,128,176 1,055,909
NON-CURRENT LIABILITIES:
Senior notes (Note 10) 3,924,000 3,637,930
Stockholders' loans (Note 11) 3,242,793 2,720,201
Satellite transponders obligation (Note 6) 1,368,843 1,314,192
Accrued interest 682,451 346,547
Other liabilities 1,179 728
------------- -------------
Total liabilities 10,347,442 9,075,507
------------- -------------
Commitments and contingencies (Note 13) - -
STOCKHOLDERS' DEFICIT:
Contributed capital:
Capital stock (Note 14) 1,913,116 1,913,116
------------- -------------
Earned capital:
Accumulated losses (Note 17) (7,018,675) (6,609,230)
Loss for the period (1,768,863) (409,445)
Deficit from restatement (31,343) (195,606)
------------- -------------
(8,818,881) (7,214,281)
------------- -------------
Supplementary liability for labor obligations (134) (15)
Total stockholders' deficit (6,905,899) (5,301,180)
------------- -------------
Total liabilities and stockholders' deficit Ps. 3,441,543 Ps. 3,774,327
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-68
INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF LOSS
(Expressed in thousands of Mexican Pesos in
purchasing power as of December 31, 2002)
Years ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Net sales Ps. 3,432,872 Ps. 3,266,037 Ps. 2,560,159
Operating expenses:
Cost of sales 1,062,761 1,222,857 1,358,609
Administrative expenses 121,474 151,415 118,229
Selling expenses 832,751 818,777 777,518
Other operating expenses 481,787 403,578 536,814
---------------- ---------------- ----------------
Total operating expenses 2,498,773 2,596,627 2,791,170
Depreciation and amortization 925,078 948,335 844,580
---------------- ---------------- ----------------
Operating profit (loss) 9,021 (278,925) (1,075,591)
---------------- ---------------- ----------------
Integral results of financing (Note 3):
Interest expense (983,057) (903,853) (742,589)
Interest income 11,064 19,779 30,204
Foreign exchange (losses) gains, net (1,174,422) 371,001 (118,814)
Gain from monetary position 498,615 442,412 522,194
Other, net - - (43,017)
---------------- ---------------- ----------------
Total integral results of financing (1,647,800) (70,661) (352,022)
Other expenses - Net (22,126) - -
Transponder services - Solidaridad 2 and
reorientation costs (Note 15) (25,933) - (430,916)
Restructuring charges (Note 16) (6,495) (13,576) -
---------------- ---------------- ----------------
Loss before taxes (1,693,333) (363,162) (1,858,529)
Provision for income and assets taxes
(Note 18) (75,530) (46,283) (130)
---------------- ---------------- ----------------
Net loss (Ps. 1,768,863) (Ps. 409,445) (Ps. 1,858,659)
================ ================ ================
The accompanying notes are an integral part of these consolidated financial
statements.
F-69
INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
(Expressed in thousands of Mexican Pesos in
purchasing power as of December 31, 2002)
Supplementary
Deficit liability
Capital from for labor Accumulated
stock restatement obligations losses
----- ----------- ----------- ------
Balance at December 31, 1999 Ps. 1,913,116 (Ps. 40,445) Ps. - (Ps. 3,749,968)
Transfer of net loss to accumulated losses (1,000,603)
Comprehensive loss (Note 19) (26,665)
-------------- -------------- ------------- ----------------
Balance at December 31, 2000 1,913,116 (67,110) - (4,750,571)
Transfer of net loss to accumulated losses (1,858,659)
Comprehensive loss (Note 19) (128,496) (15)
-------------- -------------- ------------- ----------------
Balance at December 31, 2001 1,913,116 (195,606) (15) (6,609,230)
Transfer of net loss to accumulated losses (409,445)
Comprehensive loss (Note 19) 164,263 (119)
-------------- -------------- ------------- ----------------
Balance at December 31, 2002 Ps. 1,913,116 (Ps. 31,343) (Ps. 134) (Ps. 7,018,675)
============== ============== ============= ================
Total
Net stockholders'
loss deficit
---- -------
Balance at December 31, 1999 (Ps. 1,000,603) (Ps. 2,877,900)
Transfer of net loss to accumulated losses 1,000,603 -
Comprehensive loss (Note 19) (1,858,659) (1,885,324)
-------------- --------------
Balance at December 31, 2000 (1,858,659) (4,763,224)
Transfer of net loss to accumulated losses 1,858,659 -
Comprehensive loss (Note 19) (409,445) (537,956)
-------------- --------------
Balance at December 31, 2001 (409,445) (5,301,180)
Transfer of net loss to accumulated losses 409,445 -
Comprehensive loss (Note 19) (1,768,863) (1,604,719)
-------------- --------------
Balance at December 31, 2002 (Ps. 1,768,863) (Ps. 6,905,899)
============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-70
INNOVA, S. DE R. L. DE C. V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION
(Expressed in thousands of Mexican Pesos in
purchasing power as of December 31, 2002)
Years ended December 31,
------------------------
Operating activities: 2002 2001 2000
-------------------- ---- ---- ----
Net loss (Ps. 1,768,863) (Ps. 409,445) (Ps. 1,858,659)
Adjustments to reconcile net loss to
resources (used in) provided by operating activities:
Depreciation and amortization 925,078 948,335 833,122
Impairment of fixed assets 30,776 - 11,458
Satellite reorientation reserve and
maintenance reserve 7,082 4,884 210,190
Transponder Services - Solidaridad 2 - - 222,953
Smart cards reserve - - 32,647
-------------- -------------- --------------
(805,927) 543,774 (548,289)
-------------- -------------- --------------
Changes in operating assets and liabilities:
-------------------------------------------
Trade accounts receivable 24,341 53,991 (72,357)
Value added tax credit and other 8,132 13,879 (5,930)
Inventories and spare parts (4,578) (2,224) 32,857
Prepaid advertising and other current assets 31,680 (166,664) 29,838
Deferred costs 14,718 5,301 7,539
Intangible and other assets 5,863 (6,710) 53,905
Trade accounts payable 13,629 (41,267) (6,981)
Accrued expenses and Satellite reorientation reserve (57,768) (374,069) 213,972
Due to affiliated companies and other related parties 83,794 105,499 854
Transponder Services - Solidaridad 2 - (222,953) -
Accrued interest 351,620 182,521 82,283
Deferred income 1,087 5,339 33,003
Supplementary liability for labor obligations (119) (15) -
Other 451 412 (214,569)
-------------- -------------- --------------
Resources (used in) provided by operating activities (333,077) 96,814 (393,875)
-------------- -------------- --------------
Financing activities:
--------------------
Stockholders' loans 522,592 1,154,945 804,910
Senior notes 286,070 (338,837) (304,466)
Satellite transponders obligation 63,378 (113,932) 1,472,209
Sale of restricted investments, net - - 277,197
-------------- -------------- --------------
Resources provided by financing activities 872,040 702,176 2,249,850
-------------- -------------- --------------
Investing activities:
--------------------
Investment in property and equipment (317,512) (802,722) (686,130)
Satellite transponders - - (1,432,546)
-------------- -------------- --------------
Resources used in investing activities (317,512) (802,722) (2,118,676)
-------------- -------------- --------------
Cash and cash equivalents:
Increase (decrease) for the period 221,451 (3,732) (262,701)
At the beginning of the period 45,180 48,912 311,613
-------------- -------------- --------------
At the end of the period Ps. 266,631 Ps. 45,180 Ps. 48,912
============== ============== ==============
The accompanying notes are an integral part of these consolidated financial
statements.
F-71
INNOVA, S. DE R.L. DE C.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Expressed in thousands of Mexican Pesos in purchasing power as of
December 31, 2002)
NOTE 1 - THE COMPANY AND ITS PRINCIPAL OPERATIONS:
Description of business:
Innova, S. de R.L. de C.V. ("Innova" or the "Company"), a Mexican company with
limited liability and variable capital, provides direct-to-home ("DTH")
broadcast satellite pay television services in Mexico under the SKY brand name.
Innova is a joint venture indirectly owned by Grupo Televisa, S. A. ("Televisa")
(60%), The News Corporation Limited ("News Corporation") (30%) and Liberty Media
International, Inc. ("LMI") (10%). The Company and its subsidiaries are
collectively referred to as the Group.
The Group's business requires a concession (license granted by the Mexican
federal government) to operate. On May 24, 1996, the Ministry of Communications
and Transportation (the "SCT") ratified the concession granted to a wholly-owned
subsidiary of the Company to offer DTH satellite broadcasting services in Mexico
using domestic satellites. The concession is for a period of thirty years,
beginning May 24, 1996, and renewable in accordance with Mexican Communications
Law. On November 27, 2000, the SCT, granted to a wholly-owned subsidiary of the
Company a concession to provide its broadcasting services using foreign
satellites. The concession is for a 20-year period, effective November 27, 2000
and may be extended in accordance with Mexican Communications Law.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in Mexico ("Mexican GAAP") as
promulgated by the Mexican Institute of Public Accountants ("MIPA"). A
reconciliation from Mexican GAAP to United States generally accepted accounting
principles ("U.S. GAAP") is included in Note 21.
The principal accounting policies followed by the Group are as follows:
a. Basis of presentation -
The financial statements of the Group are presented on a consolidated basis. All
significant intercompany balances and transactions have been eliminated.
