RBS–Zero Hora Editora Jornalística SA Zero Hora Editora
Transcription
RBS–Zero Hora Editora Jornalística SA Zero Hora Editora
O F F E R I N G M E M O R A N D U M [FOR LISTING PURPOSES] RBS– RBS–Zero Hora Editora Jornalística S.A. (a company incorporated under the laws of the Federative Republic of Brazil) BRL 300,000,000 11.25% GUARANTEED NOTES DUE 2017 (Payable in U.S. dollars) RBS-Zero Hora Editora Jornalística S.A. (“RBS-Zero Hora”, the “Company” or the “Issuer”), is offering BRL 300,000,000 11.25% Guaranteed Notes due 2017 (the “Notes”). The Notes will mature on June 15, 2017. Interest will accrue from June 22, 2007 and will be payable on June 15, and December 15 of each year, beginning on December 15, 2007. Televisão Gaúcha S.A. (“TV Gaúcha”), RBS TV de Florianópolis S.A. (“TV Florianópolis”) and Rádio Gaúcha S.A. (“Rádio Gaúcha”) (collectively, the “Guarantors”) will jointly and severally guarantee (such guarantees, the “Guarantees”), pari passu with all other existing and future unsecured and unsubordinated obligations of the Guarantors, the payment of principal and interest on the Notes. When used herein, “Credit Group” refers collectively to the Issuer and the Guarantors. For a more detailed description of the Notes, see “Description of the Notes” beginning on page 102. Investing in the Notes involves risks. See “Risk Factors” beginning on page 15. The Notes (and the guarantees) have not been registered under the U.S. Securities Act of 1933 (the “Securities Act”) and are being offered only to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States in accordance with Regulation S under the Securities Act. Prospective investors that are qualified institutional buyers are hereby notified that the Issuer and the Guarantors may be relying on the exemption from the provisions of Section 5 of the Securities Act provided by Rule 144A. For a description of certain restrictions on transfers of the Notes, see “Transfer Restrictions.” These listing particulars have been prepared by the Company for use in connection with the offer and sale of the Notes and for the listing of Notes on the Alternative Securities Market of the Irish Stock Exchange Ltd. Application has been made to list the Notes on the Alternative Securities Market of the Irish Stock Exchange Ltd. This Offering Memorandum constitutes the listing particulars for that purpose. The Notes sold to qualified institutional buyers are expected to be eligible for trading in The PORTAL Market. Price: 99.271% Standard Bank Plc expects to deliver the Notes to purchasers in book-entry form through The Depository Trust Company (“DTC”), on or about June 22, 2007. The language of the listing particulars is English. Certain legislative references and technical terms have been cited in their original language in order that the correct technical meaning may be ascribed to them under applicable law. Standard Bank Plc The date of this Offering Memorandum is June 26, 2007. You should rely only on the information contained in this Offering Memorandum. We have not authorized anyone to provide you with different information. Neither we nor the Initial Purchaser (as defined below) are making an offer of these securities in any jurisdiction where the offer is not permitted. You should not assume that the information contained in this Offering Memorandum is accurate as of any date other than the date on the front of this Offering Memorandum. Unless otherwise indicated or the context otherwise requires, all references in this Offering Memorandum to “RBS Group,” “we,” “our,” “ours,” “us” or similar terms refer to the RBS Group, a group of media companies under common ownership and management. The term “RBS Network” refers to the companies that are part of the RBS Group, plus affiliated media companies owned by members of the controlling shareholder families of the RBS Group (other than those members indirectly controlling RBS Comunicações S.A. (“RBS Comunicações”) and its subsidiaries). References to the “Offering” refer to the offering of the Notes as described in this Offering Memorandum. The term “Brazil” refers to the Federative Republic of Brazil. The phrase “Brazilian government” refers to the federal government of the Federative Republic of Brazil, the term “Central Bank” refers to the Banco Central do Brasil, or the Central Bank of Brazil, and the term “CVM” refers to the Comissão de Valores Mobiliários, or the Brazilian Securities Commission. This Offering Memorandum has been prepared by the Issuer solely for use in connection with the proposed offer and sale of the Notes. We and Standard Bank Plc, as initial purchaser (the “Initial Purchaser”), reserve the right to reject any offer to purchase, in whole or in part, for any reason, or to sell less than all of, the Notes offered hereby. This Offering Memorandum is personal to you (to whom it has been delivered by the Initial Purchaser) and does not constitute an offer to any other person or to the public in general to acquire the Notes. Except as set forth in the paragraph below, distribution of this Offering Memorandum to any person other than you and those persons, if any, retained to advise you with respect thereto is unauthorized, and any disclosure of its contents without the Issuer’s prior written consent is prohibited. This Offering Memorandum is intended solely for the purpose of soliciting indications of interest in the Notes from qualified investors and does not purport to summarize all of the terms, conditions, covenants and other provisions contained in the Indenture and other transaction documents described herein. The information provided is not all-inclusive. The market information in this Offering Memorandum has been obtained by us from publicly available sources deemed by us to be reliable. Notwithstanding any investigation that the Initial Purchaser may have conducted with respect to the information contained in this Offering Memorandum, the Initial Purchaser accepts no liability in relation to the information contained in this Offering Memorandum or its distribution or with regard to any other information supplied by us or on our behalf. The Issuer confirms that, having taken all reasonable care to ensure that the information contained in this Offering Memorandum is, to the best of its knowledge, in accordance with the facts and contains no omission likely to affect its import, and the Issuer accepts responsibility accordingly. This Offering Memorandum contains summaries intended to be accurate with respect to certain terms of certain documents, but reference is made to the actual documents, all of which will be made available to prospective investors upon request to us or the Trustee for complete information with respect thereto, and all such summaries are qualified in their entirety by such reference. You acknowledge that: • You have been afforded an opportunity to request from us and to review, and have received, all additional information considered by you to be necessary to verify the accuracy of, or to supplement, the information contained herein; • You have had the opportunity to review all of the documents described herein; i • You have not relied on the Initial Purchaser or any person affiliated with the Initial Purchaser in connection with any investigation of the accuracy of such information or your investment decision; and • No person has been authorized to give any information or to make any representation concerning us or the Notes (other than as contained herein and information given by our duly authorized officers and employees, as applicable, in connection with your examination of the Company, the Guarantors and the terms of this Offering) and, if given or made, any such other information or representation should not be relied upon as having been authorized by us or the Initial Purchaser. In making an investment decision, you must rely on your examination of our business and the terms of this Offering, including the merits and risks involved. These Notes have not been approved or recommended by any United States federal or state securities commission or any other United States, Brazilian or other regulatory authority. Furthermore, the foregoing authorities have not passed upon or endorsed the merits of the offering or confirmed the accuracy or determined the adequacy of this document. Any representation to the contrary is a criminal offense. Notwithstanding anything in this document to the contrary, except as reasonably necessary to comply with applicable securities laws, you (and each of your employees, representatives or other agents) may disclose to any and all persons, without limitation of any kind, the U.S. federal income tax treatment and tax structure of the Offering and all materials of any kind (including opinions or other tax analyses) that are provided to you relating to such tax treatment and tax structure. For this purpose, “tax structure” is limited to facts relevant to the U.S. federal income tax treatment of the offering. This Offering Memorandum does not constitute an offer to sell, or a solicitation of an offer to buy, any Note offered hereby by any person in any jurisdiction in which it is unlawful for such person to make an offer or solicitation. Neither the delivery of this Offering Memorandum nor any sale made hereunder shall under any circumstances imply that there has been no change in our affairs or that the information set forth in this Offering Memorandum is correct as of any date subsequent to the date of this Offering Memorandum. None of the Company, the Guarantors, the Initial Purchaser, or any of the Company’s, the Guarantors’ or the Initial Purchaser’s respective affiliates or representatives is making any representation to any offeree or purchaser of the Notes offered hereby regarding the legality of any investment by such offeree or purchaser under applicable legal investment or similar laws. You should consult with your own advisors as to legal, tax, business, financial, accounting and related aspects of a purchase of the Notes. The Notes have not been and will not be issued nor placed, distributed, offered or negotiated in the Brazilian capital markets. The Notes have not been and will not be registered with the CVM. Therefore, the Initial Purchaser has represented, warranted and agreed that it has not offered or sold, and will not offer or sell, the Notes in Brazil, except in circumstances which do not constitute a public offering, placement, distribution or negotiation of securities in the Brazilian capital markets regulated by Brazilian legislation. The Initial Purchaser has complied and will comply with all provisions of the Financial Services and Markets Act 2000 (the “FSMA”) with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom. This Offering Memorandum must not be acted on or relied on by persons who are not relevant persons. Any investment or investment activity to which this communication relates shall be available only to relevant persons and will be engaged in only with relevant persons. ii Application has been made to list the Notes on the Alternative Securities Market of the Irish Stock Exchange Ltd. Directive 2004/109/EC of the European Parliament and Council of December 15, 2004 on harmonization of transparency requirements in relation to information about issuers whose securities are admitted to trading on a regulated market and amending Directive 2001/34/EC (as amended, the “EU Transparency Directive”) became effective on January 30, 2005. It required Member States to take measures to comply with the EU Transparency Directive by January 20, 2007. If, as a result of the EU Transparency Directive or any legislation implementing the EU Transparency Directive, or otherwise, we could be required to publish financial information either more regularly than we would otherwise be required to or according to accounting principles that are materially different from the accounting principles we would otherwise use to prepare our published financial information, we may seek an alternative admission to listing, trading and/or quotation for the Notes on a different section of the Irish Stock Exchange or by such other internationally recognized listing authority, stock exchange and/or quotation system inside or outside the European Union as we may elect. NOTICE TO NEW HAMPSHIRE RESIDENTS Neither the fact that a registration statement or an application for a license has been filed under chapter 421-B with the State of New Hampshire nor the fact that a security is effectively registered or a person is licensed in the State of New Hampshire constitutes a finding by the Secretary of State of New Hampshire that any document filed under RSA 421-B is true, complete and not misleading. Neither any such fact nor the fact that an exemption or exception is available for a security or a transaction means that the Secretary of State has passed in any way upon the merits or qualifications of, or recommended or given approval to, any person, security or transaction. It is unlawful to make, or cause to be made, to any prospective investors, customer, or client any representation inconsistent with the provisions of this paragraph. __________________ INTERNAL REVENUE SERVICE CIRCULAR 230 DISCLOSURE Pursuant to Internal Revenue Service Circular 230, we hereby inform you that the description set forth herein with respect to U.S. federal tax issues was not intended or written to be used, and such description cannot be used, by any taxpayer for the purpose of avoiding any penalties that may be imposed on the taxpayer under the U.S. Internal Revenue Code. Such description was written to support the marketing of the Notes. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor. __________________ The Company and the Initial Purchaser reserve the right to withdraw the offering of the Notes at any time or to reject a commitment to subscribe for the Notes in whole or in part. iii TABLE OF CONTENTS FORWARD-LOOKING STATEMENTS ................................................................................................................. 1 PRESENTATION OF FINANCIAL INFORMATION ............................................................................................ 3 SUMMARY............................................................................................................................................................... 5 RISK FACTORS ..................................................................................................................................................... 15 EXCHANGE RATES.............................................................................................................................................. 35 USE OF PROCEEDS .............................................................................................................................................. 37 CAPITALIZATION ................................................................................................................................................ 38 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......................................................................................................................................................... 41 OVERVIEW OF THE MEDIA MARKET IN BRAZIL ......................................................................................... 64 BUSINESS .............................................................................................................................................................. 66 MANAGEMENT AND OWNERSHIP STRUCTURE........................................................................................... 91 RELATED PARTY TRANSACTIONS WITH RBS GROUP COMPANIES...................................................... 100 DESCRIPTION OF THE NOTES......................................................................................................................... 102 FORM, DENOMINATION AND TRANSFER .................................................................................................... 125 TAXATION........................................................................................................................................................... 127 PLAN OF DISTRIBUTION .................................................................................................................................. 134 TRANSFER RESTRICTIONS .............................................................................................................................. 137 SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN BRAZIL, U.S. GAAP AND IFRS...................................................................... 140 LEGAL MATTERS............................................................................................................................................... 155 ENFORCEABILITY OF CIVIL LIABILITIES.................................................................................................... 156 INDEPENDENT ACCOUNTANTS ..................................................................................................................... 158 GENERAL INFORMATION ................................................................................................................................ 159 INDEX TO FINANCIAL STATEMENTS ........................................................................................................... F-1 iv FORWARD-LOOKING STATEMENTS This Offering Memorandum contains statements that constitute forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 with respect to the Issuer, the Guarantors and the RBS Group. Many of the forward-looking statements contained in this Offering Memorandum can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate,” “target,” “forecast,” “continue,” “guideline,” “may,” “will,” “should,” “project,” and “potential,” among others. These statements appear in a number of places in this Offering Memorandum and include, but are not limited to, statements regarding the intents, beliefs or current expectations of the RBS Group with respect to: (i) their strategic directions and future operations; (ii) the implementation of their principal operating strategies; (iii) their acquisitions, joint ventures, strategic alliances or divestiture plans; (iv) the implementation of their financing strategies and capital expenditure plans; (v) consumer demand for the RBS Group’s media; (vi) variations in the cost of newsprint per ton; (vii) the quality of the television programming offered by the Globo Network (as defined herein); (viii) the financial conditions of the Issuer’s and/or the Guarantors’ customers, particularly advertisers; (ix) the loss of, or lack of revenues from, programming contracts or administrative concessions or authorizations under which the Issuer and the Guarantors operate; (x) the competitive nature of the industries in which they are operating; (xi) the cost and availability of financing; (xii) changes in the Brazilian economy, particularly in the States of Rio Grande do Sul and Santa Catarina, and the impact of such changes on advertising and subscription revenue; (xiii) fluctuations in interest rates; (xiv) the exchange rates between Brazilian and foreign currencies; (xv) developments in, or changes to, the laws, regulations and governmental policies governing their business; (xvi) the declaration or payment of dividends; (xvii) the factors discussed under “Risk Factors” in this Offering Memorandum; (xviii) other factors or trends affecting the Issuer’s or Guarantors’ financial conditions or results of operations; and 1 (xix) other statements contained in this Offering Memorandum regarding matters that are not historical facts. Forward-looking statements are only current expectations of the Issuer, the Guarantors and the RBS Group and are based on their managements’ beliefs and assumptions and on information currently available to their managements. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements as a result of various factors, including, but not limited to, those identified under “Risk Factors” in this Offering Memorandum. These risks and uncertainties include factors relating to the Brazilian economy, securities and foreign exchange markets, which exhibit volatility and can be adversely affected by developments in other countries, factors relating to the Brazilian and international media industry and changes in their regulatory environment and factors relating to the highly competitive markets in which the Issuer and the RBS Group operate. Forwardlooking statements speak only as of the date they are made, and the Issuer does not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events. Prospective investors should consider these cautionary statements together with any written or oral forward-looking statements that the Issuer, the Guarantors or the RBS Group may issue in the future. In this Offering Memorandum, unless otherwise specified, references to “U.S.$”, “$”, “U.S. Dollar” or “Dollar” are to the United States dollar; references to “R$”, “real” or “reais” are to Brazilian reais, the official currency of Brazil since July 1, 1994. 2 PRESENTATION OF FINANCIAL INFORMATION Included herein are: (i) the financial statements of the Issuer as of December 31, 2006, 2005 and 2004 and for the years then ended, and as of March 31, 2007 and 2006 and for the three-month periods then ended, together with the notes thereto (the “Issuer Financial Statements”); (ii) the special purpose combined financial statements of the Issuer and the Guarantors as of December 31, 2006, 2005 and 2004 and for the years then ended, and as of March 31, 2007 and 2006 and for the three-month periods then ended, presented on a combined basis after inter-company eliminations, together with the notes thereto (the “Credit Group Financial Statements”); and (iii) the financial statements for each of the three Guarantors as of December 31, 2006, 2005 and 2004 and for the years then ended, and as of March 31, 2007 and 2006 and for the three-month periods then ended, together with the notes thereto (the “Individual Guarantors Financial Statements”). The Financial Statements have been prepared in accordance with accounting principles generally accepted in Brazil (“Brazilian GAAP”). The financial statements of the Issuer and for each of the Guarantors and the special purchase combined financial statements of the Issuer and the Guarantors as of December 31, 2006, 2005 and 2004 and for the years then ended have been audited by PricewaterhouseCoopers Auditores Independentes, as stated in their reports appearing therein. With respect to the unaudited interim financial statements of the Issuer, the unaudited interim combined financial statements of the Issuer and the Guarantors, and the unaudited interim financial statements of each of the Guarantors for the three-month periods ended March 31, 2007 and 2006, PricewaterhouseCoopers Auditores Independentes reported that they have applied limited procedures in accordance with Brazilian professional standards for a review of such information. However, their report included herein states that they did not audit and they do not express an opinion on those unaudited interim financial statements. Accordingly, the degree of reliance on their report on such information should be restricted in light of the limited nature of the review procedures applied. Brazilian GAAP differ in certain significant respects from generally accepted accounting principles in certain other countries, including the United States. For a discussion of certain differences between Brazilian GAAP and generally accepted accounting principles in the United States (“U.S. GAAP”) and International Financial Reporting Standards (“IFRS”), see “Summary of Certain Significant Differences between Accounting Principles Generally Accepted in Brazil, U.S. GAAP and IFRS”. The financial statements have been monetarily corrected following the constant currency methodology for the effects of inflation through September 30, 2001 and financial statements monetarily corrected through September 30, 2001 are referred to as prepared following the “Constant Currenmcy Method”. Monetary correction has been abolished in financial statements for statutory and tax purposes as from January 1, 1996; however, general purpose financial statements may continue to be presented monetarily corrected following the constant currency methodology. During 2001 the Conselho Federal de Contabilidade (CFC) issued Resolution 900/01 which determined that monetary correction should be interrupted when accumulated levels of inflation over the last three years does not exceed 100%. As a result, the Financial Statements prepared following the Constant Currency Method have been monetarily corrected from January 1, 1996 through September 30, 2001, when the Issuer ceased such correction in application of Resolution 900/01. For more detail, see Note 3 to the Issuer Financial Statements. Under Brazilian GAAP, monetary correction was mandatory following a methodology known as the “Corporate Law Method” in the financial statements for statutory and regulatory purposes through December 31, 2005. For a more deta iled description of the “Constant Currency Method” and the “Corporate Law Method” see “Management’s Discussion and Analysis 3 of Financial Condition and Results of Operations — Critical accounting policies — Application of the constant currency method”. The Issuer and the Guarantors measure their financial performance by EBITDA and other items, some of which are reflected in their statement of operations. The RBS Group believes that EBITDA is a meaningful measure of performance because it is commonly used in the media and pay-TV television industries to analyze and compare companies on the basis of operating performance, leverage and liquidity. However, companies define EBITDA in different ways and caution must be used in comparing this measurement of EBITDA to other measurements of EBITDA. EBITDA is not defined under Brazilian GAAP and is not a measure of net income or cash flow from operations and should not be considered as an alternative to net income, as an indication of the Issuer’s or the Guarantor’s financial performance, as an alternative to cash flow from operations or as a measure of liquidity. You are urged to read carefully the Financial Statements and related notes included herein under “Financial statements”. See also “Summary financial information and other data”, “Risk factors”, “Management’s discussion and analysis of financial condition and results of operations” and “Business”. 4 SUMMARY The Offering The following summary contains basic information about the Issuer, the Guarantors and the Notes. It does not contain all the information that may be important in making an investment decision. Investors should carefully consider the factors set forth under “Risk Factors”, the Financial Statements and related notes thereto and more detailed information contained elsewhere in this offering memorandum in deciding whether to invest in the Notes. Overview The Issuer and the Guarantors are part of Rede Brasil Sul (Southern Brazil Network, referred to herein as the RBS Network), one of the largest multimedia networks in Brazil. The RBS Network operates primarily in southern Brazil, in the States of Rio Grande do Sul and Santa Catarina (collectively, the “Service Territory”). These two states have a combined population of approximately 16 million people, representing approximately 9% of the Brazilian population, and its inhabitants are considered to be relatively more prosperous and well-educated than the rest of the country. See “Business — The RBS Group — The RBS Network Service Territory”. The RBS Network includes 18 VHF television stations, all transmitting content provided by the Globo television network (the “Globo Network”), the largest television network in Brazil and South America. In addition, the RBS Network together includes two community content channels distributed through UHF (ultra high frequency) and/or pay television and a rural-oriented channel (Canal Rural) distributed throughout Brazil through DTH (direct to home), cable and open satellite, 21 FM radio stations, five AM radio stations, eight daily newspapers and an internet portal website that integrates content from the TV, radio and newspaper businesses of the RBS Network and a content search portal, “hagah”, that provides local consumer information for the regions it serves. The RBS Network began with the acquisition in 1957 of an interest in Rádio Gaúcha, an AM news radio station in the City of Porto Alegre, by Maurício Sirotsky Sobrinho, who was then a radio show host for the station. Since that time, the Network has expanded beyond the City of Porto Alegre throughout the south of Brazil, and has become a leader in major media fields in its Service Territory. See “Business — The RBS Group — History”. The RBS Network includes companies that are part of the RBS Group as well as certain affiliated companies associated with TV Gaúcha, TV Florianópolis, Rádio Atlântida FM de Porto Alegre and Rádio Itapema FM de Florianópolis. The term “RBS Group” refers to a group of media companies under common ownership and management. The term “RBS Network” refers to the companies that are part of the RBS Group, plus affiliated media companies owned by members of the controlling shareholder families of the RBS Group (other than those members indirectly controlling RBS Comunicações S.A. and its subsidiaries). In 2005, the RBS Group was reorganized, and RBS Comunicações S.A. was established for the purpose of integrating the Group’s main businesses, as a means to create a more efficient management structure. RBS Comunicações will be the platform through which the RBS Group expects to implement long-term strategic plans for expansion and development. RBS Comunicações S.A. (“RBS Comunicações”) is jointly owned by IMAH Participações Ltda. (“IMAH Par”), JAMAH Participações Ltda. (“JAMAH Par”) and FECH Participações Ltda. (“FECH Par”), holding companies representing the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, respectively. Its core businesses are currently organized under two primary subsidiaries — RBS TV Participações S.A. and RBS Radio Participações — with the expectation that RBS-Zero Hora, RBS Participações S.A. (“RBS Par”), RBS Administração e Cobranças (“RBS A&C”) and other RBS Group companies will be integrated into RBS Comunicações S.A. in the future. Each of RBS TV Participações and RBS Radio Participações functions as a subsidiary holding company for the Group’s individual television and radio stations while RBS-Zero Hora holds the RBS Group’s interests in newspapers. Not included within the RBS Group, but a significant part of the RBS Network, are 14 television stations and 21 radio stations owned by affiliates but which form part 5 of the RBS Network through programming assignment agreements. See “Management and Ownership Structure”. Operationally, the activities of each of the companies of the RBS Group are controlled by the Executive Committee, which generally meets every week in Porto Alegre. The Executive Committee is appointed by the Board of Directors to manage the Group’s constituent companies. See “Management”. According to RBS Network statistics, the network is currently the third-largest media network in Brazil as measured by revenue and the leading provider of multimedia services in the Service Territory. The RBS Network’s VHF television stations operating in the Porto Alegre and Florianópolis metropolitan regions, the largest population centers of the States of Rio Grande do Sul and Santa Catarina, respectively, are the most watched television stations in their respective metropolitan regions, with average audience shares of broadcast television viewership of 63% and 64%, respectively. Likewise, the RBS Network’s eight newspapers, in aggregate, are the most widely-read newspapers in the Service Territory (as a percentage of the population) and the second most widely-circulated in Brazil (in terms of the number of newspapers). The RBS Network’s principal segments of radio broadcasting operations are news/sports, youth-oriented music, popular music and adult contemporary music programming. The Network’s AM and FM radio stations operating in the Porto Alegre metropolitan region, the largest population center of the Service Territory, have aggregate audience shares of 67% and 28%, respectively, comprising in each case an audience share that is larger than that of any of their competitors. The RBS Network also includes a multimedia internet portal, clic RBS, an internet services portal, “hagah”, ViaLOG, a logistics distribution service business unit and a book publishing unit called RBS Publicações. All of the RBS Network’s 18 VHF television stations broadcast Globo Network programming regularly and occasionally provide the Globo Network with local news. The RBS Network produces approximately 15% of the programming grid locally, maintaining high “lead-in” ratings for the local news programs. As of December 31, 2006, the RBS Group had total assets of R$828.1 million. During 2006, the RBS Group had net operating revenues of R$811 million and net income of R$142 million. Prospective investors in the Notes should be aware that the Notes are not guaranteed by, nor do they constitute obligations of, the RBS Network or the RBS Group or of RBS Comunicações, but constitute obligations of RBS-Zero Hora, jointly and severally guaranteed by TV Gaúcha, TV Florianópolis and Rádio Gaúcha, the businesses of which are described below. The Issuer RBS-Zero Hora publishes the RBS Network’s eight newspapers, Zero Hora, Diário Gaúcho, O Pioneiro and Diário de Santa Maria, in the State of Rio Grande do Sul, plus Diário Catarinense, Jornal de Santa Catarina, A Hora de Santa Catarina and A Notícia in the State of Santa Catarina. Together, the eight newspapers had an average daily circulation of approximately 493,000 copies for the first three-months of 2007 which, according to the Instituto Verificador de Circulação (the Circulation Verification Institute or “IVC”), made RBS-Zero Hora the second largest newspaper publisher in Brazil by quantity of copies circulated. Daily circulation includes newspapers sold by subscription, street vendors or at newsstands. RBS-Zero Hora also serves as the informational hub for the RBS Network, making information available to all the newspapers operated by the Issuer, as well as to the RBS Network’s television stations and radio news and sports stations. Furthermore, RBS-Zero Hora also operates ViaLOG, a logistics distribution service business unit, a book publishing unit called RBS Publicações, as well as the internet-based businesses of the RBS Network , including clicRBS, the multimedia internet portal website for the RBS Group that integrates content from the TV, radio and newspaper businesses of the RBS Group with internet services, plus specialty site “hagah”. See “Business — The Issuer”. 6 At December 31, 2006, the total assets of the Issuer were R$510.4 million. For the year ended December 31, 2006, the Issuer had net operating revenues of R$409.2 million, earnings before financial income, financial expense, income tax, depreciation and amortization (“EBITDA”) of R$80.9 million and net income of R$21.5 million. In this context, the Issuer accounted for 50% of the net operating revenues and 33% of the EBITDA of the RBS Group for the year ended December 31, 2006. For the year ended December 31, 2005, the Issuer had operating revenues of R$386.5 million, EBITDA of R$86.2 million and net income of R$20.3 million. See the Issuer Financial Statements included elsewhere in this Offering Memorandum. For a discussion of the use of EBITDA as a measure of financial performance, see “Summary financial information and other data”. The Guarantors Payments of principal and interest on the Notes will be jointly and severally guaranteed by Televisão Gaúcha, TV Florianópolis and Rádio Gaúcha. The Issuer and the Guarantors on a combined basis accounted for 90% of the net operating revenues and 86% of the EBITDA of the RBS Group at and for the year ended December 31, 2006. During 2006, none of the other companies comprising RBS Group, on an individual basis, accounted for more than 10% of RBS Group’s operating revenues or more than 40% of RBS Group’s net income. Operationally, TV Gaúcha and TV Florianópolis serve as the hub for all RBS Network broadcast television operations in the States of Rio Grande do Sul and Santa Catarina, respectively, and operate VHF television broadcast stations in the cities of Porto Alegre and Florianópolis, respectively. TV Gaúcha and TV Florianópolis also receive fees under programming assignment agreements with the RBS Network’s 14 television stations that are owned by associated companies not part of the RBS Group. See “Business — The Guarantors”. Rádio Gaúcha owns and operates an AM news and sports radio station in Porto Alegre which, as the head of the Gaúcha Sat radio news network, supplies selective content to 135 affiliate radio stations throughout Brazil and is the largest radio station of all the radio stations that form part of the RBS Network. Collectively, the Guarantors represent the largest television stations in each of the States of Rio Grande do Sul and Santa Catarina, and the largest radio station as measured by revenue in the Service Territory. At December 31, 2006, the total assets of the Issuer and the Guarantors on a combined basis were R$959.4 million. For the year ended December 31, 2006, the Issuer and the Guarantors had combined net operating revenues of R$731.1 million, combined EBITDA of R$211.9 million and combined net income of R$111.9 million. Likewise, for the full year ended December 31, 2005, the Issuer and Guarantors had combined operating revenues of R$673 million, combined EBITDA of R$196.4 million and combined net income of R$88 million. See the Credit Group Financial Statements included elsewhere in this Offering Memorandum. For a discussion of the use of EBITDA as a measure of financial performance, see “Summary financial information and other data”. Strategy The RBS Group’s primary strategic goal is to be one of the most well-respected and profitable media groups in Brazil, whose activities and companies meet or exceed world class standards. Embedded in the RBS Group’s corporate strategy is to pursue growth from the Group’s core media businesses, introduce new media-related revenue sources and enter into new markets on an opportunistic basis, with a strategic focus on cash flow generation. Future strategic growth opportunities, particularly in the online, radio and newspaper businesses, in the Brazilian southern, southeastern and central western regions may be pursued, provided such growth fits within the Group’s goals. The RBS Group seeks to maintain its leadership position by attracting and retaining the most important media personalities in its Service Territory, by maintaining close ties with the communities in which it operates and by encouraging entrepreneurial initiatives among its managerial staff. The RBS Group’s business strategy is strongly-related to its unique ability to explore multimedia synergies. It believes that its 7 locally-based multimedia operating model, particularly in the radio and newspaper businesses, can be successfully replicated in other markets beyond the current Service Territory. See “Business — The RBS Group — Business development strategy”. 8 Set forth below is certain financial and statistical information about the RBS Group as a whole and the Credit Group (the Issuer and the Guarantors) as of and for the year ended December 31, 2006. Financial information for the RBS Group is presented according to the Corporate Law Method, while the financial information for the Credit Group is presented according to the Constant Currency Method. As a result information is not directly comparable and direct comparison of the financial information for the RBS Group compared to the Credit Group is not appropriate. See “Presentation of Financial Information” and Note 3 to the Credit Group Financial Statements: As of December 31, 2006, 2005, 2004 and 2003 and for the years then ended (in thousands of R$) 1 RBS Group Credit Group 2 2006 2005 2004 2003 2006 2005 2004 2003 Net operating revenues.............................. 811,369 747,507 687,609 546,184 731,105 673,001 573,462 485,034 Gross profit ........................................ 509,001 456,129 415,568 297,703 442,870 395,101 309,953 251,862 Financial expenses (income) net........... 50,959 123,449 107,322 95,425 34,276 57,360 19,249 (13,704) Net income (loss) ............................... 142.010 77,439 (86,646) (51,952) 111,870 87,953 57,893 53,090 Current assets ..................................... 445,010 203,795 180,273 210,238 425,487 267,739 159,490 108,905 Total assets......................................... 828,065 627,057 555,693 747,982 959,441 769,381 620,869 430,816 Current liabilities................................ 592,160 401,180 329,402 389,468 274,465 201,898 165,306 124,909 Total debt .......................................... 576,623 540,912 542,291 693,089 391,595 313,827 214,662 57,157 Cash and cash equivalents.................. 240,401 48,791 31,090 43,721 76,118 718 240 905 3 9 As of December 31, 2006, 2005, 2004 and 2003 and for the years then ended (in thousands of R$) 1 RBS Group Credit Group 2 2006 2005 2004 2003 2006 2005 2004 2003 336,222 492,121 511,201 649,368 315,477 313,109 214,422 56,252 (110,245) (194,903) (230,681) (136,300) 347,497 287,627 236,421 200,652 245,458 217,388 147,625 96,029 211,852 196,433 128,880 86,344 ................. 4.82 1.76 1.38 1.01 6.18 3.42 6.70 0 Leverage . .......................................... 1.37 2.26 3.46 6.76 1.49 1.59 1.66 0.65 4 Net debt ............................................ Stockholder’s equity (net capital deficiency) 3 EBITDA ........................................... Interest coverage ratio 5 3 (1) Information prepared following the Corporate Law Method and as such monetarily corrected through December 31, 1995. See “Presentation of Financial Information”. (2) Information prepared following the Constant Currency Method and as such monetarily corrected through September 30, 2001. (3) As defined in “Summary—The Issuer”, below. (4) Net debt has been computed as Total debt less cash and cash equivalents. (5) Leverage has been computed as net debt divided by EBITDA. 10 The Notes Issuer ....................................................... RBS-Zero Hora Editora Jornalistica S.A. Guarantors............................................... Televisão Gaúcha S.A. (“TV Gaúcha”). RBS TV de Florianópolis S.A. (“TV Florianópolis”). Rádio Gaúcha S.A. (“Rádio Gaúcha”). Currency.................................................. Brazilian Reais (payable in U.S. dollars). The Notes ................................................ BRL 300,000,000 equivalent aggregate principal amount of fixed rate guaranteed notes. Issue Price ............................................... 99.271% of the principal amount. Issue Date................................................ June 22, 2007. Indenture ................................................. The Notes will be issued under an indenture to be dated as of June 22, 2007 (the “Indenture”) between the Issuer and The Bank of New York (the “Trustee”). Rating ...................................................... The Notes have been rated BB- by Standard & Poor’s. Interest..................................................... The Notes shall bear interest from their date of issue at the rate of 11.25% per annum (the “Rate of Interest”) payable semi-annually in arrears on each June 15 and December 15 (each, an “Interest Payment Date”), commencing December 15, 2007. Interest will be paid on each Interest Payment Date on each Note in an amount equal to the outstanding principal amount of such Note, multiplied by the Rate of Interest, with the interest amount to be converted into U.S. dollars by the Calculation Agent on the relevant Fixing Date using the FX Rate. Such interest will be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, on the basis of the actual number of days elapsed. Maturity Date ................................ June 15, 2017. Guarantees............................................... The Notes will have the benefit of Guarantees by which each Guarantor, jointly and severally with the other Guarantors, guarantees, pari passu with all other existing and future unsecured and unsubordinated obligations of such Guarantor, the due and punctual payment of the principal, premium (if any), interest and additional amounts (if any) on the Notes, when and as the same become due and payable, whether at stated maturity, upon redemption or repayment, upon declaration of acceleration or otherwise. The Indenture will provide that the obligations of the Guarantors under their respective Guarantees will be limited so as not to constitute a fraudulent conveyance under applicable law. See “Description of the Notes — The Guarantees”. 11 Tax Redemption................................ The Issuer, at its option, may redeem all, but not less than all, of the Notes for certain taxation reasons as described under “Description of the Notes — Redemption”. Status and Ranking................................ The Notes will constitute direct, unconditional and unsecured obligations of the Issuer and will rank pari passu with all other unsecured and unsubordinated obligations of the Issuer, present or future, and without any preference among themselves. Use of Proceeds................................The Issuer intends to use the net proceeds of the issue of the Notes to repay existing indebtedness, including in connection with the concurrent tender offer for the Issuer’s 11% Guaranteed Notes due 2010 issued in 2004, and for general corporate purposes. See “Use of Proceeds”. Withholding Taxes; All payments by the Issuer and/or the Guarantors in respect of the Additional Amounts ................................ Notes shall be made without withholding or deduction for or on account of any present or future taxes, duties, assessments or other governmental charges of whatever nature imposed or levied by or on behalf of Brazil or any political subdivision or authority thereof or therein having power to tax, subject to certain exceptions (including the IPMA Standard EU Exceptions). In the event the Issuer or any Guarantor is compelled by law to make any such withholding or deduction, the Issuer or such Guarantor, as the case may be, shall pay such additional amounts as may be necessary to ensure that the net amounts receivable by the holders of the Notes after such withholding or deduction shall equal the respective amounts of principal and interest which would have been receivable in respect of the Notes in the absence of such withholding or deduction. FX Rate ................................................... FX Rate shall mean, for any Fixing Date, the BRL/U.S.$ spot offer rate (i.e., the rate at which banks buy BRL and sell U.S.$ (“BRL/U.S.$ Rate”)) expressed as the amount of BRL per one U.S.$ reported by the Central Bank on the SISBACEN Data System under transaction code PTAX-800 (“Consultas de Câmbio” or “Exchange Rate Inquiry”), Option 5 (“Cotações para Contabilidade” or “Rates for Accounting Purposes”) (the “PTAX Rate”) at or about 6:00 p.m. São Paulo time on the Fixing Date, as determined by the Calculation Agent, subject to the FX Rate Fallback Provisions. “Fixing Date” means three Brazilian Business Days immediately prior to each Interest Payment Date, the Maturity Date or earlier date specified for redemption of the Notes. “Brazilian Business Day” shall mean a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealings in foreign exchange and foreign currency deposits) in any of São Paulo or Rio de Janeiro, Brazil, and New York and London. 12 FX Rate Fallback Provisions................................................ FX Rate Fallback Provisions shall apply in the event that the PTAX Rate scheduled to be reported on the Fixing Date is not reported by the Central Bank on the Fixing Date. See “Description of the Notes — Certain definitions”. Covenants................................................ The Indenture contains certain covenants that, among other things, will limit the ability of the Issuer and the Guarantors to incur indebtedness, pay dividends, make investments, engage in transactions with stockholders and affiliates, create liens and sell substantially all of their assets and engage in mergers and consolidations. See “Description of the Notes — Affirmative covenants” and “Description of the Notes — Negative covenants”. Events of Default................................ The Notes will be subject to certain events of default, as set out in “Description of the Notes — Events of default”. Listing ..................................................... Issuer has applied to list the Notes on the Alternative Securities Market of the Irish Stock Exchange. There can be no assurance, however, that this application will be accepted. PORTAL ................................................. Notes sold to qualified institutional buyers are expected to be eligible for trading in The PORTAL Market. Transfer Restrictions ............................... There are restrictions on the transfer of the Notes sold pursuant to an exemption from registration under the Securities Act. See “Transfer restrictions.” Form, Denomination and Transfer ................................................... The Notes will be issued in book-entry form through the facilities of The Depository Trust Company (“DTC”) for the accounts of its participants, including Euroclear Bank S.A./N.V., as the operator of the Euroclear System, and Clearstream Banking, Luxembourg, socíeté anonyme, and will trade in DTC’s same-day funds settlement system. The Notes will be in fully registered form without interest coupons attached. The Notes sold in reliance on Rule 144A under the Securities Act (“Rule 144A”) will be issued in the form of a restricted global note (the “Restricted Global Note”), and the Notes sold in reliance on Regulation S under the Securities Act (“Regulation S”), will be issued in the form of a Regulation S global note (the “Regulation S Global Note,” and together with the Restricted Global Note, the “Global Notes”). The Notes will be registered in the name of Cede & Co. as nominee for, and deposited with The Bank of New York as custodian for, DTC. The Notes offered and sold will be issued in minimal denominations of R$200,000 and integral multiples of R$1,000 in excess thereof. Holders of beneficial interests in Notes held in book-entry form will be entitled to receive physical delivery of certificated Notes only in very limited circumstances. See “Form, Denomination and Transfer.” 13 Governing Law ................................The Indenture, the Notes, the Guarantees and related documents will be governed by the laws of the State of New York. Trustee, Transfer Agent and Registrar.................................................. The Bank of New York. Principal Paying Agent ........................... The Bank of Tokyo-Mitsubishi UFJ, Ltd. Calculation Agent................................ The Bank of New York. Irish Stock Exchange Listing Agent........................................... The Bank of New York. Irish Paying Agent................................ BNY Fund Services (Ireland) Limited. 14 RISK FACTORS You should consider carefully, in light of your own financial circumstances and investment objectives, the risks described below, in addition to the other information contained in this Offering Memorandum, before determining whether to purchase the Notes. The Issuer and the Guarantors may face additional risks and uncertainties that are not presently known, or that they currently do not deem relevant, which may impair their businesses. In general, investing in the securities of issuers in developing countries, such as Brazil, involves a higher degree of risk than investing in the securities of issuers in the United States and certain other jurisdictions. The Issuer and the Guarantors cannot predict with any degree of certainty how and to what extent changing conditions will impact the Issuer’s and the Guarantors’ operations and adversely affect their futures. You should be aware of the uncertainties regarding the future operations and financial condition of the Issuer and the Guarantors and of the risks associated with such events. Risks Relating to Brazil The Brazilian government has exercised, and continues to exercise, significant influence over the Brazilian economy. Brazilian economic and political conditions have a direct impact on the business of the Issuer and the Guarantors. The Brazilian economy has been affected by frequent and significant intervention by the Brazilian government, which has often changed monetary, tax, credit, tariff and other policies to influence the course of Brazil’s economy. The Brazilian government’s actions to control inflation and implement other policies have at times involved wage and price controls as well as other interventionist measures, such as nationalization, raising interest rates, freezing bank accounts, imposing capital controls and inhibiting international trade in Brazil. Changes in policy involving tariffs, exchange controls, regulation and taxation could adversely affect the Issuer’s and the Guarantors’ businesses and financial results and the market price of the Notes. Inflation, currency devaluation, social instability and other political, economic or diplomatic developments, as well as the Brazilian government’s response to such developments, could also adversely affect the Issuer’s and the Guarantors’ businesses and the market price of the Notes. Exchange rate volatility may adversely affect the financial condition and results of operations of the Issuer and the Guarantors and the ability of the Issuer and the Guarantors to meet obligations under their U.S. dollar-denominated liabilities. Brazil’s currency has historically been characterized by high degrees of volatility. Notwithstanding the appreciation of the real against the U.S. Dollar in recent years, the Brazilian currency has historically suffered frequent devaluations. Although over the longer term, devaluations of the Brazilian currency have generally correlated with the rate of inflation in Brazil, devaluations have resulted in significant short- to medium-term fluctuations in the value of the Brazilian currency. The relationship of Brazil’s currency to the value of the U.S. dollar, the relative rates of devaluations of Brazil’s currency and the prevailing rates of inflation have affected, and may in the future affect, Issuer’s and Guarantors’ financial results. The Brazilian currency has been devalued periodically during the last four decades. Throughout this period, the Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden depreciations and periodic mini-depreciations, including adjustments on a monthly or even a daily basis, floating exchange rate systems, exchange controls and dual exchange rate markets. There have been significant fluctuations in the exchange rates between the Brazilian currency and the U.S. dollar and other currencies. For example, the real/U.S. dollar exchange rate depreciated from R$2.3204 at December 31, 2001 to R$3.5333 at December 31, 2002 reaching R$3.9552 per U.S.$1.00 in October 2002. However, the stability established by the economic policy initiated by the new federal administration in 2003 restored some confidence in the Brazilian market. This new economic policy has resulted in an appreciation of the real in 2003 and 2004 of 18.23% and 8.1%, respectively. The real/U.S. dollar exchange rate was R$2.6544 per U.S.$1.00 at December 31, 2004. The real continued to appreciate against the U.S. dollar in 2005 and 2006, closing at R$2.3407 per U.S.$1.00 as of December 31, 15 2005 and R$2.1380 per U.S.$1.00 as of December 31, 2006. At June 14, 2007, the real/U.S. dollar exchange rate was R$1.9303 per U.S.$1.00. There can be no assurance, however, that there will be no more devaluations of the Brazilian currency and that they would not impact the Issuer’s or Guarantors’ businesses in the future. Any devaluation of the real could make foreign currency-linked obligations or expenses of the Issuer and the Guarantors more expensive. Any such impact could adversely affect the businesses, operations or prospects of the Issuer or the Guarantors, as the case may be. See “ — Risks Relating to the RBS Group — Fluctuations in paper costs may adversely affect the business prospects of the Issuer”. Exchange controls and restrictions on remittances abroad may adversely affect holders of the Notes. Holders of the Notes may be adversely affected if the Brazilian government imposes restrictions on the remittance to foreign investors of the proceeds of their investments in Brazil and the conversion of the real into foreign currencies. The purchase and sale of foreign currency in Brazil is subject to governmental control. The Brazilian government has implemented various economic plans and utilized a number of exchange rate policies, including sudden devaluations, periodic mini-devaluations (with the frequency of adjustments ranging from daily to monthly), floating exchange rate systems, exchange controls and dual exchange rate markets during the last few decades. Since 1983, certain payments of principal on external obligations have been centralized through the Central Bank, and the Central Bank has assumed responsibility for the external obligations to be paid in connection with the formal restructuring of the Brazilian sovereign debt. In 1988 and 1989, the Brazilian government effectively prevented domestic public and private debtors from making payments of principal or interest on certain international debt by restricting their access to foreign currencies and prohibiting payment orders abroad. In 1991, partial interest payments were resumed and an agreement was reached on the treatment of past due interest. On June 26, 1991, the Central Bank allowed all private sector companies and certain public companies to resume the payment of all external debt obligations. Brazil concluded negotiations with its commercial bank creditors on April 15, 1994 for a Brady Plan-type restructuring of medium- and long-term debt and past due interest in the amount of U.S.$50.0 billion. The Brazilian government currently does not restrict the ability of Brazilian and foreign persons or entities to convert Brazilian currency into U.S. dollars or other currencies provided that such transactions comply with applicable laws and are based on the economic factors and responsibilities of each of the parties as set forth in the underlying document for each transaction that must be entered or settled through the Central Bank. Because regulations applicable to the foreign exchange market have been recently modified, certain operational procedures are still pending regulation by the Central Bank. The Central Bank has also assumed responsibility for the external obligations in connection with the formal restructuring of Brazilian sovereign debt. Furthermore, it is uncertain whether the Brazilian government will in the future institute a more restrictive exchange control policy (including by changing existing regulations) that would have the effect of preventing or restricting the Issuer’s or the Guarantors’ access to foreign currency with which to meet foreign currency obligations, including the Notes. The likelihood that such restrictions may be imposed by the Brazilian government at any time may be affected by, among other factors beyond the Issuer’s and the Guarantors’ control, the extent of Brazil’s foreign currency reserves, the availability of sufficient foreign exchange on the date a payment is due, the size of Brazil’s debt service burden relative to the economy as a whole, Brazil’s policy toward the International Monetary Fund and political constraints to which Brazil may be subject, all of which are factors that are beyond the Issuer’s or the Guarantors’ control. Although payments by issuers located in Brazil in respect of securities issued in the international capital markets to date have not been subject to restrictions imposed by the Brazilian government, no assurance can be given that such restrictions may not be imposed in the future. Any such restrictions could adversely affect the businesses, operations or prospects of the Issuer and the Guarantors and the ability of the Issuer and the Guarantors to make timely payments on the Notes. Inflation and certain governmental measures to combat inflation may contribute significantly to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets. 16 Until mid-1994 Brazil experienced extremely high rates of inflation. Inflation contributed materially to economic uncertainty in Brazil and to heightened volatility in the Brazilian securities markets. In 1994, the Brazilian government implemented an economic stabilization plan known as the Real Plan, which was intended to reduce the size of Brazil’s federal budget deficit by reducing certain public expenditures, collecting liabilities owed to the Brazilian government, increasing tax revenues, lowering inflation and introducing a new, stable currency, the real. Since the introduction of the Real Plan, the rate of inflation as measured by the broad consumer price index (the “Indice de Preços ao Consumidor Ampliado” or “IPCA”) fell steadily to 1.65% in 1998. The IPCA was 9.3% in 2003, 7.6% in 2004, 5.7% in 2005 and 3.1% in 2006. The Brazilian government has set a target rate of inflation of 4.5%, with tolerance levels of plus 2.0% and minus 2.0% for 2007. There can be no assurance that inflation can be contained within these targeted levels. It is uncertain whether future actions of the Brazilian government (including any further action to adjust the value of the Brazilian currency) will cause inflation at a higher rate than predicted. A substantial increase in inflation may weaken investor confidence in Brazil, impacting the Issuer’s and the Guarantors’ ability to access the international capital markets. Brazil may experience high levels of inflation in the future. In that event, the Issuer’s and the Guarantors’ results of operations may be affected, which could adversely affect the ability to satisfy payment obligations under the Notes. Inflationary pressures may also curtail the ability to access foreign financial markets and may lead to further government intervention in the economy, including the introduction of government policies that may adversely affect the overall performance of the Brazilian economy, which in turn could adversely affect the Issuer’s and the Guarantors’ operations and the market value of the Notes. Developments in Brazil and other countries, especially other emerging markets, may adversely affect the business prospects and results of operations of the Issuer and the Guarantors and the market value of the Notes. The market for securities issued by Brazilian companies is influenced by economic, political and market conditions in Brazil and in other emerging market countries, especially those in Latin America. Although economic conditions are different in each country, investors’ reactions to developments in one country may affect the capital markets in other countries. Developments or conditions in other emerging market countries have from time to time significantly affected the availability of credit in the Brazilian economy and resulted in considerable outflows of funds and declines in the amount of foreign currency invested in Brazil as well as limited access to international capital markets. Such developments or conditions may adversely affect the Issuer’s or the Guarantors’ ability to borrow funds on acceptable terms or to raise capital when and if there should be a need. Although market concerns that crises that have affected other South American countries would ensue in Brazil have not become a reality, the volatility in market prices for Brazilian securities has increased from time to time. Investors’ perception of increased risk due to crises in other emerging market countries may adversely affect our ability to borrow funds at an acceptable interest rate or raise equity capital when and if there is a need for us to do so. Adverse developments in other emerging market countries could also lead to a reduction in the market price of the Notes. The Issuer’s and the Guarantors’ financial statements may present different financial positions and results of operations and may not give the same information as the financial statements prepared under generally accepted accounting principles in the United States (“U.S. GAAP”) or International Financial Reporting Standards (“IFRS”). There are significant differences between U.S. GAAP and IFRS on the one hand and Brazilian GAAP on the other. The financial statements contained herein may differ from those that would be prepared had they been prepared based upon U.S. GAAP or IFRS. The Issuer and the Guarantors have made no attempt to identify or quantify the impact of those differences. No reconciliation to U.S. GAAP or IFRS of any of the financial statements presented in this Offering Memorandum has been prepared for the purposes of this Offering Memorandum or for any other purpose. There can be no assurance that a reconciliation would not identify material quantitative differences between the financial statements of the Issuer and the Guarantors as prepared on the basis of the accounting principles determined by Brazilian GAAP and such financial 17 statements as prepared on the basis of U.S. GAAP or IFRS. In making an investment decision, investors must rely upon their own examination, including consultations with their own professional advisors, for an understanding of the differences between Brazilian GAAP on one hand and U.S. GAAP or IFRS on the other, and how those differences might affect the financial information herein. See “Summary of Certain Significant Differences between Accounting Principles Generally Accepted in Brazil, U.S. GAAP and IFRS”. Changes in Brazilian tax laws may have an adverse impact on the taxes applicable to a disposition of the Notes or may adversely impact the Issuer’s and the Guarantors’ results of operations. Generally, any capital gains generated outside Brazil as a result of a transaction between two nonBrazilian residents with assets not located in Brazil are not subject to taxation in Brazil. However, Article 26 of Law No. 10,833, of December 29, 2003, which came into force on February 1, 2004, established that capital gains realized on the disposition of assets located in Brazil by non-residents, whether to other nonresidents or Brazilian residents and whether made outside or within Brazil, is subject to taxation in Brazil at tax a rate of 15%, or 25% if such non-Brazilian resident is located in a tax haven jurisdiction (i.e., a country which does not impose any income tax or which imposes it at a maximum rate lower than 20% or where the laws impose restrictions on the disclosure of ownership composition or securities ownership). As the Notes are offered, sold and listed outside Brazil, we have been advised by our Brazilian counsel that they do not believe that the Notes fall within the definition of assets located in Brazil for purposes of Law No 10,833. However, we are unable to predict whether the Notes would be deemed as assets located in Brazil for the purposes of Law No. 10,833 and, because no judicial guidance as to application of this law yet exists, we are unable to predict if such interpretation will ultimately prevail. If income tax is deemed to be due or if the Notes are disposed of to a Brazilian resident, any related gain may be subject to income tax in Brazil at a rate of 15%, or 25% if such non-Brazilian holder is located in a tax haven jurisdiction. Furthermore, the Brazilian government frequently implements changes to tax regimes that affect us. These changes include changes in prevailing tax rates and, on occasion, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. Some of these changes may result in increases in our tax payments, which can adversely impact the Issuer’s and the Guarantors’ profitability, restrict their ability to do business in their existing and target markets and cause their financial results to suffer. There can be no assurance that the Issuer and the Guarantors will be able to maintain their prices and projected cash flow and profitability following increases in Brazilian taxes applicable to them, their subsidiaries and their operations. Brazilian bankruptcy laws may be less favorable to investors than bankruptcy and insolvency laws in other jurisdictions. If the Issuer and the Guarantors are unable to pay their indebtedness, including their obligations under the Notes, then they may become subject to bankruptcy proceedings in Brazil. Although a new bankruptcy law became effective on June 9, 2005, the bankruptcy laws of Brazil currently in effect are significantly different from, and may be less favorable to creditors than, those of certain other jurisdictions. In addition, any judgment obtained against the Issuer and the Guarantors in Brazilian courts in respect of any payment obligations under the Notes normally would be expressed in the real equivalent of the U.S. dollar amount of such sum at the exchange rate in effect (1) on the date of actual payment, (2) on the date on which such judgment is rendered or (3) on the date on which collection or enforcement proceedings are started against them. Consequently, in the event of the Issuer’s and Guarantors’ bankruptcy, all of their debt obligations that are denominated in foreign currency will be converted into reais at the prevailing exchange rate on the date of declaration of the Issuer’s and Gauarantors’ bankruptcy by the court. We cannot assure investors that such rate of exchange will afford full compensation of the amount invested in the Notes plus accrued interest. 18 Risks Relating to the RBS Group The Guarantors operate certain of their businesses pursuant to concessions and licenses that are subject to termination. The RBS Network’s broadcast television and radio businesses are dependent on licenses issued by the President of Brazil. See “Business — Government regulation”. These licenses are generally for a term of 10 years for radio and 15 years for television. Although licenses required for the operations of the RBS Network have in the past always been renewed upon expiration, there can be no assurance that the applicable regulatory authorities, acting on behalf of the President of Brazil, will renew any license as it expires. During any period of lapse, the license remains in effect pending review of the renewal application. The Guarantors have occasionally experienced delays in the license renewal process due to bureaucratic factors out of their control that resulted in the temporary lapse of a license. In the past, the Guarantors’ operations and ability to carry out their businesses have not been impacted due to a license that has lapsed. However, any failure to obtain or maintain licenses, particularly in key markets in the Service Territory, such as Porto Alegre or Florianópolis, could have a material adverse effect on results of operations. In addition, the government may in the future decide to issue additional licenses within or outside of the Service Territory, which could result in increased competition for the services of the Guarantors or the RBS Network as a whole. Certain Guarantors rely on TV Globo for the majority of their television programming. Any change in the RBS Network’s relationship with TV Globo may have a material adverse effect on those Guarantors. Pursuant to contracts entered into between the RBS Network VHF television stations and TV Globo Limitada (“TV Globo”), approximately 85% of the programming shown on VHF television stations which are part of the RBS Network, including stations operated by TV Gaúcha and TV Florianópolis, both of which are Guarantors, is provided by TV Globo. Additionally, TV Globo maintains a sales force which sells advertising to national advertising accounts on behalf of the RBS Network VHF television stations and other Globo Network affiliates. TV Globo is the highest-rated source of television programming in Brazil according to the Instituto Brasileiro de Opinião Pública e Estatística (the Brazilian Institute of Public Opinion and Statistics or “IBOPE”). The current contracts with TV Globo expire in 2008 but are subject to an automatic extension until 2011, unless terminated by either party upon 90 days written notice. As is the case from time to time, the RBS Group is currently discussing with TV Globo the terms, conditions and renewal of this contract. Although the RBS Network has had a network affiliation with TV Globo for almost 40 years, and the RBS Group believes these contracts will be renewed, no assurance can be given that the current contracts will be renewed or that any renewal will be on the same terms as the current contracts. Any change in the relationship between the RBS Network VHF television stations and TV Globo could have a materially adverse effect on RBS Network VHF television stations (including stations operated by TV Gaúcha and TV Florianópolis), and on the RBS Group, including the Issuer and the Guarantors. In addition, any negative impact on TV Globo, such as an inability to finance additional investments or to develop high quality programming, or on its ability to finance additional investments, could have a negative impact on the RBS Network, including TV Gaúcha and TV Florianópolis. Holders of the Notes (i) may not be able to receive the value of the cash assets of the Issuer or the Guarantors held by a cash management affiliate if that affiliate were to default upon its outstanding indebtedness and other potential liabilities, and (ii) may face difficulties in attaching or foreclosing on cash assets which are held by the cash management affiliate. RBS A&C, a company approximately 95% owned by the controlling shareholders of the RBS Group and approximately 5% owned by RBS Participações S.A., performs treasury functions for the RBS Group companies, including for the Issuer and the Guarantors, centralizing cash management operations. RBS A&C is a separate legal entity under common control with the Issuer and the Guarantors but is not a guarantor of the Notes. Since 1993, cash revenues of any of the RBS Group companies have been collected and held by RBS A&C, as a “cash management company”, on behalf of the respective RBS Group company 19 pursuant to a contractual arrangement among the companies. As each member of the RBS Group requires funds, it withdraws cash on deposit with RBS A&C, issues payment instructions to RBS A&C or requests a loan from another member of the RBS Group. RBS A&C and RBS Group companies also may borrow funds from third parties, such as banks or the shareholders of the RBS Group. Except for the advances for future capital increases and the “balances receivable” receivables from RBS A&C, which bear no interest, inter-company loans with the Credit Group are done on an arm’s-length basis at market rates. At December 31, 2006, RBS A&C had outstanding indebtedness in the amount of R$40.9 million. RBS A&C may in the future guarantee or incur additional indebtedness. If an event of default occurs under any of RBS A&C’s present or future obligations, the creditors of RBS A&C may attempt to attach or foreclose on the assets of RBS A&C, and the cash assets of the Issuer and the Guarantors which are in the possession of RBS A&C in its cash management role. The Issuer and the Guarantors could be considered unsecured creditors of RBS A&C (because of the funds that RBS A&C holds on their behalf), ranking pari passu with the claims of the unsecured creditors of RBS A&C and junior to the claims of the secured creditors of RBS A&C. In the event of a liquidation, insolvency or bankruptcy of RBS A&C, the Issuer and the Guarantors, and in turn the holders of the Notes, may not be entitled to receive the value of the cash assets of these entities held on their behalf by RBS A&C. In addition, if an event of default occurs under the Notes or the Guarantees, as the case may be, holders of the Notes may face difficulties in attaching or foreclosing on the cash assets of the Issuer or the Guarantors, as the case may be, that are in the possession of RBS A&C. See “Business — RBS A&C”. The Issuer and the Guarantors operate in a heavily regulated environment. Certain aspects of television, radio and newspaper operations and ownership in Brazil are governed by the Brazilian Constitution. See “Business — Government regulation.” The Brazilian government may enact additional or new regulations applicable to the activities of the Issuer or the Guarantors or the RBS Network as a whole. There can be no assurance that any new constitutional amendments, laws or regulations will not have a material adverse effect on the operations or results of the Issuer and the Guarantors or the RBS Network as a whole. The Brazilian advertising industry is cyclical. The Issuer and each of the Guarantors derive a significant portion of their respective revenues from advertising. The Brazilian advertising market has historically been cyclical in nature, increasing in times of general economic expansion and contracting during recessions. This cyclicality has in the past affected the Issuer’s and the Guarantors’ revenues and results of operations. The Issuer and the Guarantors remain exposed to the risk of a general economic downturn in Brazil, and particularly in the Service Territory, which could materially affect the Brazilian advertising industry generally and their financial condition and results of operations. The markets of the Issuer and the Guarantors are characterized by rapid technological change, which could render their equipment obsolete and cause the Issuer and the Guarantors to make substantial expenditures to adapt to technological developments. Most of the markets in which the Issuer and the Guarantors operate are currently experiencing rapid technological developments, involving industry standards and customer demands and frequent new product introductions and enhancements. The Issuer and the Guarantors must adapt quickly to these events in order to compete effectively. The Issuer and the Guarantors could be required to devote significant management and financial resources to adapt to such challenges. For example, the introduction of digital television in Brazil may require significant investments by TV Gaúcha and TV Florianópolis to adapt to the new standard. The Issuer and the Guarantors could be unable to hire sufficient numbers of qualified personnel to meet future technological challenges. Technological changes could create new competitors in the broadcast television, radio and newspaper businesses, and could provide opportunities for existing competitors to obtain market share at the expense of the Issuer and the Guarantors. Failure to effectively adapt to technological developments could adversely affect their business, financial condition and results of operations. 20 The Issuer and the Guarantors are owned by a group of individuals who have the power to control all matters relating to the Issuer’s and the Guarantors’ business, operations and management. The Issuer and the Guarantors are owned and controlled by members of the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa. The individuals of these families have the power to decide nearly all matters concerning the business and operations of the Issuer and the Guarantors and the RBS Network as a whole. See “Management and ownership structure”. Given the shareholders’ exclusive control of the Issuer and the Guarantors, there can be no assurance that decisions taken by the shareholders will at all times address the concerns, and will not conflict with the interests, of holders of the Notes. Neither the Issuer nor any of the Guarantors is required, under Brazilian law, to make any disclosure of financial or operational results to any Brazilian regulatory authority. The Issuer and each of the Guarantors is required to publish its annual financial statements in the official journal and in a newspaper with large circulation in the State in which it is domiciled, although these financial statements are not required to be audited and cannot be adjusted for inflation. See “Management’s discussion and analysis of financial condition and results of operations — Introduction — Critical accounting policies”. The Issuer and the Guarantors have engaged and may continue to engage in various transactions with other members of the RBS Network. The Issuer and the Guarantors have conducted certain transactions among themselves and with other members of the RBS Network on terms that may not in all cases be the same as would be reached in arm’slength transactions with unrelated third parties. See “Related party transactions”. Although transactions with affiliated persons are generally limited by the terms of the indentures respectively governing the Notes, the Issuer and the Guarantors may continue to enter into certain related party transactions substantially in the same manner as transactions engaged in by them at the date of the indenture. While the RBS Network believes that such transactions in the past have generally had a beneficial effect on the Issuer and the Guarantors, no assurances can be given that any such transaction, or combination of transactions, will not have an adverse effect on the Issuer and the Guarantors in the future and will not conflict with the interests of the holders of the Notes. The Issuer or any Guarantor may merge with RBS Participações, a company with net capital deficiency that may need to rely on additional resources from its shareholders or from other RBS Group companies. The Indenture permits the Issuer or any Guarantor to merge with RBS Participações, a company in the RBS Group (but not in the Credit Group) with net capital deficiency plus advance for future capital increase negative capitalization in the amount of R$433 million as of March 31, 2007. While the RBS Group is still considering the corporate structure that will result from its current restructuring under RBS Comunicações, any such merger would likely result in an immediate decrease in the capitalization of the combined Credit Group companies that could be material. The reliance on single site facilities may result in the interruption of services and loss of income. While certain operations of the Issuer and the Guarantors have off-site back-up systems, as in the case of the newspaper operations of the Issuer, which have alternative printing locations, the operations of the Issuer and each Guarantor is generally dependent on a primary site facility maintained by the Issuer or such Guarantor. Though the RBS Network maintains insurance to cover it against damage to its facilities and equipment, any interruption in the availability of any of these facilities may result in loss of income and additional expense. Fluctuations in paper costs may adversely affect the business prospects of the Issuer. Paper is the principal raw material of the RBS Network’s newspapers and accounted for 37% of RBSZero Hora’s 2006 total operating costs. Paper prices are cyclical and are affected by many factors, including demand, mill capacity, pulp supply, energy costs and general economic conditions. Consequently, the Issuer production costs can vary from period-to-period. Also, because the Issuer generally purchases a significant portion of its paper from international suppliers pursuant to U.S. dollar-denominated supply contracts (at 21 market prices), any devaluation of the real would make paper more expensive. Sustained significant paper price increases or devaluation of the real could adversely affect RBS-Zero Hora’s financial conditions and results of operations. In 2004, 2005 and 2006, the average cost of newsprint per ton for the Issuer went from U.S.$507 to U.S.$605 to U.S.$689. At March 2007, the cost of newsprint per ton for the Issuer was approximately U.S.$717. Although the Issuer believes that it can cover increases in newsprint prices with increases in the prices for its newspapers, there can be no assurance that it will be able to do so. The Issuer and the Guarantors may incur additional short-term debt that could affect their financial condition. Under existing debt agreements, the Issuer and the Guarantors have generally covenanted not to incur, and not to permit any subsidiary of the Issuer or any Guarantor to incur, any debt with a maturity greater than one year unless certain financial ratios are met. However, such covenants do not place limitations on the amount of short-term debt that may be incurred by the Issuer, the Guarantors or their subsidiaries nor their respective ability to refinance such debt at maturity. Risks Relating to the Notes There will be limited liquidity for the Notes. The Notes and the Guarantees have not been and will not be registered under the Securities Act or any other applicable securities law and are being offered for sale in transactions not requiring registration under the Securities Act or any other securities laws. The Notes will be eligible for resales pursuant to Rule 144A under the Securities Act. Unless so registered, the Notes and the Guarantees may not be offered, sold or otherwise transferred except in compliance with the registration requirements of the Securities Act, or any other applicable securities law, pursuant to an exemption therefrom or in a transaction not subject thereto. See “Transfer Restrictions”. There can be no assurance as to the development or liquidity of any market for the Notes. If an active market does not develop, the market price and liquidity of the Notes may be adversely affected. Judgments of Brazilian courts enforcing the Issuer’s and the Guarantors’ obligations under the Notes would be payable only in reais. If proceedings were brought in the courts of Brazil seeking to enforce the Issuer’s and Guarantors’ obligations under the Notes, the Issuer and the Guarantors would not be required to discharge their obligations in a currency other than reais. Under the Brazilian exchange control limitations, an obligation in Brazil to pay amounts denominated in a currency other than reais may only be satisfied in Brazilian currency at the rate of exchange, as determined by the Central Bank, in effect on the date of payment. There can be no assurance that such rate of exchange will afford the full compensation of the amount invested in the Notes plus accrued interest (if any). Changes in Brazilian tax laws may have an impact on the taxes applicable to the disposition of the Notes. According to Brazilian Law 10,833, the disposition of assets located in Brazil by non-residents of Brazil, whether to other non-residents of Brazil or Brazilian residents and whether made within or outside Brazil, may become subject to taxation in Brazil. Although the Issuer and the Guarantors believe that the Notes would not fall within the definition of assets located in Brazil for the purposes of Law 10,833, considering the general and unclear scope of Law 10,833 and the absence of judicial guidance in respect thereof, the Issuer and the Guarantors are unable to predict how the scope of Law 10,833 would be interpreted in the courts of Brazil. 22 Holders of the Notes would be subordinated to certain statutory preferences in the event of bankruptcy. Under Brazilian law, the Issuer’s obligations or the obligations of any Guarantor under any Guarantee, the Notes and the Indenture are subordinated to certain statutory preferences. In the event of the Issuer’s or any Guarantor’s bankruptcy, such statutory preferences, such as claims for salaries, wages, social security and other taxes, court fees and expenses, will have preference over any other claims, including claims by any investor in respect of any Guarantee. If the Brazilian real depreciates against the U.S. dollar, the effective yield on reais-denominated Notes (in U.S. dollar terms) will decrease below the interest rate on the Notes, and the amount payable on an interest payment date, at maturity or upon acceleration, may result in a loss to investors in the Notes. Rates of exchange between the U.S. dollar and the Brazilian real have varied significantly over time. See “Exchange Rates” below and “ — Risks Relating to Brazil — Exchange controls and restrictions on remittances abroad may adversely affect holders of the Notes”. However, historical trends do not necessarily indicate future fluctuations in rates and should not be relied upon as indicative of future trends. Currency exchange rates can be volatile and unpredictable and may be affected by macroeconomic factors and speculation. If the Brazilian real depreciates against the U.S. dollar, the effective yield on reaisdenominated Notes (in U.S. dollar terms) will decrease below the interest rate on the Notes and the amount payable on an interest payment date, at maturity or upon acceleration may result in a loss to investors in the Notes. Also, depreciation of the Brazilian real against the U.S. dollar may adversely affect the market value of the Notes. There is no existing significant secondary market for real-denominated Notes nor assurance regarding the future development of a significant secondary market for them. A significant secondary market for real-denominated Notes has not developed, and there can be no assurance that any such market will develop in the future. The absence of a significant secondary market for Notes linked to the real may have a material negative impact on the ability of holders to resell such Notes, which may negatively affect the market price for such Notes. 23 SUMMARY FINANCIAL INFORMATION AND OTHER DATA As of and for the three month period ended March 31, 2007 As of and for the year ended December 31, 2006 2006 2006 (thousands of U.S.$)1 (thousands of R$) 2005 2004 (thousands of R$) ISSUER: Income statement data: Net operating revenues................................ 103,163 94,352 191,408 409,231 386,479 337,557 30,368 65,587 140,224 131,883 111,147 Classified advertisements ................................ 20,591 19,718 40,726 87,072 82,333 71,073 Circulation ................................ 13,237 13,582 24,744 52,903 49,238 44,106 Subscriptions ................................ 34,099 29,093 57,397 122,715 113,696 99,900 5,355 10,654 22,778 24,663 24,851 Advertising ................................ 34,509 Other................................................................ 4,928 Taxes on revenues................................ (4,201) (3,764) (7,699) (16,461) (15,334) (13,520) (40,216) (34,187) (71,978) (153,888) (149,917) (150,498) Raw materials ................................ (17,232) (15,402) (32,732) (69,980) (73,057) (71,321) Personnel ................................ (13,331) (10,440) (21,810) (46,630) (44,808) (43,487) Depreciation................................ (2,380) (2,424) (4,528) (9,680) (5,351) (9,635) Royalties ................................ (1,810) (2,045) (3,877) (8,290) (9,254) (10,222) (3,876) (9,031) (19,308) (17,447) (15,833) 62,947 60,165 119,431 255,343 236,562 187,059 Operating expenses, net................................ (57,024) Operating costs................................ Other................................................................ (5,463) Gross profit ................................ (47,865) (101,677) (217,385) (211,367) (172,610) Selling................................................................ (32,637) (25,598) (53,191) (113,722) (106,436) (102,266) General and administrative ................................ (17,012) (15,071) (33,021) (70,599) (49,534) (45,429) Financial income................................ 4,461 6,203 8,602 18,392 15,510 7,437 Financial expenses ................................ (10,200) (12,199) (22,227) (47,522) (65,680) (26,492) (1,249) (1,240) (1,928) (4,122) (5,568) (6,293) (387) 40 88 188 341 433 5,923 12,300 17,754 37,958 25,195 14,449 - (1,052) (2,249) - - (16) 452 211 452 (2,704) (6,593) Non-operating income (loss), 135 net................................................................ (206) (273) (584) (789) 302 Depreciation................................ Other, net ................................ Operating income ................................ Equity in losses on subsidiaries................................ Reversal (establishment) of provision for losses on investments................................ Income before taxes on income................................ 6,042 12,546 16,547 35,577 21,702 8,158 Social contribution ................................ (745) (1,640) (2,067) (4,420) (488) (1,405) Income tax................................................................ (1,412) (3,888) (4,501) (9,624) (919) (2,749) 3,885 7,018 10,072 21,533 20,295 4,004 134,876 150,949 77,407 165,497 132,485 93,927 Net income ................................ Balance sheet data: Current assets ................................ 24 As of and for the three month period ended March 31, 2007 2006 2006 (thousands of U.S.$)1 (thousands of R$) Property, plant and equipment................................ 97,303 As of and for the year ended December 31, 2006 2005 2004 (thousands of R$) 89,610 43,289 92,552 88,509 89,425 499,890 444,252 238,763 510,475 435,658 384,160 Current liabilities................................ 182,268 120,227 90,797 194,125 118,945 110,375 Non-current liabilities ................................ 204,772 229,575 97,000 207,385 229,281 206,648 Total assets ................................ 3 Total debt ................................ 222,042 247,612 116,994 250,133 239,231 210,941 Total liabilities ................................ 387,040 349,802 187,797 401,510 348,226 317,023 Accumulated losses................................ (39,609) (60,817) (20,672) (44,196) (68,537) (91,679) Stockholders’ equity................................ 112,850 94,450 50,966 108,965 87,432 67,137 5,996 13,625 29,130 50,170 19,055 Other financial data: Financial expenses, net................................ 5,739 Depreciation ................................ 3,629 3,664 6,664 13,802 10,919 15,928 21,960 37,834 80,890 86,284 49,432 Interest coverage ratio 5 ................................2.57 1.99 2.78 2.78 1.72 2.59 Total debt to annualized 2.99 EBITDA ................................................................ 2.73 3.09 3.09 2.77 4.27 EBITDA4 ................................................................ 15,291 25 As of and for the three month period ended March 31, 2007 As of and for the year ended December 31, 2006 2006 2006 (thousands of U.S.$)1 (thousands of R$) 2005 2004 (thousands of R$) 2 CREDIT GROUP (Issuer and Guarantors combined ): Income statement data: Net operating revenues................................ 179,521 Advertising ................................ 114,216 168,229 341,957 731,105 673,001 573,462 107,111 221,904 474,431 429,621 356,513 20,591 Classified advertisements ................................ 19,718 40,726 87,072 82,333 71,073 Circulation ................................ 13,237 13,582 24,744 52,903 49,238 44,106 Subscriptions ................................ 34,099 29,093 57,397 122,715 113,696 99,900 4,928 Other................................................................ 5,355 10,654 22,778 24,663 24,851 (7,550) Taxes on revenues................................ (6,630) (13,468) (28,794) (26,550) (22,981) Operating costs................................ (76,164) (65,389) (134,815) (288,235) (277,900) (263,509) Raw materials ................................(17,232) (15,402) (32,732) (69,980) (73,057) (71,321) Programming and sales................................ (23,572) (18,332) (40,044) (85,615) (79,300) (64,760) Personnel ................................ (21,597) (18,098) (37,321) (79,793) (77,966) (76,422) Depreciation................................ (3,852) (3,742) (7,082) (15,142) (11,376) (15,753) Royalties ................................ (3,487) (3,799) (7,646) (16,347) (17,603) (18,799) Other................................................................ (6,424) (6,016) (9,990) (21,358) (18,598) (16,454) 103,357 102,840 207,142 442,870 395,101 309,953 Operating expenses, net................................ (74,764) (65,121) (135,192) (289,040) (278,021) (228,873) Selling................................................................ (38,777) (30,808) (64,334) (137,547) (127,970) (123,818) General and administrative ................................ (26,036) (24,955) Gross profit ................................ (50,889) (108,801) (82,415) (73,441) Financial income................................7,815 9,613 13,101 28,009 17,425 8,492 Financial expenses ................................ (15,007) (16,598) (29,132) (62,285) (74,785) (27,711) (2,413) (4,024) (8,604) (10,617) (12,828) Depreciation................................ Other, net ................................ (2,372) (387) 40 203 188 (341) 433 Operating income ................................ 28,593 37,719 71,950 153,830 117,080 81,080 Equity in earnings (losses) on subsidiaries................................ 185 122 (816) (1,744) 511 296 Reversal (establishment) of provision for losses on investments................................ (16) 452 211 452 (2,704) (6,593) Non-operating income (loss), 228 net................................................................ (208) (1,237) (2,644) (2,137) (27) Income before taxes on income................................ 28,990 38,085 70,109 149,894 112,750 74,756 Social contribution ................................(2,815) (3,834) (6,874) (14,696) (8,899) (7,430) Income tax................................................................ (6,782) (7,981) (10,911) (23,328) (15,898) (9,433) 52,325 111,870 87,953 57,893 Net income ................................ 19,393 26,270 26 As of and for the three month period ended March 31, 2007 As of and for the year ended December 31, 2006 2006 2006 (thousands of U.S.$)1 (thousands of R$) 2005 2004 (thousands of R$) Balance sheet data: Current assets ................................ 392,194 289,833 168,717 159,188 Property, plant and equipment................................ 199,012 425,487 267,739 159,490 75,923 162,323 157,994 158,991 947,640 779,673 448,756 959,441 769,381 620,869 Current liabilities................................256,574 189,128 128,375 274,465 201,898 165,306 324,176 Non-current liabilities ................................ 276,648 157,848 337,479 279,856 219,142 Total assets ................................ 3 Total debt ................................ 363,928 313,836 183,159 391,595 313,827 214,662 Total liabilities ................................ 580,750 465,776 286,223 611,944 481,754 384,448 Retained earnings 36,927 (accumulated losses) ................................ 20,324 7,873 16,832 (6,648) (27,923) Stockholders’ equity................................ 366,890 313,897 162,534 347,497 287,627 236,421 Funded debt7 ................................................................ 278,773 251,984 140,503 300,396 255,501 191,645 64,063 118,599 253,564 229,324 156,144 1.44 1.18 1.18 1.11 1.23 Financial expenses, net................................ 7,192 6,985 16,032 34,276 57,360 19,219 Depreciation ................................ 6,155 11,107 23,746 21,993 28,581 50,859 99,089 211,852 196,433 128,880 Interest coverage ratio ................................ 5.89 3.94 6.18 6.18 3.42 6.71 Total debt to annualized EBITDA ................................................................ 1.79 1.51 1.85 1.85 1.60 1.67 Financial Information about certain terms defined in the covenants of the Existing Notes: 6 Combined operating cash flow ................................ 53,539 Combined annualized debt to 1.15 operating cash flow ratio8 ................................ Other Financial data: 6,224 4 EBITDA ................................................................ 42,009 5 Financial information by sector9: Net operating revenue Television ................................ 69,871 67,117 136,583 292,016 259,109 212,235 Newspaper ................................ 103,163 94,352 191,408 409,231 386,479 337,557 6,760 13,965 29,858 27,413 23,670 168,229 341,957 731,105 673,001 573,462 Radio ................................................................ 6,487 Combined ................................ 179,521 Net income Television ................................ 14,312 17,699 39,527 84,508 62,123 50,635 Newspaper ................................ 3,885 7,018 10,072 21,533 20,295 4,004 Radio ................................................................ 1,196 Combined ................................ 19,393 1,553 2,726 5,829 5,535 3,254 26,270 52,325 111,870 87,953 57,893 27 As of and for the three month period ended March 31, 2007 2006 As of and for the year ended December 31, 2006 2006 (thousands of U.S.$)1 (thousands of R$) 2005 2004 (thousands of R$) TV GAÚCHA: Income Statement Data: Net operating revenues................................44,770 44,108 91,988 196,671 179,217 149,484 Advertising ................................................................ 46,851 45,788 95,510 204,201 186,230 155,515 Taxes on revenues................................ (2,081) (3,522) (7,530) (7,013) (6,031) (24,111) (21,489) (44,737) (95,648) (90,781) (81,833) Programming and sales................................ (14,078) (12,091) (26,827) (57,357) (55,178) (46,101) (5,429) (5,063) Personnel ................................................................ (10,292) (22,004) (21,859) (21,388) Operating costs................................ Depreciation................................ (1,680) (1,645) (3,518) (3,666) (5,042) Royalties ................................................................ (1,018) (1,064) (2,343) (5,009) (5,191) (5,442) Other................................................................ (2,570) (2,443) (3,630) (7,760) (4,887) (3,860) Gross Profit ................................................................ 20,659 22,619 47,251 101,023 88,436 67,651 Operating expenses, net................................ (10,703) (11,314) (19,930) (42,611) (42,214) (33,974) Selling................................................................ (3,431) (2,901) (6,369) (13,617) (13,270) (13,109) General and administrative ................................ (5,318) (6,475) (9,676) (20,687) (16,663) (14,118) 2,375 3,329 4,175 8,927 1,346 485 Financial expenses ................................(3,354) (4,294) Financial income................................ (1,016) (828) (6,219) (13,297) (8,823) (1,072) Depreciation................................ (975) (973) (1,841) (3,937) (4,804) (6,160) Operating profit................................ 9,956 11,305 27,321 58,412 46,222 33,677 122 236 505 511 296 (4) (1,003) (2,144) (588) (375) Income before taxes on income................................ 10,243 11,423 26,554 56,773 46,145 33,598 Social contribution ................................ (1,029) (2,435) (5,206) (4,201) (3,048) Income tax................................................................ (2,319) (1,194) (1,305) (2,791) (5,061) (1,019) Net income ................................................................ 7,002 9,200 22,814 48,776 36,883 29,531 Current assets ................................................................ 158,915 102,179 77,152 164,951 103,054 42,042 Property, plant and equipment................................ 62,631 60,326 28,479 60,889 60,924 59,781 Total assets ................................................................ 307,402 252,658 145,683 311,470 255,512 161,978 54,023 65,935 37,443 Equity in earnings on subsidiaries ................................ 185 Non-operating income (loss), net................................................................ 102 (922) Balance sheet data: Current liabilities................................ 50,510 56,853 25,268 Non-current liabilities ................................83,983 45,474 42,816 91,540 48,446 10,287 Total debt3 ................................................................ 99,658 65,594 47,023 100,536 73,923 2,892 134,493 102,327 68,084 145,563 114,381 47,730 43,199 46,634 16,930 36,197 37,434 37,939 Stockholders’ equity................................ 172,909 150,331 77,599 165,907 141,131 114,248 Total liabilities ................................ Retained earnings ................................ 28 As of and for the three month period ended March 31, 2007 2006 (thousands of R$) As of and for the year ended December 31, 2006 2006 (thousands of U.S.$)1 2005 2004 (thousands of R$) Other financial data: Financial expenses, net................................ 979 965 2,044 4,370 7,477 587 1,801 3,487 7,455 8,470 11,202 14,071 32,852 70,237 62,169 45,466 Interest coverage ratio ................................ 15.76 8.99 16.07 16.07 8.31 77.45 Total debt to annualized EBITDA ................................................................ 1.44 1.02 1.43 1.43 1.19 0.06 Depreciation ................................................................ 1,991 4 EBITDA ................................................................ 12,926 5 29 As of and for the three month period ended March 31, 2007 2006 As of and for the year ended December 31, 2006 2006 (thousands of U.S.$)1 (thousands of R$) 2005 2004 (thousands of R$) TV FLORIANÓPOLIS: Income Statement data: Net operating revenues................................ 25,101 23,009 44,595 95,345 79,892 62,751 Advertising ................................................................ 26,123 23,939 46,312 99,015 83,056 65,284 Taxes on revenues................................(1,022) (930) (1,717) (3,670) (3,164) (2,533) (9,369) (7,317) (12,803) (27,373) (27,419) (21,189) Programming and sales................................ (6,410) (4,452) (8,125) (17,371) (15,643) (11,425) Personnel ................................................................ (1,241) (1,084) Operating costs................................ (2,233) (4,774) (4,585) (4,266) (336) (598) (1,278) (2,123) (816) Royalties ................................................................ (480) (503) (1,050) (2,245) (2,326) (2,307) Other................................................................ (976) (942) (797) (1,705) (2,742) (2,375) Gross profit ................................................................ 15,732 15,692 31,792 67,972 52,473 41,562 Operating expenses, net................................ (4,791) (3,842) (8,609) (18,405) (15,118) (12,896) Selling................................................................ (1,583) (1,339) (2,766) (5,914) (5,047) (5,119) General and administrative ................................ (2,654) (2,363) (5,345) (11,427) (10,042) (7,870) 944 63 286 611 249 475 Financial expenses ................................(1,401) (42) (611) (1,307) (191) (140) (97) (161) (172) (368) (87) (242) 10,941 11,850 23,184 49,567 37,355 28,666 2 27 58 (582) 42 11,852 23,211 49,625 36,773 28,708 (961) Depreciation................................ Financial income................................ Depreciation................................ Operating income ................................ (262) Non-operating income (loss), net ................................ (11) Income before taxes on income................................ 10,930 Social contribution ................................ (2,036) (4,354) (3,472) (2,581) Income tax................................................................ (2,635) (985) (2,392) (4,462) (9,539) (8,061) (5,023) Net income ................................................................ 7,310 8,499 16,713 35,732 25,240 21,104 Current assets ................................................................ 88,189 29,705 Balance sheet data: 39,449 84,343 25,620 18,335 5,831 2,456 5,250 5,836 7,754 Total assets ................................................................ 118,381 63,539 53,859 115,150 59,896 56,812 Property, plant and equipment................................ 4,988 Current liabilities................................ 19,209 7,737 9,428 20,157 12,065 11,569 Non-current liabilities ................................ 35,331 1,504 Total debt3 ................................................................ 42,228 17,990 38,462 2,032 2,157 630 19,142 40,926 673 829 Total liabilities ................................ 54,540 9,241 27,418 58,619 14,097 13,726 Retained earnings ................................ 24,227 25,250 8,015 17,137 16,751 18,030 Stockholders’ equity................................ 63,841 54,298 26,441 56,531 45,799 43,086 30 As of and for the three month period ended March 31, 2007 2006 As of and for the year ended December 31, 2006 (thousands of U.S.$)1 (thousands of R$) 2006 2005 2004 (thousands of R$) Other financial data: Financial expenses (income), net ................................ 457 Depreciation ................................................................ 359 (21) 326 696 (58) (335) 497 770 1,646 2,210 1,058 12,326 24,279 51,909 39,507 29,389 Interest coverage ratio 5 ................................43.73 0.00 74.58 74.58 0.00 0.00 Total debt to annualized EBITDA................................ 0.82 0.01 0.79 0.79 0.02 0.03 EBITDA4 ................................................................ 11,757 31 As of and for the three month period ended March 31, 2007 2006 As of and for the year ended December 31, 2006 2006 (thousands of U.S.$)1 (thousands of R$) 2005 2004 (thousands of R$) RÁDIO GAÚCHA: Income statement data: Net operating revenues................................6,487 6,760 13,965 29,858 27,413 23,670 Advertising ................................................................ 6,733 7,016 14,495 30,991 28,452 24,567 (256) (530) (1,133) (1,039) (897) (2,396) (5,297) (11,326) (9,783) (9,989) Personnel ................................................................ (1,596) (1,511) Taxes on revenues................................ (246) Operating costs................................ (2,468) (2,986) (6,385) (6,714) (7,281) (154) (312) (666) (236) (260) Royalties ................................................................ (179) (187) (376) (803) (832) (828) Other................................................................ (499) (544) (1,624) (3,472) (2,001) (1,620) Depreciation................................ (194) Gross profit ................................................................ 4,019 4,364 8,668 18,532 17,630 13,681 (2,100) (4,976) (10,639) (9,322) (9,393) Selling................................................................ (1,126) (970) (2,008) (4,294) (3,217) (3,324) General and administrative ................................ (1,052) (1,046) (2,848) (6,088) (6,176) (6,024) Operating expenses, net................................ (2,246) Financial income................................ 35 18 37 79 320 95 Financial expenses ................................ (52) (63) (74) (159) (91) (7) Depreciation................................ (51) (39) (83) (177) (158) (133) Operating profit................................ 1,773 2,264 3,692 7,893 8,308 4,288 Non-operating income (loss), net................................................................ 2 - 12 26 (178) 4 Income before taxes on income................................ 1,775 2,264 3,704 7,919 8,130 4,292 Social contribution ................................ (204) (335) (716) (738) (396) Income tax................................................................ (416) (507) (643) (1,374) (1,857) (642) Net income ................................................................ 1,196 1,553 2,726 5,829 5,535 3,254 Current assets ................................................................ 10,214 7,000 5,003 10,696 6,580 5,204 Property, plant and equipment................................ 3,795 3,421 1,699 3,632 2,725 2,239 Total assets ................................................................ 22,046 19,237 10,538 22,531 18,391 17,919 4,324 2,968 6,345 5,029 5,919 95 43 92 97 50 - - - - - 4,419 3,011 6,437 5,126 5,969 (163) Balance sheet data: Current liabilities................................ 4,666 Non-current liabilities ................................ 90 3 Total debt ................................................................ Total liabilities ................................ 4,756 Retained earnings ................................ 8,890 9,257 3,599 7,694 7,704 7,787 Stockholders’ equity................................ 17,290 14,818 7,528 16,094 13,265 11,950 Financial expenses (income), net ................................ 17 45 37 80 (229) (88) Depreciation ................................................................ 245 193 394 843 394 393 Other financial data 32 As of and for the three month period ended March 31, 2007 2006 2006 2006 (thousands of U.S.$)1 (thousands of R$) EBITDA4 ................................................................ 2,035 As of and for the year ended December 31, 2005 2004 (thousands of R$) 2,502 4,123 8,816 8,473 4,593 0 110.20 110.20 0 0 0.00 0.00 0.00 0.00 0.00 5 Interest coverage ratio ................................ 160.56 Total debt to annualized 0.00 EBITDA ................................................................ Reconciliation for the Credit Group between net income and EBITDA For the three month period ended March 31 2007 2006 For the year ended December 31, 2006 (thousands of R$) 2005 2004 (thousands of R$) Net income................................................................................................ 19,393 26,270 111,870 87,953 57,893 (6,782) (7,981) (23,328) (15,898) (9,433) (-) Social contribution ................................................................ (2,815) (3,834) (14,696) (8,899) (7,430) 228 (208) (2,644) (2,137) (27) (16) 452 452 (2,704) (6,593) (-) Income tax ................................................................ (-) Non-operating income (loss), net ................................ (-) Reversal (establishment) for provision for losses in investments................................................................ 185 122 (1,744) 511 296 (-) Financial expenses ................................................................(15,007) (16,598) (62,285) (74,785) (27,711) 7,815 9,613 28,009 17,425 8,492 (6,224) (6,155) (23,746) (21,993) (28,581) (=) Combined EBITDA ................................................................42,009 50,859 211,852 196,433 128,880 (-) Equity in earnings (loss) on subisidiaries ................................ (-) Financial income................................................................ (-) Depreciation................................................................ Reconciliation for the Credit Group between net income and Combined Operating Cash Flow For the year ended December 31, For the three month period ended March 31 2007 2006 2006 (thousands of R$) 2005 2004 (thousands of R$) Net income................................................................................................ 19,393 26,270 111,870 87,953 (6,782) (7,981) (23,328) (15,898) (9,433) (-) Social contribution ................................................................ (2,815) (3,834) (14,696) (8,899) (7,430) (16) 452 452 (2,704) (6,593) 185 122 (1,744) 511 296 (-) Financial expenses ................................................................(15,007) (16,598) (62,285) (74,785) (27,711) (-) Depreciation................................................................ (6,224) (6,155) (23,746) (21,993) (28,581) (-) Royalties ................................................................ (3,487) (3,799) (16,347) (17,603) (18,799) (=) Combined operating cash flow................................ 53,539 64,063 253,564 229,324 156,144 (-) Income tax ................................................................ 57,893 (-) Reversal (establishment) of provision for losses in investments................................................................ (-) Equity in earnings (losses) on subsidiaries................................ 33 (1) (2) (3) (4) (5) (6) (7) (8) (9) Translated for the convenience of the reader only at the rate of R$2.1380 per U.S.$1.00, the commercial rate in effect at December 31, 2006, except ratios. These translations should not be construed as a representation that the real amounts actually represent such U.S. dollar amounts could be or could have been converted into U.S. dollars at the rate indicated on such date or at any other rate. The Issuer and Guarantors are not required to produce consolidated financial statements, but for purposes of this Offering Memorandum have prepared combined financial statements. Total debt has been defined as the sum of the outstanding loans under current and non-current liabilities and does not include balances due to related parties. EBITDA has been computed as earnings before income tax, social contribution, non-operating income (loss), reversal (establishment) of provision for losses on investments, equity in earnings (losses) on subsidiaries, financial income, financial expense and depreciation and amortization. EBITDA is not defined under Brazilian GAAP, does not represent cash flows for the years or periods presented and should not be considered an alternative to net income as an indicator of performance or an alternative to cash flows as a source of liquidity. The definition of EBITDA used may not be comparable with the definition of EBITDA used by other companies. Although EBITDA as defined above does not provide a Brazilian GAAP measure of operating cash flow, management uses it to measure financial performance. EBITDA for the combined Issuer and Guarantors have been calculated as presented in the “Reconciliation for the Credit Group between net income and EBITDA”. Interest coverage ratio is Annualized EBITDA divided by the financial expenses (income), net. As defined in the “Description of the Notes” section of the Offering Memorandum. Combined Operating Cash Flow for the combined Issuer and Guarantors have been calculated as presented in the “Reconciliation for the Credit Group between net income and Combined Operating Cash Flow”. Under the terms of the Notes, RBS-Zero Hora, TV Gaúcha, TV Florianópolis and Rádio Gaúcha (combined) (the “Credit Group Companies”, as defined in the “Description of the Notes” section of the Offering Memorandum), shall not permit any Subsidiary (also defined in the “Description of the Notes”) of any Credit Group Company to, incur any funded debt (funded debt is non-current loans) or issue any Disqualified Stock (both defined in the “Description of the Notes”) unless the Combined annualized debt to operating cash flow ratio for the four full fiscal quarters next preceding the incurrence of such Funded Debt for which financial statements are available, determined on a pro forma basis as if any such Funded Debt had been Incurred or any such Disqualified Stock had been issued and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less than 4.0 to 1, subject to certain exceptions. The combined annualized debt to operating cash flow ratio is calculated by dividing (i) the Funded Debt of the Credit Group Companies (consolidated) by (ii) the Combined Operating Cash Flow (as defined in the “Description of the Notes”) of the Credit Group Companies (consolidated). In calculating “Funded Debt” for the purposes of this table, the RBS Group has not included obligations in respect of interest or guarantees of interest payments, but has included principal amounts due under the 11% Guaranteed Notes due 2010, as provided in the covenants for the 11% Guaranteed Notes due 2010. Net operating revenue and net income (loss) by sector are presented after eliminating the effects of inter-company transactions that have been eliminated in preparing the combined financial statements of the Issuer and the Guarantors. 34 EXCHANGE RATES Prior to March 14, 2005, there were two official foreign exchange markets in Brazil: • the commercial rate exchange market; and • the floating rate exchange market. Most trade and financial foreign exchange transactions were carried out on the commercial rate exchange market. The floating rate exchange market generally applied to transactions to which the commercial market rate did not apply. In March 2005, the National Monetary Council enacted Resolution No. 3,265, as well as additional regulations, that consolidated the two foreign exchange markets into a single foreign exchange market in order to make foreign exchange transactions simpler and more efficient. As a result, all foreign exchange transactions in Brazil are carried out in this single foreign exchange market through authorized financial institutions. Foreign exchange rates continue to be freely negotiated, but may be influenced from time to time by Central Bank intervention. From March 1995 through January 1999, the Central Bank allowed the gradual devaluation of the real against the U.S. dollar. In January 1999, the Central Bank allowed the real/U.S. dollar exchange rate to float freely. Since then, the real/U.S. dollar exchange rate has been established mainly by the Brazilian interbank market and has fluctuated considerably. In the past, the Central Bank has intervened occasionally to control unstable movements in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market through a currency band system or otherwise, or that the exchange market will not be volatile as a result of political or economic instability or other factors. In light of these factors, we also cannot predict whether the real will depreciate or appreciate in value in relation to the U.S. dollar in the future. In addition, exchange rate fluctuations may also affect our financial condition and results of operations. For more information on these risks, see “Risk Factors — Risks Relating to Brazil” in this Offering Memorandum. The following tables set forth the exchange rate, expressed in reais per U.S. dollar (R$/U.S.$) for the periods indicated, as reported by the Central Bank. Periodend For the year ended December 31, 2002............................................................................................... 2003............................................................................................... 2004............................................................................................... 2005............................................................................................... 2006............................................................................................... 3.5333 2.8892 2.6544 2.3407 2.1380 Average for Period1 Low (reais per U.S. dollar) 2.9309 3.0715 2.9257 2.4341 2.1771 __________________ (1) The average of the offered rates for each year, using the PTAX closing quotations of each day. Source: Central Bank 35 2.2709 2.8219 2.6544 2.1633 2.0586 High 3.9552 3.6623 3.2051 2.7621 2.3711 The following table sets forth the average of the offered rates of each period, using the PTAX Closing Quotations of each day. Average for Period-end Period1 (reais per U.S. dollar) Month January 2007 ................................................................................ February 2007 .............................................................................. March 2007 .................................................................................. April 2007 .................................................................................... May 2007 ..................................................................................... 2.1247 2.1182 2.0504 2.0339 1.9289 2.1385 2.0963 2.0887 2.0320 1.9839 __________________ (1) The average of the offered rates of each period, using the PTAX closing quotations of each day. Source: Central Bank 36 USE OF PROCEEDS The Issuer intends to use the net proceeds of the issue of the Notes, which is expected to be approximately R$296 million after payment of customary underwriting, accounting, legal and other fees related to the issuance, to repay existing indebtedness, including the U.S.$56 million 11% Guaranteed Notes due 2010 issued in 2004 (the “Existing Notes”), and for general corporate purposes. Concurrent with this Offering, the Issuer is making a tender offer to purchase for cash all of the outstanding principal amount of the Existing Notes and a consent solicitation to amend the related indenture to eliminate the requirement to deliver financial statements reported under the Constant Currency Inflation adjusted (or correçâo monetária integral) method. 37 CAPITALIZATION The Issuer At March 31, 2007, the Issuer’s capital was R$102.4 million, represented by 98,576,642 nominal shares with no par value, of which 69,003,649 were common shares and 29,572,993 were preferred shares, all of which have been authorized, issued and fully paid. Each common share is entitled to one vote in the Issuer’s General Assembly. The preferred shares do not have voting rights, but have priority in the repayment of capital, without premium, according to the ratio of their participation in the capital stock, in case of liquidation of the Issuer. For further details, see Note 13(a) to the Issuer Financial Statements. The following table sets forth the capitalization (defined as loans (non-current), not including balances due to related parties, plus total stockholders’ equity) of the Issuer at March 31, 2007 derived from financial statements prepared in accordance with Brazilian GAAP and as adjusted to give effect to the Offering. There has been no material change in the capitalization of the Issuer and the Guarantors on a combined basis since March 31, 2007. (unaudited) As of March 31, 20071 As Adjusted1 Actual (thousands of R$) (thousands of U.S.$)2 (thousands of R$) (thousands of U.S.$) Loans (non-current) ................................ 168,637 102,445 Capital3................................................................ 82,246 49,963 468,637 102,445 228,559 49,963 Capital reserves4................................ 29,041 14,164 29,041 14,164 Revaluation reserve5 ................................ 20,973 10,229 20,973 10,229 Accumulated losses................................ (39,609) (19,318) (39,609) (19,318) 55,038 112,850 55,038 137,284 581,487 283,597 112,850 Total stockholders’ equity................................ Total capitalization................................ 281,487 (1) (2) Adjusted to show the effect of the Offering. No adjustment has been made to effect the debt tender offer being made by the Issuer concurrent with this offering of Notes. Translated for convenience of the reader only at the rate of R$2.0504 per U.S.$1.00, the Commercial Rate in effect at March 31, 2007. These translations should not be construed as a representation that the real amounts actually represent such U.S. dollar amounts could be or could have been converted into U.S. dollars at the rate indicated on such date or at any other rate. (3) Capital consists of capital in respect of shares of common and preferred stock, all of which have been authorized, issued and fully paid. This amount has been monetarily corrected following the constant currency methodology for the effects of inflation through September 30, 2001. See “Presentation of Financial Information”. (4) Capital Reserves consist of a share premium reserve in the amount of R$28.7 million and a fiscal incentives reserve in the amount of R$357,000. (5) Certain items of property and equipment, including printing presses and accessories are stated at its revalued cost, based on appraisals carried out by independent appraisers at least every four years. Deferred tax effects on the revaluation are recorded as non-current liabilities. Source: The Issuer’s interim Financial Statements at March 31, 2007. 38 The Credit Group The Issuer’s capital stock is described above. See “— The Issuer”. At March 31, 2007, TV Gaúcha’s capital was R$38.7 million, represented by 22,755,000 nominal common shares with no par value, all of which have been authorized, issued and fully paid. Each common share is entitled to one vote in TV Gaúcha’s General Assembly. The preferred shares (if and when issued) will not have voting rights, but will have priority in the repayment of capital, without premium, according to the ratio of their participation in the capital stock, in case of liquidation of TV Gaúcha. At March 31, 2007, TV Florianópolis’s capital was R$3.4 million, represented by 2,002,640 nominal common shares with no par value, all of which have been authorized, issued and fully paid. Each common share is entitled to one vote in TV Florianópolis’s General Assembly. At March 31, 2007, Rádio Gaúcha’s capital was R$836,000, represented by 492,000 nominal common shares with no par value, all of which have been authorized, issued and fully paid. Each common share is entitled to one vote in Rádio Gaúcha’s General Assembly. The preferred shares (if and when issued) will not have voting rights, but will have priority in the repayment of capital, without premium, according to the ratio of their participation in the capital stock, in case of liquidation of Rádio Gaúcha. The following table sets forth the capitalization (defined as loans (non-current), not including balances due to related parties, plus total stockholders’ equity) of the Issuer and the Guarantors on a combined basis derived from financial statements prepared in accordance with Brazilian GAAP at March 31, 2007. There has been no material change in the capitalization of the Issuer and the Guarantors on a combined basis since March 31, 2007. (unaudited) As at March 31, 20071 As Adjusted1 Actual (thousands of R$) Loans (non-current) ................................ 278,773 Capital3................................................................ 145,422 34,130 Capital Reserves4 ................................ 5 Revaluation Reserve ................................ 20,973 Revenue Reserves6 ................................ 129,438 Retained Earnings ................................ 36,927 Total Stockholders’ Equity ................................ 366,890 Total Capitalization................................ 645,663 (1) (2) (3) (4) (5) (thousands of U.S.$)2 (thousands of R$) (thousands of U.S.$)2 135,960 70,924 16,646 10,228 63,128 18,010 178,936 314,896 578,773 145,422 34,130 20,973 129,438 36,927 366,890 945,663 282,273 70,924 16,646 10,228 63,128 18,010 178,936 461,209 Adjusted to show the effect of the Offering. No adjustment has been made to effect the debt tender offer being made by the Issuer concurrent with this offering of Notes. Translated at the rate of R$2.0504 per U.S.$1.00, the Commercial Rate in effect at March 31, 2007. These translations should not be construed as a representation that the real amounts actually represent such U.S. dollar amounts or could have been converted into U.S. dollars at the rate indicated on such date. Capital consists of capital in respect of shares of common and preferred stock (for the Issuer) or of shares of common stock (for the Guarantors), all of which have been authorized, issued and fully paid. For further details regarding the Issuer’s and the Guarantors’ capital stock on a combined basis, please refer to Note 15 to the Credit Group Financial Statements. This amount has been monetarily corrected following the constant currency methodology for the effects of inflation through September 30, 2001. Capital Reserves consist of a share premium over book value in the amount of R$28.7 million and fiscal incentives reserves in the amount of R$5.4 million. Printing presses and accessories are stated at revalued cost, based on appraisals carried out by independent experts at least every four years. Deferred tax effects on the revaluation increment are recorded as non-current liabilities. 39 As required by Brazilian law, 5% of annual net income shall be deposited in an account to constitute a legal reserve. Such legal reserve shall not exceed 20% of the company’s capital, and can only be used by the company to offset losses or to increase the company’s capital. Source: The Credit Group’s interim Special-Purpose Combined Financial Statements at March 31, 2007. (6) 40 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction The information in this section should be read together with the financial statements included elsewhere in this Offering Memorandum. Such financial statements have been prepared in accordance with Brazilian GAAP, which differ in certain significant respects from U.S. GAAP and IFRS. For a description of certain differences between Brazilian GAAP, U.S. GAAP, and IFRS, see “Summary of Certain Significant Differences between Accounting Principles Generally Accepted in Brazil, U.S. GAAP and IFRS”. As described below, the RBS Group’s financial performance and results of operations are materially affected by: • the performance of the Brazilian economy, changes in rates of inflation, interest rates, foreign exchange rates and advertising demand; • the application of the RBS Group’s critical accounting policies; and • the implementation of the RBS Group’s strategy to pursue world class benchmarks in profitability and reduce and extend the maturity profile of its existing indebtedness, particularly foreign currency-denominated debt. During the period 2004 through 2006, and the first three-months of 2007, the RBS Group has operated in a favorable Brazilian macroeconomic environment. During this period, Brazil has experienced significant trade surpluses, increased foreign reserves, moderate economic growth, decreased rates of inflation, and, since the end of 2005, decreasing domestic interest rates. At the same time, the Brazilian real has strengthened against the U.S. dollar. These factors have impacted the Credit Group’s results of operations and financial condition. Brazilian Economic Environment Balance of trade. In 2006, Brazil registered in an accumulated trade surplus of approximately U.S.$46.1 billion, versus an accumulated trade surplus of approximately U.S.$44.7 billion in 2005. Exports in 2006 totaled U.S.$137.5 billion, a 16.2% increase over 2005, while imports totaled U.S.$91.4 billion, a 24.2% increase from U.S.$73.6 billion recorded in 2005. The trade balance in 2006 resulted in an accumulated current account surplus of approximately U.S.$13.5 billion, compared to an accumulated surplus of approximately U.S.$14.0 billion in 2005. The accumulated balance of payments surplus was approximately U.S.$30.6 billionin 2006 compared to an accumulated surplus of approximately U.S.$4.3 billion in 2005. During the first three-months of 2007, Brazil registered a trade surplus of approximately U.S.$8.7 billion, versus a trade surplus of approximately U.S.$9.3 billion for the corresponding period in 2006. Exports in the first three-months of 2007 totaled U.S.$33.9 billion, a 15.4% increase over the corresponding period of 2006, while imports totaled U.S.$25.2 billion, a 25.4% increase from the U.S.$20.1 billion recorded for the corresponding period in 2006. International reserves. Brazil’s international reserves (which include gold and foreign exchange holdings) totaled U.S.$49.3 billion on December 31, 2003, U.S.$52.9 billion on December 31, 2004, U.S.$53.8 billion on December 30, 2005 and U.S.$85.8 billion on December 29, 2006. On May 2, 2007, Brazil’s international reserves totaled U.S.$122.4 billion. Gross domestic product. On March 21, 2007, the Fundação Instituto Brasileiro de Geografia e Estatistica (“IBGE”), concluding a two-year effort to improve Brazil’s National Accounts System, revised its methodology for calculating gross domestic product (“GDP”) and restated historic GDP data since 1995. Under the new methodology, a broader range of sources of information is used to provide a more accurate measure of Brazil’s GDP. Sources such as IBGE’s annual surveys of economic segments, tax receipts 41 information and household surveys are utilized to calculate GDP. As a result, activities that were previously estimated under the prior methodology, such as government consumption and financial intermediation, are now measured. In addition, the relative weights of economic activities were adjusted to give greater importance to services such as telecommunications and transportation. As restated, Brazil’s real GDP growth for the years 2000 through 2005 was revised upward. As a result, Brazil registered an average real GDP growth for the six-year period from 2000 to 20005 of 3.0%, compared to 2.6% average real GDP growth for the same period using the prior methodology. The new methodology therefore suggests a different pace of economic growth than previously believed, and in particular growth after 2002 was higher using the new methodology. Using the prior methodology, Brazil’s real GDP growth was 4.9% in 2004 and 2.3% in 2005. Using the new methodology, Brazil’s real GDP growth was 5.7% in 2004 and 2.9% in 2005. Using the prior methodology, Brazil’s real GDP grew 2.9% in 2006 relative to the previous year, while using the new methodology, Brazil’s real GDP grew 3.7% in 2006 relative to the previous year. Inflation. In terms of inflation, the broad consumer rate index, or IPCA, rose 9.3% in 2003, 7.6% in 2004, 5.7% in 2005, 3.1% in 2006 and 3.0% in the twelve-month period ended April 30, 2007. The inflation rate (as measured by IGP-DI) rose 7.7% in 2003, 12.1% in 2004, 1.2% in 2005, 3.8% in 2006 and 4.6% in the twelve-month period ended April 30, 2007. Exchange rates. The Brazilian real-U.S. dollar exchange rate (sell side), as published by the Central Bank, was R$2.8892 to U.S.$1.00 on December 31, 2003, R$2.6544 to U.S.$1.00 on December 31, 2004, R$2.3407 to U.S.$1.00 on December 30, 2005, R$2.1380 to U.S.$1.00 on December 29, 2006 and R$1.9303 to U.S.$1.00 on June 14, 2007. These rates reflect the overall appreciation of the real against the U.S. dollar during the period under review. Unemployment rates. After declining from 13.1% in April 2004 to 9.6% in December 2004, the unemployment rate in Brazil’s six largest metropolotan areas rose to 10.8% in April 2005 before falling to 9.4% in June 2005. The unemployment rate remained relatively constant through November 2005 before declining to 8.3% in December 2005. The unemployment rate rose to 10.7% in July 2006 before declining to 8.4% in December 2006. In 2007, the unemployment rate rose to 9.3% in January and further to 10.1% in March. Interest rates. Interests rates have generally declined during the periods under review. Between February 19, 2003 and April 14, 2004, the Central Bank reduced the Over/Selic (reference for all other Brazilian interest rates) rate target from 26.5% to 16.0%. In an effort to manage inflationary expectations, the Central Bank increased its Over/Selic rate target from 16.0% to 19.75% between September 15, 2004 and May 18, 2005. After leaving the Over/Selic rate target unchanged on June 15, 2005, July 20, 2005 and August 17, 2005, the Central Bank reduced its Over/Selic rate target to 19.50% on September 14, 2005, 19.0% on October 19, 2005, 18.5% on November 23, 2005, 18.0% on December 14, 2005, 17.25% on January 18, 2006, 16.5% on March 8, 2006, 15.75% on April 19, 2006, 15.25% on May 31, 2006, 14.75% on July 19, 2006, 14.25% on August 31, 2006, 13.75% on October 18, 2006, 13.25% on November 29, 2006, 13.00% on January 24, 2007, 12.75% on March 7, 2007 and 12.50% on April 18, 2007. Growth acceleration plan 2007-2010. On January 22, 2007, the Government unveiled the Growth Acceleration Plan 2007-2010 or “PAC”, a set of measures seeking to (i) create incentives for private investment; (ii) increase public investment in infrastructure; and (iii) remove bureaucratic, administrative, normative, legal and legislative obstacles to growth. The measures are grouped under five broad headings: infrastructure investment, stimulus to credit and financing, improvement to the investment climate, tax exemptions and improvements in the tax system, and long-term fiscal measures. Critical accounting policies Critical accounting policies are those that are important both to the portrayal of the financial condition and results of operations and that also require management’s most difficult, subjective or complex judgments. 42 Complex judgment is required to conclude as to the appropriate accounting policy to be followed on complex transactions or on transactions where there is no specific definitive guidance on the accounting standards. Complex judgment is also often the result of the need to make estimates about the effect of matters that are inherently uncertain. As the number of variables and assumptions affecting the possible future resolution of uncertainties increases, those judgments become even more subjective and complex. The application of the constant currency method and the combination of financial statements do not require significant or complex judgement but are relevant to the presentation of the Issuer’s and Guarantors’ financial position and results of operations in the Financial Statements. To provide an understanding about how management forms its judgments about the most appropriate accounting policy to be followed the following critical accounting policies are presented: (i) Application of the constant currency method; (ii) Combination of financial statements; (iii) Revaluation, impairment and depreciation of permanent assets; (iv) Recognition of deferred taxes; (v) Accounting for contingent liabilities, and (vi) Accounting for losses on investments. Application of the constant currency method. The accounting records of the Issuer and the Guarantors are maintained in accordance with Brazilian corporate and tax legislation. Two methods of inflation accounting existed in Brazil: (a) the “Corporate Law method” which was required to be applied for purposes of financial statements presented in order to comply with tax and statutory requirements, and (b) the “Constant Currency method” formerly required by the Comissão de Valores Mobiliários (the Brazilian Securities Commission or “CVM”). Financial statements presented under the constant currency methodology were prepared as a means of depicting more clearly the impacts of inflation on a company’s financial information. The financial statements presented for the Issuer and on a combined basis for the Issuer and the Guarantors have been prepared following the Constant Currency Method since such criteria is required in accordance with the terms of the Indenture of the Existing Notes. The Financial Statements included in this Offering Memorandum are those prepared following the Constant Currency Method. Under the Constant Currency Methodology, all financial statement balances, including comparative balances from prior years, are presented in reais of constant purchasing power using as the basis for restatement the official index Unidade Fiscal de Referência (the Fiscal Unit of Reference or “UFIR”) up to December 31, 1995 and the variation of the Índice Geral de Preços - Mercado (the General Market Price Index or “IGP-M”) as from that date. The reported amounts of non-monetary assets, such as permanent assets, and shareholders accounts include restatement as from its respective date of origin. As a result of lower levels of inflation, effective January 1, 1996 inflation accounting was abolished under the “Corporate Law Method” in financial statements presented for tax and statutory purposes. Companies presenting their financial statements to the CVM were allowed to present financial statements adjusted for inflation prepared following the “Constant Currency Method” as additional information on a voluntary basis. In 2001, Resolution 900 of the Brazilian Federal Accountancy Council (CFC) established that the indexation of the accounts under the “Constant Currency Method” should be suspended during periods of low inflation, i.e., when the cumulative inflation rate in a 36-month period is less than 100%. The Issuer and the Guarantors have therefore suspended the indexation of their accounts under the Constant Currency method in their financial statements as from September 30, 2001, and subsequent transactions are recorded at their historical amounts without indexation. See Note 3 to the Credit Group Financial Statements. 43 Combination of financial statements. Brazilian GAAP does not address the combination of financial statements. The Credit Group Financial Statements presented in this Offering Memorandum are prepared on a combined basis, and have been prepared for the purpose of presenting the combined financial position and related combined results of operations, changes in stockholders’ equity and changes in financial position of the Issuer and the Guarantors in the preparation of the Combined Financial Statements, all assets, liabilities, income and expenses of the Issuer and the Guarantors have been added together. As there are no intercompany shareholdings, all capital and reserve accounts have been added together, although all Account balances, revenues and expenses from transactions among the Issuer and the Guarantors, or among the Guarantors have been eliminated on combination. See Note 2 to the Credit Group Financial Statements. Revaluation, impairment and depreciation of permanent assets. Property, plant and equipment are stated at cost, plus revaluation for certain items including the majority of land, buildings, printing presses and fittings of Zero Hora and TV Gaúcha, less accumulated depreciation. Depreciation is calculated on the straight-line method in accordance with the estimated useful lives of assets. Useful lives of the assets that have been revalued were reviewed upon its revaluation and reestimated with such reviewed useful lives. The Issuer and the Guarantors assess periodically if operating income is sufficient to absorb the depreciation or amortization of long-lived assets in order to assess potential asset impairment. Recognition of deferred taxes. The Issuer and the Guarantors recognize deferred tax assets and liabilities on temporary differences between the financial statements carrying amounts and the tax basis of assets and liabilities and deferred tax assets for tax loss carryforwards. The ability to realize deferred tax assets depends on the Issuer and on each of the Guarantors presenting taxable income in future years. The decision to recognize deferred tax assets is based on expected levels of future taxable income. Actual future results may differ from current estimates and affect the amount of deferred tax assets actually realized. If in future periods management’s assessment indicates that not all the amount of deferred tax assets is realizable, the Issuer and/or the Guarantors, as the case may be, will need to reduce the amount of deferred tax assets currently recorded. Accounting for contingent liabilities. The Issuer and the Guarantors are party to certain legal proceedings in Brazil arising in the normal course of business (tax, civil and labor). Provisions have been made for labor, civil and tax contingencies, estimated as probable, provided they can be reasonably estimated. In connection with some of these proceedings, the Issuer and the Guarantors made deposits (included in an account called judicial deposits and fiscal incentives) which will only be released to upon a favorable court ruling. The estimates have been made based on currently available information and on the advice of legal counsel and are the result of an analysis of potential results. Changes in circumstances may affect the amount of estimates. RBS Group financial reprofiling In 2003, in light of the Brazilian economic environment and trends in the Brazilian media business, the RBS Group reviewed its strategic objectives with the goal of trying to position the RBS Group as one of the leading media companies in Brazil, operating at world class standards. To reach that goal, management decided to concentrate on the media business or businesses directly related to the media industry, maximizing the value generated by its mature businesses – television, radio and newspapers – and divesting itself of businesses that no longer fit that profile. To that end, the RBS Group undertook a financial reprofiling exercise, renegotiating with Brazilian creditors Bradesco, Unibanco, Real/ABN AMRO and Banrisul to extend the maturities of existing indebtedness to 2006, agreeing to limit cash distributions to shareholders during 2004 and 2005 and pledging certain flows of receivables. At the same time, RBS-Zero Hora and RBS Par entered into further swap arrangements to hedge residual exposure on foreign currencydenominated indebtedness to protect against devaluation of the real. On August 2, 2004, holders of the 11% Guaranteed Notes due 2007 issued by RBS Participações S.A. (the “RBS Par Notes”) exchanged U.S.$66,845,000 of such notes (of $125,000,000 outstanding) for new notes issued by the Issuer and jointly and severally guaranteed by the Guarantors. Pursuant to the terms of the exchange offer, for each U.S.$1,000 principal amount of the RBS Par Notes notes exchanged, the noteholder received U.S.$150 in cash and U.S.$850 in new 11% RBS-Zero Hora notes with a maturity date 44 of April 1, 2010. The new notes are jointly and severally guaranteed by the Guarantors, and are the subject of the tender offer being made by the Issuer concurrent with this offer. See “Use of Proceeds”. 45 The Issuer Results of operations for the years ended December 31, 2006 and 2005 Operating revenues Advertising. Advertising revenue in 2006 was R$140.2 million, representing a 6.3% increase over advertising revenue of R$131.9 million in 2005. As a percentage of operating revenues, advertising revenue was 34.3% in 2006 and 34.1% in 2005. Advertising revenue of RBS-Zero Hora consists of sales of non-classified newspaper advertising by both external advertising agencies and RBS-Zero Hora’s own sales force. Classified advertisements are not included in this item, but are discussed separately below. The increase in advertising revenue in 2006 versus 2005 is principally the result of an increase in pricing of newspaper advertising, as well as the addition of revenue from “hagah” and Hora de Santa Catarina, which were launched in August, 2006. Classified advertisements. Revenue from classified advertisements relating to RBS-Zero Hora in 2006 was R$87.1 million, representing a 5.8% increase over classified advertisements revenue of R$82.3 million in 2005. As a percentage of operating revenues, classified advertisements revenue was 21.3% in both 2006 and 2005. Classified advertisements revenue consists of sales of classified newspaper advertisements on behalf of RBS-Zero Hora by both external advertising agencies/independent agents and RBS-Zero Hora’s own sales force, primarily in RBS-Zero Hora’s principal newspaper, Zero Hora. Payment for classified advertisements is generally made in cash prior to the date the advertisement is run. The increase in classified advertisements revenue between the two years is principally accounted for by increased prices charged for classified advertisements. Circulation. Circulation revenue consists of newsstand and street vendor sales of newspapers. Circulation revenue in 2006 was R$52.9 million, representing a 7.5% increase over circulation revenue of R$49.2 million in 2005. As a percentage of operating revenues, circulation revenue was 12.9% in 2006 and 12.7% in 2005. The increase in circulation revenue between the two years is principally accounted for by increased cover prices, plus new income through sales of Hora de Santa Catarina since its launch in August, 2006. Subscriptions. Subscriptions revenue consists primarily of subscriptions of RBS-Zero Hora’s newspapers for periods of one, six or twelve months. Payment for subscriptions is generally by monthly installments, due after the delivery of the editions of the paper for the corresponding month. For subscriptions of six or twelve months, however, depending on the arrangement with the subscriber, payment can be completed before the end of the subscription period. Subscriptions revenue in 2006 was R$122.7 million, representing a 7.9% increase over subscriptions revenue of R$113.7 million in 2005. As a percentage of operating revenues, subscriptions revenue was 30.0% in 2006 and 29.4% in 2005. The increase in subscriptions revenue between the two years resulted primarily from higher prices charged per issue, as well as an average increase in total number of subscriptions. Other. Other operating revenues consist principally of revenue from printing services for third parties, distribution of printed material for third parties by ViaLOG (as discussed in “Business — The Issuer”) and special events. Other operating revenues in 2006 were R$22.8 million, representing a 7.7% decrease from other operating revenues of R$24.7 million in 2005. As a percentage of operating revenues, other operating revenues were 5.6% in 2006 and 6.4% in 2005. The decrease in other operating revenues between the two periods is principally accounted for by decreased income from printing services for third parties. Taxes on revenues. Taxes on revenues were R$16.5 million in 2006, a 7.8% increase over taxes on revenues of R$15.3 million in 2005. As a percentage of operating revenues, taxes on revenues equaled 4.0% in each of 2006 and 2005. 46 Total operating revenues. As a result of the foregoing, the Issuer’s total operating revenues increased 5.9% to R$409.2 million in 2006, from total operating revenues of R$386.5 million in 2005. Operating costs Raw materials. Raw materials costs in 2006 were R$70.0 million, representing a 4.2% decrease from raw materials costs of R$73.1 million in 2005. As a percentage of operating revenues, raw materials costs were 17.1% in 2006 and 18.9% in 2005. This item consists primarily of cost of newsprint and, to a lesser extent, the cost of ink and plates. The decrease in raw materials costs was principally due to the continued appreciation of the real against the U.S. dollar, as newsprint prices are linked to the U.S. dollar. The Issuer also benefitted from the appreciation of the real against the U.S. dollar, as prices for newsprint are generally linked to the U.S. dollar. Personnel. Operating personnel costs in 2006 were R$46.6 million, representing a 4.0% increase over operating personnel costs of R$44.8 million in 2005. As a percentage of operating revenues, operating personnel costs were 11.4% in 2006 and 11.6% in 2005. In preparing its financial statements, the RBS Group divides its personnel into (i) operating personnel, which consists of reporters, anchor persons, camera operators and other news production personnel, (ii) sales personnel and (iii) administrative personnel, which consists of finance, accounting and other administrative personnel. Operating personnel costs consist of salary, supplemental compensation and vacation payments made to operating personnel only. Costs related to sales personnel are recorded as selling expenses and costs related to administrative personnel as general and administrative expenses, both discussed below. The increase in operating personnel costs is principally attributable to increased employee salaries reflecting the terms of the existing collective bargaining agreement. Promotional events. Promotional events costs were R$9.6 million in 2006, representing a 21.5% increase over costs of R$7.9 million in 2005. As a percentage of operating revenues, promotional events costs were 2.3% in 2006 versus 2.0% in 2005. The increase in promotional event costs is principally due to costs associated with the launch of Zero Hora’s home supplement (Casa & Cia). Depreciation and amortization. Depreciation and amortization was R$9.7 million in 2006, representing a 79.6% increase over depreciation and amortization of R$5.4 million in 2005. As a percentage of operating revenues, depreciation and amortization was 2.4% in 2006 versus 1.4% in 2005. The increase in depreciation is principally due to the lower depreciation expense in 2005 as described in “Results of operations for the years ended December 31, 2005 and 2004.” Royalties. Royalties costs in 2006 were R$8.3 million, representing a 10.8% decrease over royalties costs of R$9.3 million in 2005. As a percentage of operating revenues, royalties costs were 2.0% in 2006 and 2.4% in 2005. Royalties costs decreased in 2006 as a result of RBS-Zero Hora’s prepayment, on September 24, 2004, of royalties costs to be incurred from January 1, 2005 through December 31, 2014. The prepayment was calculated as the net present value of the royalties on the projected net operating revenues of the Issuer for the period. Royalties equaling 3.5% of net operating revenues are paid to RBS Par, which since 1996 owns the rights to the RBS trademarks. Net operating revenues produced by the newspapers O Pioneiro and Jornal de Santa Catarina, however, are not included in the calculation of royalties owed by RBS-Zero Hora to RBS Par because the trademarks used by such newspapers have not yet been transferred to RBS Par. It is intended that O Pioneiro’s and Hora de Santa Catarina’s trademarks will be transferred to RBS Par or licensed to RBS-Zero Hora in the near future. In addition, in September 2004 the Issuer pre-paid royalties to be incurred from January 2005 through September 2014 and such pre-payment was computed based on estimated projected revenues discounted to present value. Under the terms of the pre-payment the amounts pre-paid are final and not subject to recomputation based on actual revenue. The amount pre-paid has been recognized as a pre-paid asset and is being recognized as expense over the period through September 2014. As a result, if actual revenue for any given period is different than the one estimated to make the pre-payment, the ratio of royalty expenses to net operating revenue will be different than 3.5%. 47 Other. Other operating costs in 2006 were R$9.8 million, representing a 2.1% increase over other operating costs of R$9.6 million in 2005. As a percentage of operating revenues, other operating costs were 2.4% in 2006 and 2.5% in 2005. Other operating costs consist principally of delivery and travel costs and fuel, telephone, power and data communication charges relating to operating personnel. In addition, other operating costs consist of payments for maintenance of production equipment and promotional events by RBS-Zero Hora. The increase in other operating costs in 2006 is mostly related to costs associated with certain special events, including the 2006 World Cup soccer tournament in Germany and the 2006 Toyota Cup soccer tournament in Japan. Total operating costs. As a result of the factors discussed above, total operating costs increased 2.6% from R$149.9 million in 2005 to R$153.9 million in 2006. Gross profit Gross profit in 2006 was R$255.3 million, representing a 7.9% increase over gross profit of R$236.6 million in 2005. As a percentage of operating revenues, gross profit equaled 62.4% in 2006 and 61.2% in 2005. Operating income (expenses) Selling. Selling expenses in 2006 were R$113.7 million, representing a 6.9% increase over selling expenses of R$106.4 million in 2005. As a percentage of operating revenues, selling expenses equaled 27.8% in 2006 and 27.5% in 2005. Selling expenses for RBS-Zero Hora consist of (a) payments to advertising agencies, including agency bonuses that are based upon advertising revenue attributable to each agency, (b) expenditures for promotions in magazines and other media forms, (c) expenditures on market research, promotional items and sponsorship of promotional events, (d) salary, supplemental compensation and vacation payments made to sales personnel, and (e) car rental, telephone, power, data communication, transportation and travel costs and office expenditures attributable to the sales department. The R$7.3 million increase in selling expenses is primarily due to increased publicity expenses related to the launch of “hagah” and Hora de Santa Catarina. In addition, the Issuer had higher distribution costs and paid higher bonuses to its sales staff in 2006. General and administrative. General and administrative expenses in 2006 were R$70.6 million, representing a 42.6% increase over general and administrative expenses of R$49.5 million in 2005. As a percentage of operating revenues, general and administrative expenses equaled 17.3% in 2006 and 12.8% in 2005. The majority of general and administrative expenses consisted of salary, supplemental compensation and vacation payments made to administrative personnel. In addition, general and administrative expenses included car rental, telephone, power, data communication, transportation and travel costs and office expenditures attributable to administrative personnel, as well as certain property taxes and taxes on financial transactions. The R$21.1 million increase in general and administrative expenses is primarily attributable to a R$12.9 million increase in fees paid to other members of the RBS Group for the use of their administrative departments, such as legal and human resources, and an increase in payments to employees due to a profits participation program, as well as higher wages. Depreciation and amortization. Depreciation and amortization in this case represents depreciation and amortization related to assets used administratively rather than operationally. In 2006, these expenses were R$4.1 million, representing a 26.8% decrease compared to depreciation and amortization of R$5.6 million in 2005. The decrease in 2006 was principally due to the termination in 2005 of software depreciation related to clicRBS. As a percentage of operating revenues, depreciation and amortization related to administrative assets equaled 1.0% in 2006 and 1.4% in 2005. 48 Financial income. Financial income increased to R$18.4 million in 2006 from R$15.5 million in 2005. As a percentage of operating revenues, financial income equaled 4.5% in 2006 and 4.0% in 2005. The increase in financial income resulted primarily from an adjustment in recoverable taxes and increased loans to other RBS Group companies. Financial expenses. Financial expenses in 2006 were R$47.5 million, representing a 27.7% decrease from financial expenses of R$65.7 million in 2005. As a percentage of operating revenues, financial expenses equaled 11.6% in 2006 and 17.0% in 2005. The decrease in financial expenses is explained principally by lower market interest rates in 2006 compared to 2005. Other, net. Other operating income (expenses) in 2006 was R$0.2 million, representing a 44.9% decrease from other operating income of R$0.3 million in 2005. As a percentage of operating revenues, other operating income (expenses) equaled 0.0% in 2006 and 0.1% in 2005. Total operating expenses, net. Total operating expenses in 2006 were R$217.4 million, representing a 2.8% increase over total operating expenses of R$211.4 million in 2005. As a percentage of operating revenues, total operating expenses equaled 53.1% in 2006 and 54.7% in 2005. Operating income Operating income increased to an operating income of R$38.0 million in 2006 from an operating income of R$25.2 million in 2005. As a percentage of operating revenues, operating income was 9.3% in 2006 while operating income was 6.5% in 2005. Non-operating income Equity in the loss of subsidiary. Equity in the loss of subsidiary in 2006 was R$2.2 million, while there was no equity in the loss of subsidiary in 2005. As a percentage of operating revenues, equity in the loss of affiliate was 0.5% in 2006. This line item relates to the equity interest of the Issuer in its subsidiary, A Notícia, S.A., which was acquired in November 2006 and was subsequently merged into the Issuer in January 2007. Provision for losses in investments. Reversal of provision for losses in investments in 2006 was R$0.5 million, compared to a provision for losses in investments of R$2.7 million in 2005. The R$2.7 million provision was established in 2005 in connection with the loss in value of investments in connection with tax incentive programs, and the R$0.5 million reversal taken in 2006 was in connection with the Issuer’s investment in Net Serviços sold during the year and for which a provision for impairment was recognized in prior years. See “Business — The RBS Group — History”. Non-operating income (loss), net. Non-operating income (loss) decreased to a loss of R$0.6 million in 2006 from a loss of R$0.8 million in 2005. As a percentage of operating revenues, non-operating loss in 2006 was 0.1%, while non-operating loss in 2005 was 0.2%. Non-operating income (loss) in 2006 includes gains or losses on the sale of permanent assets. Income before taxes on income Income before taxes on income increased to income of R$35.6 million in 2006 from income of R$21.7 million in 2005. As a percentage of operating revenues, income before taxes on income equaled 8.7% in 2006 and 5.6% in 2005. See Note 15 to the Issuer Financial Statements. Taxes on income Social contribution. Social contribution increased to an expense of R$4.4 million in 2006 from an expense of R$0.5 million in 2005. Social contribution is essentially a 9% income tax applied to fund social security and other social services. Social contribution was an expense in both 2006 and 2005 because the Issuer recorded pre-tax income of R$35.6 million in 2006 and R$21.7 million in 2005. Income tax. Income tax increased to an expense of R$9.6 million in 2006 from an expense of R$0.9 million in 2005. Income tax is calculated at the standard rate of tax plus supplementary rates (resulting in a 49 rate of 25%) and certain adjustments. Income tax was an expense in both 2006 and 2005 because the Issuer recorded pre-tax income of R$35.6 million in 2006 and R$21.7 million in 2005. Net income Net income for the year increased to R$21.5 million in 2006 compared to R$20.3 million in 2005. As a percentage of operating revenues, net income equaled 5.3% in 2006 and in 2005. Results of operations for the years ended December 31, 2005 and 2004 Operating revenues Advertising. Advertising revenue in 2005 was R$131.9 million, representing an 18.7% increase over advertising revenue of R$111.1 million in 2004. As a percentage of operating revenue, advertising revenue was 34.1% in 2005 and 32.9% in 2004. The R$20.8 million increase in advertising revenue between 2005 and 2004 reflected the ongoing recovery of the advertising market since 2002, which created a higher demand for advertising in general and increased prices for color advertising. Classified advertisements. Classified advertisements revenue in 2005 was R$82.3 million, representing a 15.8% increase over classified advertisements revenue of R$71.1 million in 2004. As a percentage of operating revenues, classified advertisement revenue was 21.3% in 2005 and 21.1% in 2004. The increase in classified advertisements revenue between the two years primarily resulted from increased prices charged for classified advertisements and an increase in the number of color advertisements, for which the Issuer charges higher prices. Circulation. Circulation revenue in 2005 was R$49.2 million, representing an 11.6% increase over circulation revenue of R$44.1 million in 2004. As a percentage of operating revenues, circulation revenue was 12.7% in 2005 and 13.1% in 2004. The increase in circulation revenue between the two periods was principally due to an increase in cover prices and in the total number of issues sold. Subscriptions. Subscriptions revenue in 2005 was R$113.7 million, representing a 13.8% increase over subscriptions revenue of R$99.9 million in 2004. As a percentage of operating revenues, subscriptions revenue was 29.4% in 2005 and 29.6% in 2004. The increase in subscriptions revenue between the two years principally resulted from higher prices charged for subscriptions and an increase in the total number of subscriptions. Other. Other operating revenue in 2005 was R$24.7 million, which was consistent with other operating revenue of R$24.9 million in 2004. As a percentage of operating revenues, other operating revenue was 6.4% in 2005 and 7.4% in 2004. Taxes on revenues. Taxes on revenues were R$15.3 million in 2005, a 13.4% increase over taxes on revenues of R$13.5 million in 2004, which reflected the increase in the Issuer’s revenue. Total operating revenues. For the reasons set forth above, total operating revenues of R$386.5 million in 2005 represented a 14.5% increase over total operating revenues of R$337.6 million in 2004. Operating costs Raw materials. Raw materials costs in 2005 were R$73.1 million, representing a 2.4% increase over raw materials costs of R$71.3 million in 2004. As a percentage of operating revenues, raw materials costs were 18.9% in 2005 and 21.1% in 2004. The increase in raw materials costs was principally due to an increase in paper consumption due to the growth of the Issuer’s operations. The Issuer also benefitted from the appreciation of the real against the U.S. dollar, as prices for newsprint are generally linked to the U.S. dollar. 