F-72
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform with the current
year basis of presentation.
b. Members of the Group -
At December 31, 2002, the Group consists of the Company and the following
wholly-owned subsidiaries:
- Corporacion de Radio y Television del Norte de Mexico, S. de R.L. de C.V.
- Corporacion Novavision, S. de R. L. de C.V.
- Corporacion Novaimagen, S. de R. L. de C.V.
- Servicios Novasat, S. de R.L. de C.V.
- Servicios Corporativos de Telefonia, S. de R. L. de C.V. ("SECOTEL")
SECOTEL was formed in July 2001, when the Company purchased from Televisa the
call center which was providing services to the Group (Note 8).
c. Cash and cash equivalents -
The Group considers all highly liquid temporary cash investments with original
maturities of three months or less, consisting primarily of overnight deposits,
obligations of the Mexican Government, deposits and bonds in US financial
institutions to be cash equivalents.
d. Property and equipment -
Property and equipment are recorded at acquisition cost and thereafter are
restated using the National Consumer Price Index ("NCPI"), except for equipment
of a non-Mexican origin, which are restated using an index which reflects the
inflation in the respective country of origin and the exchange rate of the
Mexican peso against the currency of such country at the balance sheet date
("Specific Index"). Maintenance costs for technical equipment are reserved based
on management estimates. Actual costs are applied against the applicable reserve
when incurred. Repair and maintenance costs for computer equipment and
integrated receiver/decoder ("IRDs") are expensed as incurred.
Installation costs of antennas, low noise block ("LNB") and accessories in
subscribers' homes or businesses are capitalized in the line item antennas, LNBs
and accessories, and are amortized over the useful life of the asset, which is
three years.
F-73
When assets are retired or otherwise disposed of, the cost and the accumulated
depreciation are removed from the appropriate accounts and any gain or loss is
included in results of operations.
External costs incurred for internal use software are capitalized in computer
equipment and depreciated over three years.
e. Spare parts -
Spare parts inventory are recorded at the lower of cost or net realizable value.
The cost of spare parts utilized is charged to income when utilized.
f. Depreciation -
Depreciation of property and equipment is based upon the restated carrying value
of the assets and is recognized using the straight-line method over the
estimated useful lives of the assets, which range from 3 to 10 years. Land,
equipment in progress and advances to suppliers are not depreciated.
g. Preoperating expenses -
The Group deferred preoperating expenses incurred prior to the launch of its
satellite pay television services in December 1996. Amortization was calculated
using the straight-line method over a term of five years and was first recorded
in December 1996, with the commencement of operations. The preoperating expenses
were fully amortized in November 2001.
h. Seniority premiums and indemnities -
The Group established, in accordance with Mexican law, a seniority premium
liability for its employees. The liability is calculated by an independent
actuary using the projected unit credit method. The labor obligation is
calculated using real rates of interest (net of inflation) and the resulting
asset or liability is considered a non-monetary item. The seniority premium
liability is unfunded. Seniority premium payments are charged to the liability
at the time they are made.
Severance obligations to dismissed personnel are charged to income in the year
in which they are incurred.
i. Foreign currency -
Monetary assets and liabilities denominated in foreign currencies are reported
at the prevailing exchange rate at the balance sheet date. Exchange differences
on monetary assets and liabilities are included in income for the period and
reflected in the integral result of financing. Revenues and expenses denominated
in foreign currencies are reported at the exchange rates in effect when
recognized.
F-74
j. Revenue recognition -
Program service revenues are recognized on a monthly basis as DTH service is
provided. Program service revenues paid in advance are deferred until earned.
Through September 30, 2000, the Group sold the DTH antenna, LNB and remote
control to wholesale distributers, who inturn sold the unit to customers.
Revenue was recognized upon the sale of the unit to the wholesale distributer.
Beginning October 1, 2000, the Group began providing the DTH antenna, LNB and
remote control to customers along with the IRD, but has retained title to the
equipment. The IRD is included in fixed assets and is rented to customers under
an operating lease. Rental revenues are recognized on a monthly basis.
Advertising revenues are recognized at the time the advertising services are
rendered.
k. Capitalized financing costs -
The Group capitalizes the integral financing costs attributable to acquired
assets during installation and preoperating expenses. Capitalized integral
financing costs include interest costs, gains from monetary position and foreign
exchange gains or losses, and are determined by reference to the Group's average
interest cost for outstanding borrowings. No amounts were capitalized in 2002,
2001 and 2000.
l. Concentrations -
Financial instruments which potentially subject the Group to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
trade accounts receivable. The Group maintains its cash and cash equivalents
with various major financial institutions and are principally invested in
obligations of the U.S. and Mexican governments. Concentration of credit risk
with respect to trade accounts receivable is limited due to the large number of
customers throughout Mexico. The Group's policy is to require one month's
payment in advance, to reserve for all accounts receivable greater than ninety
days and to write off against the reserve all receivables greater than 120 days.
Bad debt expense was Ps.110,827 in 2002, Ps.174,058 in 2001 and Ps.37,893 in
2000 (Note 4).
In order to provide DTH service to customers, the Group relies on the use of 12
KU-band transponders on the PAS 9 satellite. The use of these transponders is
unprotected and, as a result, any long term disruption to one or more of the
transmission signals could have a material adverse effect on the Group.
m. Comprehensive loss -
Comprehensive loss represents the net loss for the period presented in the
income statement plus other results for the period reflected in stockholders'
equity which are from non-owner sources (Note 19).
F-75
n. Evaluation of long-lived assets
The Group evaluates the recoverability of its long-lived assets to determine
whether current events or circumstances warrant adjustment to the carrying
value. Such evaluation may be based on current and projected income and cash
flows from operations as well as other economic and market variables.
o. Income tax -
Beginning January 1, 2000, the Group adopted the guidelines of amended Bulletin
D-4, "Accounting Treatment of Income Tax, Tax on Assets and Employee Statutory
Profit Sharing", issued by the MIPA. Under Bulletin D-4, deferred income taxes
are calculated using the comprehensive asset and liability method, which
consists of calculating deferred income tax by applying the respective income
tax rate to the temporary differences between the accounting and tax values of
assets and liabilities at the date of the financial statements.
In accordance with the guidelines established in Bulletin D-4, the net accrued
effect as of January 1, 2000 was recorded directly to stockholders' deficit. The
accrued effect required the recognition of a net deferred tax asset and
corresponding valuation allowance of Ps.2,170,028, at January 1, 2000, because
available evidence did not indicate that there was a high probability of future
taxable income to realize the deferred tax asset. Subsequent changes in deferred
tax assets and liabilities and valuation allowances are recognized in income.
p. New accounting bulletins -
In December 2001, the MIPA issued Bulletin C-9, "Liability, Provisions,
Contingent Assets and Liabilities, and Commitments". Bulletin C-9 provides
guidance for the valuation, presentation and disclosure of liabilities and
provisions (other than income taxes, employee benefit plans, financial
instruments to be valued on a fair value basis and asset allowances), including
contingent assets and liabilities, as well as disclosure guidelines for
commitments incurred by an entity as a part of its operations. Bulletin C-9 is
effective as of January 1, 2003, with earlier adoption permitted.
In January 2002, the MIPA issued Bulletin C-8, "Intangible Assets", which
defines intangible assets as costs incurred and rights or privileges acquired
that will generate a future economic benefit. Bulletin C-8 provides a definition
of research and development costs requiring that only development costs could be
deferred to a future period. Furthermore, Bulletin C-8 states that preoperating
costs should be expensed as a period cost, unless they can be classified as
development costs. Bulletin C-8 requires that intangible assets, including
previously existing intangible assets, with indefinite useful lives not be
amortized, but be tested for impairment annually. Intangible assets with finite
lives continue to be amortized over their economic life. Bulletin C-8 is
required to be applied on January 1, 2003, although early adoption is
recommended.
F-76
The Group is currently evaluating the impact of these Bulletins on its results
of operation and financial position. However, the Group does not believe that
the adoption of these Bulletins will have a material impact on its results of
operations and financial position.
NOTE 3 - EFFECTS OF INFLATION ON THE FINANCIAL STATEMENTS:
The consolidated financial statements of the Group have been prepared in
accordance with Bulletin B-10, "Recognition of the Effects of Inflation on
Financial Information", as amended, ("Bulletin B-10"), which provides guidance
for recognizing the effects of inflation. The financial statements of the Group
are presented in Mexican Pesos in purchasing power as of December 31, 2002 in
order to be comparable to financial information as of that date, as follows:
- The balance sheets have been restated in Mexican Pesos in purchasing power as
of December 31, 2002 using the NCPI as of December 31, 2002.
- The statements of loss and changes in stockholders' deficit have been
restated in Mexican Pesos in purchasing power as of December 31, 2002 using
the NCPI for the month in which the transactions occurred.
The restatement of the financial statements has been applied in accordance with
Bulletin B-10 guidelines as described below:
Restatement of non-monetary assets -
Property and equipment, except for equipment of non-Mexican origin, are restated
using the NCPI. Equipment of non-Mexican origin is restated by the Specific
Index. The Specific Index is derived from inflation in the country of the
assets' origin and the foreign currency exchange rate of the Mexican Peso
against the currency of such country.