50 Personnel. Operating personnel costs in 2005 were R$44.8 million, representing a 3.0% increase over operating personnel costs of R$43.5 million in 2004. As a percentage of operating revenues, operating personnel costs were 11.6% and 12.9% in 2005 and 2004, respectively. The increase in operating personnel costs is mostly due to increased employee salaries reflecting the terms of the existing collective bargaining agreement. Promotional events. Promotional events costs in 2005 were R$7.9 million, representing a 15.9% increase over promotional events costs of R$6.8 million in 2004. As a percentage of operating revenues, promotional events costs were 2.0% in 2005 and 2.0% in 2004. The increase in promotional events costs was principally due to the launch of Globaltec, a technology event produced in partnership with the state governments of Rio Grande do Sul and Santa Catarina. Depreciation and amortization. Depreciation and amortization was R$5.4 million in 2005, representing a 44.5% decrease over depreciation and amortization of R$9.6 million in 2004. As a percentage of operating revenues, depreciation and amortization was 1.4% in 2005 and 2.9% in 2004. The decrease in depreciation and amortization is due principally to the results from a revision in the rate of depreciation for improvements made to buildings used by the Issuer but belonging to other members of the RBS Group, adjustments to the depreciation rate and the depreciation of new investments. Royalties. Royalties costs in 2005 were R$9.3 million, representing a 9.5% decrease over royalties costs of R$10.2 million in 2004. As a percentage of operating revenues, royalties costs were 2.4% in 2005 and 3.0% in 2004. Royalties costs decreased in 2005 as a result of RBS-Zero Hora’s prepayment on September 24, 2004, of royalties costs to be incurred from January 1, 2005 through December 31, 2014. The prepayment was calculated as the net present value of the royalties on the projected net operating revenues of the Issuer for the period. Other. Other operating costs in 2005 were R$9.6 million, representing a 5.9% increase over other operating costs of R$9.0 million in 2004. As a percentage of operating revenues, other operating costs were 2.5% in 2005 and 2.7% in 2004. The increase in other operating costs in 2005 is attributable principally to the launch of Globaltec, a technology event produced in partnership with the state governments of Rio Grando de Sul and Santa Catarina. Total operating costs. As a result of the factors discussed above, total operating costs remained relatively stable at R$149.9 million in 2005, compared to R$150.5 million in 2004. Gross profit Gross profit in 2005 was R$236.6 million, representing a 26.5% increase over gross profit of R$187.1 million in 2004. As a percentage of operating revenues, gross profit equaled 61.2% in 2005 and 55.4% in 2004. Operating expenses Selling. Selling expenses in 2005 were R$106.4 million, representing a 4.0% increase over selling expenses of R$102.3 million in 2004. As a percentage of operating revenues, selling expenses equaled 27.5% in 2005 and 30.3% in 2004. The increase in selling expenses was principally due to an increase of sale rewards and higher costs associated with the increased circulation of the Issuer’s newspapers. General and administrative. General and administrative expenses in 2005 were R$49.5 million, representing a 9.0% increase over general and administrative expenses of R$45.4 million in 2004. As a percentage of operating revenues, general and administrative expenses equaled 12.8% in 2005 and 13.4% in 2004. The increase in general and administrative expenses is mainly related to increased employee salaries and benefits reflecting the terms of the existing collective bargaining agreement. Depreciation and amortization. Depreciation and amortization in 2005 were R$5.6 million, representing a 11.1% decrease over depreciation and amortization of R$6.3 million in 2004. As a percentage of operating revenues, depreciation and amortization (expense) equaled 1.4% in 2005 and 1.9% in 2004. 51 Financial income. Financial income in 2005 was R$15.5 million, representing a 109.5% increase over financial income of R$7.4 million in 2004. As a percentage of operating revenues, financial income equaled 4.0% in 2005 and 2.2% in 2004. The increase in financial income is primarily due to an increase in interest income received from RBS Participações as a result of loans to RBS Participações in 2005 following RBSZero Hora’s exchange in 2004 of Existing Notes for RBS Par Notes. Financial expenses. Financial expenses in 2005 were R$65.7 million, while financial expenses in 2004 were R$26.5 million. As a percentage of operating revenues, financial expenses equaled 17.0% in 2005 and 7.8% in 2004. The increase in financial expenses is explained principally by RBS-Zero Hora’s incursion of a full year’s interest expense in 2005 as a result of its exchange of Existing Notes for the RBS Par Notes in August 2004. See “— RBS Group financial reprofiling”. Other, net. Other operating income (expenses) decreased to an income of R$0.3 million in 2005 from an income of R$0.4 million in 2004. Total operating expenses, net. As a result of the foregoing factors, total operating expenses in 2005 were R$211.4 million, representing a 22.5% increase over total operating expenses of R$172.6 million in 2004. As a percentage of operating revenues, total operating expenses equaled 54.7% in 2005 and 51.1% in 2004. Operating income Operating income in 2005 was R$25.2 million while operating income in 2004 was R$14.4 million. As a percentage of operating revenues, operating income was 6.5% in 2005 and 4.3% in 2004. Non-operating income (loss) Provision for losses in investments. Provision for losses in investments in 2005 was R$2.7 million, while provision for losses in investments in 2004 was R$6.6 million. As a percentage of operating revenues, provision for losses in investments was 0.7% in 2005 and 2.0% in 2004. Provision for losses in investments includes provisions for losses in the Issuer’s investment in Net Serviços (See “Business — The RBS Group — History”) and the devaluation of investments in connection with tax incentive programs. Non-operating income, net. Non-operating income (loss) decreased to loss of R$0.8 million in 2005 from an income of R$0.3 million in 2004. As a percentage of operating revenues, non-operating loss was 0.2% in 2005 while non-operating income was 0.1% in 2004. Income before taxes on income Income before taxes on income in 2005 was R$21.7 million, while income before taxes on income in 2004 was R$8.2 million. As a percentage of operating revenues, income before taxes on income equaled 5.6% in 2005 and 2.4% in 2004. Taxes on income. Social contribution. Social contribution in 2005 was an expense of R$0.5 million, a 64.3% decrease from social contribution expense of R$1.4 million in 2004. As a percentage of operating revenues, social contribution represented 0.1% in 2005 and 0.4% in 2004. Income tax. Income tax was an expense of R$0.9 million in 2005 and an expense of R$2.7 million in 2004. As a percentage of operating revenues, income tax expense equaled 0.2% in 2005 and 0.8% in 2004. The lower income tax expense amount in 2005 was due to tax credits in connection with the devaluation of the Issuer’s investment in Net Serviços. Net income for the year Net income in 2005 was R$20.3 million, a 407.5% increase over net income of R$4.0 million in 2004. As a percentage of operating revenues, net income equaled 5.3% in 2005 and 1.2% in 2004. 52 Credit Group (Combined Issuer and Guarantors) Results of operations for the years ended December 31, 2006 and 2005 Operating revenues Advertising. Advertising revenue in 2006 was R$474.4 million, representing a 10.4% increase over advertising revenue of R$429.6 million in 2005. As a percentage of operating revenues, advertising revenue was 64.9% in 2006 and 63.8% in 2005. The increase in advertising revenue between 2006 and 2005 is principally the result of an increase in the overall volume of the Credit Group’s advertising sales. Furthermore, in 2006, TV Gaúcha’s and TV Florianópolis’s advertising revenues included fees paid in connection with the programming assignment agreements between them and other RBS Network companies. Advertising revenue of TV Gaúcha and TV Florianópolis is derived from television commercials, programming sponsorship, and events and special projects. Under the existing contracts with TV Globo, which expire in 2008 (subject to an automatic extension until 2011), the RBS Group and TV Globo agreed to split advertising revenue on a percentage basis. The percentages are defined under the contracts, and will be reviewed, and possibly renegotiated, by the parties in 2008. See “Business — The Guarantors — The Globo Contracts”. Advertising revenue of Rádio Gaúcha consists of sales of radio advertising time by external advertising agencies and Rádio Gaúcha’s own sales force. Revenues from the line items “classified advertisements”, “circulation”, “subscriptions” and “other” relate exclusively to the operations of the Issuer, as further discussed above. Taxes on revenues. Taxes on revenues were R$28.8 million in 2006, an 8.3% increase over taxes on revenues of R$26.6 million in 2005. As a percentage of operating revenues, taxes on revenues equaled 3.9% in 2006 and 4.0% in 2005. Total operating revenues. As a result of the foregoing, total operating revenues increased 8.6% to R$731.1 million in 2006, from total operating revenues of R$673.0 million in 2005. Of the total operating revenues of R$731.1 million in 2006, 56.0% were attributable to RBS-Zero Hora, 26.9% to TV Gaúcha, 13.0% to TV Florianópolis and 4.1% to Rádio Gaúcha. Operating costs Raw materials. Costs from raw materials relate exclusively to the operations of the Issuer, as discussed above. Raw materials costs in 2006 were R$70.0 million, representing an 4.2% decrease over raw materials costs of R$73.1 million in 2005. As a percentage of operating revenues, raw materials costs were 9.6% in 2006 and 10.9% in 2005 (comparatively to the Credit Group). Promotional events, programming and sales. Promotional events, programming and sales costs in 2006 were R$85.6 million, representing a 7.9% increase over programming and sales costs of R$79.3 million in 2005. As a percentage of operating revenues, programming and sales costs were 11.7% in 2006 versus 11.8% in 2005. Of promotional events, programming and sales costs of R$85.6 million in 2006, 67.0% were attributable to TV Gaúcha, 20.3% to TV Florianópolis, 11.2% to RBS-Zero Hora and 1.5% to Rádio Gaúcha. Promotional events consisted of payments by RBS-Zero Hora in connection with Casa & Cia (an interior design event), Donna Fashion event (a fashion event) and Mostra ZH de Gastronomia (a gastronomic event). Programming and sales costs primarily consisted of payments by TV Gaúcha and TV Florianópolis to TV Globo for programming, calculated under the contracts with TV Globo as a percentage of advertising revenues, plus the costs in connection with Planeta Atlântida (a music event) and Garota Verão (a beauty pageant). See “Business — The Guarantors — The Globo Contracts”. The increase in programming and sales costs between the two years principally reflects the increase in the advertising revenue. Of the combined increase in programming and sales costs, 69.5% is accounted for by TV Gaúcha 19.7% by TV Florianópolis, 10.0% by RBS-Zero Hora and 0.8% by Rádio Gaúcha. 53 Personnel. Operating personnel costs in 2006 were R$79.8 million, representing a 2.3% increase over operating personnel costs of R$78.0 million in 2005. As a percentage of operating revenues, operating personnel costs were 10.9% in 2006 and 11.6% in 2005. Of the increase in operating personnel costs of R$1.8 million, 100.0% is attributable to RBS-Zero Hora, 5.6% to TV Gaúcha, 11.1% to TV Florianópolis and (16.7%) to Rádio Gaúcha. The increase in operating personnel costs is principally attributable to increased employee salaries reflecting the terms of the existing collective bargaining agreement. Depreciation. Depreciation was R$15.1 million in 2006, representing a 32.5% increase over depreciation of R$11.4 million in 2005. As a percentage of operating revenues, depreciation was 2.1% in 2006 versus 1.7% in 2005. The increase in depreciation is due principally to the lower depreciation expense in 2005 as described in “Results of operations for the years ended December 31, 2005 and 2004.” Royalties. Royalties equaling 3.5% of the Issuer’s and each Guarantor’s net operating revenues were paid to RBS Par, which since 1996 has owned the rights to the RBS trademarks. Royalties costs in 2006 were R$16.3 million, representing a 7.4% decrease over royalties costs of R$17.6 million in 2005. As a percentage of operating revenues, royalties costs were 2.2% in 2006 and 2.6% in 2005. In 2006, 50.9% of the R$16.3 million royalties costs were attributable to RBS-Zero Hora, 30.7% to TV Gaúcha, 13.5% to TV Florianópolis and 4.9% to Rádio Gaúcha. Royalties costs decreased in 2006 as a result of the Credit Group’s prepayment, on September 24, 2004, of royalties to be incurred from January 1, 2005 through December 31, 2014. The prepayment was calculated as the net present value of the royalties on the projected net operating revenues of the Credit Group for the period. Other. Other operating costs in 2006 were R$21.4 million, representing a 15.1% increase over other operating costs of R$18.6 million in 2005. As a percentage of operating revenues, other operating costs were 2.9% in 2006 and 2.8% in 2005. In 2006, 45.3% of the R$21.4 million other operating costs were attributable to RBS-Zero Hora, 36.4% to TV Gaúcha, 8.0% to TV Florianópolis and 10.3% to Rádio Gaúcha. Other operating costs consisted principally of delivery and travel costs and fuel, telephone, power and data communication charges relating to operating personnel. In addition, other operating costs consisted of payments for maintenance of production equipment, for use of the Embratel satellite, through which TV Gaúcha and TV Florianópolis receive national programming and advertising produced by TV Globo, and for the organization of promotional events. Other operating costs increased in 2006, primarily because the costs of companies associated with TV Gaúcha were no longer absorbed by TV Gaúcha after 2005. Instead, TV Gaúcha (and TV Florianópolis) began to charge a 30% fee over the net revenue of such associated companies as payment for programming assignments. Total operating costs. As a result of the factors discussed above, total operating costs increased 3.7% from R$277.9 million in 2005 to R$288.2 million in 2006. Of the total operating costs in 2006, 53.4% were attributable to RBS-Zero Hora, 33.2% to TV Gaúcha, 9.5% to TV Florianópolis and 3.9% to Rádio Gaúcha. The R$10.3 million increase in total operating costs is accounted for by a R$4.0 million, R$4.8 million, and R$1.5 million increase in total operating costs for each of RBS-Zero Hora, TV Gaúcha, and Rádio Gaúcha, respectively. Gross profit Gross profit in 2006 was R$442.9 million, representing a 12.1% increase over gross profit of R$395.1 million in 2005. As a percentage of operating revenues, gross profit equaled 60.6% in 2006 and 58.7% in 2005. Of gross profit in 2006, 57.6% is attributable to RBS-Zero Hora, 22.8% to TV Gaúcha, 15.4% to TV Florianópolis and 4.2% to Rádio Gaúcha. The R$47.8 million increase in gross profit is accounted for by increases in gross profit of R$18.8 million for RBS-Zero Hora, R$12.6 million for TV Gaúcha, R$15.5 million for TV Florianópolis, and R$0.9 million for Rádio Gaúcha. 54 Operating expenses Selling. Selling expenses in 2006 were R$137.5 million, representing a 7.4% increase over selling expenses of R$128.0 million in 2005. As a percentage of operating revenues, selling expenses equaled 18.8% in 2006 and 19.0% in 2005. Of selling expenses of R$137.5 million in 2006, 82.7% is attributable to RBS-Zero Hora, 9.9% to TV Gaúcha, 4.3% to TV Florianópolis and 3.1% to Rádio Gaúcha. Selling expenses for RBS Group companies consist of (a) payments to advertising agencies, including agency bonuses based upon advertising revenue attributable to each agency, (b) expenditures for promotions in magazines and other media forms, (c) expenditures on market research, promotional items and sponsorship of promotional events, (d) salary, supplemental compensation and vacation payments made to sales personnel, and (e) car rental, telephone, power, data communication, transportation and travel costs and office expenditures attributable to the sales department. The R$9.5 million increase in selling expenses is accounted for in part by a R$7.3 million increase in RBS-Zero Hora selling expenses due to increased publicity expenses to launch “hagah” and Hora de Santa Catarina, higher distribution costs and larger bonuses to its sales staff in 2006. There was also a R$2.2 million increase in selling expenses by TV Florianópolis, Rádio Gaúcha, and TV Gaúcha, collectively. General and administrative. General and administrative expenses in 2006 were R$108.8 million, representing a 32.0% increase over general and administrative expenses of R$82.4 million in 2005. As a percentage of operating revenues, general and administrative expenses equaled 14.9% in 2006 and 12.2% in 2005. Of general and administrative expenses in 2006, 64.9% was attributable to RBS-Zero Hora, 19.0% to TV Gaúcha, 10.5% to TV Florianópolis and 5.6% to Rádio Gaúcha. The majority of general and administrative expenses consisted of salary, supplemental compensation and vacation payments made to administrative personnel. In addition, general and administrative expenses included car rental, telephone, power, data communication, transportation and travel costs and office expenditures attributable to administrative personnel, as well as certain property taxes and taxes on financial transactions. The R$26.4 million increase in general and administrative expenses was primarily attributable to a R$21.1 million increase at RBS-Zero Hora, including R$12.9 million increase in fees paid to other members of the RBS Group for the use of their administrative departments, such as legal and human resources, an increase in payments to employees due to a profits participation program and higher wages. Financial income. Financial income increased to R$28.0 million in 2006 from R$17.4 million in 2005. As a percentage of operating revenues, financial income equaled 3.8% in 2006 and 2.6% in 2005. The increase in financial income resulted primarily from an adjustment in recoverable taxes and increased loans to other RBS Group companies, resulting in increased interest income to the Credit Group. Financial expenses. Financial expenses in 2006 were R$62.3 million, representing an 16.7% decrease over financial expenses of R$74.8 million in 2005. As a percentage of operating revenues, financial expenses equaled 8.5% in 2006 and 11.1% in 2005. The decrease in financial expenses was explained principally by lower market interest rates overall in 2006 compared to 2005. Other, net. Other operating income (expenses) decreased from R$0.3 million in 2005 to R$0.2 million in 2006. Total operating expenses, net. Total operating expenses in 2006 were R$289.0 million, representing a 4.0% increase over total operating expenses of R$278.0 million in 2005. As a percentage of operating revenues, total operating expenses equaled 39.5% in 2006 and 41.3% in 2005. Of total operating expenses in 2006, 75.2% are attributable to RBS-Zero Hora, 14.7% to TV Gaúcha, 6.4% to TV Florianópolis and 3.7% to Rádio Gaúcha. Operating income Operating income increased to R$153.8 million in 2006 from R$117.1 million in 2005. percentage of operating revenues, operating income was 21.0% in 2006 and 17.4% in 2005. 55 As a Non-operating income (loss) Equity in the profits (losses) of subsidiaries. Equity in the losses of subsidiaries was R$1.7 million in 2006, while equity in the profits of subsidiaries was R$0.5 million in 2005. As a percentage of operating revenues, equity in the loss of subsidiaries was 0.2% in 2006 and equity in the profit of subsidiaries was 0.1% in 2005. Provision for losses in investments. Provision for losses in investments relates exclusively to the operations of the Issuer, as discussed above. Provision for losses in investments of R$0.5 million was reversed in 2006, while provision for losses in investments of R$2.7 million was established in 2005. Non-operating income (loss), net. Non-operating income (loss) increased to a loss of R$2.6 million in 2006 from a loss of R$2.1 million in 2005. As a percentage of operating revenues, non-operating loss in 2006 was 0.4% and 0.3% in 2005. Income before taxes on income Income before taxes on income increased to an income of R$149.9 million in 2006 from an income of R$112.8 million in 2005. As a percentage of operating revenues, income before taxes on income equaled 20.5% in 2006 and 16.8% in 2005. Of the 2006 income before taxes on income, 23.7% was attributable to RBS-Zero Hora, 37.9% to TV Gaúcha, 33.1% to TV Florianópolis and 5.3% to Rádio Gaúcha. The increase in income before taxes on income resulted from a R$13.9 million increase for RBS-Zero Hora, a R$10.7 million increase for TV Gaúcha, a R$12.8 million increase for TV Florianópolis, and a R$0.2 million decrease for Rádio Gaúcha. Non-operating expenses Social contribution. Social contribution increased to R$14.7 million in 2006 from R$8.9 million in 2005. Social contribution was an expense in both 2006 and 2005 because the Issuer and the Guarantors collectively recorded pre-tax income of R$149.9 million in 2006 and R$112.8 million in 2005. Income tax. Income tax increased to an expense of R$23.3 million in 2006 from an expense of R$15.9 million in 2005. As a percentage of operating revenues, income tax equaled 3.2% in 2006 and 2.4% in 2005. Net income for the year Net income increased to a profit of R$111.9 million in 2006 from R$88.0 million in 2005. As a percentage of operating revenues, net income equaled 15.3% in 2006 and 13.1% in 2005. Of net income of in 2006, 19.2% is attributable to RBS-Zero Hora, 43.6% to TV Gaúcha, 31.9% to TV Florianópolis and 5.2% to Rádio Gaúcha. Results of operations for the years ended December 31, 2005 and 2004 Operating revenues Advertising. Advertising revenue in 2005 was R$429.6 million, representing a 20.5% increase over advertising revenues of R$356.5 million in 2004. As a percentage of operating revenue, advertising revenue was 63.8% in 2005 and 62.2% in 2004. Of the combined increase of R$73.1 million, RBS-Zero Hora accounted for R$20.7 million and Rádio Gaúcha for R$3.9 million, and TV Florianópolis and TV Gaúcha combined for R$48.5 million. The increase in advertising revenue between the 2005 and 2004 periods is a direct result of the recovery of the advertising market that began in 2002, as well as national advertising sold by TV Globo, which accounted for R$29.4 million of the R$48.5 million increase. Revenues from the line items “classified advertisements”, “circulation”, “subscriptions” and “other” relate exclusively to the operations of the Issuer, as discussed above. 56 Taxes on revenues. Taxes on revenues were R$26.6 million in 2005, a 15.7% increase over taxes on revenues of R$23.0 million in 2004, reflecting revenue growth between 2004 and 2005. As a percentage of operating revenues, taxes on revenues equaled 3.9% in 2005 and 4.0% in 2004. Total operating revenues. For the reasons explained above, total operating revenues of R$673.0 million in 2005 represented a 17.3% increase over total operating revenues of R$573.5 million in 2004. Of total operating revenues of R$673.0 million in 2005, 57.4% are attributable to RBS-Zero Hora, 26.6% to TV Gaúcha, 11.9% to TV Florianópolis and 4.1% to Rádio Gaúcha. Of the combined net increase of R$99.5 million, RBS-Zero Hora accounted for R$48.9 million, Rádio Gaúcha for R$3.7 million and TV Florianópolis and TV Gaúcha combined for R$46.9 million. Operating costs Raw materials. Costs from raw materials relate exclusively to the operations of the Issuer, as discussed above. Raw materials costs in 2005 were R$73.1 million, representing a 2.4% increase over raw materials costs of R$71.3 million in 2004. As a percentage of operating revenues, raw materials costs were 10.9% in 2005 and 12.4% in 2004. Promotional events, programming and sales. Promotional events, programming and sales costs in 2005 were R$79.3 million, representing a 22.5% increase over such costs of R$64.8 million in 2004. As a percentage of operating revenues, promotional events, programming and sales costs were 11.8% in 2005 and 11.3% in 2004. Of promotional events, programming and sales costs in 2005, 69.5% were attributable to TV Gaúcha and 19.7% to TV Florianópolis. The increase in promotional events, programming and sales costs between the two years principally resulted from the launch of the Globaltec event in 2005. In addition, programming costs of TV Gaúcha and TV Florianópolis increased in proportion to increases in their revenues. Personnel. Operating personnel costs in 2005 were R$78.0 million, representing a 2.0% increase over operating personnel costs of R$76.4 million in 2004. As a percentage of operating revenues, operating personnel costs were 11.6% in 2005 and 13.3% in 2004. Of operating personnel costs in 2005, 57.4% were attributable to RBS-Zero Hora, 28.1% to TV Gaúcha, 5.9% to TV Florianópolis and 8.6% to Rádio Gaúcha. The R$1.6 million increase in operating personnel costs is accounted for primarily by a R$1.3 million increase in operating personnel costs for RBS-Zero Hora, a R$0.5 million increase for TV Gaúcha and a R$0.3 million increase for TV Florianópolis. The increase in operating personnel costs is mostly due to increased employee salaries reflecting the terms of the existing collective bargaining agreement. Depreciation. Depreciation was R$11.4 million in 2005, representing a 27.8% decrease compared to depreciation of R$15.8 million in 2004. As a percentage of operating revenues, depreciation was 1.7% in 2005 and 2.8% in 2004. The decrease in depreciation was principally due to the revision in the rate of depreciation for improvements made to buildings used by members of the Credit Group but belonging to other members of the RBS Group and adjustments to the depreciation rate. Of the decrease in depreciation, R$4.2 million is attributable to RBS-Zero Hora, and R$1.3 million is attributable to TV Gaúcha. This decrease is partially offset by a R$1.2 million increase in depreciation for TV Florianópolis. Royalties. Royalties costs in 2005 were R$17.6 million, representing a 6.4% decrease over royalties costs of R$18.8 million in 2004. As a percentage of operating revenues, royalties costs were 2.6% in 2005 and 3.3% in 2004. Of royalties costs in 2005, 52.8% is attributable to RBS-Zero Hora, 29.5% to TV Gaúcha, 13.1% to TV Florianópolis and 4.6% to Rádio Gaúcha. Royalties costs decreased in 2005 as a result of the Credit Group’s prepayment, on September 24, 2004, of royalties to be incurred from January 1, 2005 through December 31, 2014. The prepayment was calculated as the net present value of the royalties on the projected net operating revenues of the Credit Group for the period. Other. Other operating costs in 2005 were R$18.6 million, a 13.0% increase over other operating costs of R$16.5 million in 2004. As a percentage of operating revenues, other operating costs were 2.8% in 2005 and 2.9% in 2004. Of other operating costs in 2005, 51.6% is attributable to RBS-Zero Hora, 26.3% to TV Gaúcha, 14.6% to TV Florianópolis and 7.5% to Rádio Gaúcha. 57 Total operating costs. As a result of the factors discussed above, total operating costs increased 5.5% to R$277.9 million in 2005 from R$263.5 million in 2004. Of total operating costs in 2005, 53.9% is attributable to RBS-Zero Hora, 32.7% to TV Gaúcha, 9.9% to TV Florianópolis and 3.5% to Rádio Gaúcha. The R$14.4 million increase in total operating costs is accounted for by an R$9.0 million increase in total operating costs for TV Gaúcha, a R$6.2 million increase in total operating costs for TV Florianópolis, a R$0.6 million decrease in total operating costs for RBS-Zero Hora, and a R$0.2 million decrease in total operating costs for Rádio Gaúcha. Gross profit Gross profit in 2005 was R$395.1 million, representing a 27.5% increase over gross profit of R$310.0 million in 2004. As a percentage of operating revenues, gross profit equaled 58.7% in 2005 and 54.1% in 2004. Of gross profit in 2005, 59.9% was attributable to RBS-Zero Hora, 22.4% to TV Gaúcha, 13.3% to TV Florianópolis and 4.5% to Rádio Gaúcha. The R$85.1 million increase in gross profit is accounted for by a R$49.5 million increase in gross profit at RBS-Zero Hora, a R$3.9 million increase for Rádio Gaúcha, a R$20.8 million increase for TV Gaúcha and a R$10.9 million increase for TV Florianópolis. Operating expenses Selling. Selling expenses in 2005 were R$128.0 million, representing a 3.4% increase over selling expenses of R$123.8 million in 2004. As a percentage of operating revenues, selling expenses equaled 19.0% in 2005 and 21.6% in 2004. Of selling expenses of R$128.0 million in 2005, 83.2% is attributable to RBS-Zero Hora, 10.4% to TV Gaúcha, 3.9% to TV Florianópolis and 2.5% to Rádio Gaúcha. The R$4.2 million increase in selling expenses is accounted for primarily by a R$4.2 million increase in selling expenses at RBS-Zero Hora. The increase in selling expenses was principally a consequence of an increase in bonuses paid to sales staff and higher costs associated with the increased circulation of the Issuer’s newspapers. General and administrative. General and administrative expenses in 2005 were R$82.4 million, representing a 12.2% increase over general and administrative expenses of R$73.4 million in 2004. As a percentage of operating revenues, general and administrative expenses equaled 12.2% in 2005 and 12.8% in 2004. Of general and administrative expenses in 2005, 60.1% is attributable to RBS-Zero Hora, 20.2% to TV Gaúcha, 12.2% to TV Florianópolis and 7.5% to Rádio Gaúcha. The R$9.0 million increase in general and administrative expenses is accounted for by a R$4.1 million increase at RBS-Zero Hora, a R$2.2 million increase in general and administrative expenses at TV Florianópolis, R$2.5 million increase at TV Gaúcha and R$0.2 million increase at Rádio Gaúcha. The increase in general and administrative expenses is mainly related to increased employee salaries and benefits reflecting the terms of the existing collective bargaining agreement. Financial income. Financial income in 2005 was R$17.4 million, representing a 105.2% increase over financial income of R$8.5 million in 2004. As a percentage of operating revenues, financial income equaled 2.6% in 2005 and 1.5% in 2004. The increase in financial income is primarily due to an increase in interest income received from RBS Participações as a result of loans to RBS Participações in 2005 following RBSZero Hora’s exchange of Existing Notes for RBS Par Notes in 2004. Financial expenses. Financial expenses in 2005 were R$74.8 million, while financial expenses in 2004 were R$27.7 million. As a percentage of operating revenues, financial expenses equaled 11.1% in 2005 and 4.8% in 2004. The increase in financial expenses is explained principally by RBS-Zero Hora’s incursion of a full year’s interest expense in 2005 as a result of its exchange of Existing Notes for the RBS Par Notes in August, 2004. See “—RBS Group Financial reprofiling. Other, net. Other, net represented income of R$0.3 million in 2005. Total operating expenses, net. Total operating expenses in 2005 were R$278.0 million, representing a 21.5% increase over total operating expenses of R$228.9 million in 2004. As a percentage of operating 58 revenues, total operating expenses equaled 41.3% of operating revenues in 2005 and 39.9% of operating revenues in 2004. Of total operating expenses of R$278.0 million in 2005, 76.0% were attributable to RBSZero Hora, 15.2% to TV Gaúcha, 5.4% to TV Florianópolis and 3.4% to Rádio Gaúcha. The increase of R$49.1 million in total operating expenses is accounted for by a R$38.8 million increase at RBS-Zero Hora, a R$8.2 million increase at TV Gaúcha, and R$2.2 million increase at TV Florianópolis. The increase in total operating expenses for the four companies on a combined basis is due principally to the reasons explained above. Operating income Operating profit in 2005 was R$117.1 million while operating profit in 2004 was R$81.1 million. As a percentage of operating revenues, operating profit was 17.4% in 2005 and 14.1% in 2004. The R$36.0 million increase of operating profit is accounted for by an increase of R$10.7 million at RBS-Zero Hora, an increase of R$12.5 million at TV Gaúcha, an increase of R$8.7 million at TV Florianópolis, and an increase of R$4.0 million at Rádio Gaúcha. Non-operating income (loss) Equity in the profits of subsidiaries. Equity in the profits of subsidiaries in 2005 was R$0.5 million. Equity in the profit of subsidiaries was 0.1% of operating revenues in 2005. Provision for losses in investments. Provision for losses in investments relates exclusively to the operations of the Issuer, as discussed above. Provision for losses in investments in 2005 was R$2.7 million, and R$6.6 million in 2004. As a percentage of operating revenues, provision for losses in investments was 0.4% in 2005 and 1.2% in 2004. Non-operating income (loss), net. Non-operating income (loss) increased to a loss of R$2.1 million in 2005. As a percentage of operating revenues, non-operating income (loss) was 0.3% in 2005. Income before taxes on income Profit before taxes on income in 2005 was R$112.8 million, while profit before taxes on income in 2004 was R$74.8 million. As a percentage of operating revenues, profit before taxes on income equaled 16.8% in 2005 and 13.0% in 2004. The R$38.0 million increase in profit before taxes on income is accounted for by increases in profits before taxes on income of R$13.5 million at RBS-Zero Hora, R$12.5 million at TV Gaúcha, R$8.1 million at TV Florianópolis, R$3.8 million at Rádio Gaúcha. Non-operating expenses Social contribution. Social contribution in 2005 was an expense of R$8.9 million, while social contribution in 2004 was an expense of R$7.4 million. As a percentage of operating revenues, social contribution represented 1.3% in both 2005 and in 2004. Income tax. Income tax was an expense of R$15.9 million in 2005 and an expense of R$9.4 million in 2004. As a percentage of operating revenues, income tax equaled 2.4% in 2005 and 1.6% in 2004. Net income for the year Net profit in 2005 was R$88.0 million, while net income in 2004 was R$57.9 million. As a percentage of operating revenues, net profit equaled 13.1% in 2005 while net income in 2004 was 10.1%. The net profit in 2005 is accounted for by a R$36.9 million net profit for TV Gaúcha, R$25.2 million net profit for TV Florianópolis, R$20.3 million net profit for RBS-Zero Hora, and R$5.5 million net profit for Rádio Gaúcha. Liquidity and capital resources The primary source of liquidity for the Issuer and each of the Guarantors is cash provided by operations of the Issuer or the respective Guarantor, as the case may be. 59 The primary liquidity needs of the Issuer and the Guarantors are working capital, capital expenditures for new property, plants and equipment, dividends and, to a lesser extent, debt service. Capital expenditures and investments for the Issuer and the Guarantors on a combined basis were R$83.6 million in 2006, R$22.0 million in 2005 and R$16.3 million in 2004. Capital expenditures and investments in 2006 consisted principally of the acquisition of A Notícia for R$52.6 million as well as the acquisition of machinery and equipment. Capital expenditures and investments in 2005 and 2004 consisted principally of the acquisition of machinery and equipment. Management of the Issuer and the Guarantors expect that capital expenditures on a combined basis will be approximately R$65 million in 2007. The operations of the Issuer and the Guarantors on a combined basis generated financial resources (defined as working capital, which consists of current assets less current liabilities) of R$207.6 million in 2006, R$172.9 million in 2005 and R$249.7 million in 2004. During the next few years, RBS-Zero Hora and TV Gaúcha will be required to repay principal and accrued interest on existing indebtedness as follows (TV Florianópolis and Rádio Gaúcha do not have material existing indebtedness): As of December 31, 2006 (in thousands of R$) 2007 2008 2009 2010 RBS-Zero Hora ................................................................70.5 TV Gaúcha................................................................ 16.9 24.1 30.1 24.1 30.1 131.5 TV Florianópolis................................................................3.7 12.4 12.4 12.3 66.6 66.6 167.10 1 Total ................................................................ (1) 91.1 23.3 Does not take into account the tender offer for Existing Notes being made concurrently with this offer of Notes. The shareholders of the RBS Group have entered into certain agreements regarding the payment of dividends by RBS Par, the Issuer, the Guarantors and the other RBS Group companies. The Issuer and the Guarantors do not expect to be required by the shareholders to pay dividends if they have liquidity needs. In addition, the ability of the Issuer and the Guarantors to pay dividends is restricted by the terms of certain indebtedness of the Issuer and the Guarantors. Capital Expenditures The Credit Group’s net principal capital expenditures in the past several years have been mainly to maintain its current activities by replacing or technologically updating equipment. The following table sets forth the Credit Group’s capital expenditures for the three years ended December 31, 2006, 2005 and 2004 and the periods ended March 31, 2007 and 2006. 60 Capital Expenditures Plant and equipment Information Technology Equipment Softwares Vehicles Assets and fixtures Fixed assets in progress Construction in progress Land Other Improvments to third party properties Towers and Antennas Total Capital Expenditures Year Ended December 31, 2006 2005 2004 (in R$ millions) 9.699 12.726 7.735 4.909 4.145 1.703 4.930 3.578 958 2.542 1.301 941 1.433 694 899 2.155 (1.670) 861 1.713 456 587 2.766 55 557 82 676 55 203 137 30 315 31.015 21.870 14.283 (unaudited) March 31, 2007 2006 2.261 1.875 1.046 405 346 1.012 508 3 568 18 93 8.137 2.483 811 947 880 439 1.338 63 66 292 3 7.322 Source: Prepared by the accounting department of the RBS Group. The Credit Group currently plans additional capital expenditures of approximately R$57 million through the end of 2007 and approximately R$91 million in 2008. The main investments in 2007 are expected to be approximately R$12 million in newspaper facilities and R$12 million related to Digital Television. Some of these investments, in the amount of approximately R$25 million, are contractually committed, and the Credit Group has already invested R$8 million during the first quarter of 2007. The R$26 million increase in the Credit Group’s proposed capital investments in 2008 compared to 2007 results from its plan to build a new newspaper printing facility in Porto Alegre in 2008. Indebtedness See Note 14 to the Credit Group Financial Statements. Off-Balance Sheet Arrangements The Credit Group companies have an obligation of R$12 million to RBSPREV – Sociedade Previdenciária, a non-profit private pension entity that manages pension plans according to the Benefits Plan Regulation (Regulamento do Plano de Benefícios). Under an agreement executed in January 2002, the Credit Group companies must pay RBSPREV – Sociedade Previdenciária for past services rendered through December 31, 2001 by retired employees. Such debt is being amortized in equal and consecutive monthly installments. The last installment is due in 2017. The Issuer has no majority-owned subsidiaries that are not included in its financial statements, nor does it have any interests in, or relationships with, any special purpose entities that are not reflected in its financial statements. Under Brazilian GAAP, the Issuer does not record its lease obligations that will become due in the future in its financial statements. The Issuer currently does not have non-cancellable purchase commitments. Quantitative and Qualitative Disclosures About Market Risks The main risks inherent in the Credit Group’s market risk-sensitive instruments and positions are adverse changes to interest rates and the real/U.S. dollar exchange rate. Interest rate. The Credit Group’s results are affected by changes in interest rates due to their impact on interest expense from variable-rate debt instruments and on interest income generated from the Issuer’s cash and investment balances. As of December 31, 2006, the Credit Group had R$391.6 million of indebtedness, 61 and all of the Issuer’s indebtedness had (or was swapped for) floating interest rates. If interest rates in 2007 change by 10% when compared to 2006, the Credit Group’s financial results would be impacted by approximately R$7.0 million. These amounts are determined by considering the impact of the hypothetical interest rates on the Issuer’s variable-rate debt and cash equivalent balances at December 31, 2006. Foreign Currencies. As of December 31, 2006, the Credit Group had R$156.3 million of indebtedness denominated in U.S. dollars. The Credit Group has a policy of hedging its U.S. dollar debt exposure. As a measure of the Credit Group’s market risk with respect to its foreign currency exposure, the Credit Group would incur an additional R$3.0 million in financial expenses from a hypothetical 10% devaluation of the real against the U.S. dollar. This variation would have a direct impact in the Credit Group’s cash equivalent balances. Recent developments The Issuer’s operating revenues increased 9.3% from R$94.4 million in the first quarter of 2006 to R$103.2 million in the first quarter of 2007. The increase is primarily due to increased advertising sales and subscriptions due to the launch of Hora de Santa Catarina and the acquisition of A Notícia. Operating costs increased 17.6% from R$34.2 million in the first three-months of 2006 to R$40.2 million for the same period of 2007, primarily due to higher costs relating to the two newspapers and a new event which took place in early 2007 in Florianópolis, called Floripa Tem. As a result of these factors, gross profit increased 4.6%, from R$60.2 million during the first quarter of 2006 to R$62.9 million during the first quarter of 2007. Operating expenses increased 19.1%, from R$47.9 million in the first three-months of 2006 to R$57.0 million in the first three-months of 2007, primarily due to increased costs relating to the two newspapers. As a result, the Issuer’s operating income decreased 51.8%, from R$12.3 million in the first quarter of 2006 to R$5.9 million in the first quarter of 2007, and net income for the period decreased 44.6%, from R$7.0 million in the first three-months of 2006 to R$3.9 million in the first three-months of 2007. As a percentage of operating revenues, net income during the first quarter of 2006 was 7.4%, compared to 3.8% for the same period in 2007. For the combined Credit Group, operating revenues increased 6.7% from R$168.2 million in the first quarter of 2006 to R$179.5 million in the first quarter of 2007, principally due to increases in advertising sales and subscriptions due to the launch of Hora de Santa Catarina and the acquisition of A Notícia. In the same periods, operating costs for the combined Credit Group increased 16.5% from R$65.4 million to R$76.2 million, primarily due to an increase in the costs relating to the two newspapers, a new event which took place in early 2007 in Florianópolis called Floripa Tem, and increase in Globo Cost from TV Gaúcha and TV Florianópolis. As a result of these factors, gross profit increased 0.5%, from R$102.8 million during the first quarter of 2006 to R$103.4 million during the first quarter of 2007, of which 60.8% is attributable to the Issuer. Operating expenses for the combined Credit Group increased 14.9%, from R$65.1 million in the first quarter of 2006 to R$74.8 million in the first quarter of 2007, primarily due to higher costs relating to the two new newspapers. As a result, operating income for the combined Issuer and Guarantors decreased from R$37.7 million in the first quarter of 2006 to R$28.6 million in the first quarter of 2007. Net income for the period for the Credit Group decreased 26.2%, from R$26.3 million in the first quarter of 2006 to R$19.4 million in the first quarter of 2007, of which 20.0% is attributable to the Issuer. Capital expenditures and investments for the Credit Group on a combined basis was R$8.2 million during the first quarter of 2007 (compared to R$7.3 million for the same period in 2006), and consisted principally of expenditures on plant and equipment and information technology. Net financial resources provided by operations of the Credit Group on a combined basis was R$28.3 million during the first quarter of 2007 (compared to R$45.7 million for the same period in 2006). Combined total assets for the Credit Group increased 21.5%, from R$779.7 million on March 31, 2006 to R$947.6 million on March 31, 2007. As of March 31, 2007, the Issuer and the Guarantors on a combined basis had R$580.8 million total debt outstanding, compared to R$611.9 million at year-end 2006 and R$465.8 million on March 31, 2006. The increase in total debt between March 31, 2006 and December 31, 2006 is attributed to a R$100 million loan, executed in November 2006, to TV Gaúcha and TV Florianópolis which has been used to pay the debt according to its scheduled amortization. The decrease in total debt by 62 R$31 million during the three-months ended March 31, 2007 is attributed to the payment of wages, bonuses, suppliers and other debts in such three-month period. 63 OVERVIEW OF THE MEDIA MARKET IN BRAZIL Newspapers Daily newspapers play an important role in the Brazilian media market. According to the report published in 2005 by the World Association of Newspaper, Brazil is the 9th highest-ranked country in the world in terms of circulation of daily newspapers, with approximately 6,522,000 copies circulated per day in this year. Advertising in newspapers in 2006 accounted for 16% of all advertising revenues in Brazil as reported by Projeto Inter-Meios (“Projeto Inter-Meios”), an independent Brazilian media industry group founded in 1990 that collects information from market participants on a voluntary basis for statistical and marketing purposes. The newspapers with the highest average paid circulation in Brazil as reported by IVC, Extra, Folha de São Paulo, O Estado de São Paulo and O Globo, are published in Rio de Janeiro or São Paulo and are sold principally in their respective states of publication, with a limited amount being sold nationwide, according to IVC. Folha de São Paulo and O Estado de São Paulo are published by independent companies, and Extra and O Globo are published by Editora Globo S.A. (“Editora Globo”), a subsidiary of Globopar and an affiliate of TV Globo. Broadcast television The media industry in Brazil is dominated by broadcast television. Brazilian broadcast television has among the highest prime-time ratings in the world, according to Nielsen reports, a worldwide ratings company. Based on data collected in 2006 by the Economist Intelligence Unit, the business information unit of the Economist Group, publisher of “The Economist” (the “EIU”), Brazil had approximately 352 television sets per 1,000 persons, compared to 854 in the United States, 340 in Argentina, 289 in Mexico and 246 in Chile. Estimates provided by the EIU for 2003 show Brazil with 372 television sets per 1,000 persons, compared to 857 in the United States, 338 in Argentina, 300 in Mexico and 255 in Chile. Advertising on broadcast television programs in 2006 accounted for 59.4% of all advertising revenues in Brazil, including revenues related to non-media forms of advertising, according to figures published by Projeto Inter-Meios. Broadcast television in Brazil is dominated by the Globo Network, the network of television stations in Brazil which carry the broadcast signal provided by TV Globo. The Globo Network has an average nationwide broadcast television audience share of 50% and an average prime-time audience share of 59%, 40% throughout the morning, 46% in the afternoon and 58% for late-night hours, according to estimates published by IBOPE in March 2007. The SBT, Record, Bandeirantes and Rede TV networks account for approximately 15%, 14%, 4% and 3% of the average nationwide broadcast television audience share, respectively, according to estimates published by IBOPE March 2007. The majority of the remaining 14% is captured by broadcasts by independent local television stations operating out of single locations. Radio Radio is a popular means of mass communication in Brazil with advertising on radio in 2006 accounting for 4% of all advertising revenues in Brazil, based on figures reported by Projeto Inter-Meios. At December 31, 2006, there were 335 radio stations in Rio Grande do Sul and 194 in Santa Catarina, as reported by Anatel. The majority of radio stations are independent and are principally focused on musical programming. However, there are some large radio networks operating throughout Brazil, including Bandeirantes, Jovem Pan and Rádio Globo, all networks of AM and FM stations, the latter being affiliated with TV Globo. Such networks produce both music and news programming. Magazines Magazines constitute an important element of the media market in Brazil. In 2006, advertising in magazines accounted for 8.6% of all advertising revenues in Brazil, based on figures reported by Projeto Inter-Meios. The magazine market is dominated by Editora Abril S.A. (“Editora Abril”), a publishing company based in São Paulo. 64 Subscriber television Pay-TV and cable modem broadband services are predominantly provided by Net Serviços, a public company. Net Serviços is the largest pay-TV multi-operator in Brazil. It operates the “NET” brand in some of Brazil’s major cities, including São Paulo, Rio de Janeiro, Belo Horizonte and Porto Alegre. Net Serviços has a subscriber base of 1.5 million people and its cable network extends more than 36,000 kilometers, running through nearly 6.6 million homes. Net Serviços also offers broadband internet services through its “VÍRTUA” brand name as well as data communication and multimedia services for the corporate network through “VICOM”. Televisão Abril S.A. (“TVA”), controlled and operated by Editora Abril, operate a cable system in the Cities of São Paulo, Rio de Janeiro, Curitiba, Florianópolis and Camboriú, among others. Other additional operators offer cable and MMDS (Multi-Point, Multi-Channel Distribution Service or “MMDS”) services, each operating in one or two smaller cities. In addition to the cable and MMDS operators, there are other companies, such as “Sky” and “DirecTV”, operating satellite DTH (Direct to Home) licenses, which have national coverage and therefore are strong competitors for Net Serviços. According to the Agência Nacional de Telecomunicações (the National Telecommunications Agency or “Anatel”), in 2007 there were 137 pay-TV operators in Brazil, among all technologies. Net Serviços accounted for 63%. The media industry in the RBS Group’s Service Territory The media industry in the States of Rio Grande do Sul and Santa Catarina is focused on broadcast television and radio, newspapers and subscriber television. The RBS Group believes that the relatively higher income and educational levels of the inhabitants of the Service Territory result in a more developed market for the newspapers published by RBS-Zero Hora, and for its news radio stations, including Rádio Gaúcha. As in the rest of the country, the television market is dominated by programming of TV Globo, and the RBS Group’s VHF broadcast television companies are the exclusive affiliates of the Globo Network in the Service Territory, including TV Gaúcha and TV Florianópolis. Digital television in Brazil Digital television in Brazil is currently being implemented. Standards have already been established, and in June, 2006 the various requirements that each Brazilian network has to fulfill were agreed upon and a timeline was created. The RBS Group is following the same timeline used by the Globo Network. The first digital television transmissions in Brazil are expected to occur in December 2007. 65 BUSINESS The RBS Group Introduction The Issuer and the Guarantors are part of Rede Brasil Sul (Southern Brazil Network, referred to herein as the RBS Network), one of the largest multimedia networks in Brazil. The RBS Network operates primarily in southern Brazil, in the States of Rio Grande do Sul and Santa Catarina (collectively, the “Service Territory”). These two states have a combined population of approximately 16 million people, representing approximately 9% of the Brazilian population, and its inhabitants are considered to be relatively more prosperous and well-educated than the rest of the country. See “Business — The RBS Group — The RBS Network Service Territory”. The RBS Network includes 18 VHF television stations, all transmitting content provided by the Globo television network (the “Globo Network”), the largest television network in Brazil and South America. In addition, the RBS Network together includes two community content channels distributed through UHF (ultra high frequency) and/or pay television and a rural-oriented channel (Canal Rural) distributed throughout Brazil through DTH (direct to home), cable and open satellite, 21 FM radio stations, five AM radio stations, eight daily newspapers and an internet portal website that integrates content from the TV, radio and newspaper businesses of the RBS Network and a content search portal, “hagah”, that provides local consumer information for the regions it serves. The RBS Network began with the acquisition in 1957 of an interest in Rádio Gaúcha, an AM news radio station in the City of Porto Alegre, by Maurício Sirotsky Sobrinho, who was then a radio show host for the station. Since that time, the Network has expanded beyond the City of Porto Alegre throughout the south of Brazil, and has become a leader in major media fields in its Service Territory. See “Business — The RBS Group — History”. The RBS Network includes companies that are part of the RBS Group as well as certain affiliated companies associated with TV Gaúcha, TV Florianópolis, Rádio Atlântida FM de Porto Alegre and Rádio Itapema FM de Florianópolis. The “RBS Group” refers to a group of media companies under common ownership and management. The term “RBS Network” refers to the companies that are part of the RBS Group, plus affiliated media companies owned by members of the controlling shareholder families of the RBS Group (other than those members indirectly controlling RBS Comunicações S.A. and its subsidiaries). In 2005, the RBS Group was reorganized, and RBS Comunicações S.A. was established for the purpose of integrating the Group’s main businesses, as a means to create a more efficient management structure. RBS Comunicações will be the platform through which the RBS Group expects to implement long-term strategic plans for expansion and development. RBS Comunicações S.A. (“RBS Comunicações”) is jointly owned by IMAH Participações Ltda. (“IMAH Par”), JAMAH Participações Ltda. (“JAMAH Par”) and FECH Participações Ltda. (“FECH Par”), holding companies representing the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, respectively. Its core businesses are currently organized under two primary subsidiaries — RBS TV Participações S.A. and RBS Radio Participações — with the expectation that RBS-Zero Hora, RBS Participações S.A. (“RBS Par”), RBS Administração e Cobranças (“RBS A&C”) and other RBS Group companies will be integrated into RBS Comunicações S.A. in the future. Each of RBS TV Participações and RBS Radio Participações functions as a subsidiary holding company for the Group’s individual television and radio stations while RBS-Zero Hora holds the RBS Group’s interests in newspapers. Not included within the RBS Group, but a significant part of the RBS Network, are 14 television stations and 21 radio stations owned by affiliates but which form part of the RBS Network through programming assignment agreements. See “Management and Ownership Structure”. Operationally, the activities of each of the companies of the RBS Group are controlled by the Executive Committee, which generally meets every week in Porto Alegre. The Executive Committee is appointed by the Board of Directors to manage the Group’s constituent companies. See “Management and Ownership Structure”. 66 According to RBS Network’s statistics, the network is currently the third-largest media group in Brazil as measured by revenue and the leading provider of multimedia services in the Service Territory. The RBS Network’s VHF television stations operating in the Porto Alegre and Florianópolis metropolitan regions, the largest population centers of the States of Rio Grande do Sul and Santa Catarina, respectively, are the most watched television stations in their respective metropolitan regions, with average audience shares of broadcast television viewership of 63% and 64%, respectively, for the period between 6pm and 12am. Likewise, the RBS Network’s eight newspapers, in aggregate, are the most widely-read newspapers in the Service Territory (as a percentage of the population) and the second most widely-circulated in Brazil (in terms of the number of newspapers). The RBS Network’s principal segments of radio broadcasting operations are news/sports, youth-oriented music, popular music and adult contemporary music programming. The Network’s AM and FM radio stations operating in the Porto Alegre metropolitan region, the largest population center of the Service Territory, have aggregate audience shares of 67% and 28%, respectively, comprising in each case an audience share that is larger than that of any of their competitors. The RBS Network also includes a multimedia internet portal, clic RBS, an internet services portal, “hagah”, ViaLOG, a logistics distribution service business unit and a book publishing unit called RBS Publicaçóes. All of the RBS Network’s 18 VHF television stations broadcast Globo Network programming regularly and occasionally provide the Globo Network with local news. The RBS Network produces approximately 15% of the programming grid locally, maintaining high “lead-in” ratings for the local news programs. As of December 31, 2006, the RBS Group had total assets of R$828 million. During 2006, the RBS Group had net operating revenues of R$811 million and net income of R$142 million. Prospective investors in the Notes should be aware that the Notes are not guaranteed by, nor do they constitute obligations of, the RBS Network or the RBS Group generally but constitute obligations of RBSZero Hora, jointly and severally guaranteed by TV Gaúcha, TV Florianópolis and Rádio Gaúcha, the businesses of which are described below. The RBS Network Service Territory The RBS Network’s Service Territory, comprising the southernmost Brazilian States of Rio Grande do Sul and Santa Catarina, is relatively more prosperous and better educated than much of the rest of Brazil. Rio Grande do Sul, with a population of 11.1 million, or 5.8% of the population of Brazil, accounts for 8.1% of the Gross Domestic Product (“GDP”) of Brazil, according to figures compiled by the Instituto Brasileiro de Geografia e Estatística 2004 (the Brazilian Institute of Geography and Statistics or “IBGE”) and Brasil em Foco 2007 (Target Marketing). The GDP per capita for Rio Grande do Sul is approximately U.S.$6,453, as compared to approximately U.S.$4,665 for Brazil as a whole, according to figures compiled by Brasil em Foco. Likewise, the literacy rate for Rio Grande do Sul is 82%, as compared to 78% for Brazil as a whole, according to statistics published by IBGE in 2004. Santa Catarina has a population of approximately 6.1 million, or 3.2% of the population of Brazil. Santa Catarina accounts for 3.0% of the GDP of Brazil, with a GDP per capita of U.S.$5,801, according to statistics compiled by IBGE for 2004. Likewise, the literacy rate for Santa Catarina is 85%, as estimated by IBGE in 2004. Business development strategy The RBS Group’s primary strategic goal is to be one of the best media groups in Brazil operating at world class standards. Embedded in the RBS Group’s corporate strategy is a focus on media and contentrelated businesses. To reach this goal, the RBS Group decided to adopt the following main initiatives: (i) Financial performance: Reach and maintain targeted performance ratios and generate significant cash flow, pursuing world class benchmarks in profitability and leverage; 67 (ii) Product and market: Achieve the highest standards of quality in programming and reporting vis-à-vis its competitors in each media segment in which the RBS Group operates; (iii) Sustained growth: Pursue growth strategy from the core media businesses (newspaper, television and radio) with new products and in new markets on an opportunistic basis in Brazil’s southern, southeastern and central western regions, provided that such new products or new markets contribute from the time of their introduction to the achievement of the Group’s goals; (iv) Leadership position: To defend or protect its leadership in every market segment covered; and (v) Community ties: Be a reference for every local community served, maintaining its strict ethical principles. The RBS Group seeks to maintain its leadership position by attracting and retaining the most important media personalities in its Service Territory, by maintaining close ties with the communities in which it operates and by encouraging entrepreneurial initiatives among its managerial staff. The RBS Group’s business strategy is strongly-related to its unique ability to explore multimedia synergies. It believes that its locally-based multimedia operating model, particularly in the radio and newspaper businesses, can be successfully replicated in other markets beyond the current Service Territory. Therefore, the RBS Group believes it can be seen as an attractive partner for Brazilian and foreign investors interested in the Brazilian media markets. History The RBS Group was founded by Maurício Sirotsky Sobrinho, who began his career in the early 1940’s as a radio announcer in the City of Passo Fundo, and joined Rádio Gaúcha in the City of Porto Alegre in 1950 as a radio show host (Rádio Gaúcha was incorporated on February 8, 1927). In 1957, Mr. Sirotsky Sobrinho acquired a minority ownership interest in Rádio Gaúcha. On December 29, 1962, TV Gaúcha was incorporated and began its operations in Porto Alegre, joining the Globo Network in 1965. In 1968, Mr. Sirotsky Sobrinho, along with his brother Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, assumed the corporate control of Rádio Gaúcha and TV Gaúcha and began operations under the name Rede Brasil Sul. Maurício Sirotsky Sobrinho continued to play the central managerial role at the RBS Group until his death in 1986. In 1969, the RBS Group began to build its regional television network by opening a VHF television station in the City of Caxias do Sul. In 1970, the RBS Group purchased the Zero Hora newspaper based in Porto Alegre (the Issuer, which is the publisher of the Zero Hora newspaper, was incorporated and started its operations on May 4, 1964) and continued expansion of its television network. In 1973, the RBS Group established its FM-radio network. In 1979, Zero Hora began its classified advertisements section, and on May 29, 1980, TV Florianópolis was incorporated and began its operations in the State of Santa Catarina. In 1986, the Group began operating the newspaper Diário Catarinense in the City of Florianópolis. The RBS Group has expanded into the RBS Network, a network of 18 VHF television stations, two UHF pay-TV stations focusing on community and rural content, 19 FM radio stations, five AM radio stations and eight daily newspapers. In addition, in 1995 the RBS Group established a radio news network, Gaúcha Sat, that broadcasts news programming to stations throughout Brazil. At December 31, 2006, there were a total of 135 Gaúcha Sat affiliates operating throughout the country. In 1992, the RBS Group and Globocabo formed a joint-venture to invest in pay-TV companies operating under the name of “Net Sul”, with licenses to provide pay-TV services to 18 cities in the states of Rio Grande do Sul and Santa Catarina. Distribution was initially through MMDS and, beginning in 1993, also through cable. Net Sul expanded within such states and also throughout the state of Paraná and, by the end of 1999, Net Sul was already operating in 24 cities, with over 300,000 subscribers. In 2000, Net Sul was 68 merged into the Globocabo national platform. Globocabo later changed its name to Net Serviços. See “— RBS A&C —Investments”. The RBS Group has since sold its investment in Net Serviços. In 1996, the RBS Group ventured into the business of online services, acquiring a controlling interest in “Nutec”, a regional internet service provider. Nutec quickly expanded and turned into the leading internet portal in southern Brazil, under the brand name “ZAZ”. In 1999, the RBS Group merged ZAZ into Terra Networks, the Latin-American interactive arm of Telefónica, the Spanish telecommunications company. In 2000, the RBS Group formed RBS Interativa S.A., which consisted of a multimedia internet business which integrated content from the TV, radio and newspaper businesses of the RBS Network with internet services combined with a direct marketing business, rendering market analysis, consulting services and precision marketing strategies. RBS Interativa S.A. was later spun-off, with the internet-based business going to RBS Online and the direct market business to DIRECT. RBS Online was later merged into RBSZero Hora. In 2001, the RBS Group formed ViaLOG, a division of RBS-Zero Hora, to take advantage of RBSZero Hora’s newspaper distribution network. ViaLOG offers logistics management services focusing on printed material distribution, express delivery and e-commerce. Also in 2001, the RBS Group launched a regional music record label, Orbeat, focusing on regional artists. In 2002, the Group launched Orbeat Music and the newspaper Diario de Santa Maria, while in 2003 and 2004 the Itapema FM radio network was launched and Metro FM of Guaiba was acquired. Also in 2003, the RBS Group undertook a financial reprofiling to extend debt maturities and hedge exposure to foreign currency liabilities. In 2005, the RBS Group underwent a corporate shareholding reorganization, incorporating RBS Comunicações to act as a holding company for the Group’s main operations. Additional consolidation under RBS Comunicações is planned as conditions permit. In 2006, the RBS Group launched “hagah”, Hora de Santa Catarina and acquired A Notícia. Organizational structure The core businesses of the RBS Network are structured as a group of closely held corporate entities, with each corporate entity consisting of one television or radio station or one or more newspapers. Ownership of these various corporate entities is divided among various individuals within the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa. The RBS Group Executive Committee is a centralized advisory committee of persons nominated jointly by the President and the Chief Executive Officer of the RBS Group, and approved by the RBS Group Board of Directors, that sets policy for and advises the management of all RBS Group companies. See “Management and Ownership Structure — The RBS Group Executive Committee”. The RBS Group’s businesses are owned directly or indirectly by IMAH Participações Ltda. (“IMAH Par”), JAMAH Participações Ltda. (“JAMAH Par”) and FECH Participações Ltda. (“FECH Par”), holding companies representing the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, respectively. The activities of these companies are managed by the RBS Group Executive Committee. In 2005, the RBS Group incorporated RBS Comunicações with the objective of integrating the main businesses of the RBS Group under a single holding company. The integration was commenced in 2006, and the RBS Group intends to complete the integration during 2007, including the integration under RBS Comunicações of RBS-Zero Hora (the Issuer), RBS A&C and RBS Par, and certain other companies. Operational framework Generally, the companies that form part of the RBS Network largely exploit the synergies existing among the different operations. There are numerous transactions between the various RBS Network companies, many of which involve a free exchange of information or services in the ordinary course of business. See “Related party transactions”. 69 In this context, although each television or radio station is operated by a different closely-held corporate entity, a substantial amount of support comes from the largest RBS Network television or radio station, as the case may be, in the particular state, as well as from the centralized management team for the RBS Network as a whole. For instance, TV Gaúcha, which owns and operates the largest television station in Porto Alegre, and TV Florianópolis, which owns and operates the largest television station in Florianópolis, provide the regional programming and advertising for all of the RBS Network’s television stations in the States of Rio Grande do Sul and Santa Catarina, respectively, with each of the local stations preserving a limited amount of programming and advertising space to be produced and commercialized through its respective own staff. Additionally, the newspaper business, consisting of eight titles, is owned and operated by the Issuer. The Issuer acts as a news agency, making content available to all the newspapers operated by the Issuer, as well as to the RBS Network’s television stations and radio news and sports stations, including Rádio Gaúcha. The RBS Network believes that its structure as an integrated network of media companies gives it an operational advantage over many of its competitors. For instance, the sharing of programming and news information by the RBS Network’s various stations and newspapers, and the provision of news content to the various RBS Network companies, provides substantial economies of scale. Likewise, as part of its marketing strategy, RBS Network companies generally allocate unsold advertising time to promote the events sponsored by the RBS Network such as, e.g., the summer music festival “Planeta Atlântida”, one of the largest events of its kind in Brazil. The Issuer Introduction RBS-Zero Hora publishes the RBS Network’s eight newspapers, Zero Hora, Diário Gaúcho, O Pioneiro and Diário de Santa Maria in the State of Rio Grande do Sul, plus Diário Catarinense, Jornal de Santa Catarina, A Hora de Santa Catarina and A Notícia in the State of Santa Catarina. Together, the eight newspapers had an aggregate average daily circulation of 493,125 copies in March 2007 which, according to IVC, made RBS-Zero Hora Editora Jornalística S.A. the second largest newspaper publisher in Brazil by quantity of copies circulated during the period. Daily circulation includes newspapers sold by subscription, street vendors and at newsstands. RBS-Zero Hora also serves as the informational hub for the RBS Network, making information available to all the newspapers operated by the Issuer, as well as to the RBS Network’s television stations and radio news and sports stations. Furthermore, RBS-Zero Hora also operates ViaLOG, a logistics distribution service business unit, a book publishing unit called RBS Publicações, as well as the internet-based businesses of the RBS Group, including clicRBS, the multimedia internet portal website for the RBS Group that integrates content from the TV, radio and newspaper businesses of the RBS Network with internet services, plus the service portal “hagah” and “Kzuka”, a youth-oriented marketing company in the RBS Group. Zero Hora. The Zero Hora newspaper is the most widely read newspaper in the state of Rio Grande do Sul, according to data provided by IBOPE for 2006, as well as the newspaper with the sixth-largest daily average paid circulation in Brazil for March 2007, according to calculations published by IVC. Zero Hora is published in the Issuer’s industrial facilities located in the cities of Porto Alegre and Cruz Alta, and is distributed throughout the State of Rio Grande do Sul and in several other major cities of Brazil and the southern cone of South America. For March 2007, the circulation of Zero Hora was 162,452 copies on weekdays and 251,297 copies on Sundays. According to data provided by IBOPE, updated until November 2006, Zero Hora accounts for 38% of newspaper readership in Rio Grande do Sul, out of which 49% are in the upper social-economic segments of the local market (classes A/B). Diário Gaúcho. Diário Gaúcho was launched in 2000 to target the middle-low social–economic segments (classes B/C/D) of the Porto Alegre metropolitan region, which consists of approximately 90% of 70 the population in this market. The newspaper was created both to serve a market segment not fully captured by Zero Hora, thus fostering growth, and to serve as a gatekeeper to enhance competitiveness in the market, neutralizing Zero Hora’s competitors’ growth opportunities. Diário Gaúcho’s strong identification with its audience has made it the most widely-read newspaper in the Porto Alegre metropolitan region, with nearly 1,090,021 readers according to IBOPE, and accounts for 26% of newspaper readership in Rio Grande do Sul (62% in the Porto Alegre Metro Area according to IBOPE). For March 2007, the circulation of Diário Gaúcho was approximately 157,044 copies on weekdays. Diário Gaúcho is published in the City of Porto Alegre on the same facility used to publish Zero Hora, and is distributed throughout the State of Rio Grande do Sul. O Pioneiro. O Pioneiro’s daily average circulation of approximately 24,370 copies covers 62 cities in the metropolitan region of Caxias do Sul, the second most affluent region in the State of Rio Grande do Sul. O Pioneiro newspaper reaches 264,138 readers according to IBOPE, representing 61%, according to IBOPE, of newspaper readership of such market (data provided for 2006), out of which 39% are in the upper socialeconomic segments (classes A/B). For March 2007, the circulation of O Pioneiro was approximately 24,370 copies on weekdays. O Pioneiro is published at RBS-Zero Hora’s industrial facility located in the City of Caxias do Sul. Diário de Santa Maria. Diário de Santa Maria, which RBS-Zero Hora launched in 2002, is published in Santa Maria, a city located in the central region of the State of Rio Grande do Sul, and covers 34 cities with a combined population of approximately 700,000 inhabitants. According to data provided by IBOPE, as of 2006, Diário de Santa Maria accounts for 47% of newspaper readership in the region, out of which 40% are in the upper social-economic segments (classes A/B). For March 2007, the average daily circulation of Diário de Santa Maria was approximately 15,195 copies. Diário Catarinense. Diário Catarinense is published in the City of Florianópolis and is the newspaper with the largest circulation in Florianópolis and in various other cities in the State of Santa Catarina generally, according to data provided by IVC. It is distributed principally in Florianópolis and throughout Santa Catarina (classes A/B). For March 2007, the average daily circulation of Diário Catarinense was approximately 39,945 copies on weekdays and 61,170 copies on Sundays. According to IBOPE (June 2006), Diário Catarinense accounts for 86% of newspaper readership in the Florianópolis metropolitan region, and 55% of its readers are in the upper social-economic segments (classes A/B). Jornal de Santa Catarina. Jornal de Santa Catarina newspaper circulates throughout the “Vale do Itajaí” region, one of the richest areas of the State, and in the northeastern part of the State of Santa Catarina, covering over 27% of the State’s main cities’ population, including Joinville and Blumenau, where Jornal de Santa Catarina is published. It circulates Mondays through Saturdays with a joint edition on the weekend, with an average daily circulation of approximately 18,945 copies. In the region of Blumenau alone, Jornal de Santa Catarina accounts for 80% of newspaper readership, according to IBOPE (opinion poll institute) for August 2006. A Hora de Santa Catarina. A Hora de Santa Catarina was launched by RBS in August 2006 to target the middle-low social-economic segments (classes C/D) of the Florianópolis metropolitan region, which consists of approximately 78% of the population in this market. The newspaper was created both to serve a market segment not fully captured by Jornal de Santa Catarina, thus fostering growth, and to serve as a gatekeeper to enhance competitiveness in the market, neutralizing Jornal de Santa Catarina’s competitors’ growth opportunities. The Issuer anticipates that A Hora de Santa Catarina’s strong identification with its audience will make it one of the most widely-read newspapers in the Florianópolis metropolitan region. By March 2007, the average daily circulation of this newspaper was approximately 31,028 copies. A Hora de Santa Catarina is published in the city of Florianópolis in the same facility used to publish Diário Catarinense, and is distributed throughout the “Grande Florianópolis” region. A Notícia. A Notícia, acquired by RBS in 2006, is a traditional newspaper, with 80 years of history. It is printed in the City of Joinville and circulated in the State of Santa Catarina. According to data provided by IBOPE, as of June 2006, 57% of the readers are in the upper social-economic segments (class A/B). It is the only RBS-Zero Hora newspaper that is published in standard format. 71 The newspaper market in Rio Grande do Sul and Santa Catarina; Competition The newspaper market in Rio Grande do Sul and Santa Catarina is characterized by the existence of eight newspapers in each state, affiliated with IVC. The RBS Group owns the highest rated newspapers in these states: Zero Hora, with a market share of 38% of Rio Grande do Sul’s newspaper readership market and 40% in the metropolitan area of its capital, Porto Alegre, as well as Diário Catarinense, with a 41% market share in the Santa Catarina market and 86% in the metropolitan area of Florianópolis, the capital of Santa Catarina State (source: IBOPE July through September 2006). The two metropolitan regions have high newspaper readership ratings, 56% of the population of the Florianópolis metropolitan region (source: IBOPE, November 2006) and 75% of the population of the Porto Alegre metropolitan region (source: Ipsos Marplan, January through March 2007). Porto Alegre has the highest newspaper reading rating when compared to other Brazilian state capitals like São Paulo and Rio de Janeiro. The RBS Group believes that this high level of newspaper readership can be explained by the high literacy rate and by the higher per-capita income level for Rio Grande do Sul and Santa Catarina compared to Brazil as a whole. The Zero Hora newspaper has the highest readership of any newspaper distributed in the State of Rio Grande do Sul (according to data provided by IBOPE in July through September 2006), which accounts for approximately 18% of the population of the State. Some important newspapers of national circulation are distributed in Rio Grande do Sul on a limited basis, including Folha de São Paulo, O Estado de São Paulo and O Globo, all general-interest newspapers, and Valor Econômico and Gazeta Mercantil, both national financial and business newspapers. Two important locally-produced newspaper competitors include Jornal do Comércio, a regional financial and business newspaper the distribution of which is largely limited to the local business community of the Porto Alegre metropolitan region, with a daily average circulation of approximately 30,000 copies in 2006, according to information provided by the newspaper’s sales department (Jornal do Comércio is not associated to IVC) and Correio do Povo, a low-budget newspaper which is sold by subscription at R$19 per month. Correio do Povo had a daily average circulation of approximately 155,494 copies in March 2007, according to IVC’s compilation of newspaper circulation statistics. The average daily circulation for Zero Hora on the same period was 175,144 copies. Although Correio do Povo is one of the highest circulated newspapers in Rio Grande do Sul, IBOPE estimates that its level of readership is lower than that of Zero Hora. Zero Hora and Correio do Povo are distributed Statewide. Diário Gaúcho has the highest readership of any newspaper distributed in the City of Porto Alegre, which accounts for approximately 13% of the population of the State of Rio Grande do Sul. Correio do Povo is the main competitor for Diário Gaúcho in the Porto Alegre metropolitan region. IBOPE estimates that Diário Gaúcho accounts for 62% of newspaper readership in Porto Alegre, while Correio do Povo accounts for 17% (as measured on July through September 2006). Diário Gaúcho is distributed State-wide. Diário Catarinense is one of three newspapers produced in the City of Florianópolis, which accounts for approximately 7% of the population of the State of Santa Catarina. Diário Catarinense, which is distributed State-wide, is the newspaper with the highest circulation in the State of Santa Catarina according to data provided by IVC for 2007 (circulation includes newspapers sold by subscription, street vendors or at newsstands). Zero Hora, Folha de São Paulo, O Estado de São Paulo, O Globo, Valor Econômico and Gazeta Mercantil are also distributed in the State on a limited basis, but are considered the main competitors of Diário Catarinense in the State of Santa Catarina because of their national content and because all the locally-produced newspapers are not distributed State-wide. Because Zero Hora, Diário Gaúcho and Diário Catarinense are distributed throughout their respective States (Zero Hora also circulates in the State of Santa Catarina on a limited basis), they compete to a limited extent with newspapers that are published in other cities, including with other newspapers published by RBS-Zero Hora. In this context, besides O Pioneiro, Jornal de Santa Maria and Jornal de Santa Catarina, the other important local competitor in Rio Grande do Sul, besides Correio do Povo and Jornal do Correio do Povo and Jornal de Comércio, is NH, which is published in the City of Novo Hamburgo (accounting for 72 approximately 2.4% of the population of the State of Rio Grande do Sul) by the Editora Sinos Group, with a daily average circulation of approximately 33,898 copies in March 2007, according to IVC, while in Santa Catarina the most important local newspaper competitors is O Estado, published in the City of Florianópolis by Empresa Editora O Estado Ltda., with a weekday daily average circulation of approximately 15,000 copies in 2006, according to information provided by Anuário de Mídia 2006, an annual publication of Editora Meio & Mensagem, an independent publishing company specialized in collecting data about the Brazilian communication, marketing and propaganda sectors (O Estado is not associated to IVC). All of these papers have a focus that is more local and less national and international than that of Zero Hora and Diário Catarinense. O Pioneiro has the highest readership of any local newspaper distributed in the metropolitan region of Caxias do Sul (as measured by IBOPE for November, 2006), which accounts for approximately 4% of the population of the State of Rio Grande do Sul. Diário de Santa Maria has the highest readership among local newspapers distributed in the central region of the State of Rio Grande do Sul (as measured by IBOPE for November, 2006), which accounts for approximately 2.5% of the population of the State. Another important local newspaper distributed in this region is A Razão, which accounts for 24% of newspaper readership on the region according to IBOPE (for November 2006). As of November 2006, IBOPE estimates that Diário de Santa Maria accounts for 47% of newspaper readership in the market. Jornal de Santa Catarina is published in the City of Blumenau and Porto Alegre, which accounts for approximately 5% of the population of the State of Santa Catarina. Jornal de Santa Catarina, which is distributed throughout “Vale do Itajaí” region and in the northeastern part of the State of Santa Catarina, is the local newspaper of highest circulation in the region, and accounts for the highest readership in the City of Blumenau, according to data provided by IBOPE for August 2006. A Hora de Santa Catarina was launched in August 2006, and targets the lower socio-economic segments (class C/D). It is published in Florianópolis and circulated in the State of Santa Catarina. A Notícia is an 80 years old newspaper from the city of Joinville. It was acquired by RBS at the end of 2006 and 57% of its readers are from classes A and B. The chart on the following page provides information on the readership and approximate circulation which (except as noted) have been calculated by IVC for March 2007 for each of the major papers in Rio Grande do Sul and Santa Catarina. 73 Principal newspapers of the States of Rio Grande do Sul and Santa Catarina Newspaper City of Publication Format Approximate Week-Day Circulation` Approximate Sunday Circulation1 Subscription1 Newsstand1 Number of Readers2 Rio Grande do Sul Zero Hora................................ Porto Alegre Diário Gaúcho................................ Porto Alegre Correio do Povo ................................ Porto Alegre NH ................................................................ N. Hamburgo Tabloid Tabloid Tabloid Tabloid 162,452 157,044 155,664 33,898 251,297 N/A 154,479 N/A 153,894 N/A 152,276 33,604 21,250 157,044 2,218 294 1,941,7251 1,364,4561 973,6181 263,7772 Jornal do Comércio................................ Porto Alegre Tabloid 30,000 N/A 28,800 1,200 36,6001 O Pioneiro................................ Caxias do Sul Tabloid 24,370 N/A 22,147 2,223 264,138 Diário de Santa Maria ................................ Cruz Alta Tabloid 15,195 N/A 12,789 2,406 144,137 Santa Catarina Florianópolis Diário Catarinense ................................ A Notícia................................ Joinville Tabloid Standard 39,945 27,858 61,170 31,807 38,371 26,904 4,606 1,518 861,897 308,310 Jornal de Santa Catarina................................ Blumenau Hora de Santa Catarina Florianópolis O Estado ................................ Florianópolis Tabloid Tabloid Standard 18,945 31,028 18,000 N/A N/A 15,000 17,279 N/A 10,800 1,666 31,028 4,628 197,789 N/A 12,360 (1) (2) Source (circulation): IVC March 2007, except for O Estado and Jornal de Comércio, for which the source is Anuário de Mídia 2006. Source (reading): Ibope for Santa Catarina - July 2006 and for Rio Grande do Sul - September 2006. 74 RBS-Zero Hora’s products Newspapers. The principal focus of RBS-Zero Hora is the publication of its daily morning newspapers Zero Hora, Diário Gaúcho, O Pioneiro, Diário de Santa Maria, Diário Catarinense, Jornal de Santa Catarina, A Notícia and A Hora de Santa Catarina, which are published in four colors and, except for A Notícia, in a tabloid format. The RBS Group considers the tabloid format to be preferable to the standard format for three reasons: it is easier to handle while reading, each advertising page commands the same advertising revenues as a standard-format page while using considerably less paper, and it is the format preferred by readers. The RBS Group believes that one of its more unique newspaper products is the Sunday classified advertisements section in Zero Hora, which is the largest Sunday classified advertisements publication in Brazil. The Zero Hora Sunday classified section normally consists of approximately 170 pages, comprising approximately five separate classified advertisements, and producing approximately R$950,000 of advertising revenues on a typical Sunday. Advertisers in the Zero Hora classified section have the option of placing their advertisements directly with RBS-Zero Hora by telephone, internet (through clicRBS) or at shopping stands and retail stores, among others, or indirectly through advertising agencies or independent agents working under commission. Approximately 53% of sales revenues from classified advertisements in 2006 were derived from sales of advertisements by advertising agencies, 24% by telephone, 13% by independent agents and 10% by shopping stands and retail stores. Other products. RBS-Zero Hora also operates a logistics distribution service business unit, a book publishing unit, as well as the internet-based businesses of RBS Group, including clicRBS, the multimedia internet portal website for the RBS Group. Logistics services. ViaLOG is a division of RBS-Zero Hora that currently operates the logistics services for the distribution of the eight newspapers published by RBS-Zero Hora. ViaLOG also offers logistics management services to third parties, focusing mostly on printed material distribution, using the know-how developed as the logistics division for RBS-Zero Hora, as well as on express and e-commerce storage and delivery services. ViaLOG’s services cover the Service Territory and the State of Paraná. Book publishing. RBS Publicações, a division of RBS-Zero Hora, focuses on the publication of books. The books are usually compilations of a series of connected articles and reports published by the RBS Group’s newspapers. Some recent examples are a compilation of articles written by a Zero Hora columnist and a cookbook with recipes for newborns using a series of articles prepared by Zero Hora. These books are usually offered to subscribers of the RBS Group’s newspapers at a discounted price, or generally to the public through book stores and newsstands. Internet. ClicRBS, the main product of the internet-based business of RBS-Zero Hora, integrates content from multiple sources, including the TV channels, radio stations and newspapers of the RBS Group. The main products offered through the website are news, entertainment and information. Access is free, so revenues from this business are derived entirely from advertising on the website. RBS-Zero Hora also operates “hagah,” a services portal and Kzuka, a youth-oriented marketing unit. RBS-Zero Hora’s production process Newspapers. RBS-Zero Hora’s eight newspapers employ 206 reporters and correspondents throughout Brazil. Of these reporters and correspondents, 113 are located in Rio Grande do Sul, 93 in Santa Catarina and the remainder in other parts of Brazil. RBS-Zero Hora also benefits from news reports prepared by the 90 reporters of the other RBS Network companies throughout Brazil. In addition, RBS-Zero Hora has contracted with one independent correspondent on a non-exclusive basis in each of São Paulo, Rio de Janeiro, Buenos Aires and Paris and on occasion sends its reporters to locations throughout the world as certain newsworthy events occur, such as the World Cup soccer tournament and other major sporting events. In addition to its reporters, RBS-Zero Hora has a staff of 37 writers, 18 of which are located in Rio Grande do Sul and 18 of which are located in Santa Catarina; a staff of four researchers, all located in Rio Grande do Sul; and a staff of 48 photographers, 29 located in Rio Grande do Sul and 19 located in Santa Catarina. 75 RBS-Zero Hora reporters either send information in to RBS-Zero Hora, or input the information directly onto the computers located in the respective newspaper newsroom (each RBS-Zero Hora newspaper has its own newsroom), where they are shaped into stories by the writing staff and then shared with the other RBS-Zero Hora newspapers. In addition, certain national and international news stories are taken directly from the on-line news services to which RBS-Zero Hora subscribes, including Reuters, Associated Press, Tribune Media Service International and Grupo de Diários América (the Newspaper Group of America or “GDA”). RBS-Zero Hora uses a fully computerized lay-out system. Logistics services. ViaLOG has a staff of 16 people, distributed among ViaLOG’s Distribution Centers located in the cities of Porto Alegre, Florianópolis and Curitiba, which are responsible for administrative activities, storage, loading, unloading, shipping and handling operations. The transport and distribution activities are carried by a network of approximately 10 outside contractors. Currently ViaLOG operates 28 daily designated routes, exclusively dedicated to ViaLOG’s operations. The logistics management services rendered to third parties by ViaLOG can be generally described as follows: (i) Distribution of printed material: ViaLOG receives from its clients the list of addresses of the client’s subscribers in order to print the respective labels and establish the distribution process. The client usually sends the printed material (newspapers, magazines, direct mail, etc.) to ViaLOG’s Distribution Centers one or two days in advance of distribution. ViaLOG arranges the delivery process and sends the material for transportation and distribution through the outside contractors. (ii) Express delivery: On a regular basis, ViaLOG (through outside contractors) collects the material to be delivered (volumes up to 35 kilograms) from its clients, selects and establishes the delivery routes to be used, issues the respective documents and arranges the delivery process. Transportation and final delivery is made by outside contractors. (iii) Storage and express delivery: mostly used in connection with e-commerce delivery services. On a regular basis, ViaLOG (through outside contractors) collects the products from its clients and provides storage for later distribution, as in the case, e.g., of cellular phones and equipment of a local cellular system operator. Once solicited by the client, ViaLOG selects and properly accommodates the products in shipping boxes, issues the respective documentation, establishes the delivery routes to be used and arranges the delivery process. Transportation and final delivery is made by outside contractors. Book publishing. Since book publishing involves the utilization of a high-quality paper that requires a specific printing process, considerably different from the regular newspaper printing process, RBS-Zero Hora utilizes the industrial facilities of third parties to publish its books. It has a staff of four editors and employees that compile the news reports and other materials into a book format and then prepare a camera ready version for publication. Internet. ClicRBS and “hagah” have a combined staff of 6 employees and 66 web designers that are responsible for updating and maintaining the site. Most of the website’s content is produced by the TV and radio stations and by the newspapers of the RBS Group, with a limited amount coming from on-line news services to which RBS-Zero Hora subscribes. Kzuka has a staff of 22 dedicated to maintaining its website. Newspapers. Approximately 88% of sales are of Zero Hora, 91% of O Pioneiro, 84% of Diário de Santa Maria, 89% of Diário Catarinense, 91% of Jornal de Santa Catarina, and 95% of A Notícia, while the rest are sold at newsstands or by street vendors. Diário Gaúcho and Hora de Santa Catarina is solely sold at newsstands or by street vendors. Zero Hora’s subscribing customers generally pay approximately 29.40% less on a yearly basis than purchasers of the newspaper from newsstands or street vendors. RBSZero Hora’s newspapers subscription works on a revolving basis, i.e., with monthly payments and no need for periodic renewals. Subscribers must call RBS-Zero Hora only to cancel subscriptions. Billing is either through direct bank account debit or credit card. This subscription format significantly reduces churn and delinquency rates, as well as contributes to a more steady cash inflow and to better working capital management. Distribution of the newspapers, whether to subscribers or to vendors, are made by independent 76 contractors, while ViaLOG handles distribution between the printing centers and the distribution centers throughout the States of Rio Grande do Sul and Santa Catarina. Logistics services. Services rendered to all customers, including to RBS Group companies such as Orbeat, are charged on a 2-week or monthly basis after the service has been rendered through the issuance of the respective invoice describing the services rendered. Book publishing. RBS-Zero Hora generally offers a discount of approximately 30% to subscribers of RBS-Zero Hora’s newspapers when purchasing books published by RBS Publicações through telephone or internet. Billing is made together with the next monthly newspaper subscription payment. Regular price is charged from customers buying books through bookstores and newsstands. Internet. Advertising on the website is the only source of revenues for this business, and is charged from advertisers through the same process used to charge advertisers in the RBS-Zero Hora’s eight newspapers. Occasionally some companies of the RBS Group, such as Orbeat, sell merchandising through clicRBS as part of the many inter-company relationships which exist among the different RBS Group entities in the ordinary course of business. See “Related party transactions”. The proceeds from sales through clicRBS are exclusively retained by the respective seller. Cost and revenue structure RBS-Zero Hora’s revenues consist principally of advertising, subscription, classified and newsstand revenues, revenues from third party printing and logistics services. Its costs consist principally of newsprint and other raw material costs, personnel costs, third party contractors costs and sales related costs. Although virtually all of RBS-Zero Hora’s revenues are real-denominated, approximately 28% of its operating costs, including costs of imported newsprint, ink and subscriptions to international news services, are denominated in U.S. dollars or other foreign currency. Thus, devaluations of the real against the U.S. dollar would likely have a negative impact on RBS-Zero Hora’s income. The cost of imported newsprint, which for 2006 constituted approximately 60% of RBS-Zero Hora’s raw materials costs, has fluctuated significantly over the past years. Newsprint prices for the Issuer averaged U.S.$691 per ton in 2006. Increases in newsprint costs for the Issuer could adversely affect operating revenues, although RBS - Zero Hora historically has passed on to customers the cost increases by increasing the cover and subscription price of its newspapers. RBS-Zero Hora generally seeks to maintain a target inventory sufficient for approximately 60 days of newspaper production. Delivery lead time is around 45 days. Almost all of the imported newsprint comes from Canada. RBS-Zero Hora has a supplier credit of 180 days for each purchase, backed by the Canadian Exim Bank (EDC – Export Development Canada). On occasion, newsprint purchases can be refinanced through import trade lines, usually readily available at significantly lower costs than other funding facilities in Brazil. Advertising RBS-Zero Hora’s advertising operations are conducted by approximately 32 sales employees, who principally work with advertising agencies to contract for corporate and classified advertising, and 186 independent agents, who principally arrange for classified advertising sales and who receive a 20% commission on sales made. In addition, RBS-Zero Hora employs approximately 40 telephone operators to take classified advertisements by telephone. RBS-Zero Hora is a member of Grupo de Diários América GDA, a marketing and sales organization sponsored by the major daily newspapers in Latin America. Business development strategy The RBS Group’s principal business strategy for its newspaper business is to pursue a process of centralization to capture benefits of scale and extend this strategy to new titles and explore new sources of revenue complimentary to traditional newspaper sources that have synergies, such as publications and events (shows, fairs, etc.). 77 RBS-Zero Hora also seeks to continue to increase its market share in the areas where it is currently operating by either further improving the quality of its newspapers or launching new regional titles. To achieve this goal, RBS-Zero Hora focuses on attracting, developing and retaining talented personnel and on capitalizing on the technological innovations and synergies with other RBS Network companies. The Guarantors Introduction The Guarantors of the Notes, TV Gaúcha, TV Florianópolis and Rádio Gaúcha, are among the largest of the RBS Group companies. As of and for the year ended December 31, 2006, net operating revenues of the Guarantors represented 40% of the combined net operating revenues for the RBS Group as a whole. TV Gaúcha and TV Florianópolis serve as the hub for all RBS Network broadcast television operations in the States of Rio Grande do Sul and Santa Catarina, respectively, and operate VHF television broadcast stations in the Cities of Porto Alegre and Florianópolis, respectively. Rádio Gaúcha owns and operates an AM news and sports radio station in Porto Alegre, which is the largest radio station among the radio stations operated by the RBS Network, and operates Gaúcha Sat, a radio news and sports network that at December 31, 2006 supplied, via satellite, programming to 135 affiliate stations throughout the country. Collectively, the Guarantors represent the television stations with the largest audiences in the States of Rio Grande do Sul and Santa Catarina, and radio stations including the largest one by revenue in these states. TV Gaúcha and TV Florianópolis Introduction TV Gaúcha owns and operates the leading VHF television station in Porto Alegre and TV Florianópolis owns and operates the leading VHF television station in Florianópolis. Most of the television stations of the RBS Network, including TV Gaúcha and TV Florianópolis, are VHF television broadcast stations. All VHF television broadcast stations of the RBS Network transmit Globo Network’s content. TV Globo provides approximately 85% of the programming for TV Gaúcha and TV Florianópolis, as well as for the other VHF television stations of the RBS Network. Substantially all of the remaining programming broadcast by TV Gaúcha, TV Florianópolis and other RBS Network VHF television stations is produced by TV Gaúcha or TV Florianópolis. In addition to producing most of their own programming not provided by TV Globo, TV Gaúcha and TV Florianópolis occasionally provide their programming to TV Globo, to the extent that such programming would be of interest nationwide. The Broadcast television market in Rio Grande do Sul and Santa Catarina The broadcast television market in Rio Grande do Sul includes the RBS Network’s competitors, which consist of three regional networks that are affiliated to the national networks SBT, Record and Bandeirantes, plus a local private standalone station (Guaíba, which was acquired by Record in 2007) and a State-owned television station (TVE). Altogether, there are 10 VHF stations competing with the RBS Network in the State of Rio Grande do Sul, and 12 RBS Network stations, which are located throughout the State, broadcasting Globo Network programming and producing additional local news programming. The broadcast television market in Santa Catarina consists of six RBS Network stations and 13 VHF television stations. According to Midia Dados, there were 4.3 million TV households in the Service Territory in 2004. In areas where the RBS Network offers television broadcast services, its stations generally receive ratings that are above the sum of all its competitors, mainly because TV Globo programming is exclusively broadcast through RBS Network VHF television stations. Both TV Gaúcha and TV Florianópolis continue to be the most watched television stations in their respective metropolitan regions, with average audience shares of broadcast television viewership of 57.5% and 58%, respectively (March 2007 time period between 6 a.m. and 12 a.m.), from March 2007 as measured by IBOPE. Both TV Gaúcha and TV Florianópolis are broadcast affiliates of TV Globo, and TV Gaúcha has been so affiliated for 40 years. There are six VHF broadcast television stations in the greater Porto 78 Alegre metropolitan region and four broadcast television stations in the greater Florianópolis metropolitan region. The chart on the following page shows the respective audience shares of the various television stations in the greater Porto Alegre and Florianópolis metropolitan regions, respectively, from March 2007. The references in the following table to “SBT”, “Bandeirantes” and “Record” are to the national networks that operate under those names. For the purposes of this chart, “audience share” is defined as the percentage of all households with a television set that is turned on and tuned to the network in question between the hours of 6:00 a.m. and 12:00 midnight. 79 Television network audience shares in Rio Grande do Sul and Santa Catarina Station National Affiliation Audience Share Porto Alegre: RBS TV (TV Gaúcha) ................................................................................................ Globo TVS................................................................................................................................ SBT Pampa............................................................................................................................. Record Bandeirantes................................................................................................Bandeirantes Guaíba............................................................................................................................ n/a Others............................................................................................................................. n/a 57.5% 15.7% 6.9% 5.8% 1.5% 12.6% Total........................................................................................................................... 100% Florianópolis: RBS TV (TV Florianópolis) .......................................................................................... Globo SCC................................................................................................................................ SBT Record............................................................................................................................ Record Barriga Verde................................................................................................ Bandeirantes Others............................................................................................................................. n/a 58.3% 10.6% 9.9% 5.3% 15.9% Total........................................................................................................................... 100% Source: IBOPE TeleReport Light March 2007. The RBS Network’s other VHF television stations are also the most popular in their respective regions, generally having even higher market shares than TV Gaúcha and TV Florianópolis given the lower degree of competition in the less concentrated local markets. Affiliation of the RBS Network with the Globo Network TV Gaúcha and TV Florianópolis, as well as the other VHF television stations in the RBS Network, all transmit Globo Network’s content, a network of television stations throughout Brazil which carry the broadcast signal provided by TV Globo. TV Gaúcha, TV Florianópolis and the other 16 VHF television stations that form part of the RBS Network are the sole network affiliates of TV Globo in the States of Rio Grande do Sul and Santa Catarina. The Globo Network is comprised of 121 television stations throughout Brazil, out of which 116 are affiliates and the other five are owned directly or indirectly by TV Globo. TV Globo transmits the national television signal and controls the format and content of its programming, which is unscrambled and provided free of charge to any person or institution that can receive the signal that is broadcast by satellite. The RBS Network’s VHF television stations, as a whole, are the largest affiliates of TV Globo in terms of number of stations, repeaters, transmitters, regional coverage, sales, revenues and production staff. The Globo Network is currently the largest single television network in Brazil based on revenues, audience share and the volume of programs produced. TV Globo broadcasts a broad range of programs 24 hours a day, including entertainment programs, films, sporting events, reality shows, talk shows, telenovelas (“soap operas” or serial dramas which are broadcast six nights a week for approximately six months), educational and public service programs and four news broadcasts per day. Most of the programming provided by TV Globo is produced by TV Globo itself, with the remainder being purchased from third parties. The Globo Network, of which TV Gaúcha has formed a part since 1967, is the most popular network in Brazil, with an average nation-wide broadcast television audience share of 50.48% and an average primetime audience share of 58.65% in March 2007, as measured by IBOPE. The following chart shows the relative audience shares and prime-time ratings of the Globo Network and the other national networks in 80 Brazil, as measured by IBOPE. For the purposes of this chart, “audience share” has the meaning set forth above, and “prime time audience share” refers to the audience share between the hours of 8:00 p.m. and 10:00 p.m. Television network audience shares and ratings in Brazil Network Audience Share Prime-Time Audience Share Globo .............................................................................................................................50.48% 58.65% SBT ................................................................................................................................14.94% 9.29% Record............................................................................................................................13.54% 15.12% Bandeirantes................................................................................................ 4.31% 3.25% Rede TV................................................................................................ 2.81% 3.68% Others.............................................................................................................................13.92% 10.01% Total........................................................................................................................... 100% 100% Source: IBOPE TeleReport Light PNT March 2007. Affiliation with a national television network can have significant influence on the revenues of a regional television station because the audience share drawn by a national network’s programming can significantly affect the rates at which a regional television station can sell advertising time. National television networks tend to favor affiliations with television stations which provide programming commitments and local marketing support and which are able to provide the national network with better access to a particular market. The RBS Network VHF television stations, in particular, provide TV Globo with a close connection to the local communities in Rio Grande do Sul and Santa Catarina, by offering local programming and news in each of the small cities and towns in which the RBS Network maintains a station. In 2006, the lead-in audience share for the prime-time local news produced by TV Gaúcha and TV Florianópolis as measured by IBOPE was 69.5% and 75.3%, respectively. The RBS Network VHF television stations have been transmitting the Globo Network’s content for 40 years. Contracts between the VHF television stations forming part of the RBS Network, including TV Gaúcha and TV Florianópolis, and TV Globo are valid until 2008, but are subject to an automatic extension until 2011. See “— The Globo Contracts” below. The RBS Network believes that because of its local programming capabilities, the strength of its local marketing support and the significantly broader access it can provide to the Rio Grande do Sul and Santa Catarina markets than any of its competitors, it will continue to maintain a strong relationship with TV Globo in the future. See “Risk factors — Risks relating to the RBS Group”. The Globo Contracts The relationship between TV Globo and the RBS Network is governed by a contract between TV Gaúcha and TV Globo, dated March 28, 2002 and effective as of April 1, 2002, and a contract between TV Florianópolis and TV Globo also dated March 28, 2002 and effective as of April 1, 2002 (collectively, the “Globo Contracts”), that will expire on March 31, 2008, but are subject to an automatic extension until 2011, unless they are terminated by any of the parties upon delivery of a 90-day written notice to such effect. The Globo Contracts require TV Globo to provide TV Gaúcha and TV Florianópolis with TV Globo’s programming and require TV Gaúcha and TV Florianópolis to broadcast TV Globo’s programs in the RBS Network’s Service Territory on an exclusive basis. TV Globo programming is transmitted by satellite, and TV Gaúcha and TV Florianópolis are provided by TV Globo with a receiver antenna. TV Gaúcha and TV Florianópolis agree in the Globo Contracts to retransmit the programming so received without any alterations, interruptions or omissions. The programming so provided constitutes approximately 85% of the programming shown by TV Gaúcha and TV Florianópolis. In addition, and as contemplated by the Globo 81 Contracts, TV Gaúcha and TV Florianópolis produce regional and local programming for broadcast on their respective television stations. TV Gaúcha and TV Florianópolis also assist TV Globo in the preparation of national news coverage of events occurring in the RBS Group’s Service Territory, as well as occasional foreign coverage (mostly in Argentina and Uruguay) for logistical reasons. Although not formally established in the Globo Contracts, the regional and local programming prepared by TV Gaúcha and TV Florianópolis may be occasionally provided to TV Globo at no cost, upon TV Globo’s request. Advertising time on the RBS Network’s television broadcasts is split between national advertising clients of TV Globo, regional clients of TV Gaúcha and TV Florianópolis and local clients of the various RBS Network affiliates. Under the Globo Contracts, TV Gaúcha and TV Florianópolis have granted TV Globo the authority to arrange all advertising of a national nature that is broadcast on TV Gaúcha’s and TV Florianópolis’s television stations. TV Gaúcha and TV Florianópolis have agreed to reserve at least 50% of advertising time for such national advertising and are free to use the remaining 50% of advertising time for local or regional advertising. Each break in programming for advertisements throughout the day is evenly divided in this way, with the ability for national advertising accounts to use un-sold regional and local advertising time spots and regional and local advertising accounts to use un-sold national time spots. Historically, over half of the total advertisements broadcast by the RBS Network VHF television stations has been for regional and local advertising accounts. Revenues derived from advertisements placed with TV Globo by national advertising accounts for national broadcast over the Globo Network, known as “NET” modalities, are invoiced and retained exclusively by TV Globo. Revenues derived from advertisements negotiated by TV Gaúcha and TV Florianópolis within the RBS Network’s Service Territory, known as “LOCAL” modalities, are invoiced and retained by TV Gaúcha and TV Florianópolis, respectively. Revenues derived from advertisements negotiated by TV Globo and broadcast exclusively by TV Gaúcha and TV Florianópolis, respectively, known as “SPOT” modalities, are invoiced by TV Gaúcha and TV Florianópolis against TV Globo, which directly invoices the respective “SPOT” advertisers. Effective transfer of funds under the “SPOT” modalities occurs after settlement of the revenue split defined under the Globo Contracts as the programming charges owed to TV Globo. The operating costs of TV Gaúcha and TV Florianópolis principally consist of salaries for regional reporters, production and sales staff, maintenance and operational expenses for its production and broadcast facilities, and programming charges due to TV Globo under the terms of the Globo Contracts, established as a split of advertising revenues among TV Globo and TV Gaúcha or TV Florianópolis, as the case may be. In this context, the programming charges are equal to the “SPOT” revenues less the difference between the contractual percentage of total revenues attributable to the RBS Network’s VHF television stations and the effective “LOCAL” revenues invoiced and retained by the RBS Network’s VHF television stations, according to the following formula: Programming Charges = “SPOT” – (contractual % of total revenues – “LOCAL” revenues). The terms of the Globo Contracts establish the contractual percentage of total revenues attributable to the RBS Network for each of TV Gaúcha and TV Florianópolis. The Globo Contracts may be terminated by either party in the event of non-compliance by the other party with the terms thereof, provided that the non-complying party shall have received notice of and shall have had ten days to cure the non-compliance. RBS Network programming The VHF television stations comprising the RBS Network produce approximately 15% of the programming broadcast over the stations, the balance being provided by TV Globo. Programming produced by TV Gaúcha and TV Florianópolis is broadcast throughout Rio Grande do Sul and Santa Catarina by local RBS Network VHF television stations. Each station maintains a local news facility which supplements the State-wide broadcasts with local news which is available for rebroadcast by TV Gaúcha and TV Florianópolis. All programming produced by the RBS Group television stations is shared among the stations 82 and occasionally is made available to TV Globo (upon TV Globo’s request and at no cost) for rebroadcast through the Globo Network. RBS Group transmission network Programming received from the Globo Network through satellite, as well as State and local programming produced by the television stations of RBS Network, including those produced by TV Gaúcha and TV Florianópolis, are transmitted among the different RBS Network’s television stations and retransmitters by the most extensive transmission network within the Service Territory. RBS Network’s transmission network utilizes both digital and analogical microwave technology, as well as UHF. TV Gaúcha currently owns and operates a digital microwave broadband backbone that connects Porto Alegre with many of the RBS Network’s television and newspaper operations in the States of Rio Grande do Sul, Santa Catarina, Paraná and São Paulo. The network has been designed to be able to transmit simultaneously up to four television broadcasts, four voice lines and data transfer. The principal purpose of the network is to increase the video transmission capabilities and flexibility among all RBS Network television stations, to enable Zero Hora and Diário Catarinense to transmit newspaper content for remote printing and generally to reduce reliance on the Embratel satellite system and the conventional telephone system. TV Gaúcha currently charges other RBS Network companies for services provided through the network. Unused capacity is regularly sold mainly to internet service providers and cable operators. Advertising operations Advertising accounts are designated as national, regional or local. The designation of an account as national, regional or local generally depends upon the location of the advertising agency of the customer and may not necessarily correlate with the breadth of the distribution that the advertisement is expected to receive. Sales to national advertising accounts are conducted on behalf of TV Gaúcha and TV Florianópolis by a sales force maintained by TV Globo. National advertising accounts represent either advertisements intended for simultaneous nationwide distribution (“NET” modalities) or regional advertisements for customers located outside the Service Territory (“SPOT” modalities). Sales to regional advertising accounts are conducted directly by TV Gaúcha and TV Florianópolis sales forces. Regional advertising is generally for the account of customers located in the Service Territory (“LOCAL” modalities). This category also includes local advertising produced for broadcast in the cities of Porto Alegre or Florianópolis only. Sales to local advertising accounts are conducted on behalf of TV Gaúcha and TV Florianópolis and local RBS Network television stations by sales forces maintained by the local stations. Local advertising accounts are generally for the account of customers in areas served by RBS Network television stations other than TV Gaúcha and TV Florianópolis. Nevertheless, any VHF television station’s sales force may originate sales for any other station as is the case of local advertisers desiring to reach statewide audiences. Because of their strong viewer market shares, TV Gaúcha and TV Florianópolis generally are able to charge higher prices per time slot than competitor television stations. However, these prices are generally the lowest per thousand viewers. Because of TV Gaúcha’s and TV Florianópolis’s strong audience shares and relatively lower cost of reaching viewers, the RBS Network believes that it attracts more advertising volume than its competitors. As a result, its revenue share of the television advertising market is even higher than its viewer market share. Revenue structure The revenues of TV Gaúcha and TV Florianópolis are comprised primarily of advertising revenues. Under the terms of their contracts with TV Globo and under arrangements in place with the other VHF television stations forming part of the RBS Network, there are three types of advertising revenues: “NET revenues”, “SPOT revenues” and “LOCAL revenues”. “NET revenues” are not recorded on TV Gaúcha’s or TV Florianópolis’s books, but are included in the basis for calculation of programming charges to TV Globo. 83 TV Gaúcha and TV Florianópolis also receive fees from other TV stations in the RBS Network under programming assignment agreements. Business development strategy The RBS Network has already digitalized almost all of its television generation facilities, where the digitalization process made economic sense. Once the digital TV standards for the Brazilian TV market are defined, the RBS Network will consider further investments in the transmission facilities (transmitters and antennas). There are no estimates of the costs involved in these investments, since technology, market regulation and economic structure of this new service are still uncertain. Rádio Gaúcha Introduction Rádio Gaúcha is the oldest of the RBS Network companies, having been founded in 1927 and acquired by the present principal shareholders of the RBS Network in 1957. See “— The RBS Network — History”. Rádio Gaúcha is an all-news AM station, with 24-hour news, talk shows and sports coverage. During 2006, Rádio Gaúcha had an audience share of 61% in the Porto Alegre metropolitan area, its center of broadcast operations. Rádio Gaúcha was the first all-news radio station in Brazil to offer 24-hour news and sports coverage. As its daytime broadcasts generally cover a 200-kilometer range, and as late-night shortwave broadcasts under optimal conditions reach into the northern regions of Brazil, Rádio Gaúcha enjoys a high level of recognition throughout Brazil. The following chart shows the respective average audience shares of Rádio Gaúcha and its competitor news stations in the greater Porto Alegre metropolitan region for JanuaryMarch 2007, according to IBOPE. For the purposes of this chart, “Audience Share” is defined as the percentage of households, offices, cars and others with a radio that is turned on and tuned to the radio in question, as measured 24 hours a day. AM news radio average audience shares in the Porto Alegre metropolitan area Audience Share Station Rádio Gaúcha1 ................................................................................................................................ Guaíba1............................................................................................................................................... Bandeirantes1 ................................................................................................................................ Pampa1 ............................................................................................................................................... Farroupilha2........................................................................................................................................ Others................................................................................................................................................. Total............................................................................................................................................... (1) (2) 28% 8% 6% 3% 54% 1% 100% News/sports segment. Popular segment. Of these stations, Rádio Gaúcha, Guaíba and Bandeirantes compete on a State-wide basis. According to IBOPE, Rádio Gaúcha maintains a higher audience share on a State-wide basis than Guaíba and a substantially higher market share than Bandeirantes. Farroupilha is operated by the RBS Network. Rádio Gaúcha operates a radio news network, Gaúcha Sat, through which it provides news programming to about 135 radio stations via satellite. In return, Rádio Gaúcha leverages its audience base beyond the Porto Alegre metropolitan area and consequently increases the value of advertising capabilities. In addition, programming provided by Rádio Gaúcha includes advertising of a national or regional nature sold by Rádio Gaúcha. Rádio Gaúcha is seeking to expand the Gaúcha Sat Network beyond the present 135 radio stations. 84 The radio market in Rio Grande do Sul and Santa Catarina The radio market in Brazil, including Rio Grande do Sul and Santa Catarina, is generally dominated by FM music radio stations, with an emphasis especially on modern Brazilian popular music. There are 1,427 FM stations and 1,707 AM stations in Brazil and 242 FM stations and 287 AM stations in Rio Grande do Sul and Santa Catarina, according to data provided by Associação Catarinense de Emissoras de Rádio e Televisão – ACAERT (The Santa Catarina Radio and Television Networks Association) and Associação Gaúcha de Emissoras de Rádio e Televisão – AGERT (The Rio Grande do Sul Radio and Television Networks Association). The RBS Group believes that Rádio Gaúcha’s 24-hour news format was the first of its kind in Brazil and continues to be one of the country’s few 24-hour news stations. Rádio Gaúcha had a news audience share of 58% and a sports audience share of 60% in the Porto Alegre metropolitan area in January-March 2007, according to IBOPE. On a State-wide level, Rádio Gaúcha competes with small, locally produced radio stations that operate in smaller cities and towns. Aside from those local stations, Rádio Gaúcha’s principal competition in Porto Alegre and throughout the State consists of Central Brasileira de Notícias (“CBN”), an affiliate of Sistema Globo de Rádio (affiliated to TV Globo) which produces regional and national news broadcasts principally in the central region of Brazil, and is operated in Porto Alegre and Florianópolis by RBS Network companies under certain operational agreements with CBN; Bandeirantes, which produces both news and music programming and is strongest in São Paulo and relatively weaker in Rio Grande do Sul and Santa Catarina; and Jovem Pan, which produces news and music programming on a national level. Rádio Gaúcha’s product and production process Rádio Gaúcha’s 24-hour news programming is divided among “hard” news (averaging approximately 8.6 hours per day), live sports coverage (averaging 6.8 hours per day) and talk shows (averaging 8.6 hours per day). The content of Rádio Gaúcha’s programs is prepared by a news production staff of 153 employees, who conduct the necessary research and draft the text of each program’s content. The programming is delivered by a staff of 69 radio announcers and reporters. In addition, Rádio Gaúcha maintains a sales staff of 19 persons and a technical assistance staff of 29 people. All production staff and radio announcers are given access to the on-line news service compiled by RBS-Zero Hora, which includes the reports of all RBS Network reporters located throughout Brazil. The production and transmission process for Rádio Gaúcha and most other radio stations is relatively simple. The critical factor in achieving high audience shares and, thus, high advertising revenues is the quality of the programming product. Rádio Gaúcha believes that it has attracted and retained as radio announcers the most popular radio personalities in its region and believes that, as part of the RBS Network, it has better access to news reports and sports coverage than other stations in the listening area. In addition, Rádio Gaúcha, like other RBS Network companies, is able to offer its staff full-time multimedia contracts, an option which most of the RBS Network’s competitors are not able to offer. Due to its permanent office and studio in the City of Brasília, the federal capital City, Rádio Gaúcha is quickly able to produce and report governmental and political news. In Brazil, radio transmission licenses are granted for terms of 10 or 15 years. Rádio Gaúcha’s license expired in 2003, and an application was presented for renewal, which is currently pending approval by governmental authorities. Management expects that the company’s license will be renewed, since it is in compliance with all requirements necessary for this approval. Until a decision is made on the renewal application, Rádio Gaúcha may continue to use its existing license. Cost and revenue structure Rádio Gaúcha’s currently principal source of revenue is advertising. In 2006, Rádio Gaúcha’s operating revenues consisted solely of advertising revenues. Rádio Gaúcha’s and its company revenues of principal expenses are salaries of its radio announcers, sales and related personnel, royalties paid for use of the RBS trademarks and the costs of operating and maintaining the transmission tower and equipment. 85 Rádio Gaúcha also receives fees from other radio stations in the RBS Network under programming and service contracts. Business development strategy Rádio Gaúcha is a fairly mature and stable business. Expansion alternatives exist through increasing its affiliation with the Gaúcha Sat network. Hence, Rádio Gaúcha’s main business strategy is to defend its leadership through the quality of its content and the broadest possible coverage. RBS A&C The business description RBS A&C is set out to provide a complete overview of the RBS Network’s operations and companies. Prospective purchasers of the Notes should be aware that the Notes are being issued by RBS-Zero Hora and are not guaranteed by, nor do they constitute obligations of, RBS A&C, but constitute obligations of RBS-Zero Hora, jointly and severally guaranteed by TV Gaúcha, TV Florianópolis and Rádio Gaúcha, the businesses of which are described above. RBS A&C, a company approximately 95% owned by the controlling shareholders of the RBS Group and approximately 5% owned by RBS Par, performs treasury functions for the RBS Network companies, including for the Issuer and the Guarantors, centralizing cash management operations. RBS A&C is a separate legal entity under common control with the Issuer and the Guarantors but is not a guarantor of the Notes. In addition, RSB A&C owns 45% of the Issuer. Since 1993, cash revenues of any of the RBS Network companies has been collected and held by RBS A&C, as a “cash management company”, on behalf of the respective RBS Network company pursuant to a contractual arrangement among the companies. As each member of the RBS Network requires funds, it withdraws cash on deposit with RBS A&C, issues payment instructions to RBS A&C or requests a loan from another member of the RBS Network. RBS A&C and RBS Network companies also may borrow funds from third parties, such as banks or the shareholders of the RBS Network. Except for the advances for future capital increases and the “balances receivable” receivables from RBS A&C, which bear no interest, inter-company loans with the Credit Group are done on an arms-length basis at market rates. In this context, in recent years RBS A&C has provided financing to the Issuer and Guarantors and, at December 31, 2006, Issuer and Guarantors owed RBS A&C R$72.1 million and R$107.21 million, respectively. At December 31, 2006, RBS A&C had outstanding indebtedness in the amount of R$40.9 million. RBS-Zero Hora, TV Gaúcha and Radio Gaúcha provide further guarantees to a portion of RBS A&C’s outstanding indebtedness (principal amount of approximately R$38.6 million). RBS A&C may in the future guarantee or incur additional indebtedness, which may be guaranteed by other RBS Group companies, including members of the Credit Group Companies. If an event of default occurs under any of RBS A&C’s present or future obligations, the creditors of RBS A&C may attempt to attach or foreclose on the assets of RBS A&C or demand payment under guarantees, and the cash assets of the Issuer and the Guarantors which are in the possession of RBS A&C in its cash management role. The Issuer and the Guarantors could be considered unsecured creditors of RBS A&C (because of the funds that RBS A&C holds on their behalf), ranking pari passu with the claims of the unsecured creditors of RBS A&C and junior to the claims of the secured creditors of RBS A&C. In the event of a liquidation, insolvency or bankruptcy of RBS A&C, the Issuer, the Guarantors, and in turn the holders of the Notes may not be entitled to receive the value of the cash assets of these entities held on their behalf by RBS A&C. In addition, if an event of default occurs under the Notes or the Guarantees, as the case may be, holders of these Notes may face difficulties in attaching or foreclosing on the cash assets of the Issuer or the Guarantors, as the case may be, that are in the possession of RBS A&C. Furthermore, RBS A&C is a defendant in administrative proceedings with the Brazilian tax authorities. See “Legal Proceedings”. 86 RBS Participações RBS Participações S.A. (“RBS Par”) is a holding company within the RBS Group, formed to hold the RBS Group’s investments in areas not regulated by the TV and Radio Broadcasting Law. RBS Par currently holds certain of the RBS Group’s residual investments. RBS Par also holds the RBS Group’s trademarks, for which it receives royalties from the RBS Group’s companies. RBS Par had net capital deficiency plus advances for future capital increase of R$433 million as of March 31, 2007. Government regulation Introduction The activities of the RBS Network are subject to government regulation, and certain companies of the RBS Network are subject to licensing requirements. Newspaper publishing, television broadcasting and radio broadcasting companies are subject to restrictions on their ownership of other companies which engage in the same respective media activities. Concessions for television and radio broadcasting are granted by the President of the Republic of Brazil. The following discussion gives a brief overview of the government regulation applicable to both the present and planned principal activities of the RBS Network. Ownership Until May 2002, pursuant to Article 222 of the Brazilian Constitution, corporations or other legal entities could not hold any of the voting shares and could only hold up to 30% of the total share capital (only in the form of non-voting shares) of the legal entity which owned and operated a television or radio station or newspaper, provided all shareholders of such corporations were Brazilian citizens. By a Constitutional Amendment in May 2002, Brazilian corporations (with at least 70% of the total capital and voting capital held directly or indirectly by Brazilian-born persons or people who have their Brazilian citizenship for more than 10 years) were authorized to hold up to 100% of the total share capital (including voting shares) of the legal entity owning and operating a television or radio station or newspaper business. Nevertheless, no individual, corporation or other legal entity can own interests in more than two television stations in a given State (and no more than one per city) or in more than ten television stations in Brazil, only five of which may be VHF television stations. Likewise, no person or legal entity can hold more than six FM local radio licenses, two AM medium-wave radio licenses and two short-wave radio licenses for all of Brazil. Newspaper publishing Pursuant to the Brazilian Federal Constitution and Law N° 5,250 of February 9, 1967 (the “Press Law”), the publication and circulation of books, newspapers and periodicals in Brazilian territory is free and is not subject to any governmental concession or approval. Under Articles 8 and 9 of the Press Law, all newspapers in Brazil must be registered as a company. In accordance with Article 222 of the Federal Constitution and Articles 3, 4, and 5 of the Press Law, only Brazilian-born persons, people who have held their Brazilian citizenship for more than 10 years and private companies which are incorporated under the laws of and have their headquarters in Brazil, may hold an interest in a newspaper company. At least 70% of the total capital and voting capital in a newspaper company must be held, directly or indirectly, by Brazilian-born persons or people who have held their Brazilian citizenship for more than 10 years. Television and radio broadcasting Regulation of the Brazilian television and radio industry is principally governed by the Brazilian Federal Constitution, the Brazilian Telecommunications Code and the Broadcasting Services Regulation. These are supplemented by rules issued by the Brazilian Ministry of Communications, which has overall responsibility for the regulation of the Brazilian television and radio industry. 87 Under Brazilian law, only certain entities may broadcast in Brazil. These include the Brazilian government, Brazilian universities and Brazilian private companies whose shares are held by Brazilian citizens or by private companies which are incorporated under the laws of and have their headquarters in Brazil. In either case, at least 70% of the total capital and voting capital of such companies must be held, directly or indirectly, by Brazilian-born persons or people who have held their Brazilian citizenship for more than ten years. No individual, corporation or other legal entity may hold an interest in more than ten television stations in Brazil, only five of which may be VHF television stations. Further, no individual, corporation or other legal entity can hold an interest in more than two television stations in any single State (and no more than one per city). Similarly, no person or legal entity can hold more than six local FM radio licenses, four local AM medium-wave radio licenses, two nationwide AM medium-wave radio licenses or two nationwide short-wave radio licenses. Provided that they have complied with all the applicable provisions of Brazilian law and have acted in line with public interest, a licensee has, by law, an automatic right to the renewal of its license. If the licensee requests the renewal within the term established by law, such renewal will be considered granted if the relevant agency fails to give any comments or take any action before the existing license expires. The transfer of licenses is restricted and requires the prior consent of the Brazilian government and may not be transferred within the initial five years following its date of issuance. In addition, any amendments to the statutes or by-laws of a legal entity operating a television or radio station, which involves changes to its corporate purpose, or its management, or which transfers control of the entity, requires the prior approval of the relevant Brazilian authority. Although there are few legal restrictions on the content of broadcasts, there is a legal obligation to ensure that at least 5% of daily programming is set aside for news broadcasts and five hours a week are dedicated to educational programming. In addition, advertising must be limited to a maximum of 25% of the total daily programming. There are no formal censorship laws which apply to the Brazilian television and radio industry, although a system of self-regulation operates in relation to the broadcast of advertisements. Other operational aspects of the RBS Group Employees At December 31, 2006, the RBS Group had 4,521 employees, of which all were permanent employees. The following chart shows the number of employees employed by the Issuer and the Guarantors and the other members of the RBS Group at December 31, 2006. RBS Group Employees Management Other Employees Issuer and Guarantors ................................................................................................ Other RBS Group companies......................................................................................... 39 52 2,292 2,138 Total........................................................................................................................... 97 4,521 The RBS Group maintains a policy of training management, technical and operational personnel in all three of its principal media industries. Thus, certain employees of the RBS Group are periodically rotated from company to company and from one media industry to another. All of the RBS Group’s employees (except for certain management staff) are represented by 23 different labor unions, which represent their members in collective bargaining agreements with members of the RBS Group. Labor relations for RBS Group employees are governed by 20 separate collective bargaining agreements executed between the relevant RBS Group company and labor unions, each of which have a term of 1 year(s). The RBS Group has never experienced work stoppages or strikes. The RBS Group considers its relations with its employees to be very good. The local unions have never raised major concerns. RBS Group maintains a full time officer for union relationships. 88 The RBS Group estimates that 74% of total employee compensation is in the form of fixed and variable wages, while 19% is in the form of payments made to the government of Brazil for the governmentsponsored medical, unemployment, severance and pension plans and 7% is in the form of payments made to health-care medical insurance companies, educational institutions and food and transportation services. Since 1990, the RBS Group utilizes a compensation mechanism whereby all its employees are entitled to a supplemental compensation paid in February of each year, subject to the achievement, in the previous year, of a set of operational and/or financial goals, established for each company separately. This scheme, named “PPR” or Plano de Participação nos Resultados, serves both as an incentive to collective resultsoriented performance, as well as a means of allowing the Group to pay below market average fixed salaries without jeopardizing RBS Group’s ability to attract and retain quality personnel. Within its management staff, RBS Group employs, as of December 31, 2006, ten managers holding MBAs from top U.S. and European business schools, five of whom were sponsored by the RBS Group. Additionally, several other managerial staff members are holders of international masters degrees in the fields of law, engineering and journalism, among others. RBS Group companies, like many Brazilian companies, are frequently involved in disputes regarding allegedly overdue back pay for workers and employees who no longer work for RBS Group companies. As Brazilian law and the Brazilian courts tend to look very favorably at worker claims, such disputes are generally settled outside the judicial system. The RBS Group believes that the financial effect of such claims and settlements is not, in the aggregate, material to the results of operations of the Issuer, the Guarantors or the RBS Group as a whole. Insurance The RBS Group Board of Directors has in place a comprehensive insurance plan, which it reviews on an annual basis to evaluate the RBS Group’s permanent insurance needs and reviews the next year’s requirements. The Issuer and the Guarantors maintain fire and natural disaster, transportation, civil liability, vehicle and general risk insurance, which management believes is adequate. Neither the Issuer nor any Guarantor maintains business interruption insurance. Business interruption risks are reasonably mitigated through the integration of redundant facilities, like print shops, broadcasting sites and offices. Neither the Issuer nor any Guarantor has experienced any material business interruption during the last 30 years. Legal proceedings The Issuer, the various Guarantors and certain other members of the RBS Group are involved in certain legal proceedings arising out of their normal business activities. A large number of these proceedings relate to labor disputes. None of these proceedings, taken individually or in the aggregate, is material to the results or the operations of the Issuer, the Guarantors or the RBS Group as a whole. RBS A&C is currently involved in administrative proceedings with the Brazilian tax authorities. In August 2001, the Brazilian tax authorities claimed that the transaction structure adopted by RBS A&C to transfer its controlling interest in Nutec Informática Ltda. to Telefônica Interactiva do Brasil Ltda. in 1999 masked capital gains of approximately R$286 million. The Brazilian tax authorities contended that RBS A&C owed corporate income taxes (“IRPJ” and “CSLL”) on this amount, computed at a combined rate of 34%. As a result, the tax authorities assessed RBS A&C to charge the uncollected amounts of IRPJ and CSLL, plus interest calculated in accordance with the SELIC rate and a fine of 150%. In September, 2002, the Brazilian Internal Revenue Office in Porto Alegre ruled that RBS A&C must pay these taxes, the interest and the fine. RBS A&C appealed to the Court of Taxpayers, which in October 2003 ruled 6 to 2 that RBS A&C is not obligated to pay these amounts. Tax authorities have presented a special appeal before the Higher Administrative Court of Taxpayers against this decision. The timing of the hearing on the appeal is not known. There can be no assurance that the Higher Administrative Court of Taxpayers will rule in RBS A&C’s favor. If the Higher Administrative Court of Taxpayers rules against RBS A&C, the security already provided by RBS A&C against payment of the taxes to the Brazilian government - which includes 45% 89 (15% voting and 30% non-voting) of the capital of the Issuer - could be executed after a final judicial decision. RBS A&C has been advised by its Brazilian tax counsel that its chances of loss in the claim are “possible”, and as a result, RBS A&C has taken no provision against a possible loss in this matter. The value of the claim as of March 31, 2007 was R$350 million. A final loss in this matter would have a material negative effect on RBS A&C; however, it should be noted that the case is still under administrative proceedings and, a final decision would only be rendered after full judicial proceedings have been completed. In addition, other members of the RBS Group, including the Issuer and the Guarantors, regularly guarantee indebtedness of RBS A&C, and any material adverse effect on RBS A&C could lead creditors to call on those guarantees, which could have a material adverse effect on the Issuer and/or the Guarantors. See “Business – RBS A&C”. 90 MANAGEMENT AND OWNERSHIP STRUCTURE The core businesses of the RBS Network are structured as a group of closely held corporate entities, with each corporate entity consisting of one television or radio station or one or more newspapers. Ownership of these various corporate entities is divided among various individuals within the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa. The RBS Group’s businesses are owned directly or indirectly by holding companies representing the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, respectively. The activities of these companies are managed by the RBS Group Executive Committee. In 2005, the RBS Group incorporated RBS Comunicações with the objective of integrating the main businesses of the RBS Group under a single holding company. The integration was commenced in 2006, and the RBS Group intends to complete the integration during 2007, including the integration under RBS Comunicações of RBS-Zero Hora, RBS A&C and RBS Par, and certain other companies. The RBS Group has implemented strong corporate governance policies, in an effort to treat appropriately the distinct and separate interests of the members of the controlling families, the property of the shareholders, and the RBS Group itself. Management has separated the family as a group from the RBS Group’s day-to-day business decisions by creating separate bodies -- the Executive Committee, the Board of Directors, the Family Council and the Shareholders Council. In addition, the RBS Group has a policy of hiring professional, outside management to form its management team, most notably Pedro Pullen Parente as Executive Vice President and Chief Operating Officer. Prior to joining the RBS Group, Mr. Parente occupied several senior positions in the Brazilian government, including Chief of Staff to President Fernando Henrique Cardoso, Minister of Planning, Budget and Management, and Executive Secretary of the Finance Ministry, and had previously been a consultant to the International Monetary Fund. In 2006, RBS Group was recognized by the Brazilian Institute for Corporate Governance (IBGC – Instituto Brasileiro de Governança Corporativa) for having the best corporate governance by a Brazilian private company. The RBS Group Board of Directors establishes the general guidelines for each business within the RBS Group, appoints the principal officer for each of the other companies within the RBS Group and resolves important matters relating to the RBS Group as a whole. It consists of up to eleven members, up to four of whom are external and independent members. The Executive Committee oversees the day-to-day management of the RBS Group and consists of members selected jointly by the President and the Chief Executive Officer of the RBS Group and approved by the RBS Group Board of Directors. The families that control the RBS Group also work with a prominent international family business consultant to the RBS Group as a whole on a permanent basis to align the family’s objectives with the corporate governance principles. Neither the Issuer nor the Guarantors are aware of any potential conflict of interest between the duties to the Issuer of the persons listed in the tables below and their private interests or duties. The business address for each of the persons listed in the tables below (all directors of RBS Group, the Issuer, TV Gaúcha and Rádio Gaúcha, and all members of RBS Group Executive Committee, the Issuer’s Executive Committee, TV Gaúcha’s Executive Committee, TV Florianópolis’s Executive Committee and Rádio Gaúcha’s Executive Committee) is Avenida Érico Veríssimo, 400 2º andar, Porto Alegre, Brazil, 90160-180. Risk Management At the request of the Auditing Committee of the RBS Group Board of Directors, in March 2007 the RBS Group hired an internationally renowned consulting company to assist in the implementation of risk management practices to help implement and ensure efficient internal business processes and appropriate compliance mechanisms with its established internal policies. The RBS Group expects to fully implement this initiative by the end of 2008. The chart on the following page sets forth the ownership structure of the RBS Group, including the Issuer and the Guarantors. 91 Shareholding Structure Family Holdings (IMA / IMAH, JAMA / JAMAH, FEC / FECH) H+ H+ RBS Network RBS Group RBS RBS Participações Participações RBS RBS Comunicações Comunicações S/A S/A 95% 5% RBS RBS A&C A&C 92 RBS Rádios Participações RBS TV Participações RBS Credit Group Canal Canal Rural Rural 55% RBS - Zero Hora Editora TV Gaúcha TV Florianópolis Rádio Gaúcha TV Caxias TV Blumenau Rádio Atlântida POA Rádio Metrô Rádio Itapema FLN Rádio SP • Programming concession agreements 45% Service agreements Independent Affiliates (14 TV stations and 21 radio stations) Others Others The RBS Group Shareholder Agreement The relations among the three families which are shareholders of the RBS Group companies are governed by a shareholder agreement (the “RBS Group Shareholder Agreement”), among IMAH Par, JAMAH Par and FECH Par, representing the families of Maurício Sirotsky Sobrinho, Jayme Sirotsky and Fernando Ernesto de Souza Corrêa, respectively. Pursuant to the terms of the RBS Group Shareholder Agreement, if any shareholder intends to sell its interest in an RBS Group company, the other shareholders will have a pre-emptive right to purchase the shares of the company to be sold. The RBS Group Shareholder Agreement also sets forth the relative voting rights of the various shareholders, and establishes that the board of directors of RBS Comunicações S.A. will serve as the board of directors for the RBS Group (the “RBS Group Board of Directors”) in order to oversee the general direction of the businesses of the RBS Group. The RBS Group Board of Directors The RBS Group Board of Directors establishes the general guidelines for each business within the RBS Group, appoints the officers of RBS Comunicações and the principal officer for each of the other companies within the RBS Group and resolves important matters relating to the RBS Group as a whole. The RBS Group Board of Directors consists of up to nine members (currently 8 members). If the shareholders do not reach a consensus in the appointment of the members of the Board of Directors, up to five of the members are appointed by IMAH Par (which represents the family of Maurício Sirotsky Sobrinho), up to three of the members are appointed by JAMAH Par (which represents the family of Jayme Sirotsky) and up to one of the members is appointed by FECH Par (which represents the family of Fernando Ernesto de Souza Corrêa). The Directors are elected for one-year terms and meet formally at least every two months. In addition, the Issuer and each of the Guarantors (except TV Florianópolis, which has only an executive committee in place) are governed by their own board of directors, the membership of which generally overlaps to a considerable extent with the membership of the RBS Group Board of Directors. The following table sets out the members of the RBS Group Board of Directors, generally all of whom are citizens and residents of Brazil. Position RBS Group Board of Directors Jayme Sirotsky ............................................................................................................... Nelson Pacheco Sirotsky................................................................................................ Fernando Ernesto de Souza Corrêa ................................................................................ Carlos Eduardo Schneider Melzer ................................................................................. José Pedro Pacheco Sirotsky.......................................................................................... Chairman Director Director Director Director The RBS Group also includes the following three external and independent members of the Board of Directors, since the years indicated below: Oscar de Paula Bernandes Neto ...................... 1999 David Casimiro Moreira ................................. 1997 Claudio Sonder................................................ 2005 In addition, the RBS Group Board of Directors has an Auditing Committee whose purpose is to assist the Board of Directors in supervising the financial and accounting aspects of the RBS Group. The members of the committee are Claudio Sonder (Coordinator), Oscar de Paula Bernandes Neto, Carlos Eduardo Schneider Melzer, Pedro Pullen Parente and Eduardo Damasceno Ferreira (Executive Secretary). The RBS Group Executive Committee Day-to-day management of the RBS Group companies is overseen by the executive committee of the RBS Group (the “RBS Group Executive Committee”), which consists of members selected jointly by the President and the Chief Executive Officer of the RBS Group, and approved by the RBS Group Board of 93 Directors and which generally meets every week in Porto Alegre. Meetings of the RBS Group Executive Committee take place in accordance with a schedule established at the beginning of each year or are called by the President of the RBS Group Executive Committee. Meetings of the RBS Group Executive Committee do not require the presence of a minimum number of members, and decisions may be taken by a majority of such members present at a meeting. In addition, the Issuer and each of the Guarantors have their own executive committees, the membership of which generally overlaps to a considerable extent with the membership of the RBS Group Executive Committee. The members of the RBS Group Executive Committee are as follows: RBS Group Executive Committee Position in Management Nelson Pacheco Sirotsky................................ C.E.O. and Publisher Chief Operating Officer & Executive Vice Pedro Pullen Parente ................................................................ President Afonso Antunes da Motta ................................Managing Director, Television Geraldo Barbosa Corrêa................................ Managing Director, Newspaper and Radio Silvia Nora Berno de Jesus ................................ Managing Director, Internet and Innovation Antônio Augusto Pinent Tigre ................................ Chief Administrative Officer Eduardo Damasceno Ferreira ................................ Chief Financial Officer With RBS Group Since 1971 2003 1987 1983 2006 1991 2000 The Issuer’s and the Guarantors’ Boards of Directors As mentioned above, the Issuer and each of the Guarantors (except TV Florianópolis) are governed by their own board of directors, the membership of which generally overlaps to a considerable extent with the membership of the RBS Group Board of Directors. According to the by-laws of each of RBS-Zero Hora, TV Gaúcha and Rádio Gaúcha, each of their board of directors establish the general guidelines for their respective businesses, appoint the officers and deal with other relevant matters. The following tables set out the members of each of the Issuer’s, TV Gaúcha’s and Rádio Gaúcha’s boards of directors, all of whom are citizens and residents of Brazil and are elected for one-year terms. Issuer’s Board of Directors Position Jayme Sirotsky1 .............................................................................................................. Nelson Pacheco Sirotsky1 .............................................................................................. Fernando Ernesto de Souza Corrêa 1 ............................................................................... Carlos Eduardo Schneider Melzer1 ................................................................................ José Pedro Pacheco Sirotsky.......................................................................................... Chairman Director Director Director Director TV Gaúcha’s Board of Directors Position Jayme Sirotsky1 .............................................................................................................. Nelson Pacheco Sirotsky1 .............................................................................................. José Pedro Pacheco Sirotsky.......................................................................................... Chairman Director Director 94 Rádio Gaúcha’s Board of Directors Position Jayme Sirotsky1 .............................................................................................................. Nelson Pacheco Sirotsky1 .............................................................................................. Fernando Ernesto de Souza Corrêa 1 ............................................................................... Carlos Eduardo Schneider Melzer1 ................................................................................ José Pedro Pacheco Sirotsky.......................................................................................... Chairman Director Director Director Director (3) Also members of the RBS Group Board of Directors. The Issuer’s and the Guarantors’ Executive Committees As mentioned above, the Issuer and each of the Guarantors have their own executive committees, the membership of which generally overlaps to a considerable extent with the membership of the RBS Group Executive Committee. Day-to-day management of the Issuer and of each of the Guarantors is overseen by their respective executive committees. The members of the Issuer’s and of each of the Guarantors’ executive committees are as follows: Issuer’s Executive Committee Position in Management Nelson Pacheco Sirotsky1 ................................Chief Executive Officer Pedro Pullen Parente1 ................................................................ Vice President Afonso Antunes da Motta ................................Vice President Geraldo Barbosa Corrêa 1 ................................Vice President Silvia Nora Berno de Jesus ................................ Vice President 1 Antônio Augusto Pinent Tigre ................................ Officer Eduardo Damasceno Ferreira ................................ Officer TV Gaúcha’s Executive Committee Position in Management Nelson Pacheco Sirotsky1 ................................Chief Executive Officer Pedro Pullen Parente1 2 ................................ Vice President Afonso Antunes da Motta1 ................................Officer Antônio Augusto Pinent Tigre ................................ Officer TV Florianópolis’s Executive Committee Position in Management Nelson Pacheco Sirotsky1 ................................Chief Executive Officer Pedro Pullen Parente ................................................................ Vice President Afonso Antunes da Motta ................................Officer Eduardo Damasceno Ferreira ................................ Officer Rádio Gaúcha’s Executive Committee Position in Management Nelson Pacheco Sirotsky1 ................................Chief Executive Officer Antônio Augusto Pinent Tigre ................................ Officer Pedro Pullen Parente1 2 ................................ Vice President Geraldo Barbosa Corrêa 1 ................................Officer (1) (2) With RBS Group Since 1971 2003 1983 1991 2000 With RBS Group Since 1971 2003 1987 1991 With RBS Group Since 1971] With RBS Group Since 1971 2003 1983 Also members of the RBS Group Executive Committee. Appointed in 2003. To comply with Brazilian laws, will only take office after the approval of the Brazilian Ministry of Communications. See “Business — Government regulation — Television and radio broadcasting”. 