Property and equipment in use at the beginning of the year is depreciated based
upon the restated carrying value of the assets and is recognized using the
straight-line method over the estimated useful lives of the assets. Additions
during the year are depreciated based on the restated value.
Restatement of satellite transponders -
Satellite transponders are restated using the Specific Index.
Restatement of stockholders' deficit -
Capital stock and other stockholders' deficit accounts (other than deficit from
restatement) include the effect of restatement, determined by applying the NCPI
factor to the applicable period. The restatement represents the amount required
to maintain the contributions and the accumulated results in Mexican Pesos in
purchasing power as of December 31, 2002. The deficit / surplus from restatement
includes the result from holding non-monetary assets and is the
F-77
cumulative difference between the cost of the non-monetary assets restated using
NCPI and the restatement of such assets using the Specific Index.
Integral results of financing -
The gain or loss from monetary position represents the effects of inflation, as
measured by the NCPI, on the monetary assets and liabilities of the Group at the
beginning of each month. For the years ended December 31, 2002, 2001 and 2000,
monetary liabilities exceeded monetary assets, resulting in gains from monetary
position during the periods.
Statement of changes in financial position -
Bulletin B-12, "Statements of Changes in Financial Position" ("Bulletin B-12"),
issued by the MIPA, specifies the appropriate presentation of the statement of
changes in financial position when the financial statements have been restated
in constant monetary units in accordance with the Third Amendment to Bulletin
B-10. Bulletin B-12 identifies the generation and application of resources as
the differences between beginning and ending financial statement balances in
constant monetary units. The Bulletin also requires that monetary and foreign
exchange gains and losses not be treated as non-cash items in the determination
of resources provided by operations. The translation effects of operating assets
and liabilities are included in the stated change of the related item.
Other accounts -
The following accounts are restated using the NCPI:
Preoperating expenses and related amortization
Debt issuance costs and related amortization
Leasehold improvements and related amortization
Intangible assets and related amortization
National Consumer Price Index (NCPI) -
Restatement of the financial statements to Mexican pesos in purchasing power as
of December 31, 2002, in accordance with the Third Amendment to Bulletin B-10,
requires restatement of the results for each month during each year using a
factor derived from the change in the NCPI. The NCPI as of December 31, 2002,
2001 and 2000 was 102.904, 97.354 and 93.248, respectively.
F-78
NOTE 4 - TRADE ACCOUNTS RECEIVABLE, NET:
Trade accounts receivable, net includes the receivables from DTH services
provided to subscribers, from the rental of IRD's and from the sale of
advertising. Balances as of December 31, consist of:
2002 2001
---- ----
Trade accounts receivable Ps. 176,917 Ps. 212,898
Allowance for doubtful accounts (73,135) (84,775)
------------- -------------
Ps. 103,782 Ps. 128,123
============= =============
The allowance for doubtful accounts for the years ended December 31, 2002, 2001
and 2000, was as follows:
2002 2001 2000
---- ---- ----
Beginning balance Ps. 84,775 Ps. 14,841 Ps. 13,114
Additions 110,827 174,058 37,893
Write offs (122,467) (104,124) (36,166)
------------ ------------- -------------
Ending balance Ps. 73,135 Ps. 84,775 Ps. 14,841
============ ============= =============
NOTE 5 - PROPERTY AND EQUIPMENT, NET:
Property and equipment, net as of December 31, consists of:
2002 2001
---- ----
Integrated receiver/decoders Ps. 2,548,573 Ps. 2,793,895
Transmission equipment 342,660 363,762
Antennas, LNBs and accessories 554,516 344,803
Computer equipment 305,837 241,735
Furniture 19,514 17,957
Transportation equipment 20,976 19,650
Buildings 2,036 2,036
------------- -------------
3,794,112 3,783,838
Accumulated depreciation (2,377,149) (1,985,849)
------------- -------------
1,416,963 1,797,989
Land 8,744 8,744
Equipment in progress 116,778 145,161
Advances to suppliers 2,420 282
------------- -------------
Ps. 1,544,905 Ps. 1,952,176
============= =============
F-79
Depreciation expense for the years ended December 31, 2002, 2001 and 2000 was
Ps.734,748, Ps.713,235 and Ps.651,244, respectively. The Group recorded an
impairment loss on certain transmission equipment and other equipment not in use
of Ps.30,776 (which was included in "Transponder services -Solidaridad 2 and
reorientation cost" line item) and Ps.11,458 (included in "Depreciation and
amortization" line item) during the years ended December 31, 2002 and 2000,
respectively. No impairment was needed during 2001.
As of April 2002, the Group stopped utilizing the service of the Solidaridad 2
satellite, continuing only with the services provided by the PAS-9 satellite. At
that date, transmission equipment with a book value of Ps.38,342 associated with
Solidaridad 2 was held by the Group and the Group decided to recognize an
impairment charge amounting to Ps.30,776 for the equipment that could not be
utilized by the PAS-9 satellite, and to create a spare-part inventory for the
remaining Ps.7,566 of transmission equipment that could be utilized by the PAS-9
satellite.
At December 31, 2002 and 2001, IRDs, transmission equipment, computer equipment
and transportation equipment include restated assets which are of a non-Mexican
origin of Ps.425,112 and Ps.711,061, respectively, net of accumulated
depreciation. Computer equipment includes Ps.16,301 and Ps.42,815 of capitalized
software costs as of December 31, 2002 and 2001, respectively.
NOTE 6 - SATELLITE TRANSPONDERS:
On February 8, 1999, the Group and PanAmSat Corporation ("PanAmSat") entered
into a new agreement for satellite signal reception and retransmission service
from 12 KU-band transponders on a new satellite ("PAS-9"), which became
operational in September 2000. The service term for PAS-9 will end at the
earlier of (a) the end of 15 years or (b) the date PAS-9 is taken out of
service. The Group is committed to pay a monthly fee of U.S.$1.7 million. The
Group received a credit against the initial service fees of U.S.$11.7 million
paid under the new agreement.
The concession authorizing the use of PAS-9 was granted by the Federal
Government through the SCT in November 2000. Under the terms of this concession,
the Group is bound to offer the service of paid television via DTH satellite for
a three-year term starting in November 2000, in the Municipalities or City
Districts where 40% of the total population of the coverage area dwells in, as
per the most recent census information available. The process of migrating
customers from Solidaridad 2 to PAS-9 started in November 2000 and ended in
March 2002. The Group stopped using the services of Solidaridad 2 in early April
2002.
F-80
The Group recorded an asset equal to the net present value of the U.S.$1.7
million per month payments and the U.S.$11.7 million credit. The balance of the
satellite transponders as of December 31, is as follows:
2002 2001
---- ----
Satellite transponders Ps. 1,469,602 Ps. 1,334,030
Accumulated depreciation (228,605) (118,580)
--------------- ---------------
Ps. 1,240,997 Ps. 1,215,450
=============== ===============
Amortization of satellite transponders in 2002, 2001 and 2000 was Ps.97,974,
Ps.88,935 and Ps.31,835, respectively.
The Group's future obligation from the PAS-9 agreement, determined using the
Group's incremental borrowing rate at the lease commencement date of 11.5%, is
as follows:
Total
-----
2003 Ps. 213,466
2004 213,466
2005 213,466
2006 213,466
2007 213,466
Thereafter 1,640,718
---------------
2,708,048
Less: amount representing interest (1,286,393)
---------------
Ps. 1,421,655
===============
Interest expense recognized during the years ended December 31, 2002, 2001 and
2000 was Ps.159,760, Ps.163,534 and Ps.52,172, respectively.
The obligation is reflected on the consolidated balance sheet as of December 31,
as follows:
December 31,
------------
2002 2001
---- ----
Current portion Ps. 52,812 Ps. 44,085
Long-term portion 1,368,843 1,314,192
--------------- ---------------
Ps. 1,421,655 Ps. 1,358,277
=============== ===============
F-81
The obligations of the Group under the PAS-9 agreement are proportionately
guaranteed by the Group's stockholders in relation to their respective ownership
interests.
NOTE 7 - DEFERRED COSTS, NET:
Deferred costs, net as of December 31, consist of:
2002 2001
---- ----
Preoperating expenses (a) Ps. - Ps. -
Debt issuance costs (b) 73,771 91,015
Leasehold improvements (c) 8,627 15,618
------------ -------------
Ps. 82,398 Ps. 106,633
============ =============
a. Preoperating expenses
Preoperating expenses specifically included the capitalization of advertising
costs incurred prior to the launch of the Group's DTH service, which was also
amortized over five years. Advertising expenses after the launch of the Group's
DTH service have been expensed as incurred and amounted to Ps.204,004,
Ps.226,837 and Ps.229,727 during the years ended December 31, 2002, 2001 and
2000 respectively.
Amortization of preoperating expenses in 2001 amounted to Ps.47,255 and
Ps.51,551 in 2000. The preoperating expenses were fully amortized in November
2001.
b. Debt issuance costs
Debt issuance costs represent expenses incurred for the issuance of the Senior
Notes during 1997. These costs are amortized on a straight-line basis over the
term of the Senior Notes. Amortization expense of Ps.17,250 during each of 2002,
2001 and 2000 is included in interest expense.
c. Leasehold improvements
Amortization of leasehold improvements was Ps.9,517, Ps.6,082 and Ps.5,531 in
2002, 2001 and 2000, respectively.
F-82
NOTE 8 - INTANGIBLE AND OTHER ASSETS, NET:
Intangible assets, net are amortized using the straight-line method over a
period of five years. Balances as of December 31, consist of:
2002 2001
---- ----
Noncompetition agreement (a) Ps. 174,287 Ps. 466,184
Call Center Operations (b) 18,078 18,078
------------- -------------
192,365 484,262
Accumulated amortization (179,409) (373,800)
------------- -------------
Ps. 12,956 Ps. 110,462
============= =============
(a) Consists mainly of a noncompetition agreement and certain rights for the use
of transponders acquired in 1997, both of which were fully amortized in
2002.
(b) Consist mainly of software and other licenses for the Call Center operation
that was acquired from Televisa in 2001.
NOTE 9 - TRANSACTIONS WITH AFFILIATED COMPANIES AND OTHER RELATED PARTIES:
The principal transactions of the Group with affiliated companies and related
parties are:
2002 2001 2000
---- ---- ----
Borrowings and accrued interest from
stockholders (Note 11) Ps. 3,925,244 Ps. 3,066,748 Ps. 1,718,375
Broadcasting services, Florida (a) 82,107 92,118 97,353
Programming (b) 178,973 143,522 130,037
Special events programming (c) (i) 183,202 142,089 83,293
Advertising costs (d) 128,000 140,616 128,683
Royalties (e) 44,223 95,432 72,619
Call Center services (f) - 71,672 71,163
Broadcasting services, Mexico City (g) 38,532 36,252 37,977
Fixed asset acquisitions 11,739 23,067 44,800
Acquisition of smart cards 10,085 52,117 66,547
Finance costs (Note 11) 285,256 213,861 98,472
Management and administrative services 7,242 20,513 12,946
Maintenance services 12,603 11,244 9,426
Advertising revenue 28,711 31,635 -
Transmission services, income 7,172 6,436 6,907
Other 7,829 2,222 1,424
F-83
(a) The Group has an informal agreement with DTH TechCo Partners, an affiliate
of both Televisa and News Corporation, for play-out, uplink and downlink of
signals and compression services. Costs for these services are anticipated
to be approximately U.S.$9.5 million annually.
(b) The Group purchases the rights to broadcast certain popular channels through
affiliates of Televisa and News Corporation. Fees for this programming are
based upon the number of subscribers.
(c) The Group purchases, on occasion, the rights to broadcast certain special
events programming from Televisa and its affiliates.
(d) The Group purchases advertising time from Televisa on an as needed basis and
creative services from DTH TechCo Partners.
(e) Royalties paid to an affiliate of News Corporation consist of license,
security and access fees and charges for the use of certain technology. The
monthly fees and charges are based on the total number of subscribers, new
subscribers during the period and the number of IRD's purchased.
(f) Until June 30, 2001, the Group received call processing services and
customer care from an affiliate of Televisa. As described in Note 2.b., the
Group purchased the call center operations from Televisa for Ps.24,161. Due
to the satellite repointing and price increases, costs during the first six
months of 2001 increased significantly.
(g) The Group purchases uplink and downlink, playout and compression services
from an affiliate of Televisa for operations conducted in the Mexico City
broadcast facility.
The outstanding balances due to affiliates and other related parties, excluding
stockholders' loans and accrued interest, as of December 31, are as follows:
2002 2001
---- ----
Televisa and subsidiaries (h) Ps. 377,804 Ps. 304,478
News Corporation and subsidiaries 55,616 45,148
------------- -------------
Ps. 433,420 Ps. 349,626
============= =============
(h) Amount includes the liability for the prepaid advertising to Televisa. On
October 31, 2001 and November 15, 2001, the Group entered into one-year
advertising agreements with a subsidiary of Televisa for Ps.110 million and
Ps.18 million respectively, covering the period January 1, 2002 to December
31, 2002. In December 2002, the Group entered into another one-year
advertising agreement amounting to Ps.120 million, covering the period
January 1, 2003 to December 31, 2003. The prepaid advertising is amortized
as the advertising is aired.
F-84
(i) The Company has an informal agreement with Televisa for the purchase of
exclusive rights to exhibit and distribute through SKY certain of the
professional Mexican Soccer League programming and Mexican Boxing programming
during the 2001 through 2003 seasons, as follows:
- Exclusive transmission rights and local block-out rights over 20% of the
professional Mexican Soccer League programming during the summer and
winter seasons of 2001 and 2002;
- Exclusive transmission rights and local block-out rights over 10% of the
professional Mexican Soccer League programming during the summer season
of 2003; and
- Exclusive transmission rights to all Mexican Boxing programming during
the calendar years 2001 and 2002.
In consideration for the right to distribute all of the licensed events, the
Group will pay to Televisa a total license fee amounting to US$15 million pro
rata during the term as follows:
- US$6 million for all programing to be licensed during 2001;
- US$6 million for all programing to be licensed during 2002; and
- The remaining US$3 million for all programing to be licensed thereafter
until the end of the summer soccer season for 2003.
NOTE 10 - SENIOR NOTES:
In 1997, the Group concluded an offering of senior debt securities, priced to
yield gross proceeds of U.S.$375 million, which mature in April 2007 ("Senior
Notes"). The Senior Notes bear interest at a rate of 12 7/8% and are redeemable
at the option of the Group, in whole or in part, at any time on or after April
1, 2002, initially at 106.4375% of their principal amount, plus accrued
interest, declining ratably to 100% of their principal amount, plus accrued
interest, on or after April 1, 2004. Interest on the Senior Notes is payable
semi-annually on April 1 and October 1 of each year, commencing October 1, 1997.
The Senior Notes, which are uncollateralized, unsubordinated indebtedness of the
Group, contain certain covenants which, among other things, restrict the ability
of the Company and certain subsidiaries to incur or guarantee additional
indebtedness, make certain dividend, investment or other restricted payments,
issue or sell stock of certain subsidiaries, enter into certain transactions
with stockholders or affiliates, create liens, engage in sales-leaseback
transactions, sell assets (except IRDs), or with respect to the Group,
consolidate, merge, or sell all or substantially all of its assets. The
indenture agreement required the Group to purchase and pledge as security for
the benefit of the holders of the Senior Notes a portfolio of U.S. Government
Securities for a three-year period which ended in March 2000.
F-85
NOTE 11 - STOCKHOLDERS' LOANS:
During 1999, the Group's stockholders agreed to make available to the Group up
to U.S.$67.5 million in loans and up to U.S.$64.5 million in capital
contributions. The loans and capital contributions were based on the monthly
funding requirements of the Group, but were not to exceed the above maximums. On
May 8, 2000, the Group signed an agreement which establishes that the
stockholders would fund, in debt, on a pro rata basis, the amounts required
under the Group's approved Business Plan; provided, however, that the aggregate
amounts of such debt funding during 2000 would not exceed U.S.$72.2 million. The
Group's stockholders' have provided debt funding in excess of the amounts
contained in the agreement.
During 2002 and 2001, the Group borrowed a total of U.S.$29.5 million and
U.S.$132.8 million, respectively, from its stockholders on a prorata basis. This
amount was determined based on its cash flow needs.
Each stockholder loan, plus accrued interest, is payable in full ten years from
the date of issuance. The maturity date of any individual loan may be
accelerated or otherwise modified including by means of providing for periodic
payments of interest or principle upon joint agreement of the stockholders and
the Group. Each loan will bear interest at an annual rate of 9%. Interest paid
to foreign companies will be net of the 15% withholding tax.
The Company expects that its stockholders will provide, if necessary, up to an
aggregate amount of US$25 million to meet the Group's cash requirements during
2003.
The Group has received loans of U.S.$309.9 million as follows:
Amounts in Amounts in
thousands of thousands of
U.S. Mexican
Year Dollars Pesos
---- ------- -----
1998 $ 25,000 Ps. 261,600
1999 41,600 435,302
2000 81,000 847,584
2001 132,800 1,389,619
2002 29,500 308,688
----------- ----------------
$ 309,900 Ps. 3,242,793
=========== ================
NOTE 12 - FINANCIAL INSTRUMENTS:
The Group's financial instruments include cash and cash equivalents, trade
accounts receivables, trade accounts payable, due to affiliated companies and
other related parties, and debt. For cash and cash equivalents, trade accounts
receivables, trade accounts payable, and due to affiliated
F-86
companies and other related parties, the carrying amounts approximate fair value
due to the short maturity of these instruments.
The fair value of the Senior Notes is based on quoted market prices. The
estimated fair value of these instruments at December 31, 2002 and 2001 is as
follows (amounts in thousands):
Carrying value Fair value
-------------- ----------
December 31, 2002 U.S.$ 375,000 U.S.$ 330,000
December 31, 2001 U.S.$ 375,000 U.S.$ 360,000
The Senior Notes are thinly traded financial instruments. Accordingly, their
market price at any balance sheet date may not be representative of the price
which would be obtained in a more active market.
Management is unable to estimate the fair value of the stockholders' loans due
to their nature.