95 The members of the three families which are shareholders of the RBS Group companies formed RBS Comunicações to implement a centralized corporate and management structure. The new structure will be established by internal by-laws for the RBS Group (the “Internal By-laws”). Because the RBS Group is not, in and of itself, an established legal entity and is only a reference to identify several independent corporate entities that consider themselves part of a network of related companies, the creation of RBS Comunicações is an effort of the three controlling families to provide a centralized management structure to the companies of the RBS Group. Notwithstanding, each company of the RBS Group, including the Guarantors and the Issuer, has its own by-laws, which are registered with the respective legal authorities having jurisdiction over such companies. The RBS Group is managed by a “shareholders committee”, a “board of directors” and an “executive committee”. The shareholders committee consists of eight members from the three holding companies representing the three families which are shareholders of the RBS Group companies, comprised of four members from IMAH Par, three members from JAMAH Par and one member from FECH Par. The shareholders committee is responsible for providing the general guidelines for the RBS Group companies. The board of directors consists of nine members, comprised of three non-executive shareholders of the RBS Group companies, i.e., shareholders that are not members of the executive committee, up to two members of the executive committee and up to four outside directors (not members of the executive committee nor of the three families). The board of directors is responsible for establishing the general guidelines for each business within the RBS Group, appointing and dismissing the president of the executive committee, and monitoring the activities of the executive committee. The executive committee is responsible for overseeing the day-to-day management of the RBS Group companies. Most of the current members of the RBS Group Board of Directors are appointed members of the board of directors. Likewise, most of the current members of the RBS Group Executive Committee are appointed members of the executive committee to be established according to the Internal By-laws. Biographies of the members of the RBS Group Board of Directors Jayme Sirotsky. Mr. Jayme Sirotsky is one of the three founding members of the RBS Group. Mr. Sirotsky entered the journalism profession in 1962, when he joined Rádio Gaúcha. In 1968, he assisted his brother Maurício Sirotsky Sobrinho to gain control of and expand the operations of Rádio Gaúcha, thus forming the RBS Group. Mr. Sirotsky is currently Chairman of the Board of RBS Group, of the Issuer’s Board of Directors and of the Board of Directors of Fundação Maurício Sirotsky Sobrinho (Maurício Sirotsky Sobrinho Foundation), a public interest foundation supported by the RBS Group, among others. In addition, Mr. Sirotsky serves on the Board of Directors and on the Executive Committee of the Inter American Press Association (“IAPA”), and as member of Associação Brasileira de Emissoras de Rádio e Televisão (the Brazilian Association of Radio and Television Stations or “ABERT”). He is also founder and current member of Conselho Nacional de Autoregulamentação Publicitária (“CONAR”), a self-regulatory ethics counsel of advertisers. Additionally, Mr. Sirotsky is a Board member of a Non-Governmental Organization called “Voluntary Partners” and of the Junior Achievement of Rio Grande do Sul. He was Executive Vice President of the RBS Group until 1986, and President and Chief Executive Officer from 1986 to 1991. He has also served as President and Chairman of the Advisory Council for the World Association of Newspapers and as President of Associação Nacional de Jornais (the National Newspaper Association or “ANJ”). Nelson Pacheco Sirotsky. Mr. Nelson Pacheco Sirotsky, who is the son of the late Maurício Sirotsky Sobrinho, holds a degree in business and public administration from the Federal University of Rio Grande do Sul (“UFRGS”), received in 1974. In 1979 he completed post-graduate coursework in executive management at the University of Southern California. He began his career at Rádio Gaúcha in 1971 and served as manager of Rádio Gaúcha before becoming regional director for the RBS Group in the State of Santa Catarina. He has also served as Vice President and President of the Issuer, and is presently Chief Executive Officer of the Issuer as well as a member of the RBS Group Board of Directors and of the Issuer 96 Board of Directors, among others. In addition, Mr. Nelson Pacheco Sirotsky is the President and Publisher of the RBS Group and a member of the RBS Group Executive Committee. He is also President of Fundação Maurício Sirotsky Sobrinho, member of the IBM Advisory Council to Latin America and of the Brazilian Council to the Institut European d’Administration des Affaires (the European Institute of Business Administration or “INSEAD”), and the President of the Associação Nacional de Jornais (The National Newspaper Association or “ANJ”) as well as Board member of the National Newspaper Association - ANJ and of the Brazilian Association of Radio and Television Stations - ABERT. Fernando Ernesto de Souza Corrêa. Mr. Corrêa is a lawyer, business administrator, journalist and professor who received both his law and business administration degrees from the UFRGS in 1959 and 1972, respectively. He joined Rádio Gaúcha as an in-house counsel in August 1963. He is one of the three founding members of the RBS Group. Currently, he serves as Deputy Chairman of the RBS Group Board of Directors and of the Issuer Board of Directors, among others. Mr. Corrêa has served as President of Sindicato das Empresas de Radiofusão do Estado do Rio Grande do Sul (the Broadcasting Companies Union of the State of Rio Grande do Sul), President of Sindicato das Empresas Proprietárias de Jornais e Revistas do Estado do Rio Grande do Sul (the Newspaper and Magazine Owners Union of the State of Rio Grande do Sul), President of Associação Gaúcha de Emissoras de Rádio e Televisão (the Association of Radio and Television Stations of Rio Grande do Sul or “AGERT”), Vice President of the Brazilian Association of Radio and Television Stations - ABERT and officer of the Legal Committee for the National Newspaper Association - ANJ, among others. He is currently a member of the Consulting Council of ABERT, of the Television Committee for the International Association of Broadcasting Companies (“AIR”), of the Free Expression Committee of ANJ, as well as founding partner of FESC Consultoria e Participações S/C Ltda., a local law firm. Carlos Eduardo Schneider Melzer. Mr. Melzer received his law degree from the UFRGS in 1970. He also completed advanced executive coursework in business administration at the University of Southern California in 1980 and at INSEAD in 1995. Mr. Melzer joined the RBS Group in 1971 as manager of television operations in Rio Grande do Sul and became Vice President and Director of the RBS Group in 1991. Currently, Mr. Melzer serves as a member of the RBS Group Board of Directors and of the Issuer Board of Directors, among others, as well as Vice President of the Issuer and Chief Executive Officer of Maiojama Participações Ltda., a leading real estate company owned by members of the Sirotsky family, among others. Oscar de Paula Bernardes Neto. Mr. Bernardes Neto presently is a senior partner and Chairman of LID (Latin American Internet Development) Group, a member of the audit committee of Delphi Corporation’s Board of Directors, and has been a member of the RBS Group Board of Directors since 1999, among other directorships. He was Chief Executive Officer of Bunge International from 1996 to 1999. Before joining Bunge, Mr. Bernardes Neto was a senior partner at Booz Allen & Hamilton. Additionally, he had managing roles at Alcoa Alumínio S.A., Gerdau S.A., Seara Alimentos, Johnson Electric Holdings Ltd. and at Companhia Suzano de Papel e Celulose, among others. David Casimiro Moreira. Mr. Moreira received his engineering degree in 1968 from the University of São Paulo and, in 1976, completed post-graduate coursework in executive management at Fundação Getúlio Vargas. Mr. Moreira is a business consultant specializing in privatization and business restructuring processes, and has been a member of the RBS Group Board of Directors since 1997. Mr. Moreira has served as Secretary for the Privatization Council of the Brazilian federal government from 1986 to 1988, as President of the Brazilian Association of Capital Market Analysts, as member of the Board of Directors of Banco do Brasil S.A. and Máquinas Piratininga S.A., as well as had many managing roles at several entities, such as in Gradiente Eletrônica S.A., Banco Real S.A. (current ABN-AMRO Bank S.A.) and São Paulo Alpargatas S.A. Further, Mr. Moreira currently serves as a member of the Board of Directors of Banco Nossa Caixa S.A., a State-owned bank of the State of São Paulo, and is a member of the Consulting Council for Booz Allen Hamilton in São Paulo. Claudio Sonder. Mr. Sonder received his chemical engineering degree and his economics degree from Instituto Presbiteriano Mackenzie, both in 1966. He also received a degree in Management Development from Harvard University in Boston. As an expert in refocusing and streamlining global businesses, he has 97 held numerous corporate management positions. He began his career in 1966 at Hoechst do Brasil as a Chemicals Sales Manager, and then as Head of Corporate Staff. In 1974 he joined the Corporate Staff of Hoechst AG Frankfurt for Regional Coordination - Latin America, and he has served as a Member of the Board of Management there since 1996. Mr. Sonder also currently serves as Chairman of the Board of Management of Celanese AG in Kronberg and as Chairman of the Strategy Committee for both Suzano Petroquimica S.A. and Companhia Suzano de Papel e Celulose S.A. He is a Member of the Supervisory Board of Sociedade Cultura Artistica and a Member of the Board of Hospital Albert Einstein, both in São Paulo. In 2004, Mr. Sonder joined Panorama Consult, in São Paulo, as Managing Partner. Biographies of the members of the RBS Group Executive Committee Pedro Pullen Parente. Mr. Parente received his BSc. in electrical engineering from University of Brasília in 1976. As an expert in public finance, Mr. Parente held numerous positions in governmental economic areas throughout his career. Among others, he is former Minister of State and Chief of Presidential Staff (from 1999 to 2002), Minister of Planning, Budget and Administration (from April to July 1999) and Deputy Minister of Finance (from 1995 to 1999) of the Federative Republic of Brazil. Mr. Parente has also been appointed, among several other roles in public administration, as Coordinator of the negotiations with Brazilian States aimed at restructuring their indebtedness with the Brazilian government and President of the Energy Crisis Committee, coordinating Brazilian government efforts to overcome the 2001/2002 energy shortage. He has also been a Consultant of the International Monetary Fund in 1993 and 1994. He currently holds the position of Chief Executive Officer of RBS Group and of Officer of the Issuer’s Executive Committee, among others. He has also served as Board member of large State-owned companies, such as Banco do Brasil S.A., Caixa Econômica Federal, Itaipu Binacional and Petrobrás S.A. He currently holds positions as a board member of ALL - América Latina Logística, SUZANO Petroquímica S.A., Wilson Sons Limited and TAM Linhas Aéreas S.A. Afonso Antunes da Motta. Mr. Motta received his law degree from the UFRGS in 1972, as well as holds post-graduate degrees in business administration from INSEAD (1994) and J.L. Kellogg School of Management (1996). Mr. Motta joined the RBS Group in 1987 as General Counsel and became Chief Operating Officer for the RBS Group television segment in 2002. He also served as President of the Association of Radio and Television Stations of Rio Grande do Sul - AGERT and has served in several committees at the National Newspaper Association - ANJ and at the Brazilian Association of Radio and Television Stations - ABERT. Geraldo Barbosa Corrêa. Mr. Barbosa Corrêa received his law degree from PUC-RS in 1984, and his LL.M. degree from the London School of Economics and Political Science in 1987. He also holds a postgraduate degree in business administration from the UFRGS, granted in 1989, and completed advanced executive coursework in business administration at Harvard Business School, University of Michigan Business School and at J.L. Kellogg School of Management. Mr. Barbosa Corrêa joined the RBS Group in 1983 as an in-house counsel and became Chief Operating Officer for the Broadcast Division in 1995. He is currently Chief Operating Officer for the Newspaper segment (since 2000) and, most recently, also for the Radio and Online segments, among others. He also serves as Officer in the Issuer’s Executive Committee, as Vice President of the Newspaper and Magazine Owners Union of Rio Grande do Sul and is a founding member of the Human Resources Group at the National Newspaper Association - ANJ. He has also served as Vice President of the Association of Radio and Television Stations of Rio Grande do Sul - AGERT for a 4-year period. Sílvia Nora Berno de Jesus received her chemical engineering (1977) as well as her business administration degree (1984) from the UFRGS. She also attended the Fundação Dom Cabral and Northwestern University’s Kellogg School of Management in Chicago for a business administration specialization degree. Mrs. de Jesus is the Vice-President for internet and innovation at RBS Group. One of the pioneers of the internet in Brazil, she led the implementation of ZAZ, one of Brazil’s first web portals and internet service providers, in 1996. Mrs. de Jesus was also CEO of Terra (a web portal and internet service provider) for Latin America, where she was responsible for the portal’s administration and results for 98 14 countries, including Brazil, Argentina, Chile, Colombia, Mexico, Peru and Venezuela, as well as Central America and Hispanic market in the United States. Antônio Augusto Pinent Tigre. Mr. Tigre received his MBA degree from the University of Southern California in 1998. He also holds a specialization degree in finance, received in 1990, and a degree in Business Administration (B.A.), received in 1989, both from PUC-RS. He joined the RBS Group in 1991 and since then has served as manager in different business segments. He was designated Corporate Financial Officer in 1998, and in 2000 he was further appointed as general manager of RBS Online. In 2002, he became the general manager of the radio business, and in 2003 he was appointed Chief Administrative Officer. He also serves as Officer in the Issuer’s Executive Committee. Among his current responsibilities are the strategic planning, human resources, legal, corporate marketing and information technology areas. Mr. Tigre currently serves as Vice-President of Federação das Associações Comerciais e de Serviços do Rio Grande do Sul, FEDERASUL (the Rio Grande do Sul’s Commercial Associations Federation or “FEDERASUL”). Eduardo Damasceno Ferreira. Mr. Damasceno is RBS Group’s Chief Financial Officer since March 2000. He holds an MBA degree from INSEAD, received in 1994, and earned his BSc. degree in electrical engineering in 1985 and a degree in business administration in 1992 from UFRGS. Mr. Damasceno started his professional career in Stuttgart, Germany as a trainee engineer at Herion Werke KG and later as project engineer at Fraunhofer-IPA (Institut für Produktionstechnik und Automatisierung). Between 1989 and 1993, Mr. Damasceno worked as technology manager for Zivi-Hercules, a Brazilian cutlery manufacturer. After finishing his MBA in 1994, he joined Deutsche Bank AG as an investment banker. He first joined RBS Group in August 1996 as corporate planning manager, shortly thereafter being appointed managing officer at the TV and radio broadcasting divisions. In early 1999 he left to assume the position of Chief Financial Officer of Rio Grande Energia S.A., an energy utility company, returning to the RBS Group in March 2000 to assume his current position of Chief Financial Officer. 99 RELATED PARTY TRANSACTIONS WITH RBS GROUP COMPANIES The companies which form part of the RBS Group, including the Issuer and the Guarantors, are largely operated as an integrated network similar to divisions of a single corporation. There are numerous transactions between these various RBS Group companies, many of which involve a free exchange of information or services in the ordinary course of business. In addition to these free exchanges of information and services, numerous transactions occur and numerous relationships exist between the various RBS Group companies. These transactions and relationships are described elsewhere in this Offering Memorandum and in the financial statements, including the footnotes related thereto, or summarized below. RBS A&C, a company approximately 95% owned by the controlling shareholders of the RBS Group and approximately 5% owned by RBS Par, performs treasury functions for the RBS Group companies, including for the Issuer and the Guarantors, centralizing cash management operations. Since 1993, cash revenues of any of the RBS Group companies has been collected and held by RBS A&C, as a “cash management company”, on behalf of the respective RBS Group company pursuant to a contractual arrangement among the companies. As each member of the RBS Group requires funds, it withdraws cash on deposit with RBS A&C, issues payment instructions to RBS A&C or requests a loan from another member of the RBS Group. RBS A&C and RBS Group companies also may borrow funds from third parties, such as banks or the shareholders of the RBS Group. Except for the advances for future capital increases and the “balances receivable” receivable from RBS A&C, which bear no interest, intra-company loans with the Credit Group are generally done on an arms-length basis at market rates. Transactions with related parties are reflected in the Issuer Financial Statements but, in the case of the balances and transactions between the Issuer and each of the three Guarantors or among the Guarantors, are eliminated in the Credit Group Financial Statements. At December 31, 2006 RBS Par had recorded a long term liability of R$164.5 million for amounts payable to the Credit Group companies, including R$104.6 million to RBS-Zero Hora, R$45.9 million to TV Gaúcha, R$11.6 million to RBS TV Florianópolis and R$2.4 million to Rádio Gaúcha. At such date, RBS A&C had recorded a current liability of R$179.2 million for amounts payable to the Credit Group, including R$72.1 million to RBS-Zero Hora, R$71.8 million to TV Gaúcha, R$30.3 million to TV Florianópolis and R$5 million to Rádio Gaúcha. TV Gaúcha and TV Florianópolis have arrangements in effect with the other television stations in the RBS Network regarding the sharing of advertising revenues and programming, which are described under “Business — The Guarantors — TV Gaúcha and TV Florianópolis — RBS Group programming”, “Business — The Guarantors — TV Gaúcha and TV Florianópolis — Advertising operations” and “Business — The Guarantors — TV Gaúcha and TV Florianópolis — Revenue structure”. These arrangements are generally beneficial to TV Gaúcha and TV Florianópolis because they are able to exploit the synergies existing among the different television stations, providing an operational advantage over many of their competitors and generating substantial economies of scale. Although the RBS Network currently has no plans to change these relationships, there can be no assurance that the RBS Network will not make any such changes in these relationships in the future which would have a material adverse effect on the financial results of TV Gaúcha and TV Florianópolis. As described herein under “Business”, the various companies comprising the RBS Group offer each other services and support of various types. For instance, RBS-Zero Hora provides news free of charge to other RBS Group members in return for whatever news reports (generally of a local nature) these other member companies produce. Likewise, as part of the RBS Group’s marketing strategy, spare advertising space in RBS-Zero Hora’s newspapers, including Zero Hora and Diário Catarinense, is used to print advertisements free of charge of RBS Group television and radio stations, as well as of events and shows promoted by the Group, and free air time on TV Gaúcha, TV Florianópolis and Rádio Gaúcha is used for free advertisements for RBS Group newspapers or other services, as well as events and shows promoted by the Group. The RBS Group is managed by a single management team, as further described in “Management and Ownership Structure — The RBS Group Executive Committee”. Notwithstanding, the RBS Group’s newspaper, radio and broadcast television operations are generally conducted in separate facilities and with 100 separate programming and separate advertising sales staff. Though most of the facilities, content production and sales forces operate separately, permanent functional committees, such as sales and marketing, editorial and technical, bring together cross-unit expertise, foster synergies and assure that the decision-making process remains consistent throughout the RBS Group. 101 DESCRIPTION OF THE NOTES The Notes and the Guarantees will be issued pursuant to an Indenture to be dated as of the Settlement Date (the “Indenture”) between the Issuer, the Guarantors and The Bank of New York as trustee (the “Trustee”, which term shall include any successor trustee or trustees under the Indenture) for the Holders of the Notes in a transaction not subject to the registration requirements of the Securities Act. The Notes are subject to the terms of the Indenture and prospective noteholders are referred to the Indenture for a statement of such terms. Definitions of certain capitalized terms used in the Indenture and in the following summary are set forth below under “— Certain Definitions”. Noteholders are entitled to the benefit of, are bound by, and are deemed to have notice of, all the provisions of the Indenture, including the Guarantees of the Guarantors set forth therein. The following summary of certain provisions of the Indenture does not purport to be complete and is qualified in its entirety by reference to the Indenture, including the definitions therein of certain terms used below. The Indenture will not be qualified under the U.S. Trust Indenture Act of 1939, as amended. Consequently, the Holders (as defined below) of Notes generally would not be entitled to the protections under such Act to holders of debt securities issued under a qualified indenture. For purposes of these terms and conditions, references to “Notes” shall, as the context may require, be deemed to be references to the Global Notes or, as the case may be, the Definitive Registered Notes. General The Notes will constitute direct, unconditional and unsecured obligations of the Issuer and shall at all times rank pari passu, without any preference among themselves, with all present and future unsecured and unsubordinated obligations of the Issuer. The Notes will bear interest from the Issue Date at the rate of 11.25% per annum, payable semiannually in arrears on June 15 and December 15, commencing on December 15, 2007. Interest will be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, on the basis of the actual number of days elapsed. The determination by the Paying Agent of amounts of interest shall, in the absence of manifest error, be final and binding on all parties. Unless previously redeemed or purchased and cancelled, the Notes shall be redeemed at their principal amount on June 15, 2017. All payments of principal, interest or otherwise made in respect of the Notes shall be made in U.S. dollars, as set forth in the Indenture and as further described herein. The Guarantees The Notes will have the benefit of Guarantees by which each Guarantor, jointly and severally with the other Guarantors, guarantees, pari passu with all other existing and future unsecured and unsubordinated obligations of such Guarantor, the due and punctual payment of the principal, premium (if any), interest and Additional Amounts (if any) on the Notes, when and as the same become due and payable, whether at stated maturity, upon redemption or repayment, upon declaration of acceleration or otherwise (the “Guarantees”). The Indenture will provide that the obligations of the Guarantors under their respective Guarantees will be limited so as not to constitute a fraudulent conveyance under applicable law. Form, denomination and registration The Notes will be denominated in Brazilian reais (“BRL”). Notes offered and sold in reliance on Regulation S, which will be sold outside the United States to Persons other than U.S. persons (as defined in Regulation S), will initially be represented by a single, permanent Global Note in certificated, fully registered form without interest coupons (a “Regulation S Global Note”) which will be registered in the name of a nominee of DTC and deposited on behalf of the holders of the Notes represented thereby with the Trustee as custodian for DTC for credit to the respective accounts of the holders (or to such other accounts as they may direct) at a DTC Participant, including Euroclear or Clearstream, Luxembourg. 102 Certain of the Notes are to be offered and sold within the United States to qualified institutional buyers (as defined in Rule 144A) in reliance on an exemption from registration under the Securities Act. Such Notes will be represented by a single, permanent Global Note in certificated, fully registered form without interest coupons (a “Restricted Global Note” and together with the Regulation S Global Note, the “Global Notes”) which will be registered in the name of a nominee of DTC and deposited on behalf of the purchasers of the Notes represented thereby with the Trustee as custodian for DTC. Restricted Global Notes will be subject to certain restrictions on transfer set forth in the Indenture and will bear a legend regarding such restrictions. Owners of beneficial interests in Global Notes will be entitled or required, as the case may be, under certain limited circumstances described in the Indenture to receive physical delivery of certificated Notes in fully registered definitive form (“Definitive Registered Notes”). The Notes are not issuable in bearer form. The Issuer will appoint The Bank of New York to serve as Registrar and Trustee, The Bank of New York as the Paying and Transfer Agent, The Bank of Tokyo-Mitsubishi UFJ, Ltd. as Principal Paying Agent, of the Notes, each at its offices specified in the Indenture. The Trustee, Registrar and Principal Paying Agent, will be responsible for, among other things, (i) maintaining a record of the registration of ownership, exchange and transfer of the Notes and accepting Notes for exchange and transfer, (ii) ensuring that payments of the principal and interest received from the Issuer or any Guarantor in respect of the Notes are duly paid to the registered holders thereof, (iii) transmitting to the Issuer and the Guarantors any notices or other communications from Noteholders and (iv) transmitting to the Noteholders notice of the occurrence of any Event of Default as soon as practicable after obtaining knowledge thereof. The Issuer will appoint The Bank of New York to serve as Calculation Agent at its office specified in the Indenture. The Calculation Agent will be responsible for performing the duties set forth in the Indenture in respect of calculating U.S. dollar amounts of payments to be made from time to time in respect of the Notes, as further described herein. The Notes will be issued in minimum denominations of BRL200,000 (and integral multiples of BRL1,000 in excess thereof). Global notes So long as the depositary for a Global Note, or its nominee, is the registered holder of such Global Note, such depositary or such nominee, as the case may be, will be considered the absolute owner or holder of the Notes represented by such Global Note for all purposes under the Indenture and the Notes and members of, or participants in, the depositary as well as any other persons on whose behalf participants may act (including Euroclear and Clearstream, Luxembourg and accountholders and participants therein) will have no rights under the Indenture or under a Global Note. Owners of beneficial interests in a Global Note will not be considered to be the owners or holders of any Note under the Indenture or the Notes. In addition, no beneficial owner of an interest in a Global Note will be able to exchange or transfer that interest, except in accordance with the applicable procedures of the depositary, Euroclear and Clearstream, Luxembourg, in each case to the extent applicable (the “Applicable Procedures”). Investors may hold their interests in the Regulation S Global Note directly through Clearstream, Luxembourg or Euroclear, if they are participants in such systems, or indirectly through organizations which are accountholders in such systems. Clearstream, Luxembourg and Euroclear will hold interests in the Regulation S Global Note on behalf of their accountholders through customers’ securities accounts in their respective names on the books of their respective depositaries, which in turn will hold such interests in the Regulation S Global Note in customers’ securities accounts in the depositaries’ names on the books of DTC. Investors that are qualified institutional buyers may hold their interests in the Restricted Global Note directly through DTC if they are participants in such system, or indirectly through organizations that are participants in such system. Payments of the principal of, and interest and Additional Amounts on, individual Notes represented by a Global Note registered in the name of a depositary or its nominee will be made to the depositary or its nominee, as the case may be, as the registered owner of the Global Note representing such Notes. None of 103 the Issuer, the Guarantors, the Trustee, the Registrar, any Paying Agent or the Calculation Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in the Global Notes or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests. The Issuer expects that the depositary for the Global Notes or its nominee, upon receipt of any payment of principal or interest in respect of a Global Note representing any Notes held by such depositary or its nominee, will immediately credit the accounts of its participants with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of the depositary or its nominee. The Issuer also expects that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the name of nominees for such customers. Such payments will be the responsibility of such participants. Definitive registered notes Interests in the Regulation S Global Note and the Restricted Global Note will be exchangeable or transferable, as the case may be, for Definitive Registered Notes if (i) DTC notifies the Issuer that it is unwilling or unable to continue as depositary for such Global Note, or DTC ceases to be a “clearing agency” registered under the Exchange Act, and a successor depository is not appointed by the Issuer within 90 days or (ii) an Event of Default (as defined below) has occurred and is continuing with respect to such Notes. Upon the occurrence of any of the events described in the preceding sentence, the Issuer will cause the appropriate Definitive Registered Notes to be delivered. In the case of such Definitive Registered Notes issued in exchange for the Restricted Global Note, such Definitive Registered Notes shall bear the legend set forth on the Restricted Global Note. Upon the transfer, exchange or replacement of Notes bearing such legend, or upon specific request for removal of the legend on a Note, the Issuer shall deliver only Notes that bear such legend, or shall refuse to remove such legend, as the case may be, unless there is delivered to the Issuer satisfactory evidence as may reasonably be required by the Issuer, which may include an opinion of U.S. counsel, that neither the legend nor the restrictions on transfer set forth therein are required to ensure compliance with the provisions of the Securities Act. Definitive Registered Notes will be exchangeable or transferable for interests in other Definitive Registered Notes as described in the Indenture. Transfer and exchange Before the 40th day after the later of commencement of the offering and the date of the delivery of the Notes, transfers by a holder of a beneficial interest in the Regulation S Global Note to a transferee who takes delivery of such interest through the Restricted Global Note will be made only in accordance with the Applicable Procedures and upon receipt by the Registrar of a written certification from the transferor of the beneficial interest in the form provided in the Indenture to the effect that such transfer is being made to a person whom the transferor reasonably believes is a qualified institutional buyer in a transaction meeting the requirements of Rule 144A and in accordance with any applicable securities laws of any State of the United States or any other jurisdiction. After such 40th day, such certification requirement will no longer apply to such transfers. Transfers by a holder of a beneficial interest in the Restricted Global Note to a transferee who takes delivery of such interest through the Regulation S Global Note will be made only upon receipt by the Trustee of a written certification from the transferor in the form provided in the Indenture to the effect that such transfer is being made in accordance with Regulation S, or, if available, that the interest in the Note being transferred is not a “restricted security” within the meaning of Rule 144 under the Securities Act. Transfers between participants in DTC will be effected in the ordinary way in accordance with the Applicable Procedures and will be settled in same-day funds. Transfers between participants in Euroclear and Clearstream, Luxembourg will be effected in the ordinary way in accordance with their respective rules and operating procedures. Definitive Registered Notes may be exchanged or transferred in whole or in part in the principal amount of authorized denominations by surrendering such Definitive Registered Notes at the office of the 104 Registrar or the Transfer Agent with a written instrument of transfer, the form of which is provided in the Indenture. The costs and expenses of effecting any exchange or registration of transfer pursuant to the foregoing provisions, except for the expense of delivery by other than regular mail (if any) and except for the payment of a sum sufficient to cover any tax or other governmental charges or insurance charges that may be imposed in relation hereto, will be borne by the Issuer. All Definitive Registered Notes issued upon any exchange or registration of transfer of securities shall be valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits, as the Notes surrendered upon exchange or registration of transfer. Such Definitive Registered Notes shall be obtainable at the offices of the Registrar and the Transfer Agent. The Registrar will effect transfers of Global Notes and, along with the Transfer Agent, will effect exchanges and transfers of Definitive Registered Notes. In addition, the Registrar will keep books (the “Register”) for the ownership, exchange and transfer of any Notes in definitive form. The laws of some jurisdictions require that certain persons take physical delivery of securities in definitive form. Consequently, any transfer of beneficial interests in a Global Note to such persons may require that such interests in a Global Note be exchanged for Definitive Registered Notes. Because DTC can only act on behalf of its direct participants, which in turn act on behalf of indirect participants and certain banks, the ability of a person having a beneficial interest in a Global Note to pledge such interest to persons or entities that do not participate in the DTC system, or otherwise take actions in respect of such interest, may require that such interest in a Global Note be exchanged for Definitive Registered Notes. Interests in a Global Note will be exchangeable for Definitive Registered Notes only in the limited circumstances described under “— Definitive registered notes” above. Subject to compliance with the transfer restrictions applicable to the Notes described above, crossmarket transfers between DTC, on the one hand, and directly or indirectly through Euroclear or Clearstream, Luxembourg accountholders, on the other, will be effected in DTC in accordance with DTC rules on behalf of Euroclear or Clearstream, Luxembourg, as the case may be, by its respective depositary; however, such cross-market transactions will require delivery of instructions to Euroclear or Clearstream, Luxembourg, as the case may be, by the counterparty in such system in accordance with its rules and procedures and within its established deadlines (Brussels time). Euroclear or Clearstream, Luxembourg, as the case may be, will if the transaction meets its settlement requirements, deliver instructions to its respective depositary to take action to effect final settlement on its behalf by delivering or receiving interests in the Regulation S Global Note in DTC and making or receiving payment in accordance with normal procedures for same-day funds settlement applicable to DTC. Clearstream, Luxembourg accountholders and Euroclear accountholders may not deliver instructions directly to the depositaries of Clearstream, Luxembourg or Euroclear. Because of time zone differences, the securities account of a Euroclear or Clearstream, Luxembourg accountholder purchasing an interest in the Restricted Global Note from a DTC participant will be credited during the securities settlement processing day immediately following the DTC settlement date and such credit of any transactions in interests in the Restricted Global Note settled during such processing will be reported to the relevant Euroclear or Clearstream, Luxembourg accountholder on such business day. Cash received in Euroclear or Clearstream, Luxembourg as a result of sales of interests in a Regulation S Global Note by or through a Euroclear or Clearstream, Luxembourg accountholder to a DTC participant will be received with value on the DTC settlement date but will be available in the relevant Euroclear or Clearstream, Luxembourg cash account only as of the business day following settlement in DTC. Although DTC, Clearstream, Luxembourg and Euroclear have agreed to the foregoing procedures in order to facilitate transfers of interests in a Regulation S Global Note among participants and accountholders of DTC, Clearstream, Luxembourg and Euroclear, they are under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the Issuer nor the Trustee will have any responsibility for the performance by DTC, Clearstream, Luxembourg or Euroclear or their respective direct or indirect participants or accountholders of their res pective obligations under the rules and procedures governing their operations. 105 Title to Notes passes by registration in the register which is kept by the Registrar. The holder of any Note will (except as otherwise required by law) be treated as its absolute owner for all purposes (whether or not it is overdue and regardless of any notice of ownership, trust or any interest in it, any writing on it, or its theft or loss) and no person shall be liable for so treating the holder. The depository with whom a Global Note is deposited, and not the owners of beneficial interests therein, will be treated as the Holder thereof except in the limited circumstances specified in the Indenture. Provision of Information For so long as any of the Notes bearing a restrictive legend remain outstanding and are “restricted securities” within the meaning of Rule 144(a)(3), the Issuer and each of the Guarantors covenants and agrees that it shall, during any period in which it is not subject to Section 13 or 15(d) under the United States Securities Exchange Act of 1934, as amended, nor exempt from reporting pursuant to Rule 12g3-2(b) under such Act, make available to any holder of any such Note in connection with any sale thereof and to any prospective purchaser of any such Note from such holder, in each case upon request, the information specified in, and meeting the requirements of Rule 144A(d)(4) under the Securities Act. Status and Ranking The Notes constitute direct, unconditional and unsecured obligations of the Issuer and shall at all times rank pari passu, without any preference among themselves, with all present and future unsecured and unsubordinated obligations of the Issuer. Interest The Notes shall bear interest from their date of issue at the rate of 11.25% per annum (the “Rate of Interest”) payable semi-annually in arrears on each June 15, and December 15 (each, an “Interest Payment Date”), commencing December 15, 2007. Interest will be paid on each Interest Payment Date on each Note in an amount equal to the outstanding principal amount of such Note, multiplied by the Rate of Interest, with the interest amount to be converted into U.S. dollars by the Calculation Agent on the relevant Fixing Date using the FX Rate. Such interest will be calculated on the basis of a 360-day year consisting of 12 months of 30 days each and, in the case of an incomplete month, on the basis of the actual number of days elapsed. The determination by the Paying Agent of amounts of interest for the purposes of the Indenture shall, in the absence of manifest error, be final and binding on all parties. Redemption Unless previously redeemed or purchased and cancelled and destroyed, the Notes shall be redeemed on June 15, 2017 (the “Maturity Date”) at their principal amount, divided by the FX Rate in respect of the Maturity Date. The Notes may be redeemed at the option of the Issuer prior to maturity if (A) there is any change in or amendment to the Treaty to Avoid Double Taxation entered into between Brazil and Japan, approved by Legislative Decree No. 43 dated November 23, 1967 and enacted in Brazil by Decree No. 61,899 dated December 14, 1967, as amended by Decree No. 81,194 dated January 9, 1978, which has the effect of increasing the rate of tax applicable under such treaty to a rate exceeding 12.5%; or (B)(i) as the result of any change in or amendment to the laws or regulations of Brazil or of any political subdivision or authority thereof or therein having power to tax or any change in the application or official interpretation of such laws or regulations, which shall become effective after the date of the issuance of the Notes, the Issuer or any Guarantor has or will become obligated to pay, or (ii) any act is taken by a taxing authority of Brazil after the date of issuance of the Notes (whether or not such act is taken with respect to the Issuer, any Guarantor or any Affiliate thereof) that results in a substantial probability that the Issuer or any Guarantor will be required to pay. Additional Amounts with respect to payments of principal of, and interest on, the Notes as provided or referred to under “— Additional Amounts” below (excluding interest and penalties) in excess of the Additional Amounts that the Issuer or any Guarantor would be obligated to pay if Brazilian Taxes (as defined below) (excluding interest and penalties) were payable with respect to such payments at a rate of 106 15% and such obligation cannot be avoided by the Issuer or such Guarantor, as the case may be, taking reasonable measures available to it, then the Issuer may, at its option, redeem or cause the redemption of the Notes as a whole (but not in part), upon not more than 60 nor less than 30 days’ notice to the holders of such Notes (with copies to the Trustee and the Paying Agent) at 100% of their principal amount, together with accrued interest to (but excluding) the date fixed for redemption, plus any such Additional Amounts payable with respect to such principal amount and interest as provided in the Indenture, divided by the FX Rate in respect of such date fixed for payment. Prior to the giving of notice of redemption of the Notes as described herein and as a condition to any such redemption, the Issuer will deliver to the Trustee a certificate (together with a copy of an Opinion of Counsel to the effect that the applicable rate has so increased, or the Issuer or any Guarantor has or will become so obligated, or that an act taken by a taxing authority in Brazil has resulted in a substantial probability that the Issuer or any Guarantor will become so obligated to pay Additional Amounts as a result of such change, amendment, interpretation or act), stating that the Issuer is entitled to effect such redemption and setting forth in reasonable detail a statement of facts relating thereto. No notice of redemption shall be given earlier than 60 days prior to the earliest date on which the Issuer or any Guarantor would be obligated or there is a substantial probability that the Issuer or any Guarantor would be obligated to pay such Additional Amounts were a payment in respect of the Notes then due and, at the time such notice of redemption is given, such obligation to pay, or such substantial probability that the Issuer will be required to pay, such Additional Amounts remains in effect. The Issuer shall not have the right to redeem the Notes as described in clause (B) above if it becomes obligated to pay Additional Amounts that are less than the Additional Amounts payable at such 15% rate (excluding interest and penalties). Purchases by the Issuer The Issuer or any of its Subsidiaries or Affiliates (as defined below) may at any time purchase Notes in the open market or otherwise at any price in accordance with applicable legal and regulatory requirements. Any purchase by tender of Notes shall be made available to all Noteholders alike subject to applicable legal and regulatory requirements. The Notes so purchased, while held by or on behalf of the Issuer or such Subsidiary or Affiliate, shall not entitle the holder to vote at any meetings of the Noteholders and shall not be deemed to be outstanding for the purposes of calculating quorums at meetings of the Noteholders. Payments Payments of amounts due (whether in respect of principal, interest or otherwise) in respect of any Note will be made by check or transfer in U.S. dollars drawn on a bank in New York City. Payments of amounts (including accrued interest) due on the final redemption of Notes will be made against presentation and, except in the case of partial redemption by reason of insufficiency of funds, surrender of the relevant Notes at the specified office of the Registrar or the Transfer Agent. If the due date for payment of the final redemption amount of Notes is not a Business Day, the holders thereof will not be entitled to payment thereof until the Business Day next following such due date and no further interest or other payment shall be due in respect of such delay except in the event that there is a subsequent failure to pay in accordance with these terms and conditions. Payment of amounts (whether principal, interest or otherwise) due (other than in respect of the final redemption amount of Notes) in respect of the Notes will be paid to the holders thereof as appearing in the register kept by the Registrar at the opening of business (New York time) on the fifteenth Business Day before the due date for such payment (the “Record Date”). Payments of principal, interest or otherwise due other than in respect of a final redemption of the Notes will be made by a check drawn on a bank in New York City and mailed to the address (as recorded in the register held by the Registrar) of the holder thereof unless the Holder thereof has applied to the Registrar at least fifteen days prior to the relevant payment date for payment to be made to a designated account and the Registrar has acknowledged such application. 107 All payments are subject in all cases to any applicable fiscal or other laws and regulations. No commissions or expenses shall be charged to the Noteholders in respect of such payments. The initial Principal Paying Agent, Paying Agent, Transfer Agent and Registrar and their initial specified offices are listed at the back of this Offering Memorandum and in the Indenture. The Issuer reserves the right at any time to vary or terminate the appointment of any Principal Paying Agent, Paying Agent, Transfer Agent or Registrar and appoint additional or other Principal Paying Agent, Paying Agents, Transfer Agents or Registrars; provided that it will maintain (i) a Registrar having a specified office in New York City and (ii) a Paying Agent and a Transfer Agent having a specified office in Ireland, so long as any Notes are listed on the Irish Stock Exchange Ltd. (Alternative Securities Market) and the rules of such exchange so require. The Principal Paying Agent, Paying Agents, the Transfer Agent and the Registrar reserve the right at any time to change their respective specified offices to some other specified offices in the same city. Notice of any change in the Principal Paying Agent, Paying Agents, the Transfer Agents or the Registrar or their specified offices will promptly be given to the Noteholders. All moneys paid by or on behalf of the Issuer to a Paying Agent for the payment of principal of, or interest on, any Note which remains unclaimed at the end of the Prescription Period (as defined below) in relation to such moneys will be repaid to the Issuer upon the Issuer’s written request therefor and the holder of such Note will thereafter look only to the Issuer for payment. Upon such payment all liability of the Registrar or any Paying Agent with respect thereto shall thereupon cease, without, however, limiting in any way the obligation of the Issuer in respect of the amount so repaid. Payments in respect of the Notes shall be made in U.S. dollars. In the event that on any payment date in respect of the Notes any restrictions or prohibition of access to the Brazilian foreign exchange market exists, the Issuer agrees to pay all amounts payable under the Notes in U.S. dollars by means of any legal procedure existing in Brazil (except commencing legal proceedings against the Central Bank), on any due date for payment under the Notes, for the purchase of U.S. dollars. All costs and taxes payable in connection with these procedures shall be borne by the Issuer. Any payment to be made in respect of the Notes by the Issuer to or to the order of a Paying Agent shall be in satisfaction pro tanto of the obligations of the Issuer under the Notes. The Issuer will indemnify the holders against any failure on the part of any Paying Agent to pay any sum due in respect of the Notes and will pay such sum to the Trustee on demand. This indemnity constitutes a separate and independent obligation from the other obligations of the Issuer hereunder, will give rise to a separate and independent cause of action, will apply irrespective of any waiver granted by the Trustee and/or any holder and will continue in full force and effect despite any judgment, order, claim, or proof for a liquidated amount in respect of any sum due under the Indenture, the Notes or any judgment or order. Payment of Additional Amounts All payments by the Issuer or the Guarantors in respect of the Notes shall be made without withholding or deduction for or on account of any present or future taxes, duties, assessments or other governmental charges of whatsoever nature imposed or levied by or on behalf of Brazil or any political subdivision or authority thereof or therein having power to tax (“Brazilian Taxes”), unless the Issuer or any Guarantor, as the case may be, is compelled by law to deduct or withhold such taxes, duties, assessments or governmental charges. In such event, the Issuer or any Guarantor, as the case may be, shall make such withholding, make payment of the amount so withheld to the appropriate governmental authority and forthwith pay such additional amounts (the “Additional Amounts”) as may be necessary to ensure that the net amounts receivable by the holders of the Notes after such withholding or deduction shall equal the respective amounts of principal and interest which would have been receivable in respect of the Notes in the absence of such withholding or deduction. No such Additional Amounts shall be payable with respect to the Notes: (i) to, or to a third party on behalf of, a holder who is liable for such taxes, duties, assessments or governmental charges in respect of such Note by reason of such holder’s having some connection with Brazil other than the mere holding of the Note; 108 (ii) to, or to a third party on behalf of, a holder who would be able to avoid such withholding or deduction by making a declaration of non-residence or similar claim for exemption but fails to do so; (iii) to, or to a third party on behalf of, a holder who presents a Note for payment on a date more than fifteen days after the date on which such payment became provided for or, whichever occurs later; or (iv) where such Additional Amount is imposed on a payment to an individual and is required to be made pursuant to European Union Directive 2003/48/EC or any other European Union Directive implementing the conclusions of the ECOFIN Council meeting of November 2627, 2000 on the taxation of savings income or any law implementing or complying with, or introduced in order to conform to, such Directive; nor will Additional Amounts be paid with respect to any payment of principal or interest on a Note to any holder that is a fiduciary or partnership or other than the sole beneficial owner of any such payment to the extent that a beneficiary or settlor with respect to such fiduciary, a member of such partnership or the beneficial owner would not have been entitled to the Additional Amounts had such beneficiary, settlor, member or beneficial owner been the holder of such Note. The obligation to pay taxes, duties, assessments and governmental charges shall not apply to (a) any estate, inheritance, gift, sales, transfer, personal property or any similar tax, assessment or other governmental charge or (b) any tax, assessment or other governmental charge which is payable otherwise than by deduction or withholding from payments of principal or interest on the Notes. For purposes of the provisions described in this section, the term “holder” of any Note means the direct nominee of any beneficial owner of such Note, which holds such beneficial owner’s interest in such Note. Affirmative covenants The Issuer has covenanted in the Indenture that, among other things, so long as any Note remains outstanding: Corporate existence The Issuer and the Guarantors (each, a “Credit Group Company” and, together, the “Credit Group Companies”) will preserve and keep in force and effect their corporate existence and all licenses and permits necessary for the proper conduct of their businesses; provided, however, that nothing herein or in the Indenture shall restrict the ability of the Credit Group Companies from entering into any merger or consolidation or sale of assets in accordance with the “Limitation on mergers, consolidations and asset sales of the Credit Group Companies” covenant. Maintenance of properties and of insurance The Credit Group Companies will maintain, preserve and keep their properties and equipment in good repair, working order and condition and will from time to time make all repairs, replacements, additions and improvements, as needed, so that the efficiency thereof shall be fully preserved and maintained. The Credit Group Companies will maintain insurance coverage by reputable insurance companies or associations, in such forms and amounts and against such hazards as are customary for companies engaged in similar businesses and owning and operating similar properties; provided the Credit Group Companies may maintain a system or systems of self-insurance in accordance with good business practice. Payment of taxes and other claims The Credit Group Companies will promptly pay or discharge all taxes, assessments, governmental charges, and claims for labor, materials, and supplies, except those being contested in good faith. 109 Reporting of financial information The Credit Group Companies will provide the Trustee and each Holder of Notes (i) within 120 days after the last day of each fiscal year of the Issuer, (a) the audited consolidated financial statements of the Issuer prepared in accordance with Brazilian GAAP, (b) the audited consolidated financial statements of each Guarantor and its consolidated subsidiaries prepared in accordance with Brazilian GAAP, and (c) the pro forma Credit Group Financial Statements of the Issuer on a consolidated basis and the Guarantors on a consolidated basis as a combined entity prepared in accordance with Brazilian GAAP; (ii) within 60 days after the last day of each of the first three fiscal quarters of the Issuer, (a) the unaudited consolidated quarterly financial statements of the Issuer prepared in accordance with Brazilian GAAP, (b) the unaudited consolidated quarterly financial statements of each of the Guarantors prepared in accordance with Brazilian GAAP, and (c) the pro forma combined quarterly financial statements of the Issuer on a consolidated basis and the Guarantors on a consolidated basis as a combined entity prepared in accordance with Brazilian GAAP; (iii) without duplication, copies of such other reports and notices, if any, as may be filed by the Credit Group Companies with the CVM, the Luxembourg Stock Exchange or the Irish Stock Exchange Ltd. (Alternative Securities Market); (iv) simultaneously with the delivery of each set of financial statements referred to in clauses (i) and (ii), a certificate of the chief financial officer (or such other officer as may be appropriate) of each Credit Group Company, stating whether, to the knowledge of such officer, after due inquiry, a Default or an Event of Default exists on the date of such certificate and, if such certificate shall state that to the knowledge of such officer, after due inquiry, a Default or an Event of Default exists, setting forth the details thereof and the action which the Issuer or the Guarantor, as the case may be, is taking or proposes to take with respect thereto; and (v) promptly upon any officer of the Issuer or any Guarantor becoming aware of the existence of a Default or an Event of Default, a certificate of the chief financial officer (or such other officer as may be appropriate) of the Issuer or the Guarantor, as the case may be, setting forth the details thereof and the action that the Issuer or the Guarantor, as the case may be, is taking or proposes to take with respect thereto. Delivery to the Trustee of the information in clauses (i), (ii) and (iii) is for informational purposes only and the Trustee’s receipt of such reports shall not constitute constructive notice of any information contained therein or determinable from information contained therein, including compliance with any of the covenants under the Indenture. Negative covenants Limitation on combined debt The Credit Group Companies shall not, and shall not permit any Subsidiary of any Credit Group Company to, Incur any Funded Debt or issue any Disqualified Stock unless the Combined Annualized Debt to Operating Cash Flow Ratio for the four full fiscal quarters next preceding the Incurrence of such Funded Debt for which financial statements are available, determined on a pro forma basis as if any such Funded Debt had been Incurred or any such Disqualified Stock had been issued and the proceeds thereof had been applied at the beginning of such four fiscal quarters, would be less than 4.0 to 1. Notwithstanding the foregoing paragraph, the Credit Group Companies may Incur or issue the following: (i) Debt evidenced by the Notes and the Guarantees; (ii) Debt owed by any Credit Group Company to any other Credit Group Company or to any Wholly-Owned Subsidiary of a Credit Group Company (provided that such Debt is at all times held by a Person which is a Credit Group Company or a Wholly-Owned Subsidiary of a Credit Group Company); provided, however, that upon either (x) the transfer or other disposition by such a Credit Group Company or a Wholly-Owned Subsidiary of any Debt or Disqualified Stock so permitted to a Person other than a Credit Group Company or a Wholly-Owned Subsidiary of a Credit Group Company or (y) the issuance (other than directors’ qualifying shares), sale, lease, transfer or other disposition of shares of Capital Stock (including by consolidation or merger) of a Credit Group Company or WhollyOwned Subsidiary of a Credit Group Company to a Person other than a Credit Group Company or a Wholly-Owned Subsidiary of a Credit Group Company, the provisions of 110 this Clause shall no longer be applicable to such Debt or Disqualified Stock and such Debt shall be deemed to have been Incurred at the time of such transfer, other disposition or issuance; (iii) Debt Incurred to renew, extend, refinance or refund the Notes or any Debt; provided, however, that such Debt does not exceed the principal amount of such Debt so renewed, extended, refinanced or refunded; and provided further that Debt the proceeds of which are used to refinance or refund Debt which is pari passu to the Notes or Debt which is subordinate in right of payment to the Notes shall only be permitted if (I) in the case of any refinancing or refunding of Debt which is pari passu to the Notes, the refinancing or refunding Debt is made pari passu to the Notes or subordinated to the Notes, and, in the case of any refinancing or refunding of Debt which is subordinated to the Notes, the refinancing or refunding Debt is also subordinate in right of payment to the Notes and (II) in either case, the refinancing or refunding Debt by its terms, or by the terms of any agreement or instrument pursuant to which such Debt is issued, (x) does not provide for payments of principal of such Debt at the stated maturity thereof or by way of a sinking fund applicable thereto or by way of any mandatory redemption, defeasance, retirement or repurchase thereof by the Issuer (including any redemption, retirement or repurchase which is contingent upon events or circumstances, but excluding any retirement required by virtue of acceleration of such Debt upon an event of default thereunder), in each case prior to the final stated maturity of the Debt being refinanced and (y) does not permit redemption or other retirement (including pursuant to an offer to purchase made by the Issuer) of such Debt at the option of the holder thereof prior to the final stated maturity of the Notes other than pursuant to a redemption resulting from a change in or amendment to Brazilian laws or regulations or interpretations thereof requiring the payment by any Credit Group Company of withholding or related tax on such Debt. Limitation on restricted payments The Credit Group Companies (i) shall not, directly or indirectly, declare or pay any dividend, or make any distribution, of any kind or character (whether in cash, property or securities) in respect of any class of their Capital Stock or to the holders of any class of their Capital Stock, excluding any dividends or distributions payable solely in shares of their Capital Stock (other than Disqualified Stock) or in options, warrants or other rights to acquire their Capital Stock (other than Disqualified Stock), (ii) shall not, and shall not permit any Subsidiary of any Credit Group Company, directly or indirectly, to purchase, redeem or otherwise acquire or retire for value (a) any Capital Stock of any of the Credit Group Companies or any Subsidiary of any Credit Group Company or (b) any options, warrants or rights to purchase or acquire shares of Capital Stock of any of the Credit Group Companies or any Subsidiary of any Credit Group Company, (iii) shall not make, or permit any Subsidiary of a Credit Group Company to make, any Investment in, or incur a guarantee of any obligation of, any Affiliate or any Related Person, other than a Credit Group Company or a Wholly-Owned Subsidiary of a Credit Group Company which is a WhollyOwned Subsidiary prior to such Investment, and (iv) shall not, and shall not permit any Subsidiary of a Credit Group Company to, redeem, defease (including, but not limited to, legal or covenant defeasance), repurchase, retire or otherwise acquire or retire for value pri or to any scheduled maturity, repayment or sinking fund payment. Debt of a Credit Group Company (other than the Notes and other than Debt owed by one Credit Group Company to another Credit Group Company) which is pari passu with or subordinate in right of payment to the Notes or the Guarantees, as the case may be (the transactions described in Clauses (i) through (iv) being referred to herein as “Restricted Payments”), if at the time thereof: (x) a Default or an Event of Default shall have occurred and is continuing, or (y) upon giving effect to such Restricted Payment, the Credit Group Companies could not incur at least U.S.$1.00 of additional Funded Debt pursuant to the first paragraph of the “Limitation on combined debt” covenant above. 111 The foregoing provision shall not be violated by reason of (1) the payment of any dividend within 60 days after declaration thereof if at the declaration date such payment would have complied with the foregoing provision; (2) any refinancing or refunding of any Debt otherwise permitted under clause (c) of the “Limitation on combined debt” covenant above; (3) the payment of dividends by the Issuer with respect to the Issuer’s Common Stock following an initial public offering thereof in an amount of up to 10 percent per annum of net proceeds obtained by the Issuer in such public offering; (4) the Investment in a Related Business which as a result of such Investment becomes a Wholly-Owned Subsidiary of a Credit Group Company; (5) the declaration and payment of dividends and making of loans to shareholders in the aggregate not exceeding 50% of the cumulative Combined Net Income of the Credit Group Companies for each fiscal quarter since the date of the Indenture (or, if the cumulative Combined Net Income of the Credit Group Companies is negative for any fiscal quarter, less 100% of such deficit); or (6) the declaration of dividends payable to shareholders provided that such shareholders waive the right to receive payment therefor and such Credit Group Company records such waiver as a capital or cash contribution (directly or indirectly) from such shareholders. Limitation on liens The Credit Group Companies shall not, and shall not permit any Subsidiary of any Credit Group Company to, Incur any Lien upon any of their respective property or assets, now owned or hereinafter acquired, without making, or causing such Subsidiary to make, effective provision for securing the Notes (x) equally and ratably with such Debt as to such property for so long as such Debt shall be so secured or (y) in the event such Debt is subordinate in right of payment to the Notes, on a basis senior to such Debt as to such property for so long as such Debt shall be so secured. The foregoing restrictions will not apply to Liens in respect of Debt existing at the date of this Indenture or to: (i) Liens securing only the Notes; (ii) Liens in favor of a Credit Group Company; (iii) Liens on property of a Person existing at the time such Person is merged into or consolidated with a Credit Group Company or any Subsidiary of a Credit Group Company; (iv) Liens on property existing immediately prior to the time of acquisition thereof (and not in anticipation of the financing of such acquisition); (v) Liens to secure Debt Incurred for the purpose of financing all or any part of the purchase price or the cost of construction or improvement of the property subject to such Liens; provided, however, that (a) the principal amount of any Debt secured by such a Lien does not exceed 120% of such purchase price or cost, (b) such Lien does not extend to or cover any other property other than such item of property and any improvements on such item and (c) the incurrence of such Debt is permitted by the “Limitation on combined debt” covenant above; (vi) Liens to secure the performance of statutory obligations, surety or appeal bonds, performance bonds or other obligations of a like nature incurred in the ordinary course of business; (vii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings; (viii) Liens imposed by law, such as mechanics’, carriers’, warehousemen’s, materialmen’s and vendors’ Liens, incurred in good faith in the ordinary course of business; 112 (ix) judgment Liens and other Liens for purposes of judicial and extra judicial claims; and (x) Liens incurred in the ordinary course of business with respect to obligations that do not exceed 10% of total assets of the Credit Group Companies on a combined basis (after eliminating the effect of inter-company transactions) determined as of the date of the most recent fiscal quarter-end for which financial statements are available. Limitation on transactions with affiliates and related persons The Credit Group Companies shall not, and shall not permit any Subsidiary of any Credit Group Company to, directly or indirectly, enter into any transaction or series of related transactions (including, without limitation, the purchase, sale, lease or exchange of property, or the making of any loan or advance, but excluding transactions between (a) Credit Group Companies, (b) a Credit Group Company and WhollyOwned Subsidiaries of any Credit Group Company, and (c) Wholly-Owned Subsidiaries of Credit Group Companies) with any Affiliate or Related Person of any Credit Group Company (or with a relative of an Affiliate or Related Person of any Credit Group Company), unless such transaction or series of related transactions is on terms no less favorable to the Credit Group Company or such Subsidiary than those that could be obtained in a comparable arm’s length transaction with an entity that is not an Affiliate or a Related Person and: (i) with respect to transactions with a fair value in excess of U.S.$5,000,000, an Officer’s Certificate to the effect that the terms of such transaction or series of related transactions are in the best interests of such Credit Group Company or such Subsidiary and on terms no less favorable to the Credit Group Company or Subsidiary than those that could be obtained in a comparable arms’ length transaction with an entity that is not an Affiliate or a Related Person is furnished to the Trustee; (ii) with respect to transactions with a fair value in excess of U.S.$10,000,000, a majority of the disinterested members of the Board of Directors shall determine in its good faith judgment and evidenced by a Board Resolution that the terms of such transaction or series of related transactions are in the best interests of such Credit Group Company or such Subsidiary and on terms no less favorable to the Credit Group Company or Subsidiary than those that could be obtained in a comparable arms’ length transaction with an entity that is not an Affiliate or a Related Person is furnished to the Trustee or (iii) with respect to transactions with a fair value in excess of U.S.$25,000,000, a written opinion of an independent nationally recognized Brazilian or international investment banking firm stating that the terms of such transaction or series of transactions are fair to such Credit Group Company or Subsidiary from a financial point of view, is furnished to the Trustee. Notwithstanding the above limitations, the Credit Group Companies may engage in transactions which involve the free exchange of information or services substantially in the manner engaged in at the date of the Indenture. Without limiting the generality of the foregoing, the Issuer may provide on-line news services to Affiliates and Related Persons at no charge; Credit Group Companies and their Subsidiaries may provide free or reduced price unsold advertising, time or space to Affiliates and Related Persons; and Credit Group Companies and their Subsidiaries may provide administrative services and office space to Affiliates or Related Persons. Limitation on mergers, consolidations and asset sales of the Credit Group Companies The Credit Group Company(ies) will not be a party to any merger or consolidation or sale of substantially all of its assets except for: (i) any merger, consolidation or transfer of substantially all of the assets in which the properties and assets of any Credit Group Company are transferred to or combined with, substantially as an entirety any one person, so long as (a) there shall not otherwise exist any Default of Event of Default under the Indenture, (b) upon giving effect to such merger, consolidation or transfer, the Credit Group Companies could incur at least U.S.$1.00 of additional Funded Debt pursuant to the first paragraph of the “Limitation on combined debt” covenant above, and (c) the Credit Group Company(ies) or the surviving corporation assumes all obligations of such Credit Group Company(ies) under the Notes; or 113 (ii) any merger, consolidation, or sale of substantially all of the assets among or between the Credit Group Company(ies), or one or more Wholly-Owned Subsidiaries of the Credit Group Companies or RBS Participações S.A. Defeasance and covenant defeasance The Issuer may at its option, at any time upon the satisfaction of certain conditions described below, elect to be discharged from its obligations with respect to (x) the entire indebtedness of the Notes (“defeasance”) or (y) certain restrictive covenants with respect to the Notes (“covenant defeasance”), in each case upon compliance with certain conditions set forth in the Indenture. For this purpose, defeasance means that The Issuer and the Guarantors shall be deemed to have paid and discharged the entire indebtedness represented by the Notes and the Guarantees and to have satisfied all their other obligations under such Notes, the Guarantees and the Indenture insofar as such Notes and the Guarantees are concerned, except for the following which shall survive until otherwise terminated or discharged hereunder: (i) the rights of Holders of Notes to receive, solely from the trust fund established for such purpose as described below, payments in respect of the principal amount and any Additional Amounts on such Notes when such payments are due, (ii) The Issuer’s obligations with respect to ownership, registration and transfer of the Notes, (iii) the obligation to pay Additional Amounts (as to which the Trustee will have no responsibility and The Issuer will be solely responsible for the payment of such Additional Amounts); and (iv) certain provisions relating to the rights, powers, trusts, duties and immunities of the Trustee. The Issuer may exercise its defeasance option notwithstanding the prior exercise of its covenant defeasance option as described below. Upon the Issuer’s exercise of the covenant defeasance option and upon satisfaction of the conditions set forth in the Indenture, The Issuer and the Guarantors may omit to comply with and shall have no liability in respect of any term, condition or limitation set forth in any covenant described below, the remainder of the Indenture and such Notes being unaffected thereby. Following such covenant defeasance, the occurrence of an Event of Default under the Indenture and certain other events (not including non-payment or bankruptcy and insolvency events) described in the Indenture will not constitute Events of Default. Following the satisfaction of the conditions set forth in the Indenture and the exercise of the covenant defeasance option, the Issuer and the Guarantors will no longer be required to comply with the following covenants: “Corporate existence”; “Maintenance of properties and of insurance”; “Payment of taxes and other claims”; “Reporting of financial information”; “Limitation on combined debt”; “Limitation on restricted payments”; “Limitation on Liens”; “Limitation on transactions with affiliates and related persons”; and “Limitations on mergers, consolidations and asset sales of the Credit Group Companies”. In order to cause a defeasance or covenant defeasance with respect to the Notes, RBS-Zero Hora will be required to satisfy the following conditions: (i) RBS-Zero Hora shall irrevocably have deposited or caused to be deposited with the Trustee as trust funds in trust for the purpose of making the following payments, specifically pledged as security for, and dedicated solely to, the benefit of the Holders of such Notes, (x) money in an amount, or (y) U.S. Government Obligations which through the scheduled payment of principal and interest in respect thereof in accordance with their terms will provide, not later than one day before the due date of any payment, money in an amount, or (z) a combination thereof, sufficient, in the opinion of an internationally recognized accounting firm expressed in a written certification thereof delivered to the Trustee, to pay and discharge, and which shall be applied by the Trustee to pay and discharge, the principal of, premium, if any, and each installment of interest on the Notes on the maturity of such principal or installment of interest on the day on which such payments are due and payable in accordance with the terms of the Indenture and of the Notes. For this purpose, “U.S. Government Obligations” means securities that are (x) direct obligations of the United States of America for the payment of which its full faith and credit is pledged or (y) obligations of a Person controlled or supervised by and acting as an agency or instrumentality of the United States of America the payment of which is unconditionally 114 guaranteed as a full faith and credit obligation by the United States of America, which, in either case, are not callable or redeemable at the option of RBS-Zero Hora thereof, and shall also include a depository receipt issued by a bank (as defined in Section 3(a)(2) of the Securities Act) as custodian with respect to any such U.S. Government Obligation or a specific payment of principal of or interest on any such U.S. Government Obligation held by such custodian for the account of the Holder of such depository receipt, provided that (except as required by law) such custodian is not authorized to make any deduction from the amount payable to the Holder of such depository receipt from any amount received by the custodian in respect of the U.S. Government Obligation or the specific payment of principal of or interest on the U.S. Government Obligation evidenced by such depository receipt; (ii) No Event of Default or event which with notice or lapse of time or both would become an Event of Default shall have occurred and be continuing on the date of such deposit; (iii) Such defeasance or covenant defeasance shall not cause the Trustee to have a conflicting interest for purposes of the U.S. Trust Indenture Act of 1939, as amended, with respect to any securities of RBS-Zero Hora; (iv) Such defeasance or covenant defeasance shall not result in a breach or violation of, or constitute a default under, the Indenture or any other agreement or instrument to which RBS-Zero Hora or any Guarantor is a party or by which it is bound; (v) RBS-Zero Hora shall have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel, each stating that all conditions precedent provided for relating to either defeasance or the covenant defeasance (as the case may be) have been complied with; (vi) In the case of a defeasance, RBS-Zero Hora shall have delivered to the Trustee an Opinion of Counsel stating that (x) RBS-Zero Hora has received from, or there has been published by, the U.S. Internal Revenue Service a ruling, or (y) since the date of the Indenture there has been a change in the applicable U.S. federal income tax law, in either case to the effect that, and based thereon such opinion shall confirm that, the Holders of the Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such deposit, defeasance and discharge and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such deposit, defeasance and discharge had not occurred; (vii) In the case of a covenant defeasance, RBS-Zero Hora shall have delivered to the Trustee an Opinion of Counsel to the effect that the holders of the Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such deposit and covenant defeasance and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such covenant defeasance had not occurred; (viii) RBS-Zero Hora shall have delivered to the Trustee an Opinion of Counsel to the effect that such deposit and defeasance or covenant defeasance shall not result in the trust arising from such deposit constituting an investment company as defined in the United States Investment Company Act of 1940, as amended, or such trust shall be qualified under such Act or exempt from regulation thereunder; and (ix) At the time of such deposit: (i) no default in the payment of all or a portion of principal of (or premium, if any) or interest on any Funded Debt Incurred by the Credit Group Companies shall have occurred and be continuing, and no event of default with respect to any Funded Debt so Incurred shall have occurred and be continuing and shall have resulted 115 in such Funded Debt becoming or being declared due and payable prior to the date on which it would otherwise have become due and payable and (ii) no other event of default with respect to any such Funded Debt shall have occurred and be continuing permitting (after notice or the lapse of time, or both) the holders of such Funded Debt (or a trustee on behalf of the holders thereof) to declare such Funded Debt due and payable prior to the date on which it would otherwise have become due and payable, or, in the case of either Clause (i) or Clause (ii) above, each such default or event of default shall have been cured or waived or shall have ceased to exist. Events of default If one or more of the following events (herein referred to as “Events of Default”) shall have occurred and be continuing: (i) the Issuer shall fail to pay the principal of any of the Notes when due; (ii) the Issuer shall fail to pay any interest on any of the Notes on the date when due and such failure shall continue for a period of 30 days; (iii) the Issuer or any Guarantor shall fail duly to perform or observe any other covenant in the Indenture relating to the Notes and such failure shall continue for a period of 90 days after the Issuer or any Guarantor has received written notice thereof from the Trustee or the holders of not less than 25% in aggregate principal amount of the Notes then outstanding specifying such failure and requiring the Issuer or the Guarantor to remedy the same; (iv) payment defaults on indebtedness of the Issuer or any U.S.$25,000,000; (v) acceleration on non-payment defaults on indebtedness of the Issuer or any Guarantor in excess of U.S.$25,000,000; (vi) any proceeding is initiated against the Issuer or any Guarantor in a court of competent jurisdiction in an involuntary case under applicable bankruptcy, reorganization, insolvency or other similar law now or hereafter in effect, and, within 90 days from the date the Issuer or any Guarantor, as the case may be, is served in connection thereof, (i) the Issuer or any Guarantor shall not have obtained a decision enacted by a competent court recognizing a relevant reason of law for any of the Issuer or any Guarantor not having performed the obligation that prompted such proceeding, or (ii) such proceeding shall not have been vacated, discharged or stayed or bonded pending appeal; (vii) a court of competent jurisdiction shall appoint a receiver, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Issuer or any Guarantor or for all or substantially all of the Issuer’s or any Guarantor’s property or shall order the winding-up or liquidation of the Issuer’s or any Guarantor’s affairs; or a resolution is passed for the winding-up or dissolution of the Issuer or any Guarantor or all or substantially all of the property of the Issuer or any Guarantor; (viii) the Issuer or any Guarantor shall commence a voluntary case under any applicable bankruptcy, reorganization, insolvency or other similar law now or hereafter in effect or consent to the entry of an order for relief in an involuntary case under any such law, or consent to the appointment of or taking possession by a recover, liquidator, assignee, custodian, trustee or sequestrator (or similar official) of the Issuer or any Guarantor or for all or substantially all of its property, or make any general assignment for the benefit of creditors; or 116 Guarantor in excess of (ix) any final judgment or judgments for the payment of money aggregating more that U.S.$25,000,000 (net of insurance proceeds) is or are entered against the Issuer or any Guarantor and such judgment or judgments is or are not discharged or dismissed or stayed pending appeal within 90 days after the Issuer or Guarantor, as applicable, has been notified in writing that such judgment has been entered. then (i) the holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare the outstanding principal of, premium (if any) and interest accrued on, all of the Notes then outstanding to be due and payable immediately at their outstanding principal amount plus interest accrued thereon to the date of payment, including any Additional Amounts, by written notice to the Trustee. Any such declaration of acceleration may be rescinded by the holders of a majority in aggregate principal amount of the Notes then outstanding in the manner set forth in the Indenture. Upon any such declaration of acceleration as aforesaid, and unless all such Defaults shall have been cured by the Issuer or waived as described above, the outstanding principal of such Notes then outstanding and the interest accrued thereon shall become and be immediately due and payable. Notwithstanding the foregoing, if an Event of Default specified in Clause (i), (vi), (vii) or (viii) above occurs with respect to the Issuer or any Guarantor, the outstanding principal, premium (if any) and accrued interest on the Notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder. Prescription Claims in respect of principal and interest in respect of the Notes will become prescribed unless made within a period (the “Prescription Period”) of three years from the appropriate due date. Replacement and exchange If any Note shall become mutilated or defaced or be destroyed, lost or stolen, the Trustee or its designee shall authenticate and deliver a new Note at the offices of the Trustee or such designee, on such terms as the Issuer and the Trustee may require, in exchange and substitution for the mutilated or defaced Note or in lieu of and in substitution for the destroyed, lost or stolen Note. In every case of mutilation or defacement or destruction, loss or theft, the applicant for a substitute Note shall furnish to the Issuer and the Trustee such indemnity as the Issuer and the Trustee may require and evidence to their satisfaction of the destruction, loss or theft of such Note and of the ownership thereof. In every case of mutilation or defacement of a Note, the holder shall surrender to the Trustee or its designee the Note so mutilated or defaced. In addition, prior to the issuance of any substitute Note, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. If any Note which has matured or is about to mature shall become mutilated or defaced or be apparently destroyed, lost or stolen, the Issuer may pay or authorize payment of the same without issuing a substitute Note. The costs and expenses of effecting any exchange pursuant to the foregoing provisions, except for the expenses of delivery by other than regular mail (if any) and except, if the Issuer shall so require, the payment of a sum sufficient to cover any tax or other governmental charge or insurance charges that may be imposed in relation thereto, or, in connection with this provision, the fees and expenses of the Trustee will be borne by the Issuer. Modifications, amendments and waivers The Indenture and the Notes (including the terms and conditions) may be modified or amended without the consent of the holder of any Note for the purpose of curing any ambiguity or of curing, correcting or supplementing any defective or inconsistent provisions contained therein or herein or in any manner that the parties thereto may deem mutually necessary or desirable and that will not adversely affect the interests of the holders of the Notes. 117 Modifications and amendments to the Indenture and the Notes (including the terms and conditions), may also be made, and future compliance therewith or past default by the Issuer may be waived, either with the consent of the holders of at least a majority in aggregate principal amount of the Notes at the time outstanding or by the adoption of a resolution at a meeting of the Noteholders held in accordance with the provisions of the Indenture; provided, however, that no such modification or amendment and no such waiver may, without the written consent or the affirmative vote of the holder of each such Note affected thereby, (i) change the stated maturity of the principal of or any installment of interest on any such Note; (ii) reduce the principal amount of or interest on any such Note; (iii) change the obligation of the Issuer to pay Additional Amounts; (iv) change the currency of payment of principal of or interest on any such Note; (v) impair the right to institute suit for the enforcement of any such payment on or with respect to any such Note; (vi) reduce the above-stated percentage of the principal amount of the Notes at the time outstanding necessary to modify or amend the Indenture or the Notes or to waive any future compliance or past default or reduce the percentage of the Notes required for the taking of action or the quorum required at any such meeting of holders of the Notes at which a resolution is adopted; or (vii) modify the Issuer’s obligation to maintain offices or agencies. Any such modifications, amendments or waivers will be conclusive and binding on all holders of the Notes, whether or not they have given such consent or were present at such meeting, and on all future holders of the Notes, whether or not notation of such modifications, amendments or waivers is made upon the Notes. Any instrument given by or on behalf of any Holder of a Note in connection with any consent to any such modifications, amendments or waivers will be irrevocable once given and will be conclusive and binding on all subsequent holders of such Note. Limitations on Suits by Noteholders Except as provided in the Indenture with respect to the right to institute suit for the enforcement of any payment of the principal of and interest on such Note (including any Additional Amounts) on or after the respective due dates thereof, no holder of any Note shall have any right by virtue or by availing itself of any provision of the Indenture or of the Notes to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to the Indenture, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy under the Indenture or under the Notes, unless such holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as provided in the Indenture, and unless also the holders of not less than 25% in aggregate principal amount of the Notes then Outstanding shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee under the Indenture and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to the Indenture. Under the terms of the Indenture, no one or more Holders of Notes shall have any right in any manner whatever by virtue or by availing itself of any provision of the Indenture to affect, disturb or prejudice the rights of any other holder of Notes, or to obtain or seek to obtain priority over or preference to any other holder or to enforce any right under the Indenture or under the Notes, except in the manner provided in the Indenture and for the equal, ratable and common benefit of all holders of Notes. Notices To Holders of Notes Notices to holders of Notes will be deemed to be validly given if (i) sent by first-class mail to them (or, in the case of joint holders, to the first-named in the register kept by the Registrar) at their respective addresses as recorded in the register kept by the Registrar, and will be deemed to have been validly given on the fourth Business Day after the date of such mailing, (ii) published as may be required by applicable law and (iii) so long as the Notes are listed on the Irish Stock Exchange Ltd. (Alternative Securities Market) and the rules of that exchange so require, by publication on the website of the Irish Stock Exchange Ltd. (Alternative Securities Market) designated for such purposes pursuant to the rules of the Irish Stock Exchange Ltd. (Alternative Securities Market). 