NOTE 13 - COMMITMENTS AND CONTINGENCIES:
a. In 1996, the Group signed an agreement with an affiliate of News Corporation
to acquire and implement a conditional access system. This system includes
Smart Cards which decode satellite signals and control access by
subscribers. In 1999, the Group acquired a subscriber management system
(SMS) designed specifically for DTH services. Under these arrangements, the
Group estimates that the 2003 commitment will approximate U.S.$11 million
for royalties, licenses and maintenance of the foregoing systems. In 2002,
2001, and 2000, the Group incurred expenses of US$5.9 million, US$9.7
million and US$8.4 million, respectively.
The Group has entered into agreements with Televisa and an affiliate of
Televisa to provide uplink and downlink, playout and compression services at
the Mexico City station. The annual commitments are estimated to be
approximately U.S.$4.3 million per year. The Group incurred expenses of
US$3.9 million in 2002 and US$3.8 million in each of 2001 and 2000.
The Group entered into several contracts with programming providers,
establishing that the amounts payable to the programmers will be based on
the number of subscribers. These charges totaled Ps.657.3 million, Ps.650.3
million and Ps.517.4 million for the years ended December 31, 2002, 2001 and
2000, respectively.
b. Since January 1st 2002, a 10% excise tax was imposed on the collected
revenues from the Group's pay television services. In February 2002, the
Group filed a petition for constitutional relief against the Legislative
Decree, which contains the amendments to the Law regarding the excise tax.
The respective judgment is pending. Notwithstanding that the Company has
filed
F-87
the aforementioned petition, it is currently paying the corresponding
tax as per the provisions of the Legislative Decree.
c. Under Mexican Tax Law, the Company and its subsidiaries, on an individual
basis, must pay the higher of the income tax or the assets tax as determined
annually. The assets tax is equal to 1.8% of a company's assets less certain
liabilities. The Company and most of its subsidiaries were exempt from the
assets tax from their formation in 1996 through December 31, 1999.
Article 5 of the Asset Tax Law specifies that foreign debt is excluded in
determining the assets tax. In 2000, the Group filed a declaratory judgement
with the Federal Tax Court seeking to be able to deduct foreign debt in
calculating the assets tax based on the unconstitutionality of this
provision of Article 5 as previously determined by the Supreme Court of
Justice. The tax authorities had opposed the Group's declaratory judgement
and issued a tax ruling that the Group must exclude foreign debt in
determining the assets tax.
The Group filed a petition challenging the constitutionality of this
provision of Article 5 of the Asset Tax Law.
In order to avoid incurring penalties or interest, the Group paid Ps.$45.2
million in monthly payments during 2002, Ps.43.2 million in March 2002,
corresponding to the assets tax due for fiscal year 2001 and Ps.7.5 million
for the months of January and February 2003.
On March 19, 2003, the court issued a favorable ruling allowing to the Group
to deduct foreign debt in calculating the assets tax. The Group is analyzing
various alternatives available to it in order to recover the total assets
tax payments of Ps.95.9 million made to date.
d. The Group entered into two related agreements with CSG Software, Inc. (CSG),
on June 12, 2002 under which CSG will provide: a) A non-exclusive, perpetual
license for the use of the software "Kenan" to provide billing and order
management to licensed subscribers, besides installation and implementation
of the system, training and support services and, b) consulting services.
Under the Software License and Service Agreement, the Group must pay US$3.4
million to CSG for a license capacity of up to 1,125,000 subscribers.
However, the Group can purchase additional capacity according to the
subscriber base growth at an additional cost per every 100,000 subscribers.
Technical support in Mexico will be available for the first 24 months
following the date on which live production of the system begin, the annual
cost for these service will be US$585,600. It is possible in accordance with
the agreement to use the Kenan system from other DTH platform in case of
merger, acquisition or combination of platforms. On December 27, 2002 the
Group agreed to remove some applications of the Kenan software, reducing the
total license fees in US$500,000. The Group expects that the new SMS will be
placed in service in late August 2003.
F-88
Under the Consulting Services agreement, CSG will provide management and
technology consulting, advisory and integration services related to the
implementation of the Kenan end-to-end integrated solution, as well as the
required interfaces with the Group's Siebel and NDS software currently on
operation, accordingly with a Implementation Planning and Analysis process
(IPA), previously agreed with the Group. Total cost of US$4.4 million of
these services, will be payable upon completion of certain agreed
milestones.
e. On June 2002, the Group executed an agreement with TV Azteca to begin paying
them for the rights to rebroadcast their over-the-air Channels 7 and 13. It
has also committed to purchase up to US$10.6 million in advertising from TV
Azteca over three years and received rights to broadcast certain soccer
matches and an option for exclusive broadcast rights after 2004. Prior to
May 1, 2002, the Group was permitted to rebroadcast these channels at no
cost.
NOTE 14 - CAPITAL STOCK:
The capital stock as of December 31, 2002 and 2001, is represented by three
partnership interests of unequal value, distributed as follows:
Partnership
interest Subseries Amount
-------- --------- ------
1 A-1 Ps. 1,147,870
1 B-1 573,935
1 B-2 191,311
Series "A" is composed of a partnership interest initially representing 60% of
the total capital stock. The Series "A" partnership interest may be subscribed
to only by persons of Mexican nationality.
Series "B" is composed of a partnership interest initially representing 40% of
the total capital stock. The Series "B" partnership interest is unrestricted as
to ownership and therefore, may be acquired by Mexican investors and foreign
natural and legal persons or by persons, companies or entities that are included
in Article 2, Section III of the Foreign Investments Law.
During 1999, the Group received cash contributions of U.S.$29.4 million,
U.S.$14.7 million and U.S.$4.9 million from Televisa, News Corporation and LMI,
respectively.
Dividends paid will be free of income tax if paid out of the Net Taxable Income
Account (CUFIN). A 34% rate will be paid on the amount exceeding the balance of
the CUFIN by multiplying the dividend paid by the 1.5152 factor. The applicable
tax since 2003 will be payable by the Group, and it may be credited against
income tax the Group is subject to in the fiscal year that the Group pay the
dividends or in the subsequent two fiscal years. Dividends paid will not be
subject to any tax withholding.
The ability of the Group to declare dividends is restricted by the Senior Note
indenture.
F-89
NOTE 15 - TRANSPONDERS SERVICES AND REORIENTATION COSTS:
During 2000, the Group recognized a nonrecurring charge of Ps.430,916 relating
to the redundant use of the transponders on the Solidaridad 2 satellite once the
PAS-9 satellite became operational, and for the increased costs to re-orientate
customers' antennas to PAS-9 in a short period of time. The process of migrating
customers from Solidaridad 2 to PAS-9 started in November 2000 and finally ended
in March 2002. As explained in Note 5, the Group recorded an impairment charge
of Ps.30,776 in April 2002 that related to certain transmission equipment
associated with Solidaridad 2. This impairment loss, together with the payments
for the use of Solidaridad 2 in the first quarter of 2002 amounting to
Ps.14,182, was offset by the reversal of unutilized amounts raised in 2000
amounting to Ps.19,025, and reflected as a nonrecurring charge of Ps.25,933 in
2002.
NOTE 16 - RESTRUCTURING CHARGES:
The restructuring charges in 2002 and 2001 consisted of severance costs in
connection with employee terminations.
NOTE 17 - ACCUMULATED LOSSES:
Under Mexican Corporate Law, interested third parties can request the
dissolution of the Group if accumulated losses exceed two-thirds of capital
stock. At December 31, 2002, the Group's accumulated losses exceeded its capital
stock. Although the Group believes it is unlikely such action will occur, the
Group, obtained from Televisa and News Corporation, a commitment to provide
financial support to the Group for a period of one year from the balance sheet
date, in proportion to their respective ownership interests, if required, to
avoid such action.
The recoverability of the Group's investment in DTH infrastructure and product
development is dependent upon future events, including, but not limited to, the
stability of the Mexican economic environment, obtaining adequate financing for
the Group's development program, the continued operation of satellites owned by
third parties, the competitive and market environment for pay television
services in Mexico, and the achievement of a level of operating revenues that is
sufficient to support the Group's cost structure.
NOTE 18 - PROVISION FOR INCOME TAX ("IT"), ASSETS TAX ("AT") AND EMPLOYEES'
STATUTORY PROFIT SHARING:
The Group expects to incur tax losses during the next several years. Tax losses
can be carried forward for up to ten years and offset against any profits that
the Group or Televisa may generate during that period in accordance with the
Income Tax Law.
F-90
At December 31, 2002, the Group had total tax loss carryforwards of
Ps.7,217,541, which will under certain circumstances, be carried forward over
ten years from the period that the respective tax loss was generated in:
Year of
expiration Amount
---------- ------
2003 Ps. 5
2004 4
2005 8
2006 317,041
2007 1,231,387
2008 1,885,634
2009 673,364
2010 899,542
2011 703,156
2012 1,507,400
---------------
Ps. 7,217,541
===============
The following items represent the principal differences between income taxes
computed at the statutory rate and the Group's provision for income taxes:
2002 2001 2000
---- ---- ----
Tax at the statutory rate 35% on loss
before taxes (Ps. 592,667) (Ps. 127,106) (Ps. 650,485)
Differences in restatement 89,834 (15,313) 8,853
Valuation allowance 581,927 302,962 414,150
Differences between tax and financial
accounting for cost of sales and purchases - - 2,786
Deferred advertising (13,327) (9,906) (1,108)
Depreciation and amortization (43,071) 21,820 2,010
Debt issuance costs 3,490 3,689 3,852
Provisions (11,065) (159,283) 219,308
Deferred income (7,316) (10,729) 2,711
Other (7,805) (6,134) (2,077)
------------- -------------- -------------
Provision for income tax - - -
Assets tax (75,530) (46,283) (130)
------------- -------------- -------------
Total (Ps. 75,530) (Ps. 46,283) (Ps. 130)
============= ============== =============
F-91
Deferred taxes at December 31, 2002 and 2001, were generated by the following
temporary differences and tax loss carryforwards:
2002 2001
---- ----
Prepaid expenses (Ps. 13,286) (Ps. 10,319)
Property and equipment 126,467 174,497
Other deferred costs 36,733 29,441
Debt issuance costs (25,082) (31,910)
Deferred income 37,218 37,961
Accrued expenses 162,000 62,483
Satellite transponders, net 61,424 49,990
Tax loss carryforwards 2,453,964 1,998,485
---------------- ---------------
2,839,438 2,310,628
Valuation allowance (2,839,438) (2,310,628)
----------------- ---------------
Deferred income tax Ps. - Ps. -
================ ===============
Employees' statutory profit sharing in Mexico is determined for each subsidiary
individually, not on a consolidated basis. There is no employees' statutory
profit sharing deferred tax as of December 31, 2002 and 2001.
Pursuant to the tax legislation in force, the Company must pay annually the
greater of the IT or the AT, which is determined on the average value of assets
less certain liabilities. When the AT payments are greater than IT, they are
recoverable against the IT in excess of the AT from the three prior years and
the ten subsequent years.
The Group is also included in the consolidated tax return of Televisa and its
consolidated subsidiaries for purposes of determining its income taxes and
assets tax. Beginning January 1, 1999, 60% of the tax profit or loss obtained by
the Group will be consolidated with the tax profit or loss of Televisa to the
extent of Televisa's percentage ownership of the Group. Through December 31,
1998, Televisa recognized the total taxable loss of the Group to the extent of
its percentage ownership.
The Group entered into a tax sharing agreement with Televisa under which the
Group will, during the periods that the Group is a part of Televisa's
consolidated tax group, pay Televisa the amount of income and asset taxes that
Televisa is required to pay on behalf of the Group. No such amount will be
payable until the Group's profit exceeds its tax loss carryforwards. Conversely,
Televisa shall pay to the Group the portion of any tax refund allocable to the
Group.
F-92
NOTE 19 - COMPREHENSIVE LOSS:
Comprehensive loss for the years ended December 31, 2002, 2001 and 2000, was as
follows:
2002 2001 2000
---- ---- ----
Loss per statements of loss (Ps. 1,768,863) (Ps. 409,445) (Ps. 1,858,659)
Result from holding non-monetary assets
for the year 164,263 (128,496) (26,665)
Supplementary liability for labor obligations (119) (15) -
--------------- ------------- ----------------
Comprehensive loss for the year (Ps. 1,604,719) (Ps. 537,956) (Ps. 1,885,324)
=============== ============= ================
NOTE 20 - FOREIGN CURRENCY POSITION:
a. The foreign currency position of monetary items of the Group at December 31,
2002 and 2001, were as follows:
2002:
Foreign currency Year-end Mexican pesos
Currency amounts (thousands) Exchange rate (thousands)
-------- ------------------- ------------- -----------
Assets:
U.S. Dollars 21,391 10.464 Ps. 223,835
Liabilities:
U.S. Dollars 935,999 10.464 9,794,294
2001:
Foreign currency Year-end Mexican pesos
Currency amounts (thousands) Exchange rate (thousands)
-------- ------------------- ------------- -----------
Assets:
U.S. Dollars 70,640 9.178 Ps. 648,334
Liabilities:
U.S. Dollars 880,499 9.178 8,081,220
F-93
b. The foreign currency position of non-monetary items of the Group at December
31, 2002 and 2001, were as follows:
2002:
Foreign currency Year-end Mexican pesos
Currency amounts (thousands) Exchange rate (thousands)
-------- ------------------- ------------- -----------
Property and equipment:
U.S. Dollars 35,562 10.464 Ps. 372,121
Pounds Sterling 7,521 17.00 127,857
Satellite transponders:
U.S. Dollars 134,223 10.464 1,404,509
2001:
Foreign currency Year-end Mexican Pesos
Currency amounts (thousands) exchange rate (thousands)
-------- ------------------- ------------- -----------
Property and equipment:
U.S. Dollars 36,651 9.178 Ps. 336,383
Pounds Sterling 5,969 13.560 80,940
Satellite transponders:
U.S. Dollars 134,223 9.178 1,231,899
c. Transactions during 2002, 2001 and 2000 in foreign currencies included in
the consolidated statements of loss were as follows:
2002:
Foreign
currency Year-end
amounts exchange Mexican Pesos
Currency (thousands) rate (1) (thousands) (1)
-------- ----------- -------- --------------
Interest income U.S. Dollars 74 10.464 Ps. 774
Costs and expenses:
Transponder expense U.S. Dollars 11,941 10.464 124,951
Broadcasting U.S. Dollars 12,663 10.464 132,506
Programming U.S. Dollars 58,800 10.464 615,283
Royalty fees Pounds Sterling 652 17.00 11,084
Royalty fees U.S. Dollars 3,605 10.464 37,723
Other expenses U.S. Dollars 3,552 10.464 37,168
Interest expense U.S. Dollars 79,974 10.464 836,848
F-94
2001:
Foreign
currency Year-end
amounts exchange Mexican Pesos
Currency (thousands) rate (1) (thousands) (1)
-------- ----------- -------- ---------------
Interest income U.S. Dollars 235 9.178 Ps. 2,157
Costs and expenses:
Transponder expense U.S. Dollars 22,527 9.178 206,753
Broadcasting U.S. Dollars 13,581 9.178 124,646
Programming U.S. Dollars 59,281 9.178 544,081
Royalty fees Pounds Sterling 2,177 13.560 29,520
Royalty fees U.S. Dollars 6,481 9.178 59,483
Other expenses U.S. Dollars 8,593 9.178 78,867
Interest expense U.S. Dollars 72,052 9.178 661,293
2000:
Foreign
currency Year-end
amounts exchange Mexican Pesos
Currency (thousands) rate (1) (thousands) (1)
-------- ----------- -------- ---------------
Interest income U.S. Dollars 779 9.610 Ps. 7,486
Costs and expenses:
Transponder expense U.S. Dollars 23,835 9.610 229,054
Inventory U.S. Dollars 30,612 9.610 294,181
Broadcasting U.S. Dollars 9,000 9.610 86,490
Programming U.S. Dollars 47,500 9.610 456,475
Royalty fees Pounds Sterling 2,063 14.588 30,095
Royalty fees U.S. Dollars 3,794 9.610 36,460
Other expenses U.S. Dollars 9,467 9.610 90,978
Interest expense U.S. Dollars 54,452 9.610 523,284
(1) For reference purposes only. Does not indicate the actual amounts presented
in the consolidated statement of loss.
Paragraphs b) and c) are disclosed in accordance with the Fourth Amendment to
Bulletin B-10 issued by the MIPA, which also provides that liabilities
denominated in a foreign currency are translated using exchange rates in effect
at the balance sheet date.
As of December 31, 2002 and 2001, the exchange rate between the Mexican Peso and
the U.S. Dollar was Ps.10.464 and Ps.9.178 per U.S. dollar, respectively, which
represents the interbank free market exchange rate as of those dates as
published by Banco de Mexico, S.A. As of
F-95
6
January 31, 2003, the exchange rate was Ps.10.864 per U.S. dollar, which
represents the interbank free market exchange rate as of that date as published
by Banco de Mexico, S.A.
NOTE 21 - DIFFERENCES BETWEEN MEXICAN GAAP AND U.S. GAAP:
The Group's consolidated financial statements are prepared in accordance with
Mexican GAAP, which differs in certain significant respects from U.S. GAAP.
The reconciliation to U.S. GAAP includes a reconciling item for the effect of
applying the option provided by the Modified Fifth Amendment to Bulletin B-10
for the restatement of equipment of non-Mexican origin because, as described
below, this provision of inflation accounting under Mexican GAAP does not meet
the consistent currency requirement of Regulation S-X of the Securities and
Exchange Commission ("SEC").
The reconciliation to U.S. GAAP does not include the reversal of the other
adjustments to the financial statements for the effects of inflation required
under Mexican GAAP Bulletin B-10, because the application of Bulletin B-10
represents a comprehensive measure of the effects of price level changes in the
inflationary Mexican economy and, as such, is considered a more meaningful
presentation than historical, cost-based financial reporting for both Mexican
and U.S. accounting purposes.
The principal differences between Mexican GAAP and U.S. GAAP that affect net
loss and total stockholders' deficit are described below:
Deferred preoperating expenses and advertising costs
Under Mexican GAAP, it is acceptable to defer certain preoperating expenses and
advertising costs and amortize these expenses over the life of the expected
benefit. Under U.S. GAAP, these items are expensed as incurred.
Solidaridad 2 and satellite reorientation costs
Under Mexican GAAP, the Group recognized a non-recurring loss of Ps.430,916
during the year ended December 31, 2000 for the redundent use of the
transponders on the Solidaridad 2 satellite once the PAS-9 satellite became
operational and for the increased costs to reorientate customer's antennas to
PAS-9 in a short period of time.