118 To the Trustee Notice of any meeting called by the Issuer or by the Holders shall be given to the Trustee sufficiently in advance to allow the Trustee to give the notices described above, and in any case at least 14 days prior to the proposed date of the meeting. Any notice by the Issuer or any Holder to or upon the Trustee shall be deemed to have been sufficiently given or made, for all purposes, if given or made at the Corporate Trust Office of the Trustee. Governing law and jurisdiction The Notes, the Guarantees and the Indenture shall be governed by the laws of the State of New York. The Issuer and each of the Guarantors has irrevocably submitted to the nonexclusive jurisdiction of any New York State or United States Federal court sitting in the City and County of New York over any suit, action or proceeding arising out of or relating to the Indenture or any Note. As long as any Note is outstanding, the Issuer has agreed to maintain an office or appoint an agent in New York City where or upon whom process may be served in any such suit, action or proceeding. Initially, service of process may be made on the Issuer by delivery to the office of CT Corporation System, 111 Eighth Avenue, New York, New York 10011, as agent of the Issuer in New York City upon whom such process may be served. Notice of any change in such office or of any further or other appointment of an agent for service of process shall be given as provided in the Indenture. Judgment currency If a judgment or order given or made by any court for the payment of any amount in respect of any Note is expressed in a currency (the “Judgment Currency”) other than U.S. dollars, the Issuer and each of the Guarantors agrees to jointly and severally indemnify the relevant Noteholder against any deficiency arising or resulting from any variation in rates of exchange between the date as of which the amount in U.S. dollars is notionally converted into the amount in the Judgment Currency for the purpose of such judgment or order and the date of actual payment thereof. This indemnity will constitute a separate and independent obligation from the other obligations contained in the terms and conditions of the Notes, will give rise to a separate and independent cause of action, will apply irrespective of any indulgence granted from time to time and will continue in full force and effect notwithstanding any judgment or order for a liquidated sum or sums in respect of amounts due in respect of the relevant Note or under any such judgment or order. Certain definitions “Affiliate” of any Person means any other Person directly or indirectly controlling or controlled by or under direct or indirect common control with such Person. For the purposes of this definition, “control” when used with respect to any Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing. Notwithstanding the foregoing, any entity which is a joint venture partner or a co-investor in a business with the Issuer or a Subsidiary of the Issuer shall not be deemed to be an Affiliate of any Subsidiary of the Issuer or an Affiliate of any entity in which the Issuer owns, directly or indirectly, an equity interest, solely by reason of such joint venture or business relationship. “Attributable Debt” means at any date of determination, the product of (i) the net proceeds from any sale-leaseback transaction and (ii) a fraction, the numerator of which is the number of full years of the term of the lease relating to the property involved in such sale-leaseback transaction (without regard to any options to renew or extend such term) remaining at the date of the making of such computation and the denominator of which is the number of full years of the term of such lease (without regard to any options to renew or extend such term) measured from the first day of such term. “Brazilian Business Day” means a day on which commercial banks and foreign exchange markets settle payments and are open for general business (including dealings in foreign exchange and foreign currency deposits) in any of São Paulo or Rio de Janeiro, Brazil, and New York and London. 119 “Brazilian GAAP” means generally accepted accounting principles in Brazil, including the Correção Monetária Integral; provided, however, that for all full periods starting the earlier of (i) Apri1 1, 2010 and (ii) the date on which the Issuer and Guarantors are no longer required under any covenants related to financial indebtedness to produce financial statements adjusted for the Correção Monetária Integral, “Brazilian GAAP” shall mean “generally accepted accounting principles in Brazil, in conformity with the Corporate Law Method”. “Business Day” means a day (x) which is a day on which commercial banks are open and foreign exchange markets settle payments in U.S. dollars in New York City, (y) in relation to payments due upon presentation and/or surrender of any Notes, which is a day on which commercial banks are open and foreign exchange markets settle payments in the relevant currency in the place of presentation and/or surrender and (z) which is a day on which Clearstream, Luxembourg and Euroclear and, in the case of Restricted Global Notes, DTC are in operation. “Capital Stock” of any Person means any and all shares, interests, participation or other equivalents (however designated) of corporate stock of such Person. “Capitalized Lease” means, as applied to any Person, any lease of any property (whether real, personal or mixed) of which the discounted present value of the rental obligations of such Person as lessee, in conformity with Brazilian GAAP, is required to be capitalized on the balance sheet of such Person. “Capitalized Lease Obligation” means the discounted present value of the rental obligations under a Capitalized Lease. “Combined Annualized Debt to Operating Cash Flow Ratio” means the ratio of (i) the combined principal amount of Funded Debt of the Issuer on a consolidated basis and of the Guarantors on a consolidated basis outstanding as of the date of most recent available quarterly or annual balance sheet after giving pro forma effect to any Debt incurred since such balance sheet date to (ii) the Combined Operating Cash Flow of the Credit Group Companies (after eliminating the effect of inter-company transactions); provided, however, that Funded Debt shall not include principal amounts outstanding under (a) the 11% Guaranteed Notes due 2010, (b) Debt instruments with no maturity date (perpetual bonds), (c) Debt instruments convertible into shares of the Issuer or any Guarantor or (d) Debt with a right of payment subordinate to the Notes, in each case outstanding as of such date. “Combined Income Tax Expense” of the Credit Group Companies means for any period the combined provision for income taxes of the Guarantors for such period calculated on a consolidated basis in accordance with Brazilian GAAP and of the Issuer for such period calculated on a consolidated basis. “Combined Interest Expense” means for any period the combined interest expense included in a consolidated income statement (without deduction of interest income) of the Guarantors for such period calculated on a consolidated basis in accordance with Brazilian GAAP and included in a consolidated income statement (without deduction of interest income) of the Issuer for such period calculated on a consolidated basis, including without limitation or duplication (or, to the extent not so included, with the addition of), (i) the amortization of Debt discounts; (ii) any payments or fees with respect to letters of credit, bankers’ acceptances or similar facilities; (iii) fees with respect to interest rate swap or similar agreements or foreign currency hedge, exchange or similar agreements; (iv) Preferred Stock dividends of such Person (other than with respect to Redeemable Stock) declared and paid or payable; (v) accrued Disqualified Stock dividends of such Person and all Subsidiaries of such Person, whether or not declared or paid; (vi) interest on Debt guaranteed by such Person; (vii) the portion of any rental obligation allocable to interest expense, and (viii) one third of such Person’s rental expenses allocable to sale and leaseback transactions. “Combined Net Income” means for any period the consolidated net income (or loss) of the Guarantors for such period determined on a consolidated basis in accordance with Brazilian GAAP and the net income of the Issuer for such period determined on a consolidated basis; provided that there shall be excluded therefrom (a) the net income (or loss) of any Person acquired by Guarantor or a Subsidiary of a Guarantor in a pooling-of-interests transaction for any period prior to the date of such transaction, (b) the net income (but not net loss) of any Subsidiary of a Guarantor which is subject to restrictions which prevent the payment of dividends or the making of distributions to such Guarantor to the extent of such restrictions, (c) 120 the net income (or loss) of any Person that is not a Subsidiary of a Guarantor except to the extent of the amount of dividends or other distributions actually paid to a Guarantor by such other Person during such period, (d) gains or losses on asset dispositions by any Credit Group Company or its Subsidiaries, (e) all extraordinary gains and extraordinary losses, (f) the cumulative effect of changes in accounting principles in the year of adoption of such changes, and (g) the tax effect of any of the items described in Clauses (a) through (f) above. “Combined Operating Cash Flow” of the Credit Group Companies means for any period the Combined Net Income for such period increased by the sum of (i) Combined Interest Expense for such period, plus (ii) Combined Income Tax Expense for such period, plus (iii) the combined depreciation and amortization expense (including the amortization of goodwill) included in the income statements of the Issuer and the Guarantors (all on a consolidated basis) for such period, plus (iv) non-operational non-cash charges of the Credit Group Companies for such period, plus (v) royalties expenses paid by Credit Group Companies to RBS Participações S.A., minus (vi) equity in earnings of subsidiaries. “Debt” means (without duplication), with respect to any Person, whether recourse is to all or a portion of the assets of such Person and whether or not contingent, (i) every obligation of such Person for money borrowed, (ii) every obligation of such Person evidenced by bonds, debentures, notes or other similar instruments, including obligations Incurred in connection with the acquisition of property, assets or businesses, (iii) every reimbursement obligation of such Person with respect to letters of credit, bankers’ acceptances or similar facilities issued for the account of such Person, (iv) every obligation of such Person issued or assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business which are not overdue or which are being contested in good faith), (v) every Capital Lease Obligation of such Person, (vi) the maximum fixed redemption or repurchase price of Disqualified Stock of such Person at the time of determination, (vii) every obligation under interest rate swap or similar agreements or foreign currency hedge, exchange or similar agreements of such Person, (viii) all Attributable Debt of such Person and (ix) every obligation of the type referred to in Clauses (i) through (viii) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable, directly or indirectly, as obligor, Guarantor or otherwise. “Default” means any event that is, or after notice or passage of time or both would be, an Event of Default. “Disqualified Stock” of any Person means any Capital Stock of such Person which, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable at the option of the holder thereof, in whole or in part, on or prior to the final stated maturity of the Notes. “EU Transparency Directive” means the Proposal for a Directive of the European Parliament and of the Council on the harmonization of transparency requirements with regard to information about issuers whose securities are admitted to trading on a regulated market and amending EU Directive 2001/34/EC. “Fixing Date” means three Brazilian Business Days immediately prior to the Interest Payment Date, Maturity Date or earlier date specified for redemption of the Notes. “Funded Debt” means, with respect to any Person, the sum of (i) all Debt of such Person which matures, or in such Person’s good faith opinion may mature, more than one year after the date as of which the computation is made, (ii) Capitalized Lease Obligations maturing more than one year after the date as of which the computation is made, and (iii) guarantees of Funded Debt that may be called in a period of no less than one year (as such term is used in (i) and (ii) above to describe long term Debt or Capitalized Lease Obligations) of Subsidiaries or other Persons. “FX Rate” shall mean, for any Fixing Date, the BRL/U.S.$ spot offer rate (i.e., the rate at which banks buy BRL and sell U.S.$ (“BRL/U.S.$ Rate”)) expressed as the amount of BRL per one U.S.$ reported by the Banco Central do Brasil on SISBACEN Data System under transaction code PTAX-800 (“Consultas de Câmbio” or “Exchange Rate Inquiry”), Option 5 (“Cotações para Contabilidade” or “Rates for Accounting 121 Purposes”) (the “PTAX Rate”) at or about 6:00 p.m. São Paulo time on the Fixing Date, as determined by the Calculation Agent, subject to the FX Rate Fallback Provisions set forth below. “FX Rate Fallback Provisions” shall apply in the event that the PTAX Rate scheduled to be reported on the Fixing Date is not reported by the Banco Central do Brasil on the Fixing Date, in which case the FX Rate for such Fixing Date will be the settlement rate, if available, used for such Fixing Date pursuant to the procedures used by Bolsa de Mercadorias e Futuros (the “BM&F”) to cash settle open positions in accordance with item 6.4 of the Swap Contracts (Especificações dos Contratos a Termo de Troca de Rentabilidade) that, as of the Issue Date of the Notes, are referenced to the PTAX Rate, or any successor regulations (the “BM&F FX Rate”). In the event that such BM&F FX Rate is not available on the Fixing Date, the FX Rate for such Fixing Date will be the settlement rate for such Fixing Date used by the Câmara de Custódia e Liquidação (the “CETIP”) to cash settle derivatives contracts in the over-the counter market (the “CETIP FX Rate”), that, as of the Issue Date of the Notes, are referenced to the PTAX Rate, as determined in item 2 of the Comunicado SPR n. 002/94, dated as of January 28, 1994, or any successor regulations. In the event that none of the PTAX Rate, the BM&F FX Rate and the CETIP FX Rate are available on the Fixing Date, the Calculation Agent shall determine the FX Rate by reference to the quotations received from the Reference Banks on the Fixing Date as described herein. If five or four quotations are provided, the FX Rate will be the arithmetic mean (rounded to the nearest five decimal places, which 0.000005 being rounded upwards) of the remaining three or two such quotations, as the case may be, for such rate provided by the Reference Banks after disregarding the highest such quotation and the lowest such quotation; provided, that if two or more such quotations are the highest such quotations, then only one of such quotations shall be disregarded, and if two or more such quotations are the lowest quotations, then only one of such lowest quotations shall be disregarded. If three or two quotations are provided, the FX Rate will then be the average of the BRL/U.S.$ rates obtained. The Calculation Agent will not be required to independently verify the accuracy of the information provided by the Reference Banks in this respect. If only one or no such quotations are obtained from the Reference Banks, if the Calculation Agent determines in its absolute discretion that there are one or two other suitable replacement banks active in the BRL/U.S.$ currency and foreign exchange market that could provide quotations of the BRL/U.S.$ rate (for a total of at least two banks), the Calculation Agent shall ask such banks to provide such quotations as of 4:00 p.m. São Paulo time on the Fixing Date and shall use such quotations it receives to determine the FX Rate (taking an average rate, as set forth above). If, after complying with all of the FX Rate Fallback Provisions above, the Calculation Agent determines in its absolute discretion that there are no other means to obtain the relevant quotation of the BRL/U.S.$ Rate in a timely manner on the Fixing Date, the Calculation Agent will determine the FX Rate in consultation with the Issuer using such objective criteria as are reasonably available at the time. “guarantee” by any Person means any obligation, contingent or otherwise, of such Person guaranteeing or having the economic effect of guaranteeing, any Debt of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including, without limitation, any obligation of such Person, (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Debt or to purchase (or to advance or supply funds for the purchase of) any security for the payment of such Debt, (ii) to purchase property, securities or services for the purpose of assuring the holder of such Debt of the payment of such Debt, or (iii) to maintain working capital, equity capital or other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Debt (and “guaranteed”, “guaranteeing” and “guarantor” shall have meanings correlative to the foregoing); provided, however, that the guarantee by any Person shall not include endorsements by such Person for collection or deposit, in either case, in the ordinary course of business. “IASB” means the International Accounting Standards Board. “IFRS” means International Financial Reporting Standards (formerly International Accounting Standards) issued by the IASB and interpretations issued by the International Financial Reporting Interpretations Committee of the IASB (as amended, supplemented or re-issued from time to time). “Incur” means, with respect to any Debt or other obligation of any person, to create, issue, incur (by conversion, exchange or otherwise), assume, guarantee or otherwise become liable in respect of such Debt or 122 other obligation or the recording, as required pursuant to Brazilian GAAP or otherwise, in the case of the Issuer and the Guarantors on a consolidated basis, of any such Debt or other obligation on the balance sheet of such Person (and “Incurrence”, “Incurred”, “Incurrable” and “Incurring” shall have meanings correlative to the foregoing); provided, however, that a change in Brazilian GAAP that results in an obligation of such Person that exists at such time becoming Debt shall not be deemed an Incurrence of Debt. “Investment” by any Person means any direct or indirect loan, advance or other extension of credit or capital contribution (by means of transfers of cash or other property to others or payments for property or services for the account or use of others, or otherwise) to, or purchase or acquisition of Capital Stock, bonds, notes, debentures or other securities or evidence of Debt issued by, any other Person. “Lien” means, with respect to any property or assets, any mortgage or deed of trust, pledge, hypothecation, assignment, deposit arrangement, security interest, lien, charge, easement (other than any easement not materially impairing usefulness or marketability), encumbrance, preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever on or with respect to such property or assets (including, without limitation, any conditional sale or other title retention agreement having substantially the same economic effect as any of the foregoing). “Opinion of Counsel” means an opinion in writing signed by legal counsel who may be an employee of or counsel to the Issuer or a Guarantor (or other counsel reasonably satisfactory to the Trustee). “pari passu”, when used with respect to the ranking of any Debt of any Person in relation to other Debt of such Person, means that each such Debt (a) either (i) is not subordinated in right of payment to the same Debt of such Person or (ii) is subordinate in right of payment to the same Debt of such Person as is the other and is so subordinate to the same extent and (b) is not subordinate in right of payment to the other or to any Debt of such Person as to which the other is not so subordinate. “Person” means an individual, partnership, corporation (including a business trust), limited liability company, joint stock company, trust, unincorporated association, joint venture or other entity, or a government or any political subdivision or agency thereof. “Preferred Stock” of any Person means Capital Stock of such Person of any class or classes (however designated) that ranks prior, as to the payment of dividends or as to the distribution of assets upon any voluntary or involuntary liquidation, dissolution or winding up of such Person, to shares of Capital Stock of any other class of such Person. “Reference Banks” means Banco do Brasil S.A., Banco Itaú S.A., Banco Bradesco S.A., Citibank S.A., and Banco ABN Amro S.A. “Related Business” means any business whose primary business is (a) operating or owning a newspaper or newspapers, (b) radio or television broadcasting, or (c) internet (online) services. “Related Person” of any Person means, without limitation, any other Person owning (a) 5% or more of the outstanding Common Stock of such Person or (b) 5% or more of the Voting Stock of such Person. Notwithstanding the foregoing, any entity which is a joint venture partner or a co-investor in a business with the Issuer or a Subsidiary of the Issuer shall not be deemed to be a Related Person of any Subsidiary of the Issuer or a Related Person of any entity in which the Issuer owns, directly or indirectly, an equity interest, solely by reason of such joint venture or business relationship. “Subsidiary” of any Person means (i) a corporation more than 50% of the combined voting power of the outstanding Voting Stock of which is owned, directly or indirectly, by such Person or by one or more other Subsidiaries of such Person or by such Person and one or more Subsidiaries thereof or (ii) any other Person (other than a corporation) in which such Person, or one or more other Subsidiaries thereof, directly or in directly, has at least a majority ownership and power to direct the policies, management and affairs thereof. “Voting Stock” of any Person means Capital Stock of such Person which ordinarily has voting power for the election of directors (or persons performing similar functions) of such Person, whether at all times or only so long as no senior class of securities has such voting power by reason of any contingency. 123 “Wholly-Owned Subsidiary” of any Person means a Subsidiary of such Person all of the outstanding Capital Stock or other ownership interest of which (other than directors’ qualifying shares) shall at the time be owned by such Person or by one or more Wholly-Owned Subsidiaries of such Person or by such Person and one or more Wholly-Owned Subsidiaries of such Person. 124 FORM, DENOMINATION AND TRANSFER The Notes will be initially issued in the form of one or more global securities registered in the name of Cede & Co., as nominee for DTC. Upon the issuance of a global security, DTC or its nominee will credit the accounts of Persons (which means any individual, corporation, company, association, partnership, joint venture, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity) holding through it with the respective principal amounts of the Notes represented by such global security purchased by such Persons in the offering of the Notes. Such accounts shall be initially designated by the initial purchaser. Ownership of beneficial interests in a global security will be limited to Persons that have accounts with DTC (“Participants”) or Persons that may hold interest through Participants. Any Person acquiring an interest in a global security through an offshore transaction in reliance on Regulation S of the Securities Act may hold such interest through Euroclear or Clearstream. Ownership of beneficial interests in a global security will be shown on, and the transfer of that ownership interest will be effected only through, records maintained by DTC (with respect to Participants’ interests) and such Participants (with respect to the owners of beneficial interests in such global security other than Participants). The laws of some jurisdictions require that certain purchasers of securities take physical delivery of such securities in definitive form. Such limits and such laws may impair the ability to transfer beneficial interests in a global security. Payment of principal of and Interest on Notes represented by a global security will be made in immediately available funds to DTC or its nominee, as the case may be, as the sole registered owner and the sole holder of the Notes represented thereby for all purposes under the Indenture. Issuer has been advised by DTC that upon receipt of any payment of principal of or Interest on any global security, DTC will immediately credit, on its book-entry registration and transfer system, the accounts of Participants with payments in amounts proportionate to their respective beneficial interests in the principal or face amount of such global security as shown on the records of DTC. Payments by Participants to owners of beneficial interests in a global security held through such Participants will be governed by standing instructions and customary practices as is now the case with securities held for customer accounts registered in “street name” and will be the sole responsibility of such Participants. A global security may not be transferred except as a whole by DTC or a nominee of DTC to a nominee of DTC or to DTC. A global security is exchangeable for definitive Notes only if: (i) DTC notifies us that it is unwilling or unable to continue as a depositary for such global security or if at any time DTC ceases to be a clearing agency registered under the Exchange Act; (ii) Issuer in its discretion at any time determine not to have all the Notes represented by such global security; (iii) there shall have occurred and be continuing a Payment Default with respect to the Notes represented by such global security; or (iv) upon its winding-up, insolvency, dissolution or liquidation. Any global security that is exchangeable for definitive Notes pursuant to the preceding sentence will be exchanged for definitive Notes in authorized denominations and registered in such names as DTC or any successor depositary holding such global security may direct. Subject to the foregoing, a global security is not exchangeable, except for a global security of like denomination to be registered in the name of Cede & Co., as nominee for DTC or any successor depositary or its nominee. In the event that a global security becomes exchangeable for definitive Notes, (i) definitive Notes will be issued only in fully registered form in denominations of R$200,000 and integral multiples R$1,000; 125 (ii) payment of principal of, and premium, if any, and Interest on, the definitive Notes will be payable, and the transfer of the definitive Notes will be registerable, at its office or agency maintained for those purposes; and (iii) no service charge will be made for any registration of transfer or exchange of the definitive Notes, although Issuer may require payment of a sum sufficient to cover any tax or governmental charge imposed in connection therewith. So long as DTC or any successor depositary for a global security, or any nominee, is the registered owner of such global security, DTC or such successor depositary or nominee, as the case may be, will be considered the sole owner or holder of the Notes represented by such global security for all purposes under the Indenture and the Notes. Except as set forth above, owners of beneficial interests in a global security will not be entitled to have the Notes represented by such global security registered in their names, will not receive or be entitled to receive physical delivery of definitive Notes and will not be considered to be the owners or holders of any Notes under such global security. Accordingly, each Person owning a beneficial interest in a global security must rely on the procedures of DTC or any successor depositary, and, if such Person is not a Participant, on the procedures of the Participant through which such Person owns its interest, to exercise any rights of a holder under the Indenture. Issuer understands that under existing industry practices, in the event that Issuer requests any action of holders or that under existing industry practices, in the event that Issuer requests any action of holders or that an owner of a beneficial interest in a global security desires to give or take any action which a holder is entitled to give or take under the Indenture, DTC or any successor depositary would authorize the Participants holding the relevant beneficial interest to give or take such action and such Participants would authorize beneficial owners owning through such Participants to give or take such action or would otherwise act upon the instructions of beneficial owners owning through them. DTC has advised us that DTC is a limited-purpose trust company organized under the Banking Law of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing agency” registered under the Exchange Act. DTC was created to hold the securities of its Participants and to facilitate the clearance and settlement of securities transactions among its Participants in such securities through electronic book-entry changes in accounts of the Participants, thereby eliminating the need for physical movement of securities certificates. DTC’s Participants include securities brokers and dealers (which may include the initial purchaser), banks, trust companies, clearing corporations and certain other organizations some of whom (or their representatives) own DTC. Access to DTC’s book-entry system is also available to others, such as banks, brokers, dealers and trust companies, that clear through or maintain a custodial relationship with a participant, either directly or indirectly. Although DTC has agreed to the foregoing procedures in order to facilitate transfers of interests in global securities among Participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. None of us, the Trustee or the initial purchaser will have any responsibility for the performance by DTC or its Participants or indirect participants of their respective obligations under the rules and procedures governing their operations. 126 TAXATION Brazilian Tax Considerations The following is a general summary of the Brazilian tax considerations relating to an investment in the Notes by a non-Brazilian resident. It is based on the tax laws of Brazil as in effect on the date hereof, is subject to any change in Brazilian law that may come into effect after such date, and is applicable to us. The information set forth below is intended to be a general description only and does not address all possible tax consequences relating to an investment in the Notes. Prospective investors are advised to consult their own tax advisers as to the consequences of purchasing the Notes, including, without limitation, the consequences of the receipt of the interest and the sale, redemption or repayment of the Notes. Individuals domiciled in Brazil and Brazilian companies are taxed on the basis of their world wide income (which includes earnings of Brazilian companies' foreign subsidiaries, branches and affiliates). The earnings of branches of foreign companies and non Brazilian residents in general are taxed in Brazil only when derived from Brazilian sources. Interest, fees, commissions (including any original issue discount) and any other income payable by a Brazilian obligor to an individual, company, entity, trust or organization domiciled outside Brazil in respect of debt obligations such as the Notes are currently subject to income tax withheld at source. The rate of withholding tax with respect to debt obligations is generally 15% as provided for in Section 10 of the Normative Act No. 252 of December 3, 2002 (“Normative Act No. 252/02”). According to Normative Act 252/02, in the event that the beneficiary of such payments is domiciled in a tax haven jurisdiction (as defined by Brazilian tax laws from time to time), such payments of interest, fees, commissions (including any original issue discount) and any other income are also subject to withholding in respect of Brazilian income tax at the general rate of 15 %. However, it is important to mention that pursuant to article 8 of Law No. 9779 of January 19, 1999, if the relevant average term of the Notes is of less than 96 months, the rate applicable to the beneficiary domiciled in a tax haven jurisdiction is 25 % (article 691, IX of Decree No. 3,000 of March 26, 1999 and article 1, IX of Law No. 9,481 of August 13, 1997). Accordingly, there is a risk that the tax authorities may change the understanding above and apply the rate of 25% in the event that the beneficiary is domiciled in a tax haven jurisdiction. Please note that, at this point, a lower rate may be applicable where there is a tax treaty between Brazil and the country where the recipient of the payment has its domicile. In this regard, Brazil and Japan are signatories to a treaty (the “Japan Treaty”) for the avoidance of double taxation. Under the Japan Treaty, payments of interest to entities incorporated in Japan (or a branch thereof) or other type of income deemed similar to income from borrowed funds under Brazilian tax law will be subject to a Brazilian withholding tax rate of 12.5%. As long as such payments are made by the Issuer to the Paying Agent pursuant to the terms and conditions of the Notes and provided further that such Paying Agent is a tax resident of Japan and is qualified for the treaty benefits under the Notes, they will be subject to the 12.5 % Brazilian withholding tax rate. If the Issuer is not able to rely on a treaty to make the payments, and the payments are not made by the Issuer to the Principal Paying Agent, any such payments will be subject to Brazilian withholding tax at the rates indicated in the previous paragraph. Generally, any capital gains generated outside Brazil as a result of a transaction between two non Brazilian residents with assets not located in Brazil are not subject to taxation in Brazil. However, Article 26 of Law No. 10,833, of December 29, 2003, which came into force on February 1, 2004, established that capital gains realized on the disposition of assets located in Brazil by non-residents, whether to other nonresidents or Brazilian residents and whether made outside or within Brazil, is subject to taxation in Brazil at a tax rate of 15.0%, or 25.0% if such non-Brazilian resident is located in a tax haven jurisdiction. We are unable to predict whether the Notes would be deemed as assets located in Brazil for the purposes of Law No. 10,833 and, because no judicial guidance as to application of this law yet exists, we are unable to predict if such interpretation will ultimately prevail. 127 Most fund transfers in connection with financial transactions in Brazil are subject to the Tax on Financial Transaction (CPMF). The CPMF tax is collected on debits of reais from bank accounts (with certain limited exceptions). Financial institutions are exempted from the CPMF on financial transactions entered into in the course of their business. Transactions carried out in the Stock Exchange Market are also exempt from the CPMF. The CPMF rate can be modified at any time by the Federal Government, but cannot exceed 0.38 percent. On July 13, 2004, the Federal Government enacted Law No 10.892, pursuant to which, as from October 1, 2004, debits of reais from deposit bank accounts exclusively opened for financial investments (such as investment funds, fixed and variable income financial assets) (“conta corrente de depósito para investimento” or simply “conta investimento”) will not be subject to the CPMF assessment. Additionally, pursuant to Decree no. 4,494/02, the Tax on Financial Transactions (IOF) tax may be imposed on foreign exchange, credit, issuance of bonds or securities and insurance transactions. The conversion into reais of proceeds received in foreign currency by a Brazilian entity, as well as the conversion into foreign currency of proceeds received in reais, is subject to the IOF levied on foreign exchange transactions (“IOF/Câmbio”). Currently, except in limited cases, the rate of the IOF/Câmbio is reduced to zero, although the Brazilian government is authorized to increase such rate up to 25.0%, without congressional approval. Any such increase, although immediately applicable, would not be retroactive. Generally, there are no stamp, transfer or other similar taxes in Brazil with respect to the transfer, assignment or sale of the notes outsider Brazil, nor any inheritance, gift or succession tax applicable to the ownership, transfer or disposition of the notes, except for gift and inheritance taxes imposed in some states of Brazil on gifts and bequests by individuals or entities not domiciled or residing in Brazil to individuals or entities domiciled or residing within such Brazilian states. United States Federal Income and Estate Taxation IRS Circular 230 Notice: To ensure compliance with Internal Revenue Service Circular 230, prospective purchasers of the Notes are hereby notified that: (a) any discussion of U.S. federal tax issues contained or referred to in this Offering Memorandum or any document referred to herein is not intended or written to be used, and cannot be used by Noteholders for the purpose of avoiding penalties that may be imposed on them under the Code (as defined below); (b) such discussion is written for use in connection with the promotion or marketing of the Notes by the Issuer and Standard Bank Plc; and (c) each prospective purchaser of a Note should seek advice based on its particular circumstances from an independent tax advisor. The following is a summary of certain United States federal income and estate tax considerations that may be relevant to a beneficial owner of a Note who purchases the Note in the offering at the offering price. The summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), its legislative history, existing and proposed regulations thereunder, published rulings and court decisions, all as in effect on the date of this Offering Memorandum. All of these laws and authorities are subject to change at any time, perhaps with retroactive effect. No assurances can be given that any changes in these laws or authorities will not affect the accuracy of the discussions set forth in this summary. This summary deals only with beneficial owners that hold the Notes as capital assets as defined in the United States federal tax laws. This summary does not address tax considerations applicable to special classes of holders, such as: • dealers in securities or currencies, certain securities traders, banks, tax-exempt organizations and life insurance companies; • traders in securities that elect to mark to market; 128 • persons that hold Notes as part of a hedging transaction or a position in a straddle or conversion transaction; and • United States Holders (as defined below) whose functional currency is not the U.S. dollar. Prospective purchasers of Notes should consult their own tax advisors concerning the consequences, in their particular circumstances, under the Code and the laws of any other taxing jurisdiction, of the ownership of Notes. Definition of United States Holder A “United States Holder” is a beneficial owner of a Note who or that is: • a citizen or resident of the United States; • a domestic corporation; • an estate the income of which is subject to United States federal income tax without regard to its source; or • a trust if a court within the United States is able to exercise primary supervision over the administration of that trust and one or more United States persons have the authority to control all substantial decisions of the trust. United States Holders The following discussion applies to you if you are a United States Holder. Payments of Interest Stated interest on a Note will be taxable to a United States Holder as ordinary income at the time it is received or accrued, depending on the United States Holder’s method of accounting for tax purposes. A United States Holder who uses the cash method of tax accounting will realize an amount of interest income equal to the U.S. dollar payment of interest received. A United States Holder who uses the accrual method of tax accounting will realize an amount of interest income based on the average exchange rate in effect during the interest accrual period (or with respect to an interest accrual period that spans two taxable years, at the average exchange rate for the portion of the period within the taxable year). Alternatively, an accrual method United States Holder may elect to translate all interest income on the Notes at the spot rate in effect on the last day of the accrual period in the taxable year or on the date the interest payment is received if that date is within five business days of the end of the accrual period. If made, this election must be applied consistently to all debt instruments held at the beginning of the first taxable year to which the election applies and to all debt instruments subsequently acquired. The election cannot be changed without the consent of the Internal Revenue Service. A United States Holder using the accrual method of accounting for tax purposes will recognize foreign currency gain or loss on the receipt of an interest payment if the amount actually received differs from the amount of interest income accrued, to the extent that the difference is attributable to differences between the exchange rate used to accrue that income and the exchange rate used to compute the U.S. dollar amount of the interest payment. This foreign currency gain or loss will be treated as ordinary income or loss, but generally will not be treated as an adjustment to interest income received on a Note. Interest paid by the Issuer on the Notes will constitute income from sources outside the United States. 129 Effect of Brazilian Withholding Taxes. As discussed in “Taxation–Brazilian Tax Considerations”, under current law payments of interest on the Notes to foreign investors are subject to Brazilian withholding taxes. For U.S. federal income tax purposes, United States Holders will be treated as having received the amount of Brazilian taxes withheld by the Issuer with respect to a Note, and as then having paid over the withheld taxes to the Brazilian taxing authorities. As a result of this rule, the amount of interest income included in gross income for U.S. federal income tax purposes by a United States Holder with respect to a payment of interest may be greater than the amount of cash actually received (or receivable) by the United States Holder from the Issuer with respect to the payment. Subject to certain limitations, a United States Holder will generally be entitled to a credit against its U.S. federal income tax liability, or a deduction in computing its U.S. federal taxable income, for Brazilian income taxes withheld by the Issuer. For purposes of the foreign tax credit limitation, foreign source income is classified in one of several “baskets”, and the credit for foreign taxes on income in any basket is limited to U.S. federal income tax allocable to that income. In taxable years beginning before 2007, interest on the Notes generally will constitute foreign source income in the “high withholding tax interest” basket if the Notes are subject to Brazilian withholding tax at a rate of 5 percent or higher. If the Notes are not subject to such a withholding tax, or in any case in taxable years beginning after 2006, interest generally will be in the “passive income” basket. In certain circumstances a United States Holder may be unable to claim foreign tax credits (and may instead be allowed deductions) for Brazilian taxes imposed on a payment of interest if the United States Holder has not held the Notes for at least 16 days during the 31-day period beginning on the date that is 15 days before the date on which the right to receive the payment arises. Prospective purchasers should consult their tax advisers concerning the foreign tax credit implications of the payment of these Brazilian taxes. Original Issue Discount Because the issue price of the Notes has not yet been determined, potential investors should be aware that the Notes may be issued with original issue discount (“OID”) for U.S. federal income tax purposes. A Note will be treated as issued with OID (a “Discount Note”) if the excess of the Note’s “stated redemption price at maturity” over its issue price is equal to or more than a de minimis amount (0.25 percent of the Note’s stated redemption price at maturity multiplied by the number of complete years to its maturity). Generally, the issue price of a Note will be the first price at which a substantial amount of Notes included in the issue of which the Note is a part is sold to persons other than bond houses, brokers, or similar persons or organizations acting in the capacity of underwriters, placement agents, or wholesalers. The stated redemption price at maturity of a Note is the total of all payments provided by the Note that are not payments of “qualified stated interest.” Interest payable on the Notes at a single fixed rate will generally be qualified stated interest. United States Holders of Discount Notes must include OID in income calculated on a constant-yield method before the receipt of cash attributable to the income, and generally will have to include in income increasingly greater amounts of OID over the life of the Discount Notes. The amount of OID includible in income by a United States Holder of a Discount Note is the sum of the daily portions of OID with respect to the Discount Note for each day during the taxable year or portion of the taxable year on which the United States Holder holds the Discount Note (“accrued OID”). The daily portion is determined by allocating to each day in any “accrual period” a pro rata portion of the OID allocable to that accrual period. Accrual periods with respect to a Note may be of any length selected by the United States Holder and may vary in length over the term of the Note as long as (i) no accrual period is longer than one year and (ii) each scheduled payment of interest or principal on the Note occurs on either the final or first day of an accrual period. The amount of OID allocable to an accrual period equals the excess of (a) the product of the Discount Note’s adjusted issue price at the beginning of the accrual period and the Discount Note’s yield to maturity (determined on the basis of compounding at the close of each accrual period and properly adjusted for the length of the accrual period) over (b) the sum of the payments of qualified stated interest on the Note allocable to the accrual period. The “adjusted issue price” of a Discount Note at the beginning of any 130 accrual period is the issue price of the Note increased by (x) the amount of accrued OID for each prior accrual period and decreased by (y) the amount of any payments previously made on the Note that were not qualified stated interest payments. Although not entirely clear, the Issuer intends to take the position that for purposes of calculating OID the issue price of a Note should be the Brazilian real value of the U.S. dollar purchase price on the date of purchase, calculated at the exchange rate in effect on that date, which may differ from the Brazilian real issue price listed elsewhere in this Offering Memorandum. OID for each accrual period on a Discount Note will be determined in Brazilian reais and then translated into U.S. dollars in the same manner as stated interest accrued by an accrual basis United States Holder, as described above. Upon receipt of an amount attributable to OID (whether in connection with a payment on the Note or a sale of the Note), a United States Holder may recognize U.S. source exchange gain or loss (taxable as ordinary income or loss) equal to the difference between the amount received and the amount previously accrued. OID accrued by the Issuer on the Notes will constitute income from sources outside the United States. Under the foreign tax credit rules, OID accrued in taxable years beginning before January 1, 2007, with certain exceptions, will be “passive” or “financial services” income, while OID accrued in taxable years beginning after December 31, 2006 will, depending on the holder’s circumstances, be “passive” or “general” income, which, in either case, is treated separately from other types of income for purposes of computing the foreign tax credit allowable to a United States Holder under the United States federal income tax laws. Purchase, Sale, Redemption and Retirement of the Notes A United States Holder’s adjusted tax basis in a Note generally will be its cost, adjusted upward to reflect accrued OID and downward to reflect payments other than any payments of stated interest to the date of disposition. A United States Holder generally will recognize gain or loss on the sale, redemption or retirement of a Note equal to the difference between the amount realized (not including any amounts attributable to accrued but unpaid interest) on the sale, redemption or retirement and the holder’s adjusted tax basis in the Note. Subject to the discussion of foreign currency gain or loss, below, that gain or loss will be capital, and will be long-term capital gain or loss if the Note was held for more than one year. Under current law, net capital gains of individuals may be taxed at lower rates than items of ordinary income. The ability of a United States Holder to offset capital losses against ordinary income is limited. Any capital gain or loss recognized by a United States Holder on the sale, redemption or retirement of a Note generally will be treated as income or loss from sources within the United States for foreign tax credit limitation purposes. A United States Holder must treat any portion of the gain or loss recognized on the sale or disposition of a Note as ordinary income to the extent that gain or loss is attributable to changes in the U.S. dollar - Brazilian real exchange rate. Such gain or loss, however, will be taken into account only to the extent of the total gain or loss realized on the sale or disposition. Non-United States Holders The following discussion applies to you if you are not a United States person for United States federal income tax purposes (a “Non-United States Holder”). Interest on the Notes Subject to the discussion of backup withholding below, a Non-United States Holder will not be subject to United States federal income tax, including withholding tax, on payments of interest or the accrual of OID unless that holder: 131 • is an insurance company carrying on a U.S. insurance business to which the interest is attributable within the meaning of the United States federal tax laws; or • has an office or other fixed place of business in the United States to which the interest is attributable and the interest is derived in the active conduct of a banking, financing or similar business within the United States. Disposition of the Notes Subject to the discussion of backup withholding below, a Non-United States Holder will not be subject to United States federal income tax on any capital gain realized on the sale or exchange of the Notes unless: • that gain or income is effectively connected with the conduct by that Non-United States Holder of a trade or business within the United States; or • in the case of a Non-United States Holder who is an individual, that Non-United States Holder is present in the United States for a total of 183 days or more during the taxable year in which that gain or income is realized, and either: • that gain is attributable to an office or fixed place of business maintained in the United States by that Non-United States Holder; or • that Non-United States Holder has a tax home in the United States. Treasury Regulations Requiring Disclosure of Reportable Transactions Treasury regulations require United States taxpayers to report certain transactions that give rise to a loss in excess of certain thresholds (a “Reportable Transaction”). Under these regulations, a United States Holder (or a United States alien that holds the Notes in connection with a U.S. trade or business) that recognizes a loss with respect to the Notes that is characterized as an ordinary loss due to changes in currency exchange rates (under any of the rules discussed above) would be required to report the loss on Internal Revenue Service Form 8886 (Reportable Transaction Statement) if the loss exceeds the thresholds set forth in the regulations. For individuals and trusts, this loss threshold is $50,000 in any single taxable year. For other types of taxpayers and other types of losses, the thresholds are higher. All holders should consult with their own tax advisor regarding any tax filing and reporting obligations that may apply in connection with acquiring, owning and disposing of Notes. Estate Tax The Notes will be treated as situated outside the United States for purposes of the United States federal estate tax. Thus, for purposes of that tax, the Notes will not be included in the gross estate of an individual in the case of a nonresident of the United States who was not a citizen of the United States at the time of death if income on the Notes would not have been effectively connected with a United States trade or business at the time of the individual’s death. Backup Withholding and Information Reporting In general, information reporting requirements will apply to payments of principal of and interest on the Notes to non-corporate United States Holders if those payments are made within the United States or by or through a custodian or nominee that is a United States Controlled Person, as defined below. Backup withholding will apply to those payments if such a United States Holder fails to provide an accurate taxpayer identification number or, in the case of interest payments, fails to certify that it is not subject to backup 132 withholding or is notified by the Internal Revenue Service that it has failed to report all interest and dividends required to be shown on its United States federal income tax returns. Payments of principal and interest to beneficial owners who are Non-United States Holders generally will not be subject to information reporting and backup withholding, but those holders may be required to establish their exemption from information reporting and backup withholding by certifying their status on United States Internal Revenue Service Forms W-8BEN. The payment of proceeds of a sale or redemption of Notes effected at the U.S. office of a broker will generally be subject to the information reporting and backup withholding rules described above. In addition, the information reporting rules will apply to payments or proceeds of a sale or redemption effected at a foreign office of a broker that is a United States Controlled Person, unless the broker has documentary evidence that the holder or beneficial owner is not a United States Holder (and has no actual knowledge or reason to know to the contrary) or the holder or beneficial owner otherwise establishes an exemption. A payment to a foreign partnership is treated, with some exceptions, for backup withholding purposes as a payment directly to the partners, so that the partners are required to provide any required certifications. If you hold a Note through a partnership or other pass-through entity, you should consult your own tax advisors regarding the application of these rules to your situation. A “United States Controlled Person” is: • a United States person (as defined in the United States Treasury regulations); • a controlled foreign corporation for United States federal income tax purposes; • a foreign person 50% or more of whose gross income is derived for tax purposes from a U.S. trade or business for a specified three-year period; or • a foreign partnership in which United States persons hold more than 50% of the income or capital interests or which is engaged in a U.S. trade or business. Any amounts withheld under the backup withholding rules from a payment to a holder of a Note generally will be allowed as a refund or a credit against the holder’s United States federal income tax liability as long as the holder provides the required information to the Internal Revenue Service. 133 PLAN OF DISTRIBUTION Subject to the terms and conditions contained in the Purchase Agreement dated June 15, 2007 (the “Purchase Agreement”), among the Issuer, the Guarantors and the Initial Purchaser, the Initial Purchaser has agreed to purchase from the Issuer, and the Issuer has agreed to sell to the Initial Purchaser, R$300,000,000 principal amount of the Notes. The Purchase Agreement provides that the obligation of the Initial Purchaser to pay for and accept delivery of the Notes is subject to the conditions specified in the Purchase Agreement, including the delivery of legal opinions by its counsel. Subject to the terms and conditions of the Purchase Agreement, the Initial Purchaser is obligated to take and pay for all of the Notes offered hereby if any of the Notes are taken by the Initial Purchaser. The Issuer has been advised by the Initial Purchaser that it proposes to offer and sell the Notes initially to investors at the offering price set forth on the cover page of this Offering Memorandum and that after the initial offering, the price to investors may be changed. The Purchase Agreement provides that the Issuer will indemnify the Initial Purchaser against certain liabilities, including liabilities under the Securities Act, and will contribute to payments the Initial Purchaser may be required to make in respect thereof. The Notes have not been and will not be registered under the Securities Act or any state securities laws and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons (other than distributors) unless they are registered under the Securities Act or an exemption from the registration requirements of the Securities Act is available. See “Transfer Restrictions”. The Issuer has been advised by the Initial Purchaser that it proposes to resell the Notes initially to qualified institutional buyers (as defined in Rule 144A under the Securities Act) in reliance on the exemption from the registration requirements of the Securities Act provided by Rule 144A and to non U.S. Persons in reliance on the exemption from the registration requirements of the Securities Act provided by Regulation S under the Securities Act. The Initial Purchaser has agreed that, except as permitted by the Purchase Agreement, it will not offer, sell or deliver the Notes (i) as part of its distribution at any time or (ii) otherwise until 40 days after the later of the commencement of this offering and the original issuance date of the Notes, within the United States or to, or for the account or benefit of, U.S. persons, other than in accordance with Rule 144A, and it will send to each distributor, dealer or other person receiving a selling concession or similar fee to which it sells Notes in reliance on Regulation S during such 40 day period, a confirmation or other notice detailing the restrictions on offers and sales of the Notes within the United States or to, or for the account or benefit of, U.S. persons. In addition, until the expiration of the 40 day restricted period referred to above, an offer or sale of Notes within the United States by a dealer (whether or not it is participating in this offering) may violate the registration requirements of the Securities Act if such offer or sale is made otherwise than pursuant to Rule 144A or pursuant to another exemption from registration under the Securities Act. Terms used in this paragraph have the meanings given to them by Regulation S. Application will be made to list the Notes on the Alternative Securities Market of the Irish Stock Exchange Ltd. Notes sold to qualified institutional buyers in the United States pursuant to Rule 144A are expected to be eligible for trading in The PORTAL Market, NASD’s screen-based automated market for trading of securities eligible for resale under Rule 144A. Prior to this offering, there has been no established market for the Notes. The Issuer has been advised by the Initial Purchaser that it currently intends to make a market in the Notes as permitted by applicable laws and regulations. The Initial Purchaser is not obligated, however, to make a market in the Notes and any such market making may be discontinued at any time at the sole discretion of the Initial Purchaser. In addition, such market making activity will be subject to the limits imposed by the Securities Act and the U.S. Securities Exchange Act of 1934. Accordingly, the Issuer cannot assure you as to the liquidity of, or the development or continuation of trading markets for, the Notes. 134 In connection with this offering, the Initial Purchaser may engage in transactions that stabilize, maintain or otherwise affect the price of the Notes. Specifically, the Initial Purchaser may bid for and purchase Notes in the open market for the purpose of pegging, fixing or maintaining the price of the Notes. In addition, if the Initial Purchaser creates a short position in the Notes in connection with the offering by selling more Notes than are listed on the cover page of this Offering Memorandum, then the Initial Purchaser may reduce that short position by purchasing Notes in the open market. The Initial Purchaser may also impose penalty bids, which would permit the Initial Purchaser to reclaim a selling concession from a dealer when the Notes originally sold by that dealer are purchased in a covering transaction to cover short positions. In general, purchases of a security for the purpose of stabilizing or reducing a short position could cause the price of that security to be higher than it might otherwise have been in the absence of those purchases. Neither the Issuer nor the Initial Purchaser make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the Notes. In addition, neither the Issuer nor the Initial Purchaser make any representation that the Initial Purchaser will engage in these transactions or that these transactions, if they are commenced, will not be discontinued without notice. Purchasers of the Notes may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price set forth on the cover page of this Offering Memorandum. The Initial Purchaser has from time to time in the past provided, and may in the future provide, investment banking, financial advisory and other services to the Issuer and the Issuer’s affiliates for which it has received or expects to receive customary fees. Selling Restrictions No action has been or will be taken in any country or jurisdiction by the Issuer, the Guarantors or the Initial Purchaser that would, or is intended to, permit a public offering of the Notes, or the possession or distribution of the Offering Memorandum or any other offering material, in any country or jurisdiction where action for that purpose is required. Persons into whose hands this Offering Memorandum comes are required by the Issuer, the Guarantors and the Initial Purchaser to comply with all applicable laws and regulations in each country or jurisdiction in or from which they purchase, offer, sell or deliver Notes or have in their possession or distribute such offering material, in all cases at their own expense. Brazil The Notes have not been and will not be issued nor placed, distributed, offered or negotiated in the Brazilian capital markets. The Notes have not been and will not be registered with the CVM. The Initial Purchaser has represented, warranted and agreed that it has not offered or sold, and will not offer or sell, the Notes Brazil, except in circumstances which do not constitute a public offering, placement, distribution or negotiation of securities in the Brazilian capital markets regulated by Brazilian legislation. European Economic Area In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”), the Initial Purchaser has represented and agreed that with effect from and including the date on which the Prospectus Directive is implemented in that Relevant Member State (the “Relevant Implementation Date”) it has not made and will not make an offer of Notes to the public in that Relevant Member State except that it may, with effect from and including the Relevant Implementation Date, make an offer of Notes to the public in that Relevant Member State: (a) in (or in Germany, where the offer starts within) the period beginning on the date of publication of the Offering Memorandum in relation to those Notes which have been approved by the competent authority in that Relevant Member State or, where appropriate, approved in another Relevant Member State and notified to the competent authority in that Relevant Member State, all in accordance with the Prospectus Directive and ending on the date which is 12 months after the date of such publication; (b) at any time to legal entities which are authorized or regulated to operate in the financial markets or, if not so authorized or regulated, whose corporate purpose is solely to invest in securities; (c) at any time to any legal entity which has two or 135 more of (1) an average of at least 250 employees during the last financial year; (2) a total balance sheet of more than €43,000,000 and (3) an annual net turnover of more than €50,000,000, as shown in its last annual or consolidated accounts; or (d) at any time in any other circumstances which do not require the publication by the Issuer of the Offering Memorandum pursuant to Article 3 of the Prospectus Directive. For the purposes of this paragraph, the expression an “offer of Notes to the public” in relation to any Notes in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and the Notes to be offered so as to enable an investor to decide to purchase or subscribe the Notes, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State and the expression “Prospectus Directive” means Directive 2003/71/EC and includes any relevant implementing measure in each Relevant Member State. United Kingdom The Initial Purchaser has represented and agreed that: (a) it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the FSMA) received by it in connection with the issue or sale of the Notes in circumstances in which Section 21(1) of the FSMA does not apply to the Issuer; and (b) it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom. 136 TRANSFER RESTRICTIONS The following information relates to the form and transfer of the Notes. Because of the following restrictions, holders in the United States are advised to consult legal counsel prior to making any offer, resale, pledge or transfer of the Notes. The Notes and the Guarantees have not been and will not be registered under the Securities Act and may not be offered or sold in the United States or to, or for the account or benefit of, U.S. persons, except in accordance with an applicable exemption from the registration requirements of the Securities Act. Accordingly, the Notes are being offered and sold only (i) to “qualified institutional buyers” (as defined in Rule 144A), or QIBs, in compliance with Rule 144A or (ii) outside the United States to persons other than U.S. persons, which term shall include dealers or other professional fiduciaries in the United States acting on a discretionary basis for foreign beneficial owners (other than an estate or trust), in reliance upon Regulation S under the Securities Act. As used in this section, the terms “United States”, “U.S. person” and “offshore transactions” have the meanings given to them in Regulation S. Each purchaser of the Notes, by its acceptance thereof, will be deemed to have acknowledged, represented to and agreed with the Issuer, Guarantors and the Initial Purchaser as follows: a. It is: • a qualified institutional buyer, is aware that the sale of the Notes to it is being made in reliance on Rule 144A and is acquiring the Notes for its own account or for the account of a qualified institutional buyer; or • not a U.S. person and is purchasing the Notes outside the United States in compliance with Regulation S. b. It understands that the Notes and the Guarantees are being offered in a transaction not involving any public offering in the United States within the meaning of the Securities Act and that the Notes and the Guarantees have not been, and will not be, registered under the Securities Act and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons except as set forth below. c. If it is acquiring the Notes in a sale made in reliance upon Rule 144A, it will not offer, resell, pledge or otherwise transfer the Notes prior to the date that is two years after the later of the original issue date of the Notes and the last date on which the Issuer or any of its affiliates was the owner of that Note (or any predecessor of that Note ) except: • to the Issuer; • inside the United States to a qualified institutional buyer in compliance with Rule 144A; • outside the United States to non-U.S. persons in offshore transactions in accordance with Rule 903 or Rule 904 of Regulation S; • in a transaction complying with Rule 144 under the Securities Act (if available); or • pursuant to an effective registration statement under the Securities Act, in each case in accordance with any applicable securities laws of any state of the United States and other jurisdictions. In addition, it will, and each subsequent holder is required to, notify any subsequent purchaser of those Notes from it of the resale restrictions referred to above. d. If it is acquiring the Notes pursuant to an exemption from registration under the Securities Act: (1) It is (a) not an affiliate (as defined in Rule 144 under the Securities Act) of the Issuer or a person acting on behalf of such an affiliate, (b) a QIB, (c) acquiring such Notes for its own account or for the account of a QIB and (d) aware, and each beneficial owner of 137 such Notes has been advised, that the sale of such Notes to it is being made in reliance on an exemption from registration under the Securities Act. (2) It understands that such Notes, unless otherwise agreed between the Issuer and the Trustee in accordance with applicable law, will bear a legend to the following effect: THIS NOTE AND THE GUARANTEES HAVE NOT BEEN AND WILL NOT BE REGISTERED UNDER THE U.S. SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), OR ANY STATE SECURITIES LAWS AND MAY NOT BE OFFERED, SOLD, PLEDGED OR OTHERWISE TRANSFERRED EXCEPT AS PERMITTED BY THE FOLLOWING SENTENCES. THE SALE, PLEDGE OR TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN CONDITIONS AND RESTRICTIONS, INCLUDING THOSE SET FORTH IN THE INDENTURE TO BE DATED AS OF THE SETTLEMENT DATE, PURSUANT TO WHICH THIS NOTE WAS ISSUED (THE “INDENTURE”). THE HOLDER HEREOF, BY ITS ACCEPTANCE OF THIS NOTE, REPRESENTS, ACKNOWLEDGES AND AGREES THAT (a)(i) IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A “QUALIFIED INSTITUTIONAL BUYER” (WITHIN THE MEANING OF RULE 144A) AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION WITH RESPECT TO EACH SUCH ACCOUNT, OR (ii) IT IS NOT A U.S. PERSON (WITHIN THE MEANING OF REGULATION S), AND (b) THIS NOTE IS A “RESTRICTED SECURITY” THAT HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT AND THAT IT WILL NOT REOFFER, RESELL, PLEDGE OR OTHERWISE TRANSFER THIS NOTE EXCEPT (i) TO THE ISSUER OR AN AFFILIATE OF THE ISSUER (UPON REDEMPTION OF THE NOTES OR OTHERWISE); (ii) IN COMPLIANCE WITH RULE 144A UNDER THE SECURITIES ACT, TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A) PURCHASING FOR ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER, WHOM THE SELLER HAS INFORMED, IN EACH CASE, THAT THE OFFER, SALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A; (iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE); (iv) IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 903 OR 904 OF REGULATION S UNDER THE SECURITIES ACT OR (iv) PURSUANT TO A REGISTRATION STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT; IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAW OF ANY STATE OF THE UNITED STATES AND ANY OTHER JURISDICTION. TERMS USED IN THIS LEGEND HAVE THE MEANINGS GIVEN TO THEM BY REGULATION S UNDER THE SECURITIES ACT. (3) It understands that the Notes offered in reliance on an exemption from registration under the Securities Act will be represented by the Restricted Global Note, and before any interest in the Restricted Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in the Regulation S Global Note, it will be required to provide the Registrar with a written certification (in the form provided in the Indenture) as to compliance with applicable securities laws. Prospective purchasers are hereby notified that sellers of the Notes may be relying on the exemption from the provisions of Section 5 of the Securities Act. e. If it is acquiring the Notes pursuant to Regulation S and prior to the expiration of the distribution compliance period: 138 (1) It is, or at the time the Notes are purchased will be, the beneficial owner of such Notes and (a) it is not a U.S. person and it is located outside the United States (within the meaning of Regulation S) and (b) it is not an affiliate of the Issuer or a person acting on behalf of such an affiliate. (2) It understands that the Notes offered in reliance on Regulation S will be represented by the Regulation S Global Note. Prior to the expiration of the distribution compliance period, before any interest in the Regulation S Global Note may be offered, sold, pledged or otherwise transferred to a person who takes delivery in the form of an interest in the Restricted Global Note, it will be required to provide the Registrar with a written certification (in the form provided in the Indenture) as to compliance with applicable securities laws. f. It acknowledges that the Issuer, the Guarantors, the Initial Purchaser and others will rely upon the truth and accuracy of the foregoing acknowledgments, representations and agreements and agrees that, if any of the acknowledgments, representations or warranties deemed to have been made by its purchase of Notes is no longer accurate, it shall promptly notify the Issuer, the Guarantors and the Initial Purchaser. If it is acquiring any Notes as a fiduciary or agent for one or more investor accounts, it represents that it has sole investment discretion with respect to each such account and that it has full power to make the foregoing acknowledgments, representations and agreements on behalf of each such account. g. It acknowledges that the foregoing restrictions apply to holders of beneficial interests in the Notes as well as to registered holders of the Notes. h. If it is a purchaser in a sale that occurs outside the United States within the meaning of Regulation S, it agrees that until the expiration of a 40-day “distribution compliance period” within the meaning of Rule 903 of Regulation S under the Securities Act, no offer or sale of the Securities shall be made by it to a U.S. person or for the account or benefit of a U.S. person within the meaning of Rule 902(o) of the Securities Act except to a qualified institutional buyer and in compliance with the applicable restrictions set forth in paragraph (d) above. i. It will be deemed to have represented and agreed either that: (i) it is not and for so long as it holds Notes will not be (and is not acquiring the Notes directly or indirectly with the assets of a person who is or while the Notes are held will be) an ERISA Plan or other Plan, an entity whose underlying assets include the assets of any such ERISA Plan or other Plan, or a governmental or other employee benefit plan which is subject to any U.S. federal, State or local law, or foreign law, that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code, or (ii) its purchase and holding of the Notes will not result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code as a result of the applicability to such purchase and holding of a prohibited transaction class exemption issued by the U.S. Department of Labor (or, in the case of such a governmental or other employee benefit plan, in the violation of any such substantially similar U.S. federal, State or local law, or foreign law). Similarly, each transferee of any Notes, by virtue of the transfer of such Notes to such transferee, will be deemed to have represented and agreed either that: (i) it is not and for so long as it holds Notes will not be (and is not acquiring the Notes directly or indirectly with the assets of a person who is or while the Notes are held will be) an ERISA Plan or other Plan, an entity whose underlying assets include the assets of any such ERISA Plan or other Plan, or a governmental or other employee benefit plan which is subject to any U.S. federal, State or local law, or foreign law, that is substantially similar to the provisions of Section 406 of ERISA or Section 4975 of the Code, or (ii) its purchase and holding of the Notes will not result in a prohibited transaction under Section 406 of ERISA or Section 4975 of the Code as a result of the applicability to such purchase and holding of a prohibited transaction class exemption issued by the U.S. Department of Labor (or, in the case of such a governmental or other employee benefit plan, in the violation of any such substantially similar federal, State or local law, or foreign law). 139 SUMMARY OF CERTAIN SIGNIFICANT DIFFERENCES BETWEEN ACCOUNTING PRINCIPLES GENERALLY ACCEPTED IN BRAZIL, U.S. GAAP AND IFRS The financial statements of the Issuer, of each of the three Guarantors and the special purpose combined financial statements of the Issuer and the Guarantors were prepared in accordance with the Accounting Principles Generally Accepted in Brazil. Such principles are based upon the Brazilian Corporate Law (Law No. 6,404/76, as amended), complemented by standards issued by the Conselho Federal de Contabilidade (or CFC) and the Instituto dos Auditores Independentes do Brasil (or Brazilian Institute of Independent Auditors or IBRACON), the Brazilian professional accounting body. The financial statements reflect the impacts of inflation on the companies’ financial information following the Constant Currency Methodology. Certain differences exist between Brazilian GAAP, U.S. GAAP and IFRS (which incorporates all existing International Financial Reporting Standards, or IFRS, International Accounting Standards, or IAS, as well as interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and SIC (the Standing Interpretations Committee of the International Accounting Standards Committee) which might be material to the financial information presented herein. The matters described below summarize certain of those differences that may be material. The Issuer is responsible for preparing the Summary below. Neither the Issuer nor the Guarantors have prepared a complete reconciliation of its consolidated financial statements and related footnote disclosures between Brazilian GAAP, U.S. GAAP and IFRS; accordingly no assurance is provided that this summary is complete. In making an investment decision, prospective investors must rely upon their own examination of the Company, the terms of the offering and the financial information. Potential investors unfamiliar with Brazilian GAAP should consult their own professional advisors for an understanding of the differences between Brazilian GAAP, U.S. GAAP and IFRS and how those differences might impact the financial information presented herein. This summary is subject and qualified in its entirety by reference to the respective pronouncements of the respective Brazilian and United States professional accounting bodies and those of the International Accounting Standards Board and the International Financial Reporting Interpretations Committee. In reading this summary, prospective investors should also have regard to the considerations that: future differences between Brazilian GAAP, U.S. GAAP and IFRS resulting from future changes in accounting standards or from transactions or events that may occur in the future have not been taken into account in this summary and no attempt has been made to identify any future events, ongoing work and decisions of the regulatory bodies that promulgate Brazilian GAAP, U.S. GAAP and IFRS that could affect future comparisons between Brazilian GAAP, U.S. GAAP and IFRS. Unlike U.S. GAAP and IFRS, under business combinations, financial instruments, accounting and reporting for research and development costs, amongst others. Unlike U.S. GAAP and IFRS, under Brazilian GAAP there are no specific principles or detailed guidance relating to certain matters such as business combinations, financial instruments, accounting and reporting for research and development costs. Inflation Accounting Until December 31, 1995, publicly traded companies were required to prepare financial statements under two methods: (i) the Corporate Law Method (which complies with the accounting practices arising from the Brazilian Corporate Law), valid for statutory and tax purposes; and (ii) the Constant Currency Method (which complies with Brazilian GAAP) prepared as price-level adjusted financial statements. On January 1, 1996, new legislation eliminated the requirement to adjust the financial statements under Brazilian Corporate Law for inflation. Companies are still allowed under Brazilian GAAP to present financial statements prepared under the Constant Currency Method. The Corporate Law Method through December 31, 1995 The Corporate Law Method, for all periods through December 31, 1995, provided for a simplified method of accounting for the effects of inflation. It consisted of restating permanent assets (property, plant and equipment, investments and deferred charges) and shareholders’ equity accounts using the indices 140 mandated by the Brazilian Government. The net effect represented the inflationary gain or loss credited or charged to income in a single account in the income statement. This system did not provide for restatement of individual line items in the income statement. Moreover, this system did not require restatement of previous years’ financial statements. The Constant Currency Method Under the Constant Currency Method, all amounts in the financial statements are expressed in constant purchasing power at the current balance sheet date. This method requires that all transactions and balances be updated to reflect the changes in a general price index from the date they occurred or were generated to the current balance sheet date. Accordingly, all relevant non-monetary assets and liabilities, shareholders’ equity accounts, and all components of the statements of income, changes in shareholders’ equity and changes in financial position are updated to reflect the changes in the inflation indices to the current balance sheet date. In 2001, Resolution 900 of the Brazilian Federal Accountancy Council (CFC) established that the indexation of the accounts under the “Constant Currency Method” should be suspended during periods of low inflation, i.e., when the cumulative inflation rate in a 36-month period is less than 100%. As a result in financial statements presented under the Constant Currency Method indexation required to be suspended at such time and subsequent transactions are recorded at their historical amounts without indexation. Under U.S. GAAP, in most cases, the price level restatement of financial statements is not permitted. Account balances and transactions are generally stated in the units of currency of the period/year when the transactions originated. This accounting model is commonly known as the historical cost basis of accounting. However, the Constant Currency Method described in the preceding paragraphs is substantially similar to the methodology prescribed by Accounting Principles Board Statement (“APB”) No. 3, “Financial Statements restated for General Price-Level Changes” for companies operating in hyper-inflationary environments in which inflation has exceeded 100% over the last three years and which report in local currency. As from a date between July 1, 1997 and December 31, 1997, the Brazilian economy is no longer considered highly-inflationary as the increase in general price index has been measured at less than 100% over the last three years. As a result, for U.S. GAAP purposes financial statements would have been required to be adjusted for the effects of inflation until the date on which Brazil is no longer considered highlyinflationary, usually a date between July 1, 1997 and December 31, 1997. Under IFRS, inflation accounting following the methodology prescribed by standard IAS 29 (Financial Reporting in Hyperinflationary Economies) is required for companies which operate in hyper-inflationary economies in which cumulative inflation has exceeded 100% over the preceding three years. However, other indicators prescribed by IAS 29 should take in conjunction with the 100% three year inflation indicator to define whether the economy is hyper-inflationary. As a result, considering this quantitative indicator for IFRS purposes, financial statements should be adjusted for the effects of inflation up to the date on which the Brazilian economy was no longer deemed to be hyper-inflationary, which was July 1, 1997. Cash and Cash Equivalents Under U.S. GAAP and IFRS, cash equivalents are defined as short term (less than 3 months), highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of changes in value. Generally, only investments with original maturities of three-months or less qualify under that definition. Under Brazilian GAAP, cash equivalents are not defined or presented in the same context as IFRS or U.S. GAAP. Consolidation and Proportional Consolidation Under Brazilian GAAP, as per CVM Instruction No. 247 of March 27, 1996, as amended, the financial statements of publicly listed companies should consolidate the following entities: (a) entities in which the company has voting rights that provide it with the ability to have the majority on social decisions and to elect the majority of the members of both the Administrative Council and the Board; (b) overseas branches; and (c) companies under common control or controlled by shareholders' agreements irrespective of the participation 141 in voting stock joint ventures (including investees in which the company exerts significant influence through its participation in a shareholders' agreement in which such group controls the investee) are to be accounted for under the proportional consolidation method. Non public companies are not required to present consolidated financial statements. Under U.S. GAAP, except as noted in the section “Consolidation of Special Purposes Entities” below, the usual condition for consolidation is the ownership of a majority voting interest. Therefore, as a general rule, the condition for consolidation is the ownership by one company, directly or indirectly, of over 50% of the outstanding voting shares of another company. Joint ventures are usually accounted for following the equity method of accounting. Proportional consolidation is generally not allowed under U.S. GAAP. Under IFRS, IAS 27 focuses on the concept of control, which is the power to govern the financial and operating policies of a subsidiary to obtain benefits. When a parent controls a subsidiary, except in very limited circumstances, it needs to consolidate such an investee. Control is usually presumed to exist when the parent owns, directly or indirectly through subsidiaries, more than half of the voting power of the entity. However, control may exist through means other than ownership of more than half of the voting power. Under IAS 31, joint control is the contractually agreed sharing of control over an economic activity, and exists only when the strategic financial and operating decisions regarding the activities require unanimous consent of the venturers. Joint ventures are either carried at the equity method or proportionate consolidated. Special rules apply for consolidation of special purpose entities as described in the section below for Brazilian GAAP, U.S. GAAP and IFRS. Consolidation of Special Purpose Entities Under Brazilian GAAP, CVM’s Instruction 408, effective as from fiscal years ending December 31, 2005, determines that special purpose entities (SPE's) must be consolidated by public companies when the essence of its relationship with the company indicates that activities of the SPE are directly or indirectly controlled by the company. An SPE is considered to be controlled by a company when its activities are conducted in the name of the company or substantially for the company's specific operational support when, directly or indirectly: (i) the company has the ability for decision making or has the rights to obtain the majority of rewards of the SPE's operations, or (ii) the company is subject to substantive risks of ownership of SPE. When applicable, the following information must be disclosed in the notes to the financial statements: (i) the nature, purpose, size, and activities of the SPE; (ii) the nature of its involvement with the SPE and potential exposure to losses; (iii) the type of exposure to losses due to the relationship with the SPE; and (iv) any guarantees given in favour of the SPE. Additionally, when a company has relevant rights or is exposed to relevant risks related to its relationship with the SPE, but it is not required to consolidate the SPE, the following information must be disclosed: (i) the nature, purpose, size, and activities of the SPE; (ii) the nature of its involvement with the SPE; (iii) the type of exposure to losses due to the relationship with the SPE; and (iv) potential indemnification by the Company as result of the activities of the SPE. CVM Instruction 408 is applicable only to public listed companies. Under U.S. GAAP, an SPE was required to be consolidated when it did not meet the criteria for a Qualifying Special Purpose Entity, as defined in SFAS No. 140 and in accordance with Emerging Issues Task Force Topic D-14. General factors to be considered in making this determination included whether the majority owner (or owners) of the SPE was (were) independent, had made a substantive capital investment in the SPE, had control of the SPE, or possessed the substantive risks and rewards of ownership of the SPE. In January 2003, the Financial Accounting Standard Board (“FASB”) issued FASB Interpretation No. 46 “Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51”. FIN 46 provides a new framework for identifying variable interest entities (“VIEs”) and determining when a 142 company should include the assets, liabilities, non-controlling interests and results of activities of a VIE in consolidated financial statements. Variable interest entities are entities with the following characteristics: (a) the equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties; and (b) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: (i) the direct or indirect ability to make decisions about the entity’s activities through voting rights or similar rights; (ii) the obligation to absorb the expected losses of the entity if they ocurr, which makes it possible for the entity to finance its activities, or (iii) the right to receive the expected residual returns of the entity if they occur, which is the compensation for the risk of absorbing the expected losses. In December 2003, FIN 46 was substantially revised and a new interpretation, FIN 46R (revised), was issued. The key differences between FIN 46R and its predecessor FIN 46 include: (i) FIN 46R now scopes out many – but not all – businesses, as that term is defined in the interpretation. A business – assuming it is scoped out in FIN 46R – should be consolidated with its accounting parent (if it has one) only when required by longstanding, conventional consolidation guidance. (ii) FIN 46R improves the definition of a variable interest and provides more understandable illustrations than those originally provided in FIN 46. (iii) Under FIN 46, decision maker fees and certain guarantee fees were treated as unique types of variable interests in a VIE. The special treatment increased the odds that decision makers and providers of certain guarantees would end up as a VIE’s primary beneficiary. FIN 46R eliminates the bias, putting these fees on an equal footing with other variable interests. Under IFRS specific guidance is provided with respect to consolidation of SPEs. An SPE may be created to accomplish a narrow and well-defined objective. Such a special purpose entity may take the form of a corporation, trust, partnership or unincorporated entity and are often created with legal arrangements that impose strict and sometimes permanent limits on the decision-making powers of their governing board, trustee or management. The sponsor frequently transfers assets to the SPE, obtains rights to use assets held by the SPE or performs services for the SPE, while other parties may provide funding. An entity that engages in transactions with the SPE (frequently creator or sponsor) may in substance control the SPE. SPEs shall be consolidated when the substance of the relationship between an entity and the SPE indicates that the SPE is controlled by that entity. Special Purpose Combined Financial Statements Brazilian GAAP and IFRS do not have specific accounting standards or guidance addressing the preparation of special purpose combined financial statements. Under U.S. GAAP, ARB No 51 determines that, when combined statements are prepared for a group of related companies, such as a group of commonly controlled companies, inter-company transactions and profits or losses should be eliminated. Accounting for these matters, as well as for any minority interests, foreign operations, or income taxes should follow the general guidance used for the preparation of consolidated financial statements. Equity Method of Accounting Under Brazilian GAAP, in applying the equity method of accounting, a company is required to record an original investment in the equity of another entity at cost, which is thereafter periodically adjusted to recognize the investor's share of the investee's earnings, losses and dividend payments after the date of original investment. A Brazilian parent company is required to use the equity method of accounting to record investments on its stand-alone financial statements for both its subsidiaries (companies that are controlled by the parent company) and its affiliates (companies in which the parent company owns at least 10% of the 143 issued share capital without controlling it, over whose management it exerts influence, or in which it owns 20% or more of the capital, if the aggregate book value of all such investments is equal to or greater than 15% of the net worth of the parent company or if the book value of an investment in any single subsidiary or affiliate is equal to or greater than 10% of the net worth of the parent company. Publicly listed companies should consolidate all subsidiaries, except those for which there are serious going concern issues or clear evidence of sale in the near future. Under U.S. GAAP, the equity method of accounting is used for investments, based on U.S. GAAP underlying financial statements, in which the company has a 20 per cent to 50 per cent ownership interest or has otherwise significant influence over the operations of the investee and in joint ventures in which neither party has control. Investments under 20 per cent which are not marketable securities are carried at amortised cost while investments under 20 per cent in marketable securities are recorded or fair value under SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. Under U.S. GAAP, if any of the investments described above, including those accounted for by the equity method of accounting or those following the provisions of SFAS No. 115, experience an other than temporary decline in their fair value that exceeds their carrying amounts, such investments should be reduced to their estimated fair value amount and an impairment loss recognised in earnings. The new reduced amount becomes the historical basis for such investments. Under IFRS, IAS 28 determines that the equity method of accounting is applicable to those investments in which the investor has significant influence. Significant influence is the power to participate in the financial and operating policies of the investee but is not control, or joint control. Significant influence is presumed to exist when the investor has 20% or more of the voting power of the investee. However, significant influence may exist through other means. Business Combinations, Purchase Accounting and Goodwill Under Brazilian GAAP, business combinations are not specifically addressed by detailed accounting pronouncements. The accounting practices derived from Corporation Law and CVM rules prescribe the application of the purchase method based on book values of the net assets acquired. Shares issued in exchange for shares of other companies in connection with a business acquisition are accounted for at their net asset value per share. Goodwill or negative goodwill recorded on the acquisition of a company is calculated as the difference between the cost of acquisition and the net book value of assets and liabilities acquired and is attributed to one of the following reasons: step up basis of the assets due to differences in the carrying and fair values of the assets, future profitability or other reasons. Such goodwill should be amortized as follows depending on its nature: (i) Step up basis of the assets: Goodwill or negative goodwill should be included as part of the value of the corresponding assets of the acquiree and amortized proportionally over their remaining estimated useful lives; (ii) Future profitability: Goodwill should be amortized during the time when the respective results are expected to be achieved. In this case, the amortization period should not exceed ten years; (iii) Other reasons: Goodwill should be expensed immediately. Negative goodwill should not be amortized to income until the related investment is sold or written off. Under U.S. GAAP, APB No. 16, determines that most business combinations are treated as the acquisition of one company by another and accounted for by the purchase method. In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 141 which amends APB No. 16 and which requires, among other things, that all business combinations, except those involving entities under common control be accounted for by a single method — the purchase method. The combination of entities under common control are accounted for in a manner similar to a pooling of interest. Under this method, the recorded assets and liabilities of the separate enterprises generally become 144 the recorded assets and liabilities of the combined enterprise. Additionally, the combined enterprise records as capital the capital stock and capital in excess of par or stated value of outstanding stock of the separate enterprises. Similarly, retained earnings or deficits of the separate enterprises are combined and recognised as retained earnings or deficits of the combined enterprise. Any assets or liabilities exchanged to effect the transfer are accounted for as a capital dividend to, or capital contribution by, the transferor. Under the pooling of interest method, the financial statements of the combined enterprise for periods prior to the combination are restated to present the previously separate enterprises as if they had always been combined. The purchase method is applicable for a business combination in which one company acquires an unrelated company. The acquiring company records assets acquired and liabilities assumed at its fair value, including identified intangible assets. Under SFAS No.141 and SFAS No. 142 “Goodwill and Other Intangible Assets”, goodwill and other intangible assets with indefinite useful lives are not amortised. The amount of goodwill is evaluated periodically, and in the case of impairment, its value is adjusted accordingly. Negative goodwill will is recognised as an extraordinary gain in the statement of operations. Under the purchase method, the financial statements of the acquiring company for periods prior to the acquisition are not restated. SFAS No. 141 requires the presentation of pro forma results of operations for the current and comparative periods of business combinations accounted for as purchases. Under IFRS, the International Accounting Standards Board (or IASB) issued IFRS 3 (Business Combination), which is applicable for business combinations for which the agreement date is on or after 31 March 2004, and requires, among other things, that all business combinations under its scope be accounted for under the purchase method. Under this method, the acquiring entity records identifiable assets, liabilities and contingent liabilities, acquired and assumed, at their fair values, including intangible assets that may not have been previously recognised by the acquired entity. The shares issued in exchange for shares of other companies are accounted for at fair value based on the market price. Under IFRS 3 and IAS 38, (Intangible Assets), goodwill and other intangible assets with indefinite lives are not amortized, but tested for impairment at least annually. In the case of impairment, the asset’s carrying amount is reduced to its recoverable amount, determined to be the higher of its fair value less cost to sell and its value in used, calculated based on discounted cash flows. Impairment adjustments are recognised directly in income statement. Negative goodwill is recognized as a gain in the statement of operations. Finite-lived intangible assets are generally amortized on a straight-line basis over its useful life, being the period over which the entity expects to obtain economic benefits from the asset. Transfer of Financial Assets No specific pronouncement addresses the accounting for transfers of financial assets under Brazilian GAAP. Under U.S. GAAP, SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” provides a consistent application of a financial-components approach that focuses on control to account for transfers of financial assets. Under that approach, after a transfer of financial assets, an entity recognizes the financial and servicing assets it controls and the liabilities it has incurred, but does not recognize financial assets when control has been surrendered and does not recognize liabilities when extinguished. SFAS No. 140 provides standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings from an accounting perspective. A transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent that consideration is received in exchange. Under SFAS No. 140, it is considered that the transferor has surrendered control over transferred assets if and only i f all of the following conditions are met: (i) the transferred assets have been isolated from the transferor — put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership; (ii) each transferee (or, if the transferee is a qualifying special-purpose entity, or SPE, each holder of its beneficial interests) has the right to pledge or exchange the assets (or beneficial interests) it received, and no condition both constrains the transferee (or holder) from taking 145 advantage of its right to pledge or exchange and provides more than a trivial benefit to the transferor; and (iii) the transferor does not maintain effective control over the transferred assets through either (1) an agreement that both entitles and obligates the transferor to repurchase or redeem them before their maturity or (2) the ability to unilaterally cause the holder to return specific assets, other than through a clean-up call. Under SFAS No. 140, liabilities and derivatives incurred or obtained by transferors as part of a transfer of financial assets are initially measured at fair value, if practicable. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between the assets sold, if any, and retained interests, if any, based on their relative fair values at the date of the transfer. Under IFRS, financial assets can be derecognized in full or partially but only when the necessary conditions are met. Derecognition conditions depend on the following factors: (a) the rights to the asset’s cash flows and substantially all risks and rewards of ownership are transferred out, (b) an obligation to transfer the asset’s cash flows is assumed, (c) substantially all risks and rewards are transferred out and the following conditions are met: - no obligation to pay cash flows unless equivalent cash flows from the transferred asset collected, - prohibition from selling or pledging the asset other than as security to the eventual recipients for the obligation to pass through cash flows, - obligation to remit any cash flows without material delay; or (d) substantially all the risks and rewards are neither transferred nor retained but control of the asset is transferred. Property, Plant and Equipment Under Brazilian GAAP, companies may opt to carry property, plant and equipment (PP&E) at cost, restated for inflation as discussed elsewhere in this session, or at appraised values, in which case the revaluations must be performed a least every four years and should not result in an amount higher than the value expected to be recovered through future operations. The difference between the carrying amount and the appraised value of the assets would be recorded, if positive, as an increase of property, plant and equipment with counter entry directly in shareholders equity. Decreases in the appraised value set-off prior increases recorded. Any excess decrease is recognized as impairment loss in the statement of operations. Unless it is held for sale, revaluation of land is not subject to deferred income tax. Gains and losses from the sale or disposal of assets are recorded as non-operating expenses. Under IFRS, companies may use either the historical cost or revalued amounts (based on fair value) as the accounting basis for PP&E. When the revaluation model is used, revaluations should be made with sufficient regularity. If an item of PP&E is revalued, the entire class of PP&E to which the asset belongs is required to be revalued. All revalued assets, including land, are subject, at the effective income tax rate from the sale of the asset, to deferred income tax. Gains and losses from the sale or disposal of assets are recorded as operating expenses. Under U.S. GAAP, PP&E are reported at their historical cost less accumulated depreciation subject to impairment as further described under “Impairment of Long-Lived Assets”. Revaluations are not permitted. 146 Impairment of Long-lived Assets Under Brazilian GAAP, whenever events or circumstances indicate that the carrying values of fixed assets are higher than their recoverable amounts, an impairment loss should be recognised to reduce the value of the assets to their recoverable amounts. Accounting standards mandatory for the financial year ended December 31, 2006 do not provide detailed guidance on the calculation of impairment. New accounting rules under NPC 16 (not yet effective) are expected to be consistent with IFRS. In August 2001, the FASB issued SFAS No. 144 “Accounting for the Impairment or Disposal of LongLived Assets,” which establishes the basic provisions for (a) recognition/measurement of impairment of long-lived assets to be held and used and (b) measurement of long-lived assets to be disposed of by sale. In accordance with this standard whenever events or changes in circumstances indicate that the carrying value of long-lived assets might not be recoverable, calculations of undiscounted cash flows expected to be derived from assets in service should be performed to determine whether impairment had occurred. Analysis of impairment should be made by grouping assets at the lowest level for which cash flows are largely independent from cash flows of other assets. In the event such undiscounted cash flows are not expected to be sufficient to recover the recorded value of the assets, such assets should be written down to their estimated fair values based on discounted cash flow analyses. SFAS No. 144 also superseded the accounting and reporting provisions of APB Opinion No. 30 (APB No. 30), “Reporting the Results of Operations” for segments of a business to be disposed of, but retained the requirement of APB No. 30 to report discontinued operations separately from continuing operations, and extended that reporting to a component of an entity that either has been disposed of or is classified as held for sale. SFAS No. 144 became effective for fiscal years beginning after December 15, 2001 and interim periods within those years. Under IFRS, in accordance with IAS 36, the entity analyses at each balance sheet date (including interim periods) indications of possible asset impairment. If impairment is indicated, the respective asset (or the smallest group of assets to which it belongs and generates separate cash flows) should be tested for impairment. In addition, goodwill and intangible assets with indefinite useful lives are not amortised but tested for impairment at least annually, and whenever impairment indications exist. If impairment adjustment is determined, a loss must taken to the income statement, as a result of reducing the asset’s carrying amount to its recoverable amount. The recoverable amount of an asset is defined as the higher of its fair value less cost to sell and its value in use, based on discounted cash flows. Reversals of previously recorded losses are permitted in certain circumstances (except for impairment in goodwill which is never reversed) as long as there have been changes in the circumstances that resulted in impairment. Impairment is recorded as an operating expense in the income statement for the year. Capitalization of Software Developed for Internal Use Under Brazilian GAAP, computer development costs are generally capitalized at cost and amortized at annual rates of 20%. Under U.S. GAAP costs incurred after the preliminary project stage and for upgrades and enhancements, including direct costs of materials and services, costs of employees directly associated with project and interest costs incurred for the project are required to be capitalized. Capitalized costs should be amortized over the expected period to be benefited. Under IFRS, IAS 38, “Intangible assets”, which includes software, requires classification of the costs associated with the creation of intangible assets as “research” or “development”. Costs in the research phase of producing an intangible asset must always be expensed. Costs in the development phase of producing the asset are expensed, unless the entity can demonstrate all of the following: (i) the technical feasibility of completing the intangible asset; (ii) the intention to complete the intangible asset; 147 (iii) the ability to use or sell it; (iv) how the intangible asset will generate future economic benefits – the entity must demonstrate the existence of a market or, if for internal use, the usefulness of the intangible asset; (v) the availability of adequate resources to complete the development; and (vi) the ability to measure reliably the expenditure attributable to the intangible asset during its development. Development costs initially recognised as an expense cannot be capitalised in a subsequent period. Income Taxes Under Brazilian GAAP, deferred income tax assets should be recorded whenever it is probable that they will be recovered. Deferred income taxes are presented as gross rather than being netted. Pursuant to CVM Deliberation No. 273 of August 20, 1998 and Instruction No. 371 of June 27, 2002, management is required to present its best estimate of the expected realization of tax assets arising from the carrying forward of income tax and social contribution tax losses based on a discounted cash flow model approved by a meeting of the board of directors and there is a limit to the recognition of the tax assets that will be realized within a ten-year period. Instruction 371 introduced more stringent criteria for the recognition of deferred tax assets than those previously established by Deliberation 273. Instruction 371 does not allow companies to recognize deferred tax assets for amounts higher than the amounts recognized following Deliberation 273 until all conditions established in Instruction 371 are met. Under U.S. GAAP, the liability method is used to calculate the income tax provision, as specified in SFAS No. 109, “Accounting for Income Taxes”. Under the liability method, deferred tax assets or liabilities are recognised with a corresponding charge or credit to income (or in certain cases to other comprehensive income within stockholders’ equity) for differences between the financial and tax basis of assets and liabilities to each year/period end. The deferred tax assets and liabilities are being measured using rates enacted by law. Net operating loss carry forwards arising from tax losses are recognised as assets and valuation allowances are established to the extent it is not more likely than not such assets will be recovered. Under U.S. GAAP consideration of projected taxable income in future years generally is not appropriate when a company has presented cumulative taxable losses in recent years. Under IFRS, the liability method is used to calculate deferred income taxes, as specified in IAS 12, (Income Taxes). Under the liability method, deferred tax assets or liabilities are recognized with a corresponding charge or credit to income for differences between the accounting and tax basis of assets and liabilities to each year/period end. The deferred tax asset, including net operating losses carry forwards, shall be recognized to the extent that it is probable that future taxable profit will realize such deferred tax asset. Treasury Stock Under Brazilian GAAP, the acquisition of treasury stock is accounted for by reducing capital by its nominal amount and both the excess or the shortfall compared to par is taken against reserves. Under U.S. GAAP, both the cost method and par value method of accounting for treasury stock are acceptable. Under the cost method, each acquisition is accounted for at cost. Under the par value method, the treasury stock account is increased by only the par value of each share, with any excess being offset firstly against any additional paid capital that arose on the issue of the shares, with any remaining excess being setoff against reserves. Any excess of par value over purchase price paid in is credited to paid in capital from treasury stock. When treasury stock is acquired with the intent of retiring the stock, the excess of the price paid for the stock over its par value may be allocated between paid in capital and retained earnings. Under IFRS, when an entity’s own shares are repurchased, the shares are shown as a deduction from shareholders’ equity. Any profit or loss on the subsequent sale of the shares is shown as a change in equity 148 Guarantees Granted Under Brazilian GAAP, a provision for losses for guarantees granted should be recorded when it is probable that a loss exist and it can be reasonably estimated. Under U.S. GAAP FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN No. 45”). This interpretation requires certain disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also requires a guarantor to recognise, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Under IFRS, IAS 37 (Provisions, Contingent Liabilities and Contingent Assets) a guarantee shall be recognized when: (i) a present obligation (legal or constructive) exists a result of a past event; (ii) it is probable that the outflow of resources embodying the economic benefits will be required to settle the obligation; and (iii) a reliable estimate can be made of the amount of the obligations. However, if the guarantee is a financial instrument within IAS 39 or an insurance contract specific rules apply. Employee Benefits Under Brazilian GAAP employee pension costs and other benefits were or expensed as they fall due until the issuance by IBRACON of Normas e Procedimentos de Contabilidade (or NPC) Statement 26. As from the fiscal years beginning on or after December 31, 2002, with prior application encouraged, NPC 26 (approved by the CVM) should be applied by plan sponsors that are public companies to account for employee benefits including pension costs and other post-employment benefits. Under the standard, an actuarial method is used for determining defined benefit pension costs and other post-employment benefits and provides for the deferral of actuarial gains and losses (in excess of a specific band). Defined contribution pension plans and other post employment benefits require the recognition as an expense of contributions when they fall due. Under U.S. GAAP, employee pension costs are recognized in accordance with SFAS No. 87, “Employers’ Accounting for Pensions.” SFAS No. 87 requires the use of an actuarial method for determining defined benefit pension costs and provides for the deferral of actuarial gains and losses (in excess of a specific corridor) that result from changes in assumptions or actual experience differing from that assumed. SFAS No. 87 also provides for the prospective amortization of costs related to changes in the benefit plan, as well as the obligation resulting from transition, and requires disclosure of the components of periodic pension costs and the funded status of pension plans. U.S. GAAP, SFAS No. 106, applies to all post-retirement benefits related to life insurance provided outside a pension plan or to other post-retirement health care and welfare benefits expected to be provided by an employer to current and former employees. SFAS No. 106 is similar to SFAS No. 87 in that the cost of a post-retirement benefits plan should be recognized over the employees’ service periods and that actuarial assumptions are used to project the cost of health care benefits and the present value thereof. Under SFAS No. 106, a company is required to describe the plan, employee groups covered, type of benefits provided, funding policy, types of assets held, and any matter affecting comparability, among other disclosures. U.S. GAAP, SFAS No. 112, “Employers’ Accounting for Post- Employment Benefits,” establishes accounting standards for employers who provide benefits to former or inactive employees after employment but before retirement. Post-employment benefits include, but are not limited to, salary continuation, severance benefits, disability, and counselling and continuation of benefits such as health care benefits and life insurance coverage. SFAS No. 112 requires employers to recognize the obligation to provide post-employment benefits in accordance with SFAS No. 43, “Accounting for Compensated Absences,” if the obligation is attributable to employees’ services already rendered, employees’ rights to those benefits are accumulated or vested, if payment of the benefits is probable, and if the amount of the benefit can be reasonably estimated. If those four conditions are not met, the employer should account for post-employment benefits when it is probable that a liability has been incurred and the amount can be reasonably estimated in accordance with SFAS No. 5, “Accounting for Contingencies.” 149 Under IFRS employee pension costs are recognized in accordance with IAS 19 (Employee Benefits). This standard requires the cost of providing these benefits to be recognised on a systematic and rational basis over the period during which employees provide services to the entity. It also separate pension plans into defined contribution plans and defined benefit plans. Defined contribution plans are post-employment benefit plans that require the entity to pay fixed contributions into a fund. The entity is under no legal or constructive obligation to make further contributions to the fund even if losses are sustained. Under these plans it is the employee who is exposed to the risk attributable to the plan assets. Pension cost is to be measured as the contribution payable to the fund on a periodic basis. A defined benefit plan is a pension plan that is not a defined contribution plan. Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and compensation. The liability to be recognised in the balance sheet in respect of defined benefit pension plans is the present value of the defined benefit obligation at the balance sheet date less the fair value of plan assets, together with adjustments for unrecognised actuarial gains or losses and past service costs. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. Option to Prepay Debt/Classification Under Brazilian GAAP, debts are classified according to their final maturity regardless of the existence of rights to prior redemption. Under U.S. GAAP and IFRS , debts subject to redemption prior to maturity at the option of the holders thereof must be classified according to the date the redemption right is exercisable. Accounting Changes Under Brazilian GAAP, the cumulative effect of changes in accounting principles is generally applied as an adjustment to the current year's opening equity balance. However, certain changes may be applied prospectively. In certain instances, changes in estimates may be accounted for as changes in accounting principles. Under U.S. GAAP, the cumulative effect of changes in accounting principles is generally disclosed as a cumulative adjustment to earnings in the year of the change, along with pro forma disclosure of the effects of such change on prior years' financial statements. The effects of changes in accounting estimates are generally reflected prospectively. Under SFAS No 154 “Accounting Changes and Error Corrections a replacement of APB Opinion No. 20 and FASB Statement No. 3” applicable for fiscal years beginning after December 15, 2005, retrospective application to prior periods’ financial statements of changes in accounting principle is required, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. When it is impracticable to determine the period-specific effects of an accounting change on one or more individual prior periods presented, SFAS 154 requires that the new accounting principle be applied to the balances of assets and liabilities as of the beginning of the earliest period for which retrospective application is practicable and that a corresponding adjustment be made to the opening balance of retained earnings (or other appropriate components of equity or net assets in the statement of financial position) for that period rather than being reported in an income statement. When it is impracticable to determine the cumulative effect of applying a change in accounting principle to all prior periods, SFAS 154 requires that the new accounting principle be applied as if it were adopted prospectively from the earliest date practicable. Under IFRS, changes in accounting policy should be accounted for retrospectively, with comparative information restated and the amount of the adjustment relating to prior periods adjusted against the opening balance of retained earnings of the earliest year presented. An exemption applies when it is impracticable to change comparative information. 150 Policy changes made on the adoption of a new standard must be accounted for in accordance with that standard’s transition provisions. If transition provisions are not specified, the method described above must be used. Prior Period Adjustments – Correction of Errors Under Brazilian GAAP, prior period adjustments encompass corrections of errors in previously issued financial statements and the effects of changes in accounting principles. Under Brazilian GAAP prior period adjustments are generally recorded as an adjustment to retained earnings of the year when the error has been identified. Under U.S. GAAP, prior period adjustments are effectively limited to corrections of errors which are effected by adjusting current and prior periods' financial statements and appropriate footnote disclosure regarding the effects of the errors on current and prior periods. Under IFRS, IAS 8 requires to correct material prior period errors retrospectively in the first set of financial statements authorized for issue after their discovery by restating the comparative amounts for the prior period(s) presented in which the error occurred. Dividends and Interest Attributable to Stockholders' Equity Under Brazilian GAAP, at each balance sheet date, the directors are required to propose a dividend distribution from earnings, subject to ratification by the shareholders' meeting, and accrue for this in the financial statements. Under Brazilian GAAP, companies are permitted to distribute or capitalize an amount of interest, subject to certain limitations, calculated based on a government interest rate, on stockholders' equity. Such amounts are deductible for tax purposes and are presented as a deduction from stockholders' equity. Under U.S. GAAP and IFRS, since proposed dividends may be ratified or modified at the annual Shareholders' Meeting, such dividends would not be considered as declared at the balance sheet date and would therefore not be accrued. However, interim dividends paid or interest credited to shareholders as capital remuneration under Brazilian legislation would be considered as declared for U.S. GAAP and IFRS purposes. Statement of Cash Flows Under Brazilian GAAP, a statement of cash flows is not required and may be presented as supplemental information. Instead, under Brazilian GAAP, a statement of changes in financial position is provided which demonstrates the source and application of working capital. Under U.S. GAAP and IFRS, a statement of cash flows is required and cash receipts and payments are classified by investing, financing and operating activities. Extraordinary Items Under Brazilian GAAP, extraordinary items may be disclosed separately in the income statement, but normally gross of the income tax effect. Under U.S. GAAP, extraordinary items (i.e., items of unusual nature and infrequent occurrence) are disclosed separately in the income statement, net of the income tax effect, if applicable. Extraordinary items are defined under U.S.GAAP very narrowly. Under IFRS, the presentation of extraordinary items is prohibited. Segment Information Under Brazilian GAAP, there is no requirement for financial reporting for segments. 151 Under U.S. GAAP, SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information” requires public companies to report both financial and descriptive information about its reportable operating segments. Reportable operating segments are defined as those about which separate financial information is available and is regularly evaluated by the chief decision maker. Generally, financial information to be reported will be on the basis used internally for evaluating segment performance. Financial information to be disclosed includes segment profit or loss, certain specific revenue and expense items and segment assets as well as a reconciliation of total segment revenues, profit or loss and assets to the corresponding amounts in the financial statements. IFRS requires public entities to report primary and secondary segments, business and geographic regions, based on risks and returns and internal reporting structure. The information must be prepared according to the group accounting polices. All entities with listed equity or debt securities or that are in the process of obtaining a listing are required to disclose segment information. A two-tier approach to segment reporting is required, and an entity should determine its primary and secondary segment reporting formats (i.e., business or geographical, but not a mixture) based on the dominant source of the entity’s business risks and returns. Reportable segments are determined by identifying separate profiles of risks and returns and then using a threshold test. The majority of the segment revenue must account for 10% or more of either total revenue, total profit or loss, or total assets. Additional segments must be reported (even if they do not meet the threshold test) until at least 75% of consolidated revenue is included in reportable segments. The disclosures concentrate mainly on the segments in the primary reporting format, with only limited information being presented on the secondary segment. Disclosures for reportable segments in the primary reporting format include, by segment: revenue, result, assets, liabilities, capital expenditure, depreciation and amortization, the total amount of significant non-cash expenses and impairment losses. Disclosures for reportable segments in the secondary segment include segment revenue, assets and capital expenditure. Segment result is not required to be shown for secondary segments. Reconciliation should be provided between the information disclosed for reportable segments and the totals shown in the financial statements. Earnings Per Share Under Brazilian GAAP, disclosure of earnings per share is normally calculated based on the number of shares outstanding at the end of the year, although a weighted-average basis is acceptable. Under U.S. GAAP, SFAS No. 128 “Earnings per Share” requires publicly held companies to present earnings per share, including earnings per share from continuing operations and net income per share on the face of the income statement, and the per share effect of changes in accounting principles, discontinued operations and extraordinary items either on the face of the income statement or in a note. SFAS No. 128 also requires a dual presentation of earnings per share, basic and diluted. Companies should base computations of basic and diluted earnings per share on the weighted average number of common shares outstanding during each period presented. Diluted earnings per share is calculated on the same basis except that effect is given to all outstanding dilutive potential common shares. In accordance with SFAS 128 earnings per share data has to be adjusted for all periods presented in the financial statement to reflect new number of shares that will result from the reverse stock split. On March 31, 2004, the EITF issue a EITF Issue 03-6, “Participating Securities and the Two-Class Method” under SFAS 128. Typically, a participating security is entitled to share in a company’s earnings, often via a formula tied to dividends on the company’s common stock. The issue clarifies what is meant by the term “participating security”, as used in SFAS 128. When an instrument is deemed to be a participating security, it has the potential to significantly reduce basic earnings per common share because the two-class method must be used to compute the instrument’s effect on earnings per share. The consensus also covers 152 other instruments whose terms include a participation feature. The consensus also addresses the allocation of losses. If undistributed earnings must be allocated to participating securities under the two-class method, losses should also be allocated. However, EITF 03-6 limits this allocation only to situations when the security has (1) the right to participate in the earnings of the company, and (2) an objectively determinable contractual obligation to share in net losses of the company. Under IFRS, in accordance with IAS 33 (Earnings per Share or EPS), the presentation of basic and diluted earnings per share must be disclosed on the face of the income statement of enterprises with publicly traded ordinary shares (as defined) or potential ordinary shares (as defined), or those in the process of issuing such instruments. The EPS data given is basic EPS and diluted EPS for each class of ordinary share. EPS based on alternative measures of earnings also may be given if required. Computations of basic and diluted earnings per share data should be based on the weighted average number of common shares outstanding during the period and all potentially dilutive common shares outstanding during each period presented, respectively. Derivative Financial Instruments Under Brazilian GAAP, there is no clearly designated set of defined accounting practices to address the valuation of derivative financial instruments other than for financial institutions. Under U.S. GAAP, SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, (collectively referred to as derivatives), and for hedging activities. SFAS No. 133, as amended, requires that a company recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. If certain conditions are met, a derivative may be specifically designated as: (i) a hedge of the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment; (ii) a hedge of the exposure to the variable cash flows of a forecasted transaction; or (iii) a hedge of the foreign currency exposure of a net investment in a foreign operation. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Derivatives that are not designated as part of a hedging relationship must be adjusted to fair value through income. Certain robust conditions must be met in order to designate a derivative as a hedge. If the derivative is a hedge, depending on the nature of the hedge, the effective portion of the hedge’s change in fair value is either (1) offset against the change in fair value of the hedged asset, liability or firm commitment through income or (2) held in equity until the hedged item is recognized in income. If the hedge criteria are no longer met, the derivative instrument would then be accounted for as a trading instrument. If a derivative instrument designated as a hedge is terminated, the gain or loss is deferred and amortized over the shorter of the remaining contractual life of the terminated risk management instrument or the maturity of the designated asset or liability. IAS 39 (Financial Instruments: Recognition and Measurement) requires that a company recognize all derivatives as either assets or liabilities in the statement of financial position and measures those instruments at fair value. The accounting for changes in the fair value of a derivative (that is, gains and losses) depends on the intended use of the derivative and the resulting designation. Derivatives that are not designated as part of a hedging relationship must be adjusted to fair value through income. Certain robust conditions including specified documentation requirements must be met in order to designate a derivative as a hedge. If the derivative is a hedge, depending on the nature of the hedge, the effective portion of the hedge's change in fair value is either: (i) offset against the change in fair value of the hedged asset, liability or firm commitment through income; or (ii) held in equity until the hedged item is 153 disposed of or the hedged relationship is not longer effective, when its recognized in income. The ineffective portion of a hedge's change in fair value is immediately recognized in income. 154 LEGAL MATTERS The validity of the Notes will be passed upon for the Issuer by Arnold & Porter LLP, its U.S. counsel, and for the Initial Purchaser by Linklaters LLP, U.S. counsel to the Initial Purchaser. Matters of Brazilian law will be passed upon for the Issuer by Tozzini Freire Teixeira & Silva Advogados, its Brazilian counsel, and for the Initial Purchaser by Lefosse Advogados, Brazilian counsel to the Initial Purchaser. 155 ENFORCEABILITY OF CIVIL LIABILITIES The Issuer and the Guarantors are corporations organized under the laws of Brazil. All of the RBS Group’s directors and executive officers and certain advisors named herein reside in Brazil or elsewhere outside the United States, and all or a significant portion of the assets of such persons may be, and substantially all of the Issuer’s and Guarantors’ assets are, located outside the United States. As a result, it may not be possible for investors to effect service of process within the United States or other jurisdictions outside Brazil upon such persons or to enforce against them or against the Issuer or any of the Guarantors any judgments obtained in such courts, including judgments predicated upon the civil liability provisions of the U.S. federal securities laws or predicated upon the laws of such other jurisdictions outside Brazil. The Issuer and the Guarantors (i) have agreed that the New York State or United States Federal court sitting in the City and County of New York shall have jurisdiction over any suit, action or proceeding arising out of or relating to the Indenture or any Note and, for such purposes, irrevocably submit to the jurisdiction of such courts and (ii) have named an agent for service of process in the City and County of New York. See “Description of the Notes”. The Issuer and the Guarantors have been advised by Tozzini Freire Teixeira & Silva Advogados, their Brazilian counsel, that judgments of non-Brazilian courts for civil liabilities predicated upon the securities laws of such countries, including the securities laws of the United States, subject to certain requirements described below, may be enforced in Brazil. A judgment against either the Issuer, the Guarantors or any other person described above obtained outside Brazil would be enforceable in Brazil against the Issuer, the Guarantors or any such person without reconsideration of the merits, upon confirmation of that judgment by the Brazilian Superior Court of Justice. That confirmation, generally, will occur if the foreign judgment: (i) fulfills all formalities required for its enforceability under the laws of the country where the foreign judgment is granted; (ii) contemplates an order to pay a determined sum of money; (iii) is issued by a competent court after proper service of process is made, in accordance with Brazilian legislation; (iv) is not subject to appeal; (v) is authenticated by a Brazilian consular office in the country where the foreign judgment is issued and is accompanied by a sworn translation by a certified translator into Portuguese; and (vi) is not contrary to Brazilian national sovereignty, public policy or public morality (as set forth in Brazilian law). Notwithstanding the foregoing, no assurance can be given that confirmation will be obtained, that the process described above can be conducted in a timely manner or that a Brazilian court would enforce a monetary judgment for violation of the securities laws of countries other than Brazil with respect to the Notes. The Issuer and the Guarantors understand that original actions predicated on the securities laws of countries other than Brazil may be brought in Brazilian courts and that, subject to Brazilian public policy, public morality and national sovereignty, Brazilian courts may enforce civil liabilities in such actions against the Issuer, the Guarantors, their respective directors, certain of their officers and the advisors named herein. Pursuant to Article 835 of the Brazilian Code of Civil Procedures, a plaintiff (whether Brazilian or nonBrazilian) who resides outside or leaves Brazil during the course of litigation in Brazil must provide a bond to guarantee court costs and legal fees if the plaintiff owns no real property in Brazil that may ensure such payment. This bond must have a value sufficient to satisfy the payment of court fees and defendant’s attorneys’ fees, as determined by the Brazilian judge. This requirement does not apply to enforcement of foreign judgments which have been duly confirmed by the Brazilian Superior Court of Justice, nor to the 156 exceptions set forth in certain limited circumstances (enforcement of trade bills and counterclaims) under Article 836 of such Code. 157 INDEPENDENT ACCOUNTANTS The financial statements of the Issuer as of and for the years ended December 31, 2006, 2005 and 2004 and the special purpose combined financial statements of the Issuer and the Guarantors as of and for the years ended December 31, 2006, 2005 and 2004, included in this Offering Memorandum have been audited by PricewaterhouseCoopers Auditores Independentes, Porto Alegre, Brazil, independent accountants, as stated in their reports appearing herein. PricewaterhouseCoopers Auditores Independentes is registered with the Conselho Regional de Contabilidade of the State of Rio Grande do Sul. With respect to the unaudited interim financial statements of the Issuer and the unaudited interim combined financial statements of the Issuer and the Guarantors, as of and for the three-month periods ended March 31, 2007 and 2006 included in this Offering Memorandum, PricewaterhouseCoopers Auditores Independentes reported that they have applied limited procedures in accordance with Brazilian standards for a review of such information. However, their reports appearing herein state that they did not audit and they do not express an opinion on the unaudited interim financial statements. Accordingly, the degree of reliance on their reports on such information should be restricted in light of the nature of the review procedures applied. 158 GENERAL INFORMATION (A) Each of the Issuer and the Guarantors is a corporation organized and operating under the laws of Brazil. Their registered office and principal place of business is Av. Érico Veríssimo, 400 2º andar, Porto Alegre, Brazil 90160-180. Their telephone number is +55 51 3218 6000. For the life of this Offering Memorandum, the following documents (or copies thereof) may be inspected by physical means at such office: (a) the memorandum and articles of association of each of the Issuer and the Guarantors; (b) all reports, letters and other documents, historical financial information, valuations and statements prepared by any expert at the Issuer’s or a Guarantors’ request, any part of which is included or referred to in this Offering Memorandum; and (c) the historical financial information of the Issuer and the Guarantors’ undertakings for each of the two financial years preceding the publication of this Offering Memorandum. (B) Application has been made to the Irish Stock Exchange for the Notes represented by the Regulation S Global Note to be admitted to the Official List and traded on its regulated market. The total expenses related to the admission to trading the Notes are estimated to be €4,440. The ISIN for the Notes sold in reliance on Rule 144A is US74927RAC97, and the ISIN for the Notes sold in reliance on Regulation S is USP7993HAB52. The CUSIP number for the Notes sold in reliance on Rule 144A is 74927R AC9, and the CUSIP number for the Notes sold in reliance on Regulation S is P7993H AB5. The SEDOL number and the Common Code for the Notes will be contained in a supplement to the Offering Memorandum. In addition, application will be made with respect to the Notes to be accepted for trading in book-entry form by DTC. Application will also be made to have the Notes accepted for trading in The PORTAL Market. (C) The Notes were authorized by resolutions (i) of each of the Issuer’s, TV Gaúcha’s and Rádio Gaúcha’s Boards of Directors, passed on May 25, 2007, and (ii) of TV Florianópolis’s General Assembly, also passed on May 25, 2007. All consents, approvals, authorizations and other orders of all regulatory authorities under the laws of the Federative Republic of Brazil have been given for the issue of the Notes and the execution of the Indenture and are in full force and effect except for (i) the registration of the relevant financial terms and conditions of the Notes with the Central Bank under the module Registro de Operação Financeira (the Registry of Financial Transactions or “ROF”) of the Central Bank Data System (ii) the registration under the ROF of the Esquema de Pagamento (the Schedule of Payment) relating to the Notes after its disbursement which will enable the Issuer and the Guarantors to make remittances from Brazil in the relevant currency of the principal of and interest on the Notes, as well as costs, fees and expenses in relation thereto, and (iii) the approval of the Central Bank for the Issuer and the Guarantors to make any payment in U.S. dollars not set forth in the relevant ROF or to make any payment provided for therein earlier than the due date therefor or on a date after the 120 th day from scheduled maturity date therefor provided in such ROF. (D) The Issuer’s corporate objectives are, among others, to exploit the journalism business by providing news and information through the publication of newspapers, books and magazines; to exploit commercial advertising and the production of artistic and promotional shows; and to perform logistics services, storage and ground transportation of commercial products. (Article 3 of the Issuer’s by-laws. The Issuer’s by-laws are registered before the Commercial Registry of the State of Rio Grande do Sul – JUCERGS under number 1164852.) The Guarantors’ corporate objective are, in general, to exploit the broadcasting business, observing the provisions of any applicable legislation. (Article 3 of TV Gaúcha’s and Rádio Gaúcha’s by-laws, or Article 2 of TV Florianópolis’s by-laws. TV Gaúcha’s and Rádio Gaúcha’s bylaws are registered before JUCERGS under numbers 1216763 and 1216766, respectively. TV Florianópolis by-laws are registered before the Commercial Registry of the State of Santa Catarina under number 4230002100). (E) Neither the Issuer nor the Guarantors nor any subsidiary of any of the Issuer or the Guarantors is involved in any litigation, arbitration or governmental proceedings which are material in the context of the issue of the Notes, and so far as the Issuer or any Guarantor is aware, are any such litigation, arbitration or governmental proceedings pending or threatened. (F) There has been no significant change in the financial or trading position of the Issuer or the Guarantors since December 31, 2006, the date of the Issuer’s and the Guarantors’ most recently audited 159 financial statements or (if later) the date of the last interim report incorporated in, and forming part of, this Offering Memorandum, nor has there been any material adverse change in the financial position or prospects of the Issuer or the Guarantors since December 31, 2006, the date of each of their most recently audited financial statements. (G) Copies in English of the latest audited financial statements and consolidated accounts of the Issuer and the Guarantors, the latest interim quarterly consolidated and non-consolidated accounts of the Issuer and the Guarantors, in each case being incorporated in and forming part of this Offering Memorandum, may be obtained free of charge, and copies of the Indenture will be available for inspection, at the specified offices of each of the Trustee and the Paying Agent in Ireland during normal business hours, so long as any of the Notes are outstanding. Copies of this Offering Memorandum and of the Indenture will be available for inspection at the registered office of the Issuer at the office of the Paying Agent in Ireland. (H) The Issuer and the Guarantors have agreed that, for so long as any Notes are “restricted securities” within the meaning of Rule 144(a)(3) under the Securities Act, the Issuer and the Guarantors will, during any period in which it is neither subject to Section 13 or 15(d) of the Exchange Act nor exempt from reporting pursuant to Rule 12g3-2(b) thereunder, provide to any holder or beneficial owner of such restricted securities or to any prospective purchaser of such restricted securities designated by such holder or beneficial owner upon the request of such holder, beneficial owner or prospective purchaser, the information required to be provided by Rule 144A(d)(4) under the Securities Act. (I) The EU has adopted EU Council Directive 2003/48/EC on the taxation of savings income. Member States are required to provide to the tax authorities of other Member States details of payments of interest and other similar income paid by a person to an individual in another Member State, except that Austria, Belgium and Luxembourg will instead impose a withholding system for a transitional period unless during such period they elect otherwise. (J) Save for the fees payable to the Initial Purchaser described in the “Plan of Distribution”, so far as the Issuer is aware, no person involved in the issue of the Notes has any interest material to the issue. 160 INDEX TO FINANCIAL STATEMENTS RBS - Zero Hora Editora Jornalística S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 Page Report of Independent Accountants ............................................................................................................ F-3 Balance Sheet .............................................................................................................................................. F-5 Statement of Operations .............................................................................................................................. F-6 Statement of Changes in Stockholders’ Equity ........................................................................................... F-7 Statement of Changes in Financial Position................................................................................................ F-8 Notes to the Financial Statements ............................................................................................................... F-9 Rede Brasil Sul - RBS - Credit Group (previously named Rede Brasil Sul - RBS - Guarantors) at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 Page Report of Independent Accountants .......................................................................................................... F-35 Special-Purpose Combined Balance Sheets .............................................................................................. F-37 Special-Purpose Combined Statements of Operations .............................................................................. F-38 Special-Purpose Combined Statement of Changes in Stockholders’ Equity............................................. F-39 Special-Purpose Combined Statement of Changes in Financial Position ................................................. F-41 Notes to the Special-Purpose Credit Group Financial Statements ............................................................ F-42 Televisão Gaúcha S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 Page Report of Independent Accountants .......................................................................................................... F-76 Balance Sheet ............................................................................................................................................ F-78 Statement of Operations ............................................................................................................................ F-79 Statement of Changes in Stockholders’ Equity ......................................................................................... F-80 Statement of Changes in Financial Position.............................................................................................. F-81 Notes to the Financial Statements ............................................................................................................. F-82 RBS TV de Florianópolis S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 Page Report of Independent Accountants ........................................................................................................ F-103 Balance Sheet .......................................................................................................................................... F-105 Statement of Operations .......................................................................................................................... F-106 Statement of Changes in Stockholders’ Equity ....................................................................................... F-107 Statement of Changes in Financial Position............................................................................................ F-108 Notes to the Financial Statements ........................................................................................................... F-109 Rádio Gaúcha S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 Page Report of Independent Accountants ........................................................................................................ F-128 Balance Sheet .......................................................................................................................................... F-130 Statement of Operations .......................................................................................................................... F-131 Statement of Changes in Stockholders’ Equity ....................................................................................... F-132 Statement of Changes in Financial Position............................................................................................ F-133 Notes to the Financial Statements .......................................................................................................... F-134 F-1 - Zero Jornalistica Financial Statements Hora Editora S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 and Report of Independent Accountants F-2 s PlicewaterhouseCoopers Rua Mostardeiro, Caixa Postal 800 8" e 9' 2178 90430-000 Po~to Alegre, RS - Brasil Telefone Report of Independent Accountants (51) 3378-1700 Fax (51) 3328-1609 To the Board of Directors and Stockholders RES - Zero Hora Editora Jornalistica S.A. 1 Wehaveauditedtheaccompanying balancesheetsofRES- ZeroHoraEditora Jornalistica S.A. (previouslynamed Zero Hora - Editora Jornalistica S.A.) as of December 31, 2006, 2005 and 2004, andtherelatedstatements ofoperations, ofchangesinstockholders' equityandof changesinfinancial position fortheyearsthenended.Thesefinancial statements arethe responsibility ofthecompany's management. Ourresponsibility istoexpressanopinion on these financial statements. 2 We conducted our audits in accordance with approved Brazilian auditing standards which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairly presented in all material respects. Accordingly,our work included, among other procedures: (a) planning ourauditstakingintoconsideration the significance of balances, the volume of transactionsand the accountingand internalcontrolsystemsof the company, (b)examining, ona testbasis,evidence andrecordssupporting theamounts and disclosures in the financialstatements, and (c) assessing the accounting principles used and significant estimates madebymanagement, aswellas evaluating theoverall presentation of the financial statements. 3 In our opinion, the financial statementsauditedby us presentfairly,in all materialrespects, thefinancial position ofRES- ZeroHoraEditora Jornalistica S.A.at December 31,2006, 2005 and 2004, and the results of its operations,the changes in stockholders'equityand the changes in its financialposition fortheyearsthenended,inconformity withaccounting principles generally accepted in Brazil. 4 We have also reviewed the accompanying financial statements of RES - Zero Hora Editora Jornalistica S.A~ as of and for the quartersended March31, 2007 and 2006.These financial statementsare the responsibility ofthe company's management. F-3 I RES - Zero Hora Editora Jornalistica S.A. 5 Weconducted ourreviews inaccordance withstandards approved bytheInstitute of Independent Auditors of Brazil(IBRACON). A reviewconsists,pn'ncipally, ofapplying analytical procedures tofinancial dataandmaking inquiries ofpersonsresponsible for financial andaccounting mattersregarding thecriteria usedtopreparethefinancial statements. Areview doesnotrepresent anauditconducted inaccordance withapproved Brazilianauditingstandards,the objectiveof whichis the expression of an opinion regarding the financial statements taken as a whole. Accordingly,we do not express such an opinion. 6 Based on our reviews,we are not aware of any material modificationsthat should be made to the financial statements mentioned in paragraph 4 for them to be in conformitywith accounting principlesgenerally accepted in Brazil. Porto Alegre, May 25, 2007 P ricewaterhouseCoopers Auditores Independentes CRC 2SP000160/0-5 "F" RS Carfos Biedernann Contador CRC 1RS029321/0-4 (Copyof the originalmanuallysigned) F-4 $ "~~Non~vN, 'Wp 'i"i "A ~orbrc~"i"i .Bi 41 9 !1 · $~~~~~Ot~~ e '-NV) · m r~no, P ~(D~LI) c ~%~$mr~~,m~ m~~,p,~ OV~gN~pN~~ o N"- B N~ 8~~ ~ ~~~ ~uoloi otolo o ,51" o omojrd ~rm vom o"ltq ij to ~n · 4 944 2 .g g E I Pr?.~ E.E 2 ,s .6 es ·.p 3 '5 ~ ,o e! 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Ir N,,, oo olDm ~o~n~ ~oolmoru~omlo~iomo q~mv~~ ODo- u)a3~rg, r- ~ clj mvuj N~n ~g~m~~ n~~uru~ NN~-m m~moo 8 ~ olpvpT~o,p ~n~-oi~W pmm E o N r10 NIon ~om r- L e Io ,,0 u, oN ~co (3) e s I .~m·' ~~-om ~n Q~ P) Q) S B r X 0) Q) t t m Pi ~i o f if$1 5 ~ ~ "' Y EsmE '16':4$ ~~meemor ~oIca-~aao~o O 9m "mEm ~mx8"a O·' ~~ EEV e.m :E oo~tSPO~~"g z Q e m a O -8 3 ~M~ 00 59"~ P"1'Y mr o o p$yo.m c .6,B m U)·c~ NQ, '· ~s Oa a % nc > E V) a~ o m mrL: ~Z m o m 8 a w m mp ~U)U)g m~, ~rc~omr-LD~ooo O co oo ~op~n~ E-ao~p p~oo~^ N Q g ,u, ,, mine u, O ~oo m~oni 0 r0 d 9 i 1 my lc, a "I G: o, PV)LD a " mp~ o r ·5 a cx s0 EP m a, m E~ ts.~ ,,,E=$ ~~e9 ~p0 P 9, m o O o m m 8 ~ F-5 E a~ r a, - Zero Hora Editora Jornalistica S.A. Statement of Operations Inthousands ofBrazilian reals,exceptper-share data Years ended December 31 Note Operating 2007 (Unaudited) ended March 31 2006 2005 2004 2006 (Unaudited) 140.224 87,072 52.903 122,715 22,778 131.883 82.333 49.238 113.696 24,663 111,147 71,073 44.106 99,900 24.851 409.231 386.479 337.557 103.163 (69.980) (46.630) (9.576) (9.680) (73,057) (44.808) (7.869) (5.351) (71.321) (43.487) (6.790) (9.635) (17.232) (13.331) (2,959) (2.380) (9.043) (2,504) (2,229) (150.498) (40.216) (34.187) 255.343 236.562 187,059 62.947 60.165 (113.722) (106.436) (102266) (32,637) (25,598) (45.429) (17.012) (15.071) 7.437 4.461 revenues Advertising Classified advertisements Circulation Subsc~p~ons Other Taxesonrevenues Operating Quarters (16.461) (15,334) (13,520) 34.509 20.591 13.237 34.099 4.928 (4.201) 30,368 19,718 13.582 29.093 5.355 (3,764) 94,352 costs Rawmaten'als Personnel Promotional events Depreciation andamortization Royalties Other (8.290) (9,732) (153.888) Grossprofit (9.254) (9.n8) (149.917) (10,222) (1.810) (15,402) (10.440) (1.647) (2,424) (2,045) Operating income (expenses) Selling General and administrative (net of reimbursement) Depreciation andamortization Financial income ~ae:cial expenses 7 C/o.599) 14 18.392 15.510 188 341 (4.122) 14 Equityin losses ofsubsidiary lossesoninvestments Non-operating loss,net (1,249) (1.240) 6,203 433 (387) 40 (217.385) (211.367) (172.610) (57.024) (47.865) 37,958 25,195 14,449 5.923 12.300 452 (2,704) (6.593) 302 135 35,577 (4.148) 21,702 (8.563) 8.158 (6.279) 6.042 (2.464) -12.546 (698) (584) 15 15 Netincome fortheyearlquarter in circulation (6.293) (2.249) Reversal (establishment) of provision for Shares (5.568) (47.522) (65.680) (26,492) (10,200) (12.199) Operating profit Income beforetaxesonincome Current income taxes Deferredincometaxes (49.534) (789) (16) 452 (206) (9.896) 7.156 2.125 307 (4.830) 21.533 20,295 4.004 3.885 7.018 98.577 _ 98.577 98.577 98.577 98.577 0.22 0.21 0.04 0.04 0.07 at the end of the year\quarter tinthousands) Net income per share atthe 13 end of the yearlquarter-R$ The accompanying notes are an integral part of these financialstatements. F-6 W m c66 or 88 R esi PP ~mm O" "~ ,,,,,, ~ ori V " 8 8 W "i? ii I~11 Cg ~`O ~o d; 8 v. ~ I Oc ~~ "" aZ ~N ~o ,,,, mo $ a I 9 6 mm m ~ "N 6r ~o 9·· ~gN i TT qf1 1 v, :: ~o ~d P·U a w W a a G; m 6 m m m N- ~3" ss~~~ 91- N ~ S u, 6 m u, m m 1 ~8~~18 d 8 uj ocr o U1 r o u, I? n m Eo o, OC 00 L O B 1 o C V) rd C ul m B o a iii~ ~~ Be~e 8~2. 08~ Ns` ~3~ $ RB~- ,gb ~~b , ~ ODe a W C O I c Be O C LQ) O N cn m r E ~o $5 V)E o~g N6= 6~u r a a (T~ ~B C~ ~a ,e I~CI 2~ e r · 6~ C~ S~ "N ce Om r a, 9 F o·rrz a m~, at a ~ r g cbs 8,- ~J a 1, c " ~~b 2 NOC SB~NI 8"8 ~BL Or ~,r > m g~m cm B ~m ,m C6E ~BQ ~ E~QE BBE ~8 a E fgg ~ r ~.8 m ~NC g.N~ NC m ~NrE e · PE c S"- rm m^ B O m a E r e 5"1 L~ Sm at m~ % d~ia,~m 4 F-7 P, .~ x m ~nz F co m - ZeroNoraEditoraJornalisticaS.A. Statement In thousands ofChanges in FinancialPosition of Brazilian reals Years ended Quarters ------~I~l 2006 (Reclassified) _ 2005 2004 2007 (Unaudited) Financial resources were provided by: Net income for the year/quarter Expenses notaffecting working capital: Deferred(income) income taxes Provision forcontingendes Provision forlossesonfiscal incentives Depreciationand amortization NetbookvalueofPermanent assetdisposals 3.885 (2,125) (307) Increase inlong-term liabilities (3,051) 567 2.704 13,802 10.919 75,928 230 95 50.410 Accounts payable relating toinvestment acquired Transferofdeferred (1.215) 634 (188) Decrease in long-termreceivables assets 4,004 (7.156) 2.249 Amortization ofnegative goodwill current 20.295 9,896 277 Equity inlossesofsubsidiary 6.593 (341) (433) 26,003 21.011 25.411 161.127 Stock subscriptionrightssold 4 16 279 3,629 _ 7.365 1.263 910 3,664 (40) 2.050 17.805 3,412 1.500 1.963 Total funds provided ---- --- 183.638 Financialresourceswereused for: Decrease inadvancesforfuturecapitalincrease Decrease in long-termliabilities Increase in long-termreceivables Investments 35.570 5.572 Property,plantandequipment 52,628 Deferredcharges 4.830 967 2.874 Negative goodwill onacquisition ofRESOnLineLtda. Transfer fromInvestments tomarketable secun~ties 7.018 4 138 13,872 income taxes from long-term to 2006 (Unaudited) 21,533 16 Provision forlosseson invesbnents ended March91 1.963 9,595· 23.180 40.667 17.517 TransferfromInvestments to liabilities Mergerwithsubsidiary 12.458 81 9.689 108 120,545 6.465 14,233 118 3.469 349 558 734 4.706 538 Long-term receivables Investments Property, plant andequipment 82 Deferred charges Long-term liabilities 8.388 3.149 Total funds used Increase(decrease) inworking capital Current 1~~87 4.010 (11.504) --~ ----~2~ 179,645 28.359 5.998 3,993 assets (18.764) 17,182 At the end of the year/quarter Atthe beginning oftheyear/quarter Current liabilities Attfie end of the year/quarter Atthebeginning oftheyear/quarter !~,5'4_9! 132.485 93.927 ~-2 ----1~5 ~8 194.125 75~0~Z~ Increase(decrease) inworking capital 93.927 134.876 150.949 59 033 165.497 34.894 118.945 110.375 110.375 79 474 (30.621) 18,464 182,268 194.125 120.227 118.945 30.901 (11.857) 1,282 3.993 The accompanying notes areanintegral part ofthese financial statements F-8 132.485 (18.764) 17182 - Zero Hora Editora Jornalistica S.A. Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands 1 of Brazilian reals, unless othennrise stated Business The companyis ownedby three familygroupsand is operated,togetherwithRES Comunica~besS.A.,its subsidiariesand futuresubsidiarieslas definedbelow),as one integratedunit,the RESGroup.The companyis locatedin PortoAlegre,in the State of Rio Grandedo Sul,Brazil,andis engagedinpublishing anddistribution ofnewspapers(ZeroHora and Di~irioGa(jcho in Porto Alegre, Pioneiro in Caxias do Sul and Di~riode Santa Maria in SantaMaria,allinthe StateofRioGrandedo Sul;Di~rioCatarinense inFlorian6polis, Jomal de Santa Catarinain Blumenauand A Noticiain Joinvillelas fromNovember2006 - Note9 (c)), all in the State of Santa Catarina). RESComunicaCbes S.A.wasestablishedin2005withthe objective to integratethe main businesses that are ownedby the three familygroups.The shareholdersof RES ComunicaCbes S.A.startedto implementthis integrationin January2006 and intendto completeit during2007 throughthe acquisitionfromthe familygroupsof the directand indirectcontrolofthe mainoperational companies("future subsidiaries"). Mostofthe RES Groupcompaniesare locatedinthe StatesofRioGrandedo Suland SantaCatarina,Brazil, andoperateprincipally infourareasofthe mediabusiness(radioandtelevision broadcasting, internet and newspaper publishing). OnApril15,2004,theshareholders decidedto changethe company'snamefromZeroHoraEditora Jornalistica S.A. to RES - Zero Nora Editora Jornalistica S.A. TheBrazilian FederalConstitution establishesthat,as fromApril2002,foreignshareholders mayowna maximumof 30%of the capitalof newspaperpublishingcompanies. 2 Presentation of the Financial Statements Theaccounting recordsofthe companyare maintained inaccordancewithBrazilian corporate and taxlegislation, andthefinancial statementshavebeenpreparedtherefrom, including certainadjustments to conform withaccounting principles generally acceptedinBrazil ("Brazilian GAAP"),whichoriginallyrequiredthe presentationof financialstatementsunderthe constant currency methodology, as a meansofdepicting moreclearly theimpacts ofinflation on a company's financial information. F-9 - Zero Hora Editora Jornalistica S.A. Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othennrise stated Under the constant currency methodology, all financial statement balances, including comparative balances from prior years, are presented in reals of constant purchasing power using as the basis for restatement the official index Unidade Fiscal de Refer~ncia - UFIR (Fiscal Unitof Reference) up to December 31, 1995 and the variation of the indice Geral de PreGos - Mercado - IGP-NI(General Market Price Index) as from that date and up to September 30, 2001. Thereafter, the company suspended the price-level restatement of its financial statements, since the cumulative inflation rate over the preceding 36-month period was less than 100%. The reported amounts of non-monetary assets, such as inventories and permanent assets, and stockholders' equity include price-level restatement as from the date of origin up to September 30, 2001. The price-level restatement of financial statements for both statutory and tax purposes was abolished as from January i, 1996, by Law 9249. Although the company's statutory accounting records as from January 1, 1996 do not reflect any price-level restatements of permanent assets and stockholders' equity accounts, pro forma adjustments have been made to the financial statements to reflect these restatements through the constant currency methodology. These restatements no longer have any tax effects, but pro forma tax adjustments have been made to the financial statements to assure consistency with prior periods as well as to reflect future deferred tax effects, as explained in the following paragraph. As from January i, 1996, the full tax effect of the net restatement effect taken to income was recognized as a credit to income at the current tax rates, in order to maintain comparability with the prior periods. The deferred tax liability on the price-level restatement of permanent assets has been shown as a long-term liability and is reversed to income as the restatement is realized through the disposal of investments and the depreciation or disposal of property, plant and equipment. On the other hand, the tax credit/debit arising from the price-level restatement of stockholders' equity accounts is reversed and charged to retained earnings since this amount does not represent an actual tax benefit (cost). (4) Reclassification of liabilities On March 31, 2007 the company reclassified part of the balance of accounts payable relating to investment acquired, amounting to R$ 14,207, from current to long-term liabilities in connection with management's intention to pay this balance only upon final maturity. The prior period has been reclassified accordingly. The reclassification for December 31, 2006 amounted to R$ 13,872. F-10 - Zero Hora Editora Jornalistica Notes to the Financial Statements S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated 3 Significant Accounting Policies (a) Determinationof results of operations and current and long-term assets and liabilities Resultsof operationsare determinedon the accrualbasis and includegains and losses on monetary items and, where applicable,the effects of adjustments of assets to market or net realizable values. Net exchange gains and losses on foreign currency liabilitiesare recorded in financial expenses. Shares classified as marketable securities are recorded at market value. Revenuesfromadvertisingand classifiedadvertisementsare recordedwhen published. Revenuefromcirculationrelatesto sales of newspapersat newsstandsand street vendors and is recorded at the time the newspapers are sold to consumers. Subscription revenuerelatesto salesofnewspapersbysubscription. Deferredsubscription revenue,whichrepresentsamountsbilledto customersin advanceof newspaperdeliveries,is appropriated to revenues over the term of the subscription. Non-cashexchangesof advertisingfor servicesor goodsare recordedat marketvalue in both revenues (b) and expenses. Inventories Inventories are stated at the average purchase cost, which is lower than net realizable value. (c) Permanent assets Theinvestment inA Noticia S.A.EmpresaJomalistica wasaccounted forontheequitymethodup to itsmergerintothe company,including goodwill basedon expectedprofitability. The investmentsin othercompaniesshownin Note9 are stated at cost, less a provisionfoi losses. Property, plantandequipment are statedat costplusthe effectsofrevaluations ofprinting presses and accessories.Depreciationof property,plantand equipmentis computedon the straight-linemethod, at the rates shown in Note 10, which take into consideration the estimated useful lives of the assets. F-ll - Zero Notes Hora Editora to the Financial Jornalistica Statements S,A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands (d) Income of Brazilian reals, unless otherwise stated taxes Income tax is calculated at the standard rate plus supplementary rates totaling 25%. Social contribution tax is calculated at the current rate of 9% applied to adjusted income before income tax. Deferred income taxes are calculated on temporary differences and tax loss carryfonnrards.Tax losses do not expire but may be used to offset only up to 30% of future taxable income in any year. (e) Swap receivables and payables The assetslliabilities are recorded at cost plus accrued rate differences up to the balance sheet date (accrual basis). 