Under U.S. GAAP, the Group continued to use the Solidaridad 2 satellite to
provide services to its customers through the termination of the Solidaridad 2
agreement. Accordingly, the monthly payments cannot be recognized as a one time
loss, and the Group must continue using the straight-line method in accounting
for the agreement. The Group discontinued the use of Solidaridad 2 satellite on
March 31, 2002. The satellite reorientation costs are expensed as incurred as a
part of operating expenses.
F-96
Maintenance reserve and smart cards replacement
Under Mexican GAAP, it is acceptable to accrue for certain expenses which
management believes will be incurred in subsequent periods. Under U.S. GAAP,
these costs are expensed as incurred.
Capitalization of financing costs
Mexican GAAP allows, but does not require, capitalization of integral financing
costs attributable to acquired assets during installation and preoperating
expenses. In 1996, the Group capitalized integral financing costs attributable
to those assets. Capitalized integral financing costs include interest expense,
gains from monetary position and foreign exchange losses.
U.S. GAAP requires the capitalization of interest during construction and
installation of qualifying assets. In an inflationary economy, such as Mexico's,
acceptable practice is to capitalize interest net of the monetary gain on the
related Mexican Peso debt, but not on U.S. dollar or other stable currency debt.
In addition, U.S. GAAP does not allow the capitalization of foreign exchange
losses or the capitalization of financing costs on deferred expenses.
No interest costs were capitalized for the years ended December 31, 2002, 2001
and 2000.
Restatement of property and equipment
Effective January 1, 1997, the Group adopted the Fifth Amendment to Bulletin
B-10 which eliminated the use of replacement costs for the restatement of
property and equipment and instead, included an option of using the Specific
Index for the restatement of equipment of non-Mexican origin. The Group has
elected to apply the Specific Index option for determining the restated balances
of equipment of non-Mexican origin under Mexican GAAP. For U.S. GAAP purposes,
the use of an index that contemplates currency exchange movements is not in
accordance with the historical cost concept nor does it present financial
information in a constant currency.
Restructuring charges
In 2002 and 2001, the Group provided for restructuring costs related to expected
employee terminations. Under Mexican GAAP, these costs are recorded as other
expenses. For U.S. GAAP purposes, these costs have been expensed as incurred and
classified in operating expenses.
Revenue recognition
In prior years, under Mexican GAAP, concession fees paid to the Mexican
Government and to the actors and artists guild were recorded against revenues.
From January 1, 2002, these fees are recorded in cost of sales, consistent with
the accounting treatment under US GAAP. Revenues
F-97
under Mexican GAAP for the years ended December 31, 2001 and 2000 have been
restated to conform with classification in the current year. Accordingly, the
accompanying condensed consolidated statement of loss contains no adjustment in
respect of the classification of such expenses.
Through September 30, 2000, the Group sold and transferred title to the DTH
antenna, LNB and accessories to wholesale and other distributors who then
re-sold the units to the subscriber. Revenue was recognized upon the sale of the
unit to the distributor.
Effective October 1, 2000, the Group began providing the antenna, LNB and
accessories to new subscribers, together with the IRD, for a set monthly rental
fee, retaining title and ownership of all the equipment. From that date, the
Group also uses intermediate parties to perform certain customer acquisition and
installation services on its behalf. Under Mexican GAAP, the Group records as
revenue amounts received from these intermediate parties. Under US GAAP, the
Group follows the guidance of Emerging Issues Task Force Summary No. 99-19,
"Reporting Revenue Gross as a Principal versus Net as an Agent", pursuant to
which it has determined that it serves as principal in these transactions and
that it should record as revenue amounts billed to the subscriber, as ultimate
customer. The accompanying condensed consolidated statement of loss under US
GAAP for the year ended December 31, 2002 therefore includes an adjustment to
reflect as revenue the amounts billed to subscribers and not the amounts
received from intermediate parties. The adjustments for the year ended December
31, 2001 and 2000 were not material.
In addition, under Mexican GAAP, initial non-refundable subscription fees are
recognized upon activation of the new subscriber's DTH services. Under US GAAP,
initial non-refundable subscription fees are recognized over the period that a
new subscriber is expected to remain a customer (2002 and 2001 estimated to be 3
years). Customer acquisition costs directly attributable to the income are
recognized over the same period under US GAAP. Those customer acquisition costs
in excess of the initial non-refundable subscription fee revenues, are expensed
as incurred.
Initial non-refundable subscription fees for the year ended December 31, 2002
amounted to Ps.144.9 million (Ps.165.8 million in 2001). Under US GAAP, deferred
initial non-refundable subscription fee revenues of approximately Ps.195.0
million were recorded as of December 31, 2002 (Ps.135.9 million in 2001). In
addition, customer acquisition costs which are expensed immediately under
Mexican GAAP, have been deferred to match and equal initial non-refundable
subscription revenues; therefore at December 31, 2002, deferred costs under US
GAAP also amounted to Ps.195.0 million (Ps.135.9 million in 2001). Initial
non-refundable subscription revenues (which are matched by customer acquisition
costs) that have been recognized during the year amount to Ps.78.5 million
(Ps.30.0 million in 2001). Deferred initial non-refundable subscription fee
revenues and customer acquisition costs as of and for the year ended December
31, 2000 were not material.
The net impact on both operating loss and net loss of these US GAAP adjustments
is nil in 2002, 2001 and 2000.
F-98
Deferred income taxes
Under Mexican GAAP, the Group follows the guidelines of amended Bulletin D-4 in
accounting for income taxes. Bulletin D-4 is similar to U.S. GAAP, Statement of
Financial Accounting Standards No. 109 ("SFAS 109") "Accounting for Income
Taxes", in many respects.
SFAS 109 requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statements and tax basis of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Deferred
tax assets including benefits from tax loss carryforwards are recognized to the
extent their realization is more likely than not.
The tax effects of temporary differences that give rise to significant deferred
tax assets and liabilities, applying SFAS 109 at December 31, 2002 and 2001, are
as follows:
2002 2001
---- ----
Deferred income tax liabilities:
Current:
Prepaid expenses and other (Ps. 79,601) (Ps. 10,319)
---------------- ---------------
Total current (79,601) (10,319)
Non-current:
Debt issuance costs (25,082) (31,910)
----------------- ---------------
Total deferred income tax liabilities (104,683) (42,229)
----------------- ---------------
Deferred income tax assets:
Current:
Satellite transponders, net 71,576 49,990
Accrued expenses 157,932 40,730
Deferred income 103,533 37,961
---------------- ---------------
Total current 333,041 128,681
Non-current:
Other deferred costs 36,733 29,441
Property and equipment 101,635 174,497
Tax loss carryforwards 2,453,964 1,998,498
---------------- ---------------
Total deferred income tax assets 2,925,373 2,331,117
Less: Valuation allowance (2,820,690) (2,288,888)
----------------- ---------------
Net deferred income tax assets 104,683 42,229
---------------- ---------------
Deferred income taxes Ps. - Ps. -
================ ===============
F-99
In conformity with the Income Tax Law, the Group restates the tax basis of
preoperating expenses and property and equipment in a form similar to the
restatement for financial reporting purposes, however based on a different date
criteria.
Summary
Net loss for the years ended December 31, 2002, 2001 and 2000, adjusted to take
into account the principal differences between Mexican GAAP and U.S. GAAP, as
they relate to the Group, are as follows:
2002 2001 2000
---- ---- ----
Net loss as reported under Mexican GAAP (Ps. 1,768,863) (Ps. 409,445) (Ps. 1,858,659)
Deferred preoperating expenses - 46,667 50,958
Solidaridad 2 costs - (264,086) 264,086
Satellite reorientation costs (32,314) (252,584) 89,594
Maintenance reserve 7,082 (6,535) 3,798
Smartcards replacement - (32,648) 32,648
Capitalization of financing costs - 1,850 1,221
Restatement of property and equipment (992) (18,592) 7,898
Restructuring charge (4,714) 4,714 -
------------- ----------- -------------
Net loss in accordance with U.S. GAAP (Ps. 1,799,801) (Ps. 930,659) (Ps. 1,408,456)
============= =========== =============
Stockholders' deficit as of December 31, 2002 and 2001, adjusted to take into
account the principal differences between Mexican GAAP and U.S. GAAP, as they
relate to the Group, are as follows:
2002 2001
---- ----
Total stockholders' deficit under Mexican GAAP (Ps. 6,905,899) (Ps. 5,301,180)
U.S. GAAP adjustments:
Satellite reorientation costs - 51,881
Maintenance reserve 11,967 4,884
Restatement of property and equipment 43,179 188,868
Restructuring charge - 4,714
--------------- ---------------
Total U.S. GAAP adjustments 55,146 250,347
--------------- ---------------
Total stockholders' deficit under U.S. GAAP (Ps. 6,850,753) (Ps. 5,050,833)
=============== ===============
F-100
A summary of the Group's statement of changes in stockholders' deficit with
balances determined under U.S. GAAP is as follows:
Balance at December 31, 2000 (Ps. 4,120,159)
Supplementary liability for labor obligations (15)
Net loss for the year (930,659)
---------------
Balance at December 31, 2001 (5,050,833)
Supplementary liability for labor obligations (119)
Net loss for the year (1,799,801)
---------------
Balance at December 31, 2002 (Ps. 6,850,753)
===============
A summary of the Group's stockholders' deficit after the U.S. GAAP adjustments
described above, as of December 31, is as follows:
2002 2001
---- ----
Capital stock Ps. 1,913,116 Ps. 1,913,116
Accumulated losses (8,775,571) (6,975,770)
Other comprehensive income:
Excess from restatement 11,836 11,836
Supplementary liability for labor obligations (134) (15)
--------------- ---------------
Total stockholders' deficit under U.S. GAAP (Ps. 6,850,753) (Ps. 5,050,833)
=============== ================
Included below are condensed consolidated financial statements of the Group as
of December 31, 2002 and 2001 and for the years ended December 31, 2002, 2001
and 2000, after giving effect to the U.S. GAAP adjustments.
F-101
CONDENSED CONSOLIDATED BALANCE SHEETS
(Expressed in thousands of Mexican Pesos in purchasing power as of December 31,
2002)
December 31,
-----------
2002 2001
---- ----
ASSETS
Current assets:
Cash and cash equivalents Ps. 266,631 Ps. 45,180
Trade accounts receivables, net 103,782 128,123
Prepaid expenses and other 122,035 197,731
Other current assets 58,265 62,992
---------------- ----------------
Total current assets 550,713 434,026
Property and equipment, net 1,617,943 2,044,714
Satellite transponders, net 1,211,138 1,311,776
Deferred costs, net 277,442 197,391
Intangible and other assets, net 22,530 111,232
---------------- ----------------
Total assets Ps. 3,679,766 Ps. 4,099,139
================ ================
LIABILITIES
Current liabilities:
Trade accounts payable Ps. 99,585 Ps. 85,956
Accrued expenses 256,531 289,254
Satellite transponders obligation 52,812 44,085
Due to affiliated companies and other related parties 433,420 349,626
Other current liabilities 468,905 270,695
---------------- ----------------
Total current liabilities 1,311,253 1,039,616
Non-current liabilities:
Senior notes 3,924,000 3,637,930
Stockholder's loans 3,242,793 2,720,201
Satellite transponders obligation 1,368,843 1,314,192
Other non-current liabilities 683,630 438,033
---------------- ----------------
Total liabilities 10,530,519 9,149,972
---------------- ----------------
Commitments and contingencies - -
Stockholders' deficit (6,850,753) (5,050,833)
---------------- ----------------
Total liabilities and stockholders' deficit Ps. 3,679,766 Ps. 4,099,139
================ ================
F-102
CONDENSED CONSOLIDATED STATEMENT OF (LOSS) INCOME
(Expressed in thousands of Mexican Pesos in purchasing power as of December 31,
2002)
Years ended December 31,
------------------------
2002 2001 2000
---- ---- ----
Revenues from programming services Ps. 1,904,516 Ps. 1,998,665 Ps. 1,716,179
Revenues from rental of IRDs 804,826 515,358 381,321
Other revenues 606,634 626,973 462,002
--------------- --------------- ---------------
Net revenues 3,315,976 3,140,996 2,559,502
Operating expenses:
Cost of sales - programming services 557,832 780,028 624,543
Cost of sales - other 388,033 560,745 799,972
Administrative expenses 132,683 445,195 330,392
Selling expenses 832,751 858,242 816,414
Other operating expenses 555,078 369,695 254,671
Depreciation and amortization 926,070 918,410 784,503
--------------- --------------- ---------------
Total operating expenses 3,392,447 3,932,315 3,610,495
--------------- --------------- ---------------
Operating loss (76,471) (791,319) (1,050,993)
Integral results of financing (1,647,800) (93,057) (357,332)
--------------- --------------- ---------------
Loss before tax (1,724,271) (884,376) (1,408,325)
Provision for income and assets taxes (75,530) (46,283) (131)
--------------- --------------- ---------------
Net loss (Ps. 1,799,801) (Ps. 930,659) (Ps. 1,408,456)
=============== =============== ===============
Cash Flows
Mexican GAAP Bulletin B-12, specifies the appropriate presentation of the
statements of changes in financial position. Under Bulletin B-12, the sources
and uses of resources are determined based upon differences between beginning
and ending financial statement balances in constant pesos. Under U.S. GAAP, a
statement of cash flows is required, which presents only cash movements and
excludes non-cash items.
F-103
Presented below are statements of cash flow for the years ended December 31,
2002, 2001 and 2000, prepared after considering the impact of U.S. GAAP
adjustments. The cash flow statements present nominal cash flows during the
period, adjusted to December 31, 2002, purchasing power.
2002 2001 2000
---------------- --------------- ----------------
Operating activities:
Net loss (Ps. 1,799,801) (Ps. 930,659) (Ps. 1,408,456)
Adjustments to reconcile net (loss)
to cash flows (used in)
operating activities:
Gain from monetary position (498,615) (432,168) (495,772)
Unrealized exchange losses (gains) 1,022,900 (303,104) 84,403
Allowance for doubtful accounts 110,827 174,058 37,893
Depreciation and amortization 926,070 918,410 773,046
Impairment of fixed assets 30,776 - 11,458
Other - 37,563 -
Changes in operating assets and liabilities:
Assets (116,385) (249,798) (132,912)
Liabilities 629,954 247,065 395,889
---------------- --------------- ----------------
Cash flows provided by (used in)
operating activities 305,726 (538,633) (734,451)
---------------- --------------- ----------------
Financing activities:
Stockholders' loans 308,688 1,288,311 858,982
Satellite transponders obligation (45,089) (29,909) -
---------------- --------------- ----------------
Cash flows provided by financing
activities 263,599 1,258,402 858,982
---------------- --------------- ----------------
Investing activities:
Investment in property and equipment (337,081) (719,889) (643,468)
Sale of restricted investments - - 277,197
---------------- --------------- ----------------
Cash flows (used in) investing activities (337,081) (719,889) (366,271)
---------------- --------------- ----------------
Effects of inflation (10,793) (3,612) (20,962)
---------------- --------------- ----------------
Increase (decrease) in cash and cash
equivalents 221,451 (3,732) (262,702)
Cash and cash equivalents, beginning
of period 45,180 48,912 311,614
---------------- --------------- ----------------
Cash and cash equivalents, end of period Ps. 266,631 Ps. 45,180 Ps. 48,912
================ =============== ================
F-104
2002 2001 2000
---------------- --------------- ----------------
Interest and taxes paid:
Interest paid Ps. 495,124 Ps. 510,433 Ps. 617,178
Income and asset taxes paid 88,868 129 48
Non-cash Investing and Financing Activities
Capital lease obligation of U.S.$133.9 million (Ps.1,432.6 million) was incurred
when the Group entered into agreements with PanAmSat for the use of 12 KU-band
transponders on the PAS-9 satellite in September 2000.
Recently Issued Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligation" ("SFAS 143"). SFAS 143 establishes accounting standards for
recognition and measurement of a liability at fair value for an asset retirement
obligation and an addition to the associated asset retirement cost. The
accretion of interest expense each period is subsequently recorded as an expense
and added to the liability. The Group is required to adopt SFAS 143 effective
January 1, 2003. The Group does not expect that the adoption of FAS 143 will
have a material impact on its results of operations and financial position.
In April 2002, the FASB issued Statements of Accounting Standards No. 145,
"Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical
Corrections as of April 2002" ("SFAS 145"). SFAS 145 rescinds SFAS No. 4,
"Reporting Gains and Losses from Extinguishment of Debt," SFAS No. 44,
"Accounting for Intangible Assets of Motor Carriers", and SFAS 64,
"Extinguishments of Debt made to satisfy Sinking-Fund requirements". As a
result, gains and losses from extinguishment of debt will no longer be
classified as extraordinary items unless they meet the criteria of unusual or
infrequent as described in Accounting Principles Boards Opinion 30, "Reporting
the Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions". In addition, SFAS 145 amends SFAS 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS 145
also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings, or describe their applicability under
changed conditions. SFAS 145 is effective for fiscal years beginning after May
15, 2002. The Group is currently evaluating the impact that the adoption of SFAS
145 will have on its results of operations and financial position. However, the
Group does not believe that the adoption of SFAS 145 will have a material impact
on its results of operations and financial position.
F-105
In June 2002, the FASB issued Statement of Accounting Standards No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146").
This Statement addresses financial accounting and reporting for costs associated
with exit or disposal activities and nullifies Emerging Issues Task Force Issue
No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exist an Activity (including Certain Costs Incurred in a
Restructuring)" ("EITF 94-3"). SFAS 146 eliminates the definition and
requirements for recognition of exist costs in EITF 94-3. SFAS 146 requires that
a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. Under EITF 94-3, a liability for an
exit cost as defined in EITF 94-3 was recognized at the date of an entity's
commitment to an exit plan. SFAS 146 also concludes that an entity's commitment
to a plan, by itself, does not create a present obligation to others that meets
the definition of a liability. SFAS 146 also establishes that fair value is the
objective for initial measurement of the liability. SFAS 146 is effective for
exist or disposal activities initiated after December 31, 2002. The Group is
currently evaluating the impact that the adoption of SFAS 146 will have on its
results of operations and financial position. However, the Group does not
believe that the adoption of SFAS 146 will have a material impact on its results
of operations and financial position.
F-106