4 Trade accounts receivable December 2006 Subscriptions Advertising Classified advertisements others Checks in collection Promissory notes Endorsed securities Allowancefordoubtfulaccounts 5 31 2005 2004 March 31 2007 2006 (Unaudited) (Unaudned) 12.248 21.826 9.883 17.169 8.793 15.755 15,294 20.987 9.978 15.682 9.235 3.440 8.774 3.836 7.572 3.977 9.979 3.087 9,404 3.580 700 760 718 670 712 488 367 339 680 299 1.883 1,162 1.133 1.786 1.444 (s,ses) (2.978) (2776) (2.914) (2.948) 46.994 38.931 35.463 49.611 38.139 inventories December 2006 Newsprint Maintenance materials Fascides (inserts), video-cassette 7.490 7.339 tapes 2005 13,233 6,894 31 2004 March 2007 (Unaudited) 31 2006 (Unaodited) 7.471 6.387 7.843 7.754 8.181 6.976 2.796 (960) 8.941 3.303 (546) 6.618 3,552 (546) 5,980 and compact discs (CD) Provision for losses Imports in transit (newsprint) 4.561 (546) 9,201 28,045 F-12 3,272 (546) 101 22,954 24,635 24.972 24.143 - Zero Hora Editora Notes to the Financial Jornalistica Statements S.A. at December 31, 2006, 2005 and 2004 and March jl, 2007 and 2006 (Unaudited) In thousands 6 Taxes of Brazilian reals, unless otherwise stated recoverable December 2006 Excise tax (IPI) Withholding income 1.669 investments (IRRF) 2,133 22 party transactions Assets (liabilities) - Related - Related 72.141 S.A. Empresa Jomalistica - ComBrcio Marcas e Licenciamento 104.588 5,411 187 155 48 2.320 1.455 4,183 54 2.936 2005 Assets 31 2004 Assets (liabilities) (liabilities) March 31 2007 2006 (UnaudYed) (Unaudited) Assets Assets (liabilities) (liabilities) 54.447 18,522 10 (10.608) (66) 95.050 5.411 85.422 5.411 38,908 66.720 11 1 5 107,117 5.411 97,350 5.411 de Ltda. Ag~nciaRES de Noticias Ltda. Other related companies 150 136 124 153 139 878 15 878 28 878 (10) 878 25 878 23 113.549 Current 577 2.507 RES ParticipaCi~s S.A. RES Marketinge Jniormllca Ltda. RES 1,387 companies RES Administra~o e Cobrancas Ltda. Televis~o Gabcha S.A. RES TV de Flon'an6polis S.A. A Noticia 26 companies RES Administra~o e CobranCas Ltda. assets 2,305 and balances 2006 Long-term 2006 (Unaudited) 827 December assets 2007 (Unaudited) 1.921 784 3.084 Current 31 1.274 609 Other Related 2004 March tax on financial Social conbibutions (PIS and COFINS) 7 2005 31 liabilities - Related 101.513 81.151 113.596 103,806 companies Televis~o Gai~chaS.A. Other related companies (185) (56) _(241) Long-term liabilities - Advance capital increase (64) (26) (66) (55) ~8) (45) (90) (121) (53) (63) (63) for future Stockholders (63) F-13 (631 (63) -Zero Notes Hora Editora to the Financial Jornalistica Statements S.A. at December 31, 2000, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otheMllse stated December 2006 2005 31 2004 March 2007 (Unaudited) Income Income (expenses) General and administrative (reimbursement) TelevisPo Gadcha S.A. RES TV de Flon~an6polis S.A. Rgdio Gadcha S.A. Ott~ergroupcompanies (16,918) (489) (1.252) 27 (17.732)_ Financial S.A. e ticenciamento 1~,501) (3.342)_ (1.331) (1.046) Income (expenses) (4.107) (143) (347) 7 (3.374) (32) (219) _(4,590) (3.619) 11.922 10,834 473 3,162 2.874 3,168 2,878 de Ltda. 17 Other related companies 14 192 11.939 (a) (3,342) (expenses) income RES Participa~es RES - Com~cio Marcas Income (expenses) (4.set) 2006 (Unaudited) expenses RES Administra~io e CobranFas Ltda. Financial Income (expenses) 31 11.040 14 167 654 RES AdministraC~o e Cobran~as Ltda. is a related company which functions as a treasury department, carrying out all collections and making all payments on behalf of the companies of the RES Group. Except as described in the next sentence, the balances with this company bear no interest and are shown in current assets because the funds held by this company on behalf of the group companies are readily available. At December 31, 2004, there is an additional liabilitybalance of R$ 10,608 shown as a reduction of long-term assets which bears interest calculated (b) at market rates. Loans to and from other related companies bear interest calculated at market rates. Advances for future capital increase bear no interest. Loans to RES Marketing e Informstica Ltda. and AgQncia RES de Noticias Ltda. bear no interest. (c) The company, together with the other three main media companies of the RES Group (RBS TV Floriani~polis S.A., Televis~o GaQcha S.A. and RBdio GaQcha S.A.), has guaranteed the first and second tranches, amounting to US$ 50,000 thousand ani~ US$ 125,000 thousand, respectively, of a US$ 200,000 thousand Global Medium-Term Notes Program issued by RES ParticipaCBes S.A. in December 1995 and in March 1997, with final maturity in December 2003 and April i, 2007. The first and second tranches were fully paid in December 2003 and March 2007, respectively. F-14 - Zero Hora Editora Jornalistica S.A. Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) Inthousandsof Brazilianreals,unlessothenrvise stated On November25, 2005,RESParticipa~desS.A.contractedan interestrate.swapin the notionalamountof R$ 129,744(equivalentto US$58,155thousandon that date) exchanging the U.S.dollarexchangevariationforthe interbankcertificateof deposit(CDI)interestrate less 5.0%p.a. Thiscontractwas terminatedin March2007and was guaranteedby the companyand the otherthree mainmediacompaniesof the RESGroup. Withthe objective ofreducingthe refinancing riskto whichthe RESGroupwasexposedin 2007,onAugust2, 2004,RESParticipa~bes S.A.andthecompanysuccessfully completed an ExchangeOfferProgramunderwhichsomeofthe holdersofthe secondtrancheofNotes issuedbyRESParticipa~bes S.A.exchangedthosenotesfornewonesissuedbythe company.Inaccordancewiththe termsoftheExchangeOffer,foreachUS$1,000principal amount,the noteholderreceivedUS$ 150in cash and US$850 in notes issued by the company, withfinalmaturity inApril2010and interestof 11%p.a. payableinApriland Octoberofeachyear.Thenewnotes(the"2010Notes")arejointlyand severally guaranteed byTelevisBo GalichaS.A.,RESTVde Florianbpolis S.A.andRgdioGalichaS.A.Overall, notes withan aggregateface valueof US$66,845thousandwere exchangedunderthe terms of the Exchange Offer (See Note 12). (d) OnNovember 25,2005,Televis~o GaQchaS.A.contractedloansinthe notionalamountof R$ 40,815withfinalmaturityin May2010and bearinginterestof 108%of the interbank certificate ofdeposit(CDI)interestrate.Thiscontractis guaranteedbythe company,RESTV de Florian6polis S.A. and Rgdio Ga6cha S.A. (e) Thecompanyhas guaranteeda loanamounting to R$8,000,equivalent to US$3,575 thousand,receivedby RESAdministra~Bo e Cobran~asLtda.in November2005 and terminated (f) in May 2006. Thecompanyhas guaranteedlocalcurrencyloansamounting to R$ 15,000and R$ 10,000 receivedbyRESAdministra~~o e CobranCas Ltda.in March2006andApril2006withmaturity in March 2008 and April 2007, respectively. (0) The company,togetherwithTelevisBoGa6chaS.A.,has guaranteedlocalcurrencyloans amountingto R$ 15,000receivedby RESAdministra~go e Cobran~asLtda.in May2006with final maturity in May 2008. (h) The companyhas guaranteedlocalcurrencyloansamountingto R$ 60,000and R$ 40,000 receivedby Televido GalichaS.A.and RESTV Florian6polis S.A.,respectively,in November 2006 with final maturities in November 2010 and bearing interest of 110% of the interbank certificate deposit (CDI) interest rate. F-15 - Zero Hora Editora Jornalistica S.A. Notes to the Financial and 2004 and March Statementsat December31 2006,2005 31,2007and 2006(Unaudited) InthousandsofBrazilian reals,unlessotherwise stated (i) Incomeand expenses on transactions amongtherelatedcompanies areallocated amongthe companies that benefit from or incurthe income andexpenses usingbasesthatmaynot necessarily be the same as those that would have been appliedifthe transactionshad been made with unrelated parties. (j) On December26, 1996, thecompany transferred allofitstrademarks registered withthe InstituteNacionalde PropriedadeIndustrialINPI (National Industrial Patents Institute) to anotherRESGroupcompany, S.A. was entitled to collect calculated at 3.5%. RESParticipaF~es S.A., freeofchargeRESParticipaFdes royalties onthemajority ofthecompany's netoperating revenues, On September 24, 2004, the ten years from Participa~ges S.A. thecompany settled inadvance theroyalties tobeincurred during January 2005throughout December 2014.Thispayment toRES wascalculated asthenetpresent value oftheroyalties ontheprojected netoperating revenuesofthecompany fortheperiod. (k) Some of the other RES Group companies arereimbursed bythecompany foradministrative and generalexpensesincurredbythemon behalfofthecompany. AsfromJanuary2006,the amounts reimbursed by the mentioned 8 in Note 1. company reflectthechangesintheshareholding structure Judicialdepositsandfiscalincentives 2006 Fiscal ------------~ 2005 2004 (Unaudited) incentives 1.388 JP~i~P~~~iqtssses On sscal incentives (1.388) Current assets 7.570 ---~I-0 1,388 7~481~ F-16 (543) ~q (89) Long-term receivables 1,388 (1.111) 6.891 --~ 6.227 7,072 March 31 2006 2007 (Unaudited) 1.388 (1.388) 9,145 9.145 1,388 (1.388) 6.863 6.863 /89) 7.oZZ 9.058 6.863 - Zero Hora Editora Jornalistica S.A. Notes to the FinancialStatements at December31, 2006,2005 and 2004and March31, 2007and 2006(Unaudited) In thousands 9 of Brazilian reals, unless othennrise stated Investments December3i 2006 2005 2004 March3i 2007 (Unaudited) NetServicos de Comunica~o S.A. Provision forlosses A NoticiaS.A.EmpresaJomalistica 31.006 (27.070) 31.835 (27,070) (538) 2.704 956 (726) 2,704 957 (1.067) 2.704 957 (3,338) (2.704) (13,900) Goodwill on acquisition ofA Noticia s.A Empresa Jornalistica 2006 (Unaudited) 64,279 Negative goodwill on acquisition of RES Online Ltda. Fiscal incentives Otherinvestments Provision for losses on fiscal incentives and other investments 50,163 _ _4.167 (3,354) 7.359 (686) 2.704 2.770 906 957 (2,704) 322 271 (a) Theinvestment inNetServices deComunicaF~o S.A.(formerly known as Globe CaboS.A.) consistedof3,757,947preferredshareson December 31,2005(December 31,2004- 3.665.417 preferred shares),representing approximately 0.1%oftheinvestee's totalcapital, 3.548,152ofwhichwereacquiredbythecompanyonAugust24,2001fromRES Participa~bes S.A. for R$ 31,753. NetServiFos deComunica~lo S.A.(NET) isa holding company forseveralsubsidiary companieswhichoperatecable and microwaveTVsystemsin the mainBraziliancities. Duringthe quarter ended March 31, 2006, the company sold 1,883,825 NET preferred shares. As a result of these transactions, the companyrecordeda gainof R$ 353 as non-operating Income.The remaining1,874,122NETpreferredshares were reclassifiedfromInvestmentsto Marketable Securitiesdueto management's plansto sellthemintheshortterm.Theseshares weretransferredat theircarryingvalueofR$1,963andthe unrealized gainofR$452was recorded in reversal of provision for losses on investments. Duringthe quarter ended June 30, 2006,the company sold the remaining NET preferred shares.Asa resultofthesetransactions, thecompany recorded a gainofR$244as non- operating income. F-17 - Zero Hora to the Financial Notes Editora Jornalistica Statements S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands (b) of Brazilian reals, unless otherwise stated On January 17, 2004, the company acquired a 100% interest in RES Online Ltda. from Televis~o Ga6cha S.A. and other related parties for R$ 1,987. As a result of this transaction, the company recorded negative goodwill of R$ 1.500 from the difference between the cost of the investment and the quotaholders' equity of RES Online Ltda., which will be amortized in approximately 7 years. On the same date, RES Online Ltda. was merged into the company. In March, 2007, the negative goodwill balance amounting to R$ 538 was transferred to current liabilities. (c) On November 6, 2006, the company acquired a 99.08% interest in A Noticia S.A. Empresa Jornalistica, a newspaper publisher in the area of Joinville, state of Santa Catarina, for the amount of R$ 52,628, of which R$ 27,743 remains unpaid at December 31, 2006. Because this company's net worth was negative R$ 11,651, goodwill of R$ 64,279 was recorded on the acquisition. The unpaid balance bears interest of 80% of CDI and has a final maturity in August 2008. On December 31, 2006, the investment in A Noticia S.A. Empresa Jornalistica is accounted for on the equity method, including goodwill based on expected profitability, as presented below: A Noticia Empresa S.A. Jornalistica Activity Net worth on acquisition date (11,651) Goodwill on acquisition 64,279 Equityin losses (2,249) At December 31, 2006 50,379 F-18 - Zero Hora Editora Jornalistica S.A. Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othennrise stated In January, 2007, the company acquired the remaining 0.92% interest in A Noticia S.A. Empresa Jornalistica for the amount of R$ 118. In the same month, the stockholders of the company and of A Noticia S. A. Empresa Jornalistica (A Noticia), decided to unify the operations by merging A Noticia into the company. The merger was based on an appraisal of statutory book value at December 31, 2006, as presented Assets Liabilities Current below (Unaudited): and net capital deficiency Current Cash and cash equivalents Trade accounts receivable Inventories Taxes recoverable 114 5.742 259 76 Others 54 6,245 Accounts payable Salaries and social security contributions Other taxes payable Commissions and bonuses payable 903 1.643 720 645 Loans 104 Provision for contingencies Advances from customers 7.198 4.319 others 714 Non-Current Long-term receivables Deferredincometaxes Judicial others deposits 16.246 2447 and fiscal incentives 939 51 3.437 Non-Current Long-term liabilities special tax payment installments-PAES 8.956 Advance 2.507 for future capital increase Loans Permanent investments Property. 41 assets 28 plant and equipment 11.504 4.010 Net capital 4.038 deficiency Capital Capital reserves Revenue 2.000 64 reserves 861 Accumulated losses (16.955) (14.030) Total assets 13.720 Total liabilities and net capital deficiency 13.720 On January, 2007, goodwill of R$ 64,279 was transferred to deferred charges and will be amortized in approximately 10 years, based on expected profitability, according appraisal carried out by an independent expert on November 20, 2006. F-19 to an ,,,,,, ~mlncucua, iicjd,n o ~~o tm c, V O)P~~O~ ~cu·p~rco Z ~n~~co~o, (DI~ gQ e co o~urc~ ~N re ~ Z m Nrot~cou: Nrc~-cn~cuo PQ)EcN(ON~- l"i 1" (T),yyrO) IC(V a)P-O(DrNO 6a $ m ~;f0300)Q)Ca z omcu~ncr ·o o o cu a~m~omoolo~ o~c~~oa~cu~ V)~rcNCyp-(r) 'I `O ONQ)C~ E O O hi pr (C) CI r m Z r a Tt~~ooo~coln ~ao~~or~r-coco~-o r"i mocu~~~ 'O d O O h( o~~c~~~-ocu~o 1 S 1 II o cP ~nmaJ~~o o,,,, u, O o EUe! N t rrO(O~ --- ~a~o3oo~~no i "L uj P m E o o, E a eB Se U1 tiio I O~~~~-rU N1-g)a, E O~ at ~ E .g Q V) ~ m a, ~n o (I) o O ot CIE O ~rr~p,~ rocucoln~co o a " 0 CO m~ E I~ m ~a t ti 2 5: v, $Eo, " mE ZI~ c m g r~,B a, ,, n P $~ ~a a pr~e8 ZC P N Bfi (O m g, P? a ~n.g BP o,~ ~ ~e ~mraT>O o F-20 13 a~e e - Zero Hora Editora Jornalistica S.A. Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilianreals, unless otherwisestated (a) OnDecember 31,1994,thecompany decided torevalue themajoritemsofmachinery and equipmentbasedon an appraisalcarriedoutbyindependent experts.Deferredtaxeffectson the revaluation increment are recorded upon realization of the reserve. (b) OnDecember31,2003,the companydecidedto revaluetheprinting pressesand accessories based on an appraisalcarriedout by independentexperts.Deferredtax effectson the revaluation increment are recorded upon realization of the reserve. On March31, 2007,R$ 8,669of property,plantand equipmentare pledgedin guaranteeof legal cases. 11 Trade accounts payable Tradeaccountspayableat December31, 2006includeR$ 22,521(December31, 2005 R$ 21,186;December31, 2004- R$ 21,643;March31, 2007- R$ 19.034;March31, 2006R$ 15,508) payable to foreign suppliers and indexed to the U.S. dollar. F-21 - Zero i-lore Editora Jornalistica Notes to the Financial Statements S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) Inthousandsof Brazilianreals,unlessothennrise stated 12 Loans December31 Interest Marc~ 2006 2005 2004 2007 2006 21,099 3.573 2.841 11.240 12.257 155.507 116.500 123.432 9,671 9.771 2,782 (46) (Unaudited) (Unaudited) Foreign currency US$ 9,869 thousand (December 31, 2005 US$1,526 thousand; December 31, 2004 - US$1,070thousand, March31,2007- US$ 5,482 thousand, March 31, 2006US$ 5.642 thousand) (i) LIBOR plus 0.2% to 1.8% p.a. plus commission of 0.9%p.a.to4.4% p.a. LIBOR plus 0.2% p.a. plus commission of December 31, 2005 - US$ 3.190 thousand (ii) 1.55% p.a. 7.467 US$ 58,585 thousand (Global Medium-Term Notes)(March31,2007 and 2006- US$ 56.818 thousand) (iii) 11%0.a. 125.253 US84.498thousand) (iv) 4.8%p.a. 9,969 US$ 4.663 thousand (March31.2007US$ 4.717 thousand, March31,2006- Interestrateswaps (v) 3,884 Localcurrency (vi) CDIplus3%p.a. (vii) 108%ofMeCDI 82,267 (viii) 105%oftheCDI 7.516 Localcurrency-Others 137,128 (4,681) ~ 26.615 11.230 145 25.828 84.364 150 150 7.514 76,283 84,405 5.010 10.025 556 254 250.133 239.231 210.941 222,042 247.612 Currentliabilities (70.528) (24,056) (21,177) (53.405) (32.995) Long-term liabilities 11_9.605__215.175 189.764 168.637 214,617 CDI - Interbank certificate of deposit rate LIBOR - London Interbank Offered Rate F-22 -ZeroHoraEditoraJornalisticaS.A. Notes to the Financial Statements at December 31,2006,2005 31, 2007 and 2006 (Unaudited) Inthousands ofBrazilian reals,unlessotherwise stated and 2004 and March Long-termloansfalldue as follows: --- - - 2006 2006 2005 2007 12,331 2008 24.053 131499 2010 ~ (ii) 179605 2007 2006 24,075 24.053 120509 24.053 (Unaudited) (Unaudited) 24.053 24,053 2009 (i) 2004 March31 - 24,053 24.053 143016 177433 -----L111= -·-~··- 175 215 189.764 168637 Theseloansarebackedbysureties 33,057 24,053 133,454 214 ---~-·· 617 f'om RES AdministraFpo e Cobran~as Ltda. OnMarch 31, 2007,partofthebalance (R$2,671) isguaranteed by Televis8o Ga~ichaS.A. Loans paid in 2006. (iii) OnAugust 2,2004, thecompany Global Medium-Term Notesintheamount of US$56,818thousand,withfinal issued matun'ty in April 2010 and bearing interest of 11% per year, withsemiannual payments. These Notesoriginated fromtheExchange Offer Program mentioned inNote7 (c)andarejointly and severally guaranteed byTelevisSio GaOcha S.A., RES n/ de Florian6polis S.A.and RBdioGaQcha S.A. (iv) OnMarch 29,2006thecompany contracted foreign currency loansintheamount ofR$10,000 ~ee9cu~ent Of US$ 4,497 thousand) with final maturity inMay 2007. These loans are not (v) OnAugust20~2004, thecompany contracted aninterest rateswap inthenotional amount of R$ 169,148 (equivalent 56,818 thousand onthatdate, matching theamount ofthe Global Medium-Term toUS$ mentioned (iii) above) exchanging theU.S. dollar exchangevariation forNotes the CDI interestinitem eitherpartyis requiredto settle rateless2.30% p.a.Under thetermsoftheswap, onpreestablished 27,August27andDecember 27 ofeachyear)theexcessoftheaggregate fair dates(April value of the company's and RES Participa~Bes S.A.'sswapsovera preestablished limit ofUS$26.000 thousand (equivalent toR$62,735 on August 29,2005).Thisswapcontract was loss was recorded in terminated 25,2005, andtheresulting financial expenses(R$ 85,364).onNovember F-23 - Zero Hora Editora Jornalistica S.A. Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated On the same date, the company contracted a new interest rate swap in the notional amount of R$ 126,762 (March27, 2007 - R$ 117,273) (equivalent to US$ 56,818 thousand on that date) exchanging the U.S. dollarexchange variationfor the CDI interest rate less 5.04% p.a. (March 27, 2007 - 5.77% p.a.) The due date of the contract is March 30, 2010. Under the terms of this swap, either party is required to settle on preestablished dates (March27, July 27 and November 27 of each year) the excess of the aggregate fair value of the swaps. Accordingly,the company completed its settlements on the preestablished dates and the resulting loss was recorded in financialexpenses during the year ended December 31, 2006 totaling R$ 15,053 (quarter ended March 31, 2007 - R$ 9,015). These contracts are guaranteed by Televis~o GaOcha S.A., RES TV de FlorianbpolisS.A. and Rgdio Gai~cha S.A. December 2006 Interest rate swaps 2005 31 2004 March 31 2007 2006 (Unaudited) (Unaudited) - liabilities (assets) Bookvalue Fair value 2.663 2,304 (4,681) (3.564) 26,615 42,821 890 656 (294) 572 On March 29, 2006, the company contracted a swap in the notional amount of R$ 10.000 (equivalent to US$ 4.497 thousand on that date) in connection with the contract mentioned in item (iv)above, exchanging the U.S. dollar exchange variation plus 4.8% p.a. for the 110% of the CDI, with final maturity in May 2007. On December 31, 2006, the book value of this swap was R$ 1,221 (loss) (March31, 2007 - R$ 1,892 (loss); March 31, 2006 - R$ 248 (loss)). (vi) The loans were paid in 2006. (vii) On November25, 2005,the companycontractedlocalcurrencyloans in the notionalamountof R$ 84,185 with final maturityin May2010 and monthlypayments as from December 2006. These contracts are guaranteed by TelevisBoGalicha S.A., RES n/ de Florian6polisS.A. and Rgdio Galicha S.A. (viii) On March 27, 2006, the company contracted local currency loans in the notional amount of R$ 10,000 with final maturity in September 2007 and monthly payments as from October 2006. These loans are not secured. In connection with the above loans, the company and certain other RES Group companies, mainly those engaged in n/ and radio broadcasting activities,are required to observe certain negative covenants. All of these covenants are being observed. F-24 - Zero Hora Editora Jornalistica S.A. Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and Anarch 31, 2007 and 2006 (Unaudited) In thousands of Brazilian 13 Stockholders' (a) Capital comprises Common Preferred reals, unless othe~wise stated equity common and preferred shares without par value: shares shares 69,003,649 29,572,993 98,576,642 The stockholders are entitled to an annual dividend of not less than 25% of net income per the statutory financial statements, after appropriation to the legal reserve of an amount equivalent to 5% of the annual net income, up to the limit of 20% of capital, also per the statutory financial statements. In accordance with the company's by-laws, a statutory reserve for investments and working capital should be established based on appropriations of 10% of net income after appropriations to the legal reserve and the minimum annual dividend. The total of the legal and statutory reserves cannot exceed the amount of the company's capital. At December 31, 2006, 2005 and 2004, the board of directors decided not to make the appropriation related to the statutory reserve. The respective Annual General Stockholders Meetings confirmed these decisions. Also, in December 2006, 2005 and 2004, no dividends were proposed by the company's board of directors, decisions which were subsequently approved at the respective Annual General Meetings. In 2006, 2005 and 2004, no earnings were distributed. (b) Law 9249 introduced as from 1996 an option for companies to calculate a nominal interest charge on capital invested and utilized in operations for the period (defined as total stockholders' equity less revaluation reserves) calculated on a pro rata basis based on the Taxa de Juros de Lengo Prate - TJLP (long-term interest rate). This charge, limited to 50% of the net income for the period or of retained earnings, is deductible for income tax purposes and social contribution, but is subject to 15% withholding tax; such interest amounts may be used to increase capital or be paid directly to stockholders either as interest or as prepayment of·the minimum statutory dividend. The company did not pay any interest to its stockholders in 2006, 2005 and 2004. F-25 - Zero Here Editora Jornalistica S.A. Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) stated In thousands of Brazilianreals, unless otherwise (c) - Thebalanceofaccumulated deficit inthecompany's statutory financial statements is reconciled to the balance in these financial statements as follows: DecemberJ~ 2006 2005 March31 2004 2007 2006 (Unaudited) (Unaudited) Balances perstatutory financial statements (49,044) (75.367) (95,391) (44,457) (66,013) Adjustmentsarisingfromthe constantcurrency accounting methodology 203 Further adjustments to conform the financial statements to accounting principles generally accepted inBrazil Balances inthesefinancial statements 14 Financial income 1,010 2.546 4.645 5.820 1.166 4.830~ (44,196) (68.537) (91.679) (39.609) (60.817) and expenses December Financial 804 18 31 2006 2005 2004 34 4.042 3 3.218 1 5.667 March 2007 (Unaudited) 31 2006 (Unaudited) income Eamingson financialinvestments Exchangevariationson assets Interestonrelatedcompanies (Note7) Interest on taxes 11,040 1.452 1.617 18.392 15.510 925 Otherfinancialincome Financial 11,939 expenses Interestandchargesonloansandfinancing Exchange variations on loans and linandng and lossfrominterestrateswap,net Interest on related companies (Note 7) Intereston taxes 2.842 3.168 37 2.878 42 1.040 323 441 4.461 6.203 75 7,437 (30.708) (22.971) (13.330) (6.697) (7.952) (12,989) (36.456) (8.219) (1.942) (3.393) (1.331) (1.046) (900) Otherfinancial expenses (368) 933 654 (2.925) (3.160) (2.333) (434) (330) (1.762) (1.564) (1.127) (524) (47,522) (65.680) (26,492) (10.200) (12199) F-26 - Zero Notes Hora Editora to the Financial Jornalistica Statements S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian 15 Social contribution (0) Reconciliation reals, and of social unless income otherwise stated tax contribution and income tax Years ended Quarters December31 2006 2005 2005 2007 2006 (Unaudited) (I) (Unaudited) Social contribution Income before taxes on income 35.577 Rate-% Effects of permanent 21,702 8.158 9 9 9 (3.202) (1,953) (734) (544) (1,129) (253) (711) (122) 44 145 income (87) 1 in 1.073 Other (1.218) 601 Expense for the year (4.420) (488) Current Deferred (1.482) (2.938) (2.3461 1.858 (4,420) (488) (105) (79) (425) (1.405) (745) (1.640) (1,891) 486 (790) 45 (275) (1,365) (1.405) (745) (1.640) tax Income before taxes on income Rate-% Effects 12,546 9 differences: Effect of provision for losses on Me investment Net Servicos de Comunica~es S.A. Income 6.042 9 Non-deductible expenses Non-taxable (II) ended March3i of permanent 35,577 21.702 8.158 6.042 12,546 25 25 25 25 25 (8.894) ~5.425) (2.040) (1.511) (3.136) 309 (704) (1.979) (12) 83 differences: Non-deductible expenses Non-taxable income Effect of provision for losses on he investment Net ServiCos de ComunicaCdes S.A. 5 123 403 3 in 2.976 Other (1.044) Expenseforthe year _(9,624)_ 2.111 _ (919j~ 867 111 (2.749) (1.412) Current (2.666) (6.217) (4,388) (1.674) Deferred (6.958) 5,298 1.639 262 (2.749) (1,412) (9.624) F-27 (919) (3.888) (423) (3.888) -Zero Notes Hora Editora to the Financial Jornalistica Statements S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands (b) of Brazilian reals, unless otherwise stated Nature of balances December 2006 (I) Prepaid income taxes 2005 Social conb~ibution Provision for income 2005 taxes 771 353 15 60 786 413 92 2006 (Unaudited) 357 357 654 92 Deferred income 2.464 162 162 taxes contn'bution Tax loss carryforwards 12.153 Temporarydifferences Income 2007 (Unaudited) 1.810 Social contribution Social 31 - current Incometax (III) larch - current Income tax (II) 31 14.OY8 i 1.873 1,238 12.641 3.401 544 2.276 'i2.560 2.427 13.391 16.042 14.640 14,149 14.987 32.522 3.605 33.833 9.753 37.844 1.551 31.744 6,491 33.608 7,051 36.127 43,586 39,395 38.235 40.659 49.518 59.628 54,035 52.384 55.646 (4.137) (3.412) 48,247 52,234 tax Tax loss canyforwards Temporarydifferences Current assets (2.874) Long-term receivables 46.644 F-28 _ 59.628 _ 54.035 _ - Zero Hora Editora Jornalistica S.A, Notes to the Financial Statements at December 31, 2006, 2005 and 2904 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated DecemberJ~ Long-term Social MarchS~ 2006 2005 2004 2007 (Unaudited) 2006 (Unaudited) 1.948 2.286 2.672 1.897 2.202 518 633 595 268 774 159 501 766 575 598 3.099 3.149 3.605 3.164 3.375 5.544 6.508 7.422 5.270 6.266 1,438 1.760 1,653 745 2.150 441 1,391 2.128 1.598 1664 8.742 8.906 10.013 8.789 9.528 liabilities contribution Deferred social contribution on revaluation reserve Indexation of permanentassets Temporarydifferences Income tax Deferred income taxes on revaluation reseNe Indexationof permanentassets Temporarydifferences _ 11.841 12.055 13.618 _ 11.953 12.903 As of March31, 2007,the Companyexpectsto offsetthe deferredincometax assets against future taxable income according to the following schedule: December 31, 2006 March 31, 2007 (Unaudited) 2007 2008 2,874 4,741 3,399 4,601 2009 2010 2011 2012 2013 5,793 9,029 10,603 11,286 5,192 5,390 8,340 9,580 10,387 10,687 49.518 52,384 Current assets (2,874) (4,137) Long-termreceivables 4_6.644 48,247 Considering that taxable income encompasses not only the accounting profitthat can be generated, but also the existence of non-taxable income and non-deductibleexpense, tax credits and other differences, there is no direct relationshipbetween the accounting profitand the taxable income. As a result, the company's expected timing to offset deferred income tax assets should not be taken as an indicator of future profits of the company. F-29 - Zero Hora Editora Jornalistica Notes to the Financial Statements S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) Inthousandsof Brazilianreals,unlessothemisestated 16 Contingencies (a) Thecompanyis partyto variouscivillawsuitsthathaveariseninthe ordinarycourseof its business, includingactions for libel.Provisionsfor estimated probable losses from contingencies havebeenrecordedbasedontheopinions ofexternalandin-houselegal advisors.Duringthe yearendedDecember 31,2006,the companypaid,eitheras a resultof unfavorablejudicialdecisionsor settlement,the amountof R$ 2,073(December31, 2005 R$ 1,709; December 31, 2004 - R$ 1,868; quarter ended March 31, 2007 - R$ 81, quarter ended March 31, 2006 - R$ 378). (b) Thecompanyis the defendantincertainlaborandtaxsuits.Provisions forestimatedprobable losses fromcontingencieshave been recordedbased on the opinionsofexternaland in-house legal advisors. Provision for probable losses December31 2006 2005 Nlarch3i 2004 2007 jiinaudiiedj 2006 jiinaudiiedi Tax matters 1.600 1.600 1.600 1.600 1.600 Laborand socialmatters 7.204 5,762 5.992 11,217 5.813 Civilmatters 3.892 3.588 2.473 6.854 3.630 12,696 19,671 11.043 Currentliabilities Long-term liabilities 10,950 10.065 (19.692) (8.962) (6,862) (17.663) (9.051) 2,004 1,988 3.203 2.008 1.992 The activityin the provisionforprobablelosses in 2006and 2007was as follows: December 31, 2006 March 31, 2007 (Unaudited) Atthe beginningof the year/quarter 10,950 Increase 14,218 Amounts paid (2,073) Reversal Atthe end of the year/quarter F-30 12,696 10,514 (si) .(10,399) (3,458) 12,696 19,671 - Zero Hora Editora Jornalistica S.A, Notes to the Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands Possible of Brazilian reals, unless othennilse stated losses The company is the defendant in certain civiland labor suits which are estimated as possible .losses based on the opinionof external and in-house advisors. For these suits no provisions have been recorded by the company, and the respective amounts at December 31, 2006 and March 31, 2007 are presented below: December 31, 2006 March 31, 2007 (Unaudited) Civil matters Labor and social matters 17 Pension 3,035 3,542 3.003 4,269 6,577 7,272 fund The company, together with RES Comunica~BesS.A. and other associated companies (the "Sponsors"), have formed RES Prev-Sociedade PrevidenciBria,a private pension fund (the "Fund"),to provide employees with supplementary pension and disabilitybenefits, in addition to those paid by the NationalSocial Security System. The Fund was approved by the Ministry of Social Security in October 1996 and was implemented as from January 1997. The Fund is a defined contributionplan, with contributionsfrom Sponsors and participants calculated based on variable amounts and percentages at the option of each participant. The normal contributionsof the Sponsors are based on the basic contributionof the participants at rates of up to 300% depending on the participant's age. These contributionswillautomatically cease when the participantterminates employmentfor any reason, reaches retirement age, dies or becomes disabled. Past service benefits will be funded by the Sponsors over twenty years throughmonthlypaymentsadjustedby the indiceNacionalde PreFosao ConsumidorINPC (National Consumer Price Index). Furthermore, the Sponsors may opt to make additionalcontributionsat any time, and the normal and additionalcontributionsmay be revised by the Sponsors in February of each year. The Sponsors may also temporarilyreduce or suspend their contributions,maintainingonly those necessary to cover the minimumbenefits mentioned below, the payments related to the past service benefits and the Fund's administrative costs. F-31 - Zero Hora to the Financial Notes Editora Jornalistica Statements S.A, at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated The plan grants all the participantsa minimumone-time retirement benefit equal to a maximum of 3 times the participant's monthly salary for participants with 30 years of service upon retirement. Participants with less than 30 years of service are entitled to a proportional amount, based on their years of service. Except for this minimum benefit, the Sponsors do not have any responsibility to guarantee the minimum level of the benefits to the participants when they terminate their employment. The company's contributions in the year ended December 31, 2006 amounted to R$ 2,291 (December 31, 2005 - R$ 2,299; December 31, 2004 - R$ 2,308; quarter ended March 31, 2007 - R$ 648; quarter ended March 31,2006 - R$ 548). The Fund's financial statements at December 31, 2004, 2005 and 2006 were examined by independent auditors, and the actuarial reserves were determined by an actuary. The independent auditors issued an unqualified opinion on those financial statements. 18 Financial instruments The company has financial assets and liabilities recorded in the balance sheet which are characterized as financial instruments. Except for the interest rate swaps mentioned in Note 12, the investment in NET mentioned in Note 9 (a), and the accounts receivable from related companies bearing no interest (Notes 7 (a) and (b)), the balances of other financial assets and liabilities are stated based on their contractual the respective 19 market conditions, which are equivalent to values. Insurance The company's policy of insurance risk management seeks coverage'compatible with its responsibilities and its operations. The insurance was contracted for amounts which were considered sufficient for the company to cover eventual losses, considering the nature of its activity, the risks involved in its operations and its insurance consultants' recommendations. F-32 - Zero Notes Hora Editora to the Financial Jornalistica Statements S.A. at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othemise stated On March 31, 2007, the company had the following principal insurance parties: policies with third Insured Type amount (Unaudited) Fire damage to property, plant and equipment Civil liability Diverse risks 20 Tax Recovery Program 218,016 3,250 1,185 (PAES) A Noticia S.A. Empresa Jornalistica, which was merged into the company in January 2007, joined the PAES program tin July 2003) for payment of its federal tax debts in the amount of R$ 6,874, to be paid in 180 monthly installments plus interest based on the TJLP (long-term interest rate). On March 31, 2007 the balance was R$ 9,499, R$ 1,594 classified in Other taxes payable - current liabilities and R$ 7,904 in Special tax payment installments - PAES Ivlly-~II~l Property, IlaUlllll~b· plant and equipment are pledged in guarantee of R$ 1,925. F-33 of this fiscal program, in the amount Brasil Sul - RES - Credit Group (previously namedRedeBrasil Sul-RBS-Guarantors) Special-Purpose Financial Statements Combined at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 and Report of Independent Accountants F-34 O PricewaterhouseCoopers Rua Mostardeiro, Caixa Postal 800 8~ e 9" 2178 90430-000 Porto Alegre. RS - Brar;il Telefone Report of Independent Accountants To the Board of Directors (51) 3378-1700 i Fax(51) 3328-1609 and Stockholders Rede BrasilSul - RES - Credit Group (previouslynamed Rede BrasilSul - RES - Guarantors) 1 We have audited the accompanyingspecial-purpose combined balance sheets of Rede Brasil Sul - RES - Credit Group (previouslynamed Rede Brasil Sul - RES - Guarantors) las defined in Note 1) as of December 31, 2006, 2005 and 2004, and the related special-purpose combined statements of operations, of changes in stockholders' equity and of changes in financialposition for the years then ended. These special-purpose combined financial statements are the responsibilityof the company's management. Our responsibilityis to express 2 an opinion on these special-purpose combined financial statements. We conducted our audits in accordance with approved Brazilianauditing standards which require that we perform the audit to obtain reasonable assurance about whether the financial statements are fairlypresented in all material respects. Accordingly,our work included, among other procedures: (a) planningour audits taking into consideration the significance of balances, the volume of transactions and the accounting and internal control systems of the companies, (b) examining,on a test basis, evidence and records supporting the amounts and disclosuresin the special-purposecombinedfinancialstatements,and (c) assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall presentation of the special-purpose combined financial statements. 3 Inour opinion,the special-purposecombinedfinancialstatementsauditedby us present fairly,in all material respects, the combined financialpositionof Rede Brasil Sul - RES Credit Group at December 31, 2006, 2005 and 2004, and the combined results of their operations, the combined changes in stockholders' equity and the combined changes in their financial position for the years then ended, prepared for the purposes described in Note 2, in conformitywith accounting principlesgenerally accepted in Brazil. F-35 b Rede Brasil Sul - RES - Credit Group (previouslynamed Rede Brasil Sul - RES - Guarantors) 4 We have also reviewed the accompanying special-purpose combined financialstatements of Rede Brasil Sul - RES - Credit Group as of and for the quarters ended March 31, 2007 and 2006. These special-purpose combined financialstatements are the responsibilityof the companies' 5 management. We conductedour reviewsin accordancewithstandardsapprovedby the Instituteof IndependentAuditorsof Brazil(IBRACON). A reviewconsists,principally, of applying analytical procedures to financialdata and making inquiriesof persons responsible for financial and accounting matters regarding the criteria used to prepare the financial statements. A review does not represent an audit conducted in accordance with approved Brazilianauditingstandards,the objectiveofwhichis the expressionof an opinionregarding the financialstatementstaken as a whole.Accordingly, we do not express such an opinion. 6 Based on our reviews, we are not aware of any material modificationsthat should be made to the special-purpose combined financialstatements mentioned in paragraph 4 for them to be fairlystated in conformity withaccountingprinciplesgenerallyaccepted in Brazil. Porto Alegre, May 25, 2007 PricewateihouseCoopers Auditores Independentes CRC 2SP000160/0-5 "F" RS Carlos Contador Biedermann CRC 1RS029321/0-4 (Copy of the originalmanuallysigned) F-36 mgNCUmN(DoPN(DO) ~~~O~~NO~ONO 'I'I 4i P mmrcoomcm N U)NI- (DN """868~ ~""OPO"O~N366 m~~~m~mr` mC~NmOO~N~~NN n N Om~~~~~~,m ~,om~-~~~N d~~,~o~ru~~om mrN~ m~~m~~mmmm~m ooN mh~lcOh ~;~ooommrc~n N~VIPr. o m e. f e e MB~~ ~nmN N ~ =PF I:U ='= I g ·5 m m m g m~ ra g rza a -e " mn o NOgCNV)(D " 3xs%,,, ~gCgp~ O1OON ai a s ,,~oomm ~ ~Lxvpm ooloo B O ~ C U) 'D,, Nor~ore C N(OQ)mm mcuP~uU, Cm E Om dl n E r a E d .· , lo~Du, r q NC Nm (D or ~$8LO E m s N a, a? 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L Q) ~m oeQ ~ ~ c Z 4: u, a m bm P, ol s m n ~ E o r m ~L E 8 o 0 rcu ~ F-39 a ~ocn~o C~ ga~ a b ~ co2"q rE oo~ e~E9, rucu ~ oo 4)~ cu ~) Q)r o ~u ~O eE o~Q -Icnl U)IC S N 4 9 o a3 s " ~cu 4 ~il91 ~co r ~u ~ ") co co g ca, Incu 91 cor- ,, P`O aoo 4 "i w eE oV~OO I o b $ $ ]I i "/ 1 ~o (s 03 cu ~(r, D LLV) N to $ ~ S In ~u cu M t In In ru 1cu ·o W r c E d d u, o c m .r_E i~F o Q) E B p, u, ~J o o r a o o c~ u,l o a, E m U) 9) U) (U C m e~Lg =I, go <3e · 'O f~ c ·rJ o r S m~ C~E) 3a ac S (Oh ~s a, E $ L d t~c~ Ov, V) m L~L EO = · .k V) or Q) cn~ij ~ a L CL~ Q) c~a U "~ Q) Pi Q~ L ~s3 s o .· O r r ~ ~E E, m m c ~cr J~ > m 3 a m >r o s~ "'' L O OCP 6 o oB~-0 Og oP! O CUa~N"IQRI r .s E ~tii 8 c O t E r .P E O ~tii 8 o r ~~z ~ ~Q, cnE r (D ,ac ~ .a~ ~ ~~z m ~a ·'' d ~i;J m n m rIF-40 Brasil Sul - RES - Credit Group Special-Purpose Changes Combined Statement of in Financial In thousands of Brazilian Position reais Years ended December 3! 2006 Financial resources were provided by: Net income for the yearlquarter Expenses (income) not affectingworkingcapital: Deferred income taxes Provision forcontingencies 57,893 19.393 9.338 (5,866) (2.572) (665) 633 Depreciation andamortization Amortization ofnegative goodwill 23.746 (188) Netbookvalueofpermanent assetdisposals 5,460 152.906 in long-term receivables Netincreaseinlong-termliabilities 58.767 Stocksubscription rightsold Transferofdeferredincometaxes fromlong-termto assets (1.430) (511) 596 4.224 23,016 (341) 395 108.036 63,856 910 (3,810) (296) 6.593 29,657 ~433) 1.318 88.350 159.875 7.800 Transfer frominvestments tomarketable securities 1,963 Negative goodwillon acquisitionof RES Online Ltda Total funds provided 612 42,339 148.420 52.628 81 2.035 31.015 Deferred charges Transfer from investments to liabilities 21,870 14.283 108 349 Mergerwithsubsidiary 5 (185) (122) 279 16 6,224 6.155 (40) 568 2.082 25.357 1.318 38.231 16 1.605 5.493 28.280 45.703 24.888 118 3.517 8.137 7,322 3.437 Property, plantandequipment Deferred charges 82 8.388 Long-termliabilities 3.149 Decreaseinadvancesforfuturecapitalincrease 40.667 Interest on capital Dividends used Increa~e (decrease) invo*ing capital 14.058 4.010 (11,504) 3.247 1,954 52.000 33.500 20.210 136,255 101.145 239.537 s5.lsl 71.857 10.188 (15~402) 43.682 10.839 34.864 assets Attheendoftheyear/quarter 425.487 267,739 Atthebeginning oftheye'ar/quarter Current 3.602 6 538 Long-term receivable Inves~nents Current 26.270 1,963 221,436 172.802 249.725 Property, plant and equipment funds 2006 1.500 Financial resources were used for: Net increase in long-term receivables Net decrease in long-term liabilities Investments Total 2007 (Unaudited) ~Unaudited) 87.953 1.744 277 Provision forlossesoninvestments current 2004 111.870 26 Equity inloss (eamings) ofsubsidiaries Provision forlossesonfiscalincentives Net decrease 2005 Reclassified auarters ended March 31 267.739 liabilities Attheendoftheyear/quarter Atthe beginningof the year/quarter 159.490 392.194 289.833 108,905 425.487 267,739 157.748 108.249 274.465 201,898 165.306 256.574 189.128 165.306 124.909 274.465 201,898 (17.891) (12.770) 201.898 Increase (dRrease) inuualing capital 159.490 50.585 (33.293) 22.094 72.567 36.592 40,397 ss,lsl_ 71.85/ 10.188 (15,4021 34.864 Theaccompanying notesare an integralpartofthesespecial-purpose combined financial statements. F-41 Brasil Sul - RES - Credit Notes to the Special-Purpose Group Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands 1 of Brazilian reals, unless othemise stated Business The followingcompanies (CreditGroup) are included in these special-purpose combined financial statements. The Credit Group is under the common control of three family groups. Televisso Ga6cha S.A., RES TV de Floriani~polis S.A. and Rgdio Galicha S.A. are indirectly owned by RES Comunica~BesS.A. (untilDecember 2005, ownership of the companies was held directly by the three family groups), a holding company ultimately owned by the three familygroups which also control RES - Zero Hora EditoraJornalistica S.A. The Credit Group is operated, together with RES ComunicaG~esS.A., its subsidiaries and future subsidiaries, as one integrated unit, the RES Group. The Credit Group is located in the states of Rio Grande do Sul and Santa Catarina, Brazil, and is engaged in three areas of the media business: Newspaper RES publishing - Zero Television Televisso i-lora Editora Jornalistica S.A. broadcasting Galicha S.A. RES n/ de Florian6polis S.A. Radio broadcasting Rgdio Galicha S.A. RES ComunicaCbesS.A. was established in 2005 withthe objective to integrate the main businesses that are owned by the three family groups. The stockholders of RES Comunica~bes S.A. started to performthis integrationin January 2006 and intend to complete it during 2007 through the acquisitionfrom the familygroups of direct and indirectcontrol over the main operational companies ("futuresubsidiaries").The RES Group also includes other companies which do not form part of these special-purpose combined financialstatements. Most of the RES Group companies are located in the states of Rio Grande do Sul and Santa Catarina, Brazil, and operate principally in four areas of the media business (radio and television broadcasting, internet and newspaper publishing). On April 15, 2004, the shareholders decided to change the company's name from Zero Hora Editora Jornalistica S.A. to RES - Zero Mora Editora Jornalistica S.A. Duringthe quarter ended March 31, 2007, the management decided to change the name of the combined group from Rede Brasil Sul - RES - Guarantors to Rede BrasilSul - RES - Credit Group. F-42 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othennrise stated The BrazilianFederalConstitutionestablishesthat, as fromApril2002,foreignstockholders may own a maximumof 30% of the capital of newspaper publishingand television and radio broadcasting companies. TheFederallicensesrequiredforthetelevision andradiobroadcasting activities are granted by governmentauthoritiesand are approvedby the FederalCongress.Moreover,television and radio broadcasting licenses are granted separately by location. The licenses are non- exclusive,expireaftera predeterminedtime-limit (fifteenyears fortelevisionand ten years for radio)and are renewableuponapplicationfora similarperiod.The CreditGroup'scurrent licensesexpireon differentdates: RgdioGalichaS.A.in 2003 (expired),and Televis~o GaOchaS.A.and RESn/ de Florian6polis S.A.in 2007. RgdioGaQchaS.A.has appliedfor renewalof its license,whichis pendingapprovalbythe governmentauthorities.Management expects that RgdioGalichaS.A.'slicensewillbe renewed,since it is in compliancewithall requirements necessary for this approval. Until a decision is made on Rgdio Galicha S.A.'s renewal application, it may continue to use the license. Televis~o GaQcha S.A. and RES n/ de FlorianC~polis S.A.have appliedfor renewalof theirlicenses.Managementexpectsthe companies' licenses will be renewed. Throughoperatingagreements, thetelevision broadcasting companiesformpartofthe largest Braziliannationaln/ network,the Globenetwork.Althoughthe networkagreementshave limitedterms,such agreementsare renewable,and each companyhas maintainedits network relationshipcontinuouslyformorethan thirty-five years. Televis%o GalichaS.A.andRESn/ de Florian6polis S.A.maintainoperatingagreementswith other televisioncompaniesin the states of RioGrandedo Sul and Santa Catarina, respectively. These independent affiliatedstations are required to broadcast the national and regional network programs and advertisements and are entitled to the revenues from local advertisements soldbythem.Inexchangeforthe nationalandregionalprogramming, the affiliated companiesare chargeda programming fee basedon theirnetrevenue(until December2005,the programming feewascalculated as a reimbursement of programming costs, proportionalto each affiliate'snet revenue). F-43 Brasil Sul - RES - Credit Notes to the Special-Purpose Group Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands 2 of Brazilian Special-Purpose reals, unless othenrvise stated Combined Financial Statements Accountingprinciplesgenerally accepted in Brazildo not address the combination of financial statements. These special-purpose combined financialstatements have been prepared solely for the purpose of presenting the combined financialposition and related combined results of operations, changes in stockholders' equity and changes in financial position of the group of companies which are guarantors under the Global Medium-TermNotes Program of RES Participa~bes S.A., a holdingcompany withinthe RES Group with investments in subscriber television companies and in the telecommunications area. As there are no intercompany shareholdings, all capital and reserve accounts are added together, although all account balances, revenues and expenses from transactions among the Credit Group have been eliminated on combination. The four companies included in the special-purpose combined financial statements are the main media companies 3 Presentation of the RES Group. of the Combined Financial Statements The accounting records of each of the Credit Group companies are maintained in accordance with Braziliancorporate and tax legislation,and the financial statements have been prepared therefrom, includingcertain adjustments to conformwith accounting principles generally accepted in Brazil("BrazilianGAAP"),which originallyrequired the presentation of financial statements under the constant currency methodology,as a means of depicting more clearly the impacts of inflation on a company's financial information. Under the constant currency methodology,all financialstatement balances, including comparative balances from prioryears, are presented in reals of constant purchasing power using as the basis for restatement the officialindex Unidade Fiscal de Refe~ncia - UFIR (FiscalUnitof Reference)up to December31, 1995and the variationof the jndiceGeralde Pre~os - Mercado - IGP-M(General MarketPrice Index) as from that date and up to September 30, 2001. Thereafter, the Credit Group suspended the price-level restatement of their financial statements, since the cumulative inflation rate over the preceding 36-month period was less than 100%. The reported amounts of non-monetary assets, such as inventories and permanent assets, and stockholders' equity include price-level restatement as from the date of origin up to September 30, 2001. F-44 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) Inthousandsof Brazilianreals,unlessotherwisestated The price-levelrestatementof financialstatementsfor bothstatutoryand tax purposeswas abolishedas fromJanuary1, 1996,by Law9249.Althoughthe CreditGroup'sstatutory accounting recordsas fromJanuary1, 1996do notreflectanyprice-level restatements of permanentassetsandstockholders' equityaccounts,proformaadjustments havebeenmade to the financial statements to reflect these restatements through the constant currency methodology.These restatementsno longerhave any tax effects,but pro formatax adjustments havebeenmadeto thefinancial statementsto assureconsistency withprior periodsas wellas to reflectfuturedeferredtaxeffects,as explainedinthe following paragraph. AsfromJanuary1, 1996,thefulltaxeffectofthe net resultofthe restatementswastakento incomethrougha charge/creditto incomeat the currenttax rates, in order to maintain comparability withthe priorperiods.Thedeferredtaxliability on the price-level restatementof permanentassets has beenshownas a long-term liability andwillbe reversedto incomeas the price-level restatement is realizedthroughthe disposalofinvestments andthedepreciation or disposalofproperty, plantandequipment. Ontheotherhand,the deferredtaxassetlliability arisingfromthe restatement ofstockholders' equityaccountsis reversedandcharged currently to retainedearnings,sincethisamountdoesnotrepresentan actualtaxbenefit (cost). (a) Reclassification of liabilities On March31, 2007 RES- Zero HoraEditoraJornalisticaS.A.reclassifiedpart of the balance of accountspayablerelatingto investmentacquired,amountingto R$ 14,207,fromcurrentto long-termliabilitiesin connectionwithmanagement'sintentionto pay this balanceonlyupon thefinalmaturity. Thepriorperiodhas beenreclassified accordingly. Thereclassification for December 31, 2006 amounted to R$ 13,672. 4 Significant Accounting Policies (a) Determination of resultsof operationsand currentand long-termassets and liabilities Resultsof operationsare determinedon the accrualbasis and includegains and losses on monetaryitems,and, whereapplicable,the effectsof adjustmentsof assets to marketor net realizablevalues.Netexchangegainsand losses on foreigncurrencyliabilitiesare recordedin financialexpenses.Shares classifiedas marketablesecuritiesare recordedat marketvalue. F-45 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and Rllarch31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated Revenues from advertisingand classified advertisements are recorded when the related broadcastingor publishingtakes place.The gross advertisingrevenueof the television broadcasting companiesincludesthe saleofadvertising negotiatedlocally, as wellas that negotiatedby the Globenetworkinthe television companies'nameforregionalbroadcasting, according to the network agreement(Note1).A percentageofthegrossadvertising revenue, as definedinthe networkagreement,is chargedmonthlyby the nationalnetworkas programming costs. Revenuefromcirculationrelatesto sales of newspapersat newsstandsand street vendors and is recorded at the time the newspapers are sold to consumers. Subscription revenuerelatesto salesofnewspapersbysubscription. Deferredsubscription revenue,whichrepresentsamountsbilledto customersin advance of newspaperdeliveries,is appropriated to revenues over the term of the subscription. Non-cashexchangesof advertisingforservicesor goods are recordedat marketvalue in both revenues (6) and expenses. Inventories Inventories are statedat the averagepurchasecost,whichis lowerthanreplacement costor net (c) realizable Permanent value. assets Investmentsin entitiesin whichthe CreditGroup'sownershipinterestexceeds 20%are accountedforon the equitymethod.TheinvestmentinA NoticiaS.A.EmpresaJornalisticawas accountedforon the equitymethodup to its mergerintoRES- ZeroHoraEditoraJornalisticaS.A., including goodwill basedon expectedprofitability. The otherinvestmentsare stated at cost, less provision for estimated losses. Property, plantandequipment arestatedat costplustheeffectsofrevaluations ofthemajority ofland,buildings, printing pressesandaccessoriesoftwoofthe companiesincludedinthe combination (Note12).Depreciation ofproperty, plantandequipmentis computedon the straight-linemethodat the rates shownin Note12,whichtake intoconsiderationthe estimated useful lives of the assets. F-46 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Statements at December Combined 31, 2006, 2005 Financial and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othennrise stated (d) Income taxes Income tax is calculated at the standard rate plus supplementary rates totaling 25%. Social contribution tax is calculated at the current rate of 9% applied to adjusted income before income tax. Deferred income taxes are calculated on temporary differences and tax loss carryforwards (Note 17). Tax losses do not expire but may be used to offset only up to 30% of future taxable income in any year. The tax legislation allows the television and radio broadcasting companies financial related statements to record free electoral advertising, (e) Swap receivables and deduct tax credit included in these to the reimbursement of as shown in Note 17 (a). and payables The assets/liabilities are recorded date (accrual basis). 5 an income at cost plus accrued rate differences up to the balance sheet Cash and cash equivalents December 2006 2005 31 2004 March 2007 (Unaudited) Financial investment Cash funds 75,619 499 76, 118 Financial investment 126 31 2006 (Unaudited) 50,634 106 592 240 782 832 718 240 511416 938 funds earn interest at rates near the CDI (Interbank Certificate of Deposit) rate. F-47 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands 6 Trade of Brazilian reals, unless otheMlise stated accounts receivable December 2006 Subscriptions Advertising March 31 2004 2007 2006 (Unaudited) (Unaudited) 12,248 78,370 9,883 61,710 8,793 58,935 15,294 65,941 9,978 56,228 Classified advertisements 9,235 8,774 7,572 9,979 9,404 Checks in collection 1,016 1,004 947 986 958 655 723 454 776 Promissorynotes Endorsed securities Others Allowancefordoubtfulaccounts 1.883 3,527 (3,995) 102,939 7 2005 31 1,786 3,375 549 1,162 3,925 1,133 4,121 1,444 3,707 (3,899) (3,804) ~4,075) (3,897) 83,282 78, 151 94.062 78,371 Inventories December 2006 2005 31 2004 March 31 2007 2006 (Unaudited) (Unaudited) Newsprint 7.490 13.233 7,471 7.843 8.181 Maintenance materials 9.376 8.841 8,240 9.866 9.255 4.561 3.272 2.796 3,303 3.552 9.201 101 8,94? 6,618 5.980 Fascicles (inserts), video-cassette tapes andcompactdiscs(CD) Provisionfor losses Importsintransit(newsprint) (546) 30,082 F-48 (546) 24.901 ~960) 26,488 (546) 27.084 (546) 26,422 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands 8 of Brazilian reals, Related party transactions unless othennrise stated and balances December 2006 Assets 2005 Assets 31 2004 Assets March 2007 Assets 31 2006 Assets (liabilities) (liabilities) (liabilities) (liabilities) (liabilities) (Unaudited) Current assets - Related parties RES Administra~io e CobranFas Ltda. 179,241 Long-term receivables - Related companies RES Administra~o e CobranFas Ltda. A Noticia S.A Empresa Jornalistica. - Comercio Marcas Others Current e Licenciamento 27,564 1&1,340 151.379 168.019 5.411 154.413 5,411 517 878 995 (10.608) 164.495 5,411 878 688 151,209 5,411 505 878 971 103.218 5.411 459 878 883 878 705 de Ltda. liabilities -Related 132,670 2,507 RES Participa~ies S.A. RES Marketinge Inform8ticaLtda. RES Empresa de NA Ltda. AgBnciaRES de Noticias Ltda. TelevisBoAno Uruguai S.A. RES (Unaudited) 150 176 136 374 124 79 153 208 139 358 174,305 159,484 100.444 175.374 162,711 companies Otherrelatedcompanies (115) (105) (114) (126) (63) (63) (63) (63) Televisso TuiutiS.A. TelevisBoImembui S.A. Radio e N Caxias S.A. Radio e TV Umb~ Ltda. TV Coligadas de Santa Catarina S.A. Cia. Catarinense de Radio e TV TelevisBoChapec6 S.A. (lss) (313) (495) (213) (296) (366) (124) (Iss) (313) (495) (213) (296) (366) (124) (169) (313) (495) (213) (296) (366) (124) (lss) (313) (495) (213) (296) (366) (124) (169) (313) (495) (213) (296) (366) (124) RES TV Santa CruZ Ltda. RES TV Santa Rosa Ltda. (229) (197) (229) (197) (229) (197) (229) (197) (229) (197) Others (283) (283) (283) (283) (283) (2,685) (2,685) (2.685) (2.685) (2.6851 Long-term liabilities - Advance for future capital increase Stockholders Long-term liabilities - Related ~63) companies F-49 Brasil Sul - RES - Credit Notes to the Special-Purpose Group Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 3?, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othenrvise stated Years ended December 31 2006 Income 2005 Income Quarters 2004 Income ended March 31 2007 Income 2006 Income (expenses) (expenses) (expenses) (expenses) (expenses) (Unaudited) Financial expenses RESAdministra~ao e CobranFasLtda. Financial (1,331) (1,046) 11.279 473 income RESParticipa~desS.A. 16,607 Canal Rural ProduFbes Ltda.. - ComBrcio e Licenciamento 4,405 4,004 21 15 29 166 RES Empresade NA Ltda. TelevisBoAltoUruguaiS.A. RES (Unaudited) 63 122 58 111 208 de Marcas Ltda. PlanejarProcessamentode DadosLtda. Others 17 14 14 (130) 29 30 217 118 16.708 11.709 1.146 1,023 1.072 1,054 1,014 11.054 9.603 7.052 6.934 12.446 _ _ 13.083 795 622 167 6 1 4 (130) 8 3.930 Depreciation (reimbursement) Other RES Group companies Operating cost (reimbursement) Other RES Group companies Network agreement Otherrelatedcompanies General and administrative (reimbursement) 31,979 expenses OtherRESGroupcompanies (a) 2.896 RES Administra~goe Cobran~as Ltda. is a group company which functions as a treasury department,carryingout allcollectionsand makingall paymentson behalfof the companiesof the RES Group. Except as described in the next sentence, the balances of receivables from this company bear no interest and are shown in current assets because the funds held by this company on behalf of the group companies are readilyavailable. At December 31, 2004 there is an additional liabilityof R$ 10,608 shown as reduction or long-term assets which bears interest (b) calculated at market rates. Loans to and from other related companies bear interest calculated at market rates. Advances for future capital increase and loans to RES Marketinge Inform~ticaLtda. and AgQnciaRES de Noticias Ltda. bear no interest. Some of the balance with RES Participa~des S.A. (December31, 2006 and 2005- R$ 18,803;December31, 2004- R$ 16,836;March31, 2007 and 2006 - R$ 18,803) bears no interest. F-50 Brasil Sul - RES - Credit Notes to the Special-Purpose Group Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated (c) The Credit Group has guaranteed the first and second tranches, amounting to US$ 50,000 thousand and US$ 125,000 thousand, respectively, of a US$ 200,000 thousand Global Medium-Term Notes Program issued by RES ParticipaC~es S.A. in December 1995 and in March 1997, with f~nalmaturityin December 2003 and April1, 2007. The first tranche was fully settled in December 2003. In connection with this Program, the Credit Group is required to observe certain negative covenants. All of these covenants are being observed. The first and second tranches were fully paid in December 2003 and March 2007, respectively. On November 25, 2005, RES Participa~bes S.A. contracted an interest rate swap in the notional amount of R$ 129,744 (equivalent to US$ 58,155 thousand on that date) exchanging the U.S. dollar exchange variation for the CDI interest rate less 5.00% p.a. This contract was terminated in March 2007 and is guaranteed by the Credit Group. With the objective of reducing the refinancing risk to which the RES Group was exposed in 2007, on August 2, 2004, RES Participa~Bes S.A. and RES - Zero Nora Editora Jornalistica S.A. successfully completed an Exchange Offer Program under which some of the holders of the second tranche of Notes issued by RES Participa~Bes S.A. exchanged those notes for new ones issued by RES - Zero Hora Editora Jornalistica S.A. In accordance with the terms of the Exchange Offer, for each US$ 1,000 principal amount, the noteholder received US$ 150 in cash and US$ 850 in notes issued by RES - Zero Nora Editora Jornalistica S.A., with final maturity in April 2010 and interest of 11% p.a. payable in April and October of each year. The new notes (the "2010 Notes") are jointly and severally guaranteed by Televis~o GaQcha S.A., RES TV de Florian6polis S.A. and Rgdio GaQcha S.A. Overall, notes with an aggregate face value of US$ 66,845 thousand were exchanged under the terms of the Exchange Offer. On November 25, 2005, RES - Zero Hora Editora Jornalistica S.A. contracted an interest rate swap in the notional amount of R$ 126,762, equivalent to US$ 56,818 thousand on the inception date, exchanging the U.S. dollar exchange variation for the interbank certificate of deposit (CDI) interest rate less 5.04% p.a. the swap is guaranteed by Rgdio Galicha S.A., together with TelevisBo Galicha S.A. and RES n/ de FlorianC~polisS.A. The due date of the contract is March 30, 2010. Under the terms of this swap, either party is required to settle on preestabilished dates (March 27, July 27 and November 27 of each year) the excess of the aggregate (d) fair value of the swaps. In April 1996, Televis~o Ga~cha S.A. and RES TV de FlorianC~polisS.A. received deposits (R$ 2,685) from the affiliated stations to guarantee the companies' equipment used by these affiliated stations; these are recorded as long-term liabilities. F-51 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands (e) RES - Zero NoraEditoraJornalisticaS.A.has guaranteeda loanamountingto R$ 8,000, equivalentto US$3.575thousand,receivedby RESAdministra~oe Cobran~asLtda.in November (f) of Brazilian reals, unless othemrise stated 2005 and finished in May 2006. RES- Zero NoraEditoraJornalisticaS.A.,togetherwithTelevis~oGaOchaS.A.,has guaranteedlocalcurrencyloansamountingto R$ 23,375receivedby RESAdministra~%o e CobranCasLtda.in July2003withfinalmaturityin July2006(December31, 2005 - R$ 6,818; December 31, 2004 - R$ 18,505).Accordingly,RES Administra~o e Cobran~as Ltda. completed its settlements on the preestablished dates. (g) Televis~oGalichaS.A.has guaranteedlocalcurrencyloansamountingto R$ 10,000received by RESAdministra~~o e Cobran~asLtda.in December2005and withfinalmaturityin December 2007 (December 31, 2006 - R$ 7,059). (h) RES - Zero NoraEditoraJornalisticaS.A.has guaranteedlocalcurrencyloans amountingto R$ 15,000 received by RES Administra~o e Cobran~as Ltda. in March 2006 with maturityin March (i) 2008. Televis~o GaQcha S.A. together with RES - Zero Hora EditoraJornalistica S.A., has guaranteed local currency loans amounting to R$ 15,000 received by RES Administra~~oe CobranCas Ltda. in May 2006 with final maturity in May 2008. (j) RES - Zero HoraEditoraJornalisticaS.A.has guaranteedlocalcurrencyloans amountingto R$ 10,000receivedby RESAdministraC~o e Cobran~asLtda.in April2006withmaturityin April 2007. (k) Incomeand expenses on transactionsamongthe RESGroupcompaniesare allocatedamong the companiesthat benefitfromor incurthe incomeand expenses usingbases that may not necessarilybe the same as those thatwouldhave been appliedifthe transactionshad been made with unrelated parties. UntilDecember 2005, the RES Group also included other affiliated television and broadcast (I) companies. On December26, 1996,RES- Zero HoraEditoraJornalisticaS.A.,TelevisBoGalichaS.A. and Rgdio Galicha S.A. transferred all their trademarks registered with the Institute Nacienal de PrepriedadeIndustrial- INPI(NationalIndustrialPatents Institute),whichalso includethose of RES TV de Florian6polisS.A., to another RES Group company, RES Participa~bes S.A., free of charge. RES ParticipaCdesS.A. was entitled to collect royalties from all RES Group companies on their net operating revenues, calculated at 3.5%. F-52 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othemrise stated On September24, 2004,the CreditGroupsettledin advancethe royaltiesto be incurred duringthe ten years fromJanuary2005throughoutDecember2014.Thispaymentto RES Participa~es S.A.was calculatedas the net presentvalueof the royaltieson the projectednet operating revenues of each company for the period. (m) Televis~oGabchaS.A.and RESn/ de Florian6polis S.A.are reimbursedfor administrative and general expenses incurred on behalf of other RES Group companies. UntilDecember 2005, the RES Group included other affiliatedtelevision companies, which also reimbursed administrativeand generalexpenses and operatingcosts incurredby the companies,as well as depreciation expenses related to the equipment used by these affiliatedcompanies. Rgdio Galjcha S.A. is reimbursed for administrative and general expenses incurred on behalf of other RES Group companies. UntilDecember 2005, the RES Group included other radio and broadcast companies, which also reimbursed depreciation expenses incurred by the company in 2005. As from January 2006, the amounts reimbursed to and by the company reflect the changes in the shareholding structure mentioned in Note 1. Some of the RES Group companies are reimbursed by RES - Zero Nora Editora Jornalistica S.A. for administrativeand general expenses incurred by them on behalf of RES - Zero Nora Editora Jornalistica S.A. As from January 2006, the amounts reimbursed by RES - Zero Nora Editora Jornalistica S.A. reflect the changes in the shareholding structure mentioned in Note 1. 9 Taxes recoverable December Excise tax (IPI) 31 March 2007 (Unaudited) 31 2006 2005 2004 2006 (Unaudited) 1,669 2.133 1,274 1,921 2,305 26 1.748 577 Withholding income tax on financial investments (IRRF) Social contributions 609 on revenues (PIS/COFINS) 784 Other 829 22 222 158 49 65 3,084 2,355 1.458 4.547 2,947 F-53 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated 10 Judicial deposits and fiscal incentives December 2006 Fiscal incentives Provision for losses 2004 31 2007 2006 (Unaudited) (Unaudited) 4.052 4,052 4,052 4.052 4,052 (4,052) 14.909 (3,775) 14,423 (3,178) 14.777 (4.052) 16.502 (4.052) 14,664 14.909 14,700 15.651 16,502 14,664 Current assets (89) Long-term receivables 14.820 (89) 14,700 15.651 16.413 14.664 Investments December 2006 A Noticia S.A Empresa Jornalistica Goodwill on acquisition of A Noticia S.A. Empresa Jornalistica Net Servi~os de Comunica~o S.A. Provision for losses Negative goodwill on acquisition of RES Online Ltda. Provision for losses 2005 31 March 2004 31 2007 2006 (Unaudited) (Unaudited) 4,564 4.499 (13,900) 64,279 31,006 (27,070) (538) Fiscal incentives ~726) 31,835 (27.070) (1.067) 4,499 (686) 4.498 4.499 (5.132) (4.499) (5.148) (4.499) 2,723 2,219 1,708 2,858 2,341 51.930 5.429 91630 2.274 1.655 on fiscal incentives and other inves~nents Other investments (a) March on fiscal incentives Judicial deposits 11 2005 31 (275) The investment in Net Servi~os de Comunica~go S.A. (formerly known as Globe Cabo S.A.) consists of 3,757,947 preferred shares on December 31, 2005 (December 31, 2004 - 3,665,417 preferred shares), representing approximately 0.1% of the investee's total capital, 3,548,152 of which were acquired by RES - Zero Nora Editora Jornalistica 2001 from RES Participa~des S.A. for R$ 31,753. F-54 S.A. on August 24, Brasil Sul - RES - Credit Notes to the Special-Purpose Group Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated Net Senri~os de Comunica~~oS.A. (NET)is a holdingcompany for several subsidiary companies which operate cable and microwaven/ systems in the main Braziliancities. Duringthe quarter ended March 31, 2006, RES - Zero Hora Editora Jornalistica S.A. sold 1,883,825 NET preferred shares, recording a gain of R$ 353 as non-operating income. The remaining 1,874,122 NETpreferred shares were reclassified from Investments to Marketable Securities due to management's plans to sell them in the short term. These shares were transferred at their carryingvalue of R$ 1,963 and the unrealized gain of R$ 452 was recorded in reversal of provision for losses on investments. During the quarter ended June 30, 2006, RES - Zero Hora Editora Jornalistica S.A. sold the remaining NET preferred shares, recording a gain of R$ 244 as non-operating income. (b) On January 17, 2004, Televis~oGaljcha S.A. contributedadditional capital of R$ 2,035 to RES Online Ltda. At the same date, RES - Zero Hora Editora Jornalistica S.A. acquired from Televis~o Gadcha S.A and other related parties a 100% interest in RES Online Ltda. for. R$ 1,987. The acquisition price was based on an appraisal of statutory book value carried out by experts. As a result of this transaction, Televisso Ga6cha S.A. recorded a loss of R$ 460 from the difference between the carrying value of the investment and the sales price. As a result of this transaction, RES - Zero Nora Editora Jornalistica S.A. recorded negative goodwill of R$ 1,500 from the difference between the acquisition price of the investment and the shareholders' equity of RES Online Ltda., which will be amortized in approximately 7 years. On the same date, RES Online Ltda. was merged into RES - Zero Hora Editora Jornalistica S.A. In March, 2007, the negative goodwill balance amounting to R$ 538 was transferred to current (c) liabilities. On November 6, 2006, RES - Zero Nora EditoraJornalistica S.A. acquired a 99.08% interest in A Noticia S.A. Empresa Jornalistica, a newspaper publisher in the area of Joinville, state of Santa Catarina, for the amount of R$ 52,628, of which R$ 27,743 remains unpaid at December 31,2006. Because this company's net worth was negative R$ 11,651, goodwill of R$ 64,279 was recorded on the acquisition. The unpaid balance bears interest of 80% of CDI and has a final maturity in August 2008. F-55 Brasil Sul - RES - Credit Notes to the Special-Purpose Statements at December Group Combined Financial 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othennrise stated On December 31, 2006, the investment in A NoticiaS.A. Empresa Jomalistica is accounted for on the equitymethod,includinggoodwillbased on expectedprofitability, as presentedbelow: A Noticia S.A. Empresa Jornalistica Activity Networthon acquisitiondate Goodwillon acquisition Equityin losses (11,651) 64,279 (2,249) At December 31, 2006 50,379 In January,2007,RES- Zero HoraEditoraJornalisticaS.A acquiredthe remaining0.92% interest in A NoticiaS.A. Empresa Jornalistica for the amount of R$ 118. In the same month, the stockholders of the company and of A NoticiaS. A. Empresa Jornalistica (A Noticia), decidedto unifythe operationsby mergingA NoticiaintoRES- Zero HoraEditoraJornalistica S.A.The mergerwas based on an appraisalof statutorybookvalueat December31, 2006, as presented below (Unaudited): F-56 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Statements at December Combined Financial 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othennrise stated Assets Liabilities Current and net capital deficiency Current Cash and cash equivalents 114 Trade accounts receivable Inventories Taxes recoverable 5.742 259 76 Others 54 6.245 Accounts payable 903 Salaries and social security contributions Other taxes payable Commissions and bonuses payable Loans 1.643 720 645 104 Provision for contingencies Advances from customers 7.198 4.319 Others 714 Non-Current Long-term receivables 16.246 Deferredincometaxes Judicial deposits Others 2.447 and fiscal incentives 939 51 3,437 Non-Current Long-term liabilities Special tax payment installments-PAES 8.956 Advance for future capital increase 2,507 Loans Permanent Investments Property. 41 assets 28 plant and equipment 11.504 4.010 4.038 Net capital deficiency Capital Capital reserves 2.000 64 Revenuereserves Accumulated 861 losses (16.455) (14.030) Total assets In January, 13,720 Total liabilities and net capital deficiency 2007, goodwill of R$ 64,279 was transferred to deferred charges 13,720 and will be amortized in approximately 10 years, based on expected profitability, according to an appraisal carried out by an independent expert on November 20, 2006. F-57 ~mOcUv)~ =qs~~ 4oa ~ ,, ~ aO~c0~0~ rc~~~m~0 Z r ~I ~S~~~cu a d J~ s O ~I I (Y ZO ~OP~OC) O)rcg)N~N(O COO 18 I"P' ~~-~O E a o ~ '"i t gp1"i 1 "1 rPcO(O~CV~ ~ (1) o o h( r n~ n a r r n E m $ I $ o Z N oocu~cooooo r-ru~oocucucu a, ,~,o~m~ 030~V)~--~ ~~ too a ~ E m ~J,r 0 P ~o c a, m o o u, aDN~c3ot~um o o ~or-o~ncum h( n ~c3rcumoore oDr~~(O~ ~~ ·qo m a r u, o a, E oN .a. o $ o ~Y co~~c~ln~o (OOr~O~re CU (DO~OJN~Q) ~-~ O~t C L 0) (Z E I I a, n I a, p a~q tii Y (II E E g ~coolN~m B c~oo~~rc~ "Io03N00 Or~O) B YV OD O aO I $ o a tff ct u, a U ~E EO 4~ E "IB =I g~ o_ ILe (000COICQ) (DP-OQJQ)~ (DF)~(D~P- IDr-P~~~ ~cccuoo~ "g a~0 Or ~cl ~I ~O L O ~ m~ m OW o r ct o cn r a ~n o· ~d E P. uL Q) m~ E ~L C ti ~b m u C"I `O o $O OC m ~H ~ tn Pa, Ze tn rr S: E O cnm E a~ O R a, 'E u, 1"1 EB p~ pe V) r O (DO~NV)N r(3 u g ~E "" sE a 2 E " u, ·Cr.o "ObEyr~ E"~~n-e QF hi r F-58 o a, O~ .e"~n gO~~ jm'al>O ocu nE cu C~ O Brasil Sul - RES - Credit Notes to the Special-Purpose Statements at December Group Combined 31, 2006 Financial , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated (a) On December 31, 1994, RES - Zero Hora Editora Jornalistica S.A. and Televisso GaOcha S.A. decided to revalue their major items of machinery and equipment, and land and buildings and structures, respectively, based on appraisals carried out by independent experts. Deferred tax effects on the revaluation increments are recorded upon realization of the reserves. (b) On December 31, 2003, RES - Zero Hora Editora Jornalistica S.A. decided to revalue the printing presses and accessories based on an appraisal carried out by independent experts. Deferred tax effects on the revaluation increment are recorded upon realization of the reserve. 13 Trade accounts payable Trade accounts payable at December 31, 2006 include R$ 23,386 (December 31, 2005 R$ 21,332; December 31, 2004 - R$ 22,709 ; March 31, 2007 - R$ 19,636 ; March 31, 2006 - R$ 15,717) payable to foreign suppliers and indexed to the U.S. dollar. 14 Loans December Interest 2006 2005 31 2004 March 2007 (Unaudited) Foreign currency US$ 9.869 thousand (December 31. 2005 - US$ 1.526 thousand: December 31, 2004 - US$ 1.070 thousand; March 31.2007 - 31 2006 (Unaudited) LIBOR plus 0.2% to 1.8% p.a. plus commission US$ 5.482 thousand; March 31, 2006 - US$ 5.642 thousand) of 0.4% p.a. to 4.4X p.a. (i) 21.099 3,578 2.841 11.240 12.257 155,507 116.500 123.432 9,671 9.771 LIBOR plus 0.20/0 p.a. plus commission US$ 3.190 thousand of 1.55% Pa (ii) 7,467 US$ 58.585 thousand (Global Medium-Term Notes)(March 31, 2007 and 2006 - US$ 56.818 thousand) 125,253 137.128 US$ 4,663 thousand (March 31, 2007 - CIS$ 4.717 thousand: March 31, 2006 - US$ 4.497 thousand) US$ 467 thousand (December 31, 2004 - US$ 1,090 thousand; March 31. 2006 - US$ 312 thousand) 4,8% p.a. (iv) LIBOR plus 1.8% p.a. plus commission of 4.4% p.a. ~v) F-59 9.969 1.094 2.892 677 Brasil Sul - RES - Credit Notes to the Special-Purpose Statements at December Group Combined 31, 2008, Financial 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othemise stated December Interest Interest rate swaps (vi) 2006 3.884 (vii) Local currency 2005 31 March 2004 (4,681) 31 2007 2006 (Unaudited) (Unaudited) 26.615 2782 (46) 1,450 (5) 108% of CDI (viii) 82,267 84.364 76,283 84.405 108% of CDI (b) 39.886 71,378 36.985 64.922 110% of CDI (xiii) 60.650 62.673 110% of CDI (xiv) 40,433 41,782 105% of CDI 0x) 7.516 5.010 10,025 cDI plus 3% p.a. (xi) 11,230 25,828 7,514 493 673 829 446 630 145 15? 150 556 254 TJLP plus 4.5% p.a. (xii) Local currency- others 391.595 313,827 214.662 363.928 313.836 Current liabilities (91.199) (58.326) (23,017) (85.155) (61.852) Long-term liabilities 300.396 2551501 191.645 278,773 251,984 Long-term loans fall due as follows: December 2006 2005 2006 31 2007 2006 (Unaudited) (Unaudited) 66.674 66.594 167,128 35.901 35.901 35.823 147.876 180 180 105 177.433 56,036 66.600 156,137 41.944 35.902 35.824 138.314 300.396 255,501 191,645 278,773 251.984 Loans contracted by RES - Zero Hora Editora Jornalistica S.A are backed by sureties from RES Administra~o e Cobran~a Ltda. On March 31, 2007, part of the balance (R$ 2,671) is guaranteed (ii) 2004 March 13,747 2007 2008 2009 2010 (i) 31 by Televis~o Galjcha S.A. Loans paid in 2006. F-60 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands (iii) of Brazilian reals, unless othemise stated On August 2, 2004, RES - Zero Hora Jornalistica S.A. issued Global Medium-TermNotes in the amountof US$56,818thousand,withfinalmaturityinApril2010and bearinginterestof 11%per year,withsemiannualpayments.These Notesoriginatedfromthe ExchangeOffer Programmentionedin Note8 (c) and are jointlyand severallyguaranteedby Televis~o GaLichaS.A., RES n/ de Florian6polisS.A. and Rgdio GaLichaS.A. (iv) OnMarch29,2006RES- ZeroHoraEditoraJornalistica S.A.contractedforeigncurrency loansin amountof R$ 10,000(equivalentto US$4,497thousand)withfinalmaturityand payments (v) in May 2007. These loans are not secured. Theseforeigncurrencyloanscontracted byTelevidoGaljchaS.A.are guaranteedbythe related company RES Administra~~oe Cobran~as Ltda. (vi) On August 20, 2004, RES - Zero Hora EditoraJornalistica S.A. contracted an interest rate swap in the notionalamountof R$ 169,148(equivalentto US$56,818thousandon that date, matchingthe amountof the GlobalMedium-Term Notesmentionedin item(iii)above) exchangingthe U.S.dollarexchangevariationforthe CDIinterestrate less 2.30%p.a. Under thetermsofthe swap,eitherpartyis requiredto settleonpreestablished dates(April27, August27 and December27 of each year)the excess of the aggregatefairvalue of RES Zero i-loraEditoraJornalisticaS.A.'sand RESParticipaCbes S.A.'sswaps over a preestablishedlimitof US$26,000thousand(equivalentto R$ 62,735on August29, 2005). Thisswapcontractwasterminated on November 25,2005,andthe resultinglosswas recorded in financialexpenses (R$ 85,364). On the same date, RES - Zero Hora EditoraJornalistica S.A. contracted a new interest rate swap in the notionalamountof R$ 126,762(Nlarch27, 2007- R$ 117,273)(equivalentto US$56,818thousandon that date) exchangingthe U.S.dollarexchangevariationfor the interbankcertificateof deposit(CDI)interestrate less 5.04%p.a. (March27, 2007- 5.77%p.a.)Theduedateofthecontractis March30,2010.Underthetermsofthisswap, eitherpartyis requiredto settleon preestabiisheddates (March27, July27 and November27 ofeachyear)the excessoftheaggregatefairvalueoftheswaps.Accordingly, RES- Zero HoraEditoraJornalisticaS.A.completedits settlementson the preestablisheddates and the resultingloss was recordedinfinancialexpensesduringthe year ended December31, 2006 totalingR$ 15,053(quarterended March31,2007- R$ 9,015). F-61 Brasil Sul - RES - Credit Notes to the Special-Purpose Group Combined Financial Statements at December 31, 2006,2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated These contracts are guaranteed by Televis%o Galicha S.A., RES TV de Florian6polis S.A. and Rgdio Galicha S.A. December 2006 Interest rate swaps - liabilities (assets) Book value Fair value 2.663 2.304 2005 (4,681) (3.564) 31 2004 26,615 42.821 March 31 2007 2006 (Unaudited) (Unaudited) 890 656 (294) 572 On March 29, 2006, RES - Zero Nora Editora Jornalistica S.A. contracted a swap in the notional amount of R$ 10,000 (equivalent to US$ 4,497 thousand on that date) in connection with the contract mentioned in item (iv) above, exchanging the U.S. dollar exchange variation plus 4.8% p.a. for the 110% of the CDI, with final maturity in May 2007. On December 31, 2006, the book value of this swap was R$ 1,221 (loss). On March 31, 2007 the book value of this swap was R$ 1,892 (loss) (March 31, 2006 - R$ 248 (loss)). (vii) On January 31, 2005, Televisso Galicha S.A. contracted interest rate swaps in the notional amount of R$ 30,000 exchanging 108% of the CDI interest rate for the higher of the U.S. dollar exchange variation or 70% of CDI. The swaps were settled bimonthly and terminated in November 2006, resulting in a loss of R$ 47 recognized in the statement of operations. (viii) On November 25, 2005, RES - Zero Hora Editora Jornalistica S.A. contracted loans in the principal amount of R$ 84,185 with final maturity in May 2010 and monthly payments as from December 2006. These contracts are guaranteed by Televis~o Galicha S.A., RES n/ de Florianbpolis S.A. and Rgdio Ga6cha S.A. (December 31, 2006 - R$ 82,180) (ix) On January 31, 2005, Televido Galicha S.A. contracted a local currency loans, in the total amount of R$ 30,000 with final maturity in November 2006 and bearing interest of 108% of the interbank certificate of deposit (CDI), with bimonthly payments. Accordingly, the company completed its settlements on the preestablished dates. On November 25, 2005, Televis~o GaQcha S.A. contracted local currency loans in the total amount of R$ 40,815 with final maturity in May 2010 and bearing interest of 108% of the interbank certificate of deposit (CDI) interest rate, with monthly payments as from December 2006. These loans are guaranteed by the related companies RES - Zero Hora Editora Jornalistica S.A., RES n/ de Florian6polis S.A. and Rgdio Galjcha S.A. F-62 Brasil Sul - RES - Credit Notes to the Special-Purpose Statements at December Group Combined 31, 2006 Financial ,2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated (x) On March 27, 2006 RES - Zero Hora Editora Jornalistica S.A. contracted local currency loans in the notional amount of R$ 10,000 with final maturity in September 2007 and monthly payments as from October 2006. These loans are not secured (December 31, 2006 R$ 7,500). (xi) These loans were paid in 2006. (xii) The loans contracted by RES TV de Floriani~polis S.A have a final maturity in 2009 and interest based on the Taxa de Jures de Lengo Prate 4.5% p.a. - TJLP (long-temn interest rate) plus (xiii) On November 30, 2006, TelevisBo Gailcha S.A; contracted a loan in the notional amount of R$ 60,000 with final maturity in November 2010 and bearing interest of 110% of CDI. These loans are guaranteed by RES - Zero Hora Editora Jornalistica S.A. (xiv) On November 30, 2006, RES TV de Florian6polis S.A. contracted a loan in the notional amount of R$ 40,000 with final maturity in November 2010 and bearing interest of 110% of CDI. These loans are guaranteed by RES - Zero Hora Editora Jornalistica S.A. In connection with the above loans, RES - Zero Hora Editora Jornalistica S.A. and certain other RES Group companies, mainly engaged in TV and radio broadcasting activities, are required to observe certain negative covenants. All of these covenants are being observed. 15 (a) Stockholders' equity The stockholders financial statements of the individual companies are entitled to annual included in the special-purpose minimum dividends of not less than combined 25% of net income per the statutory financial statements, except for RES TV de Floriani~polis S.A. (6%); after appropriation to the legal reserve of an amount equivalent to 5% of the annual net income, up to the limit of 20% of capital, also per the statutory financial statements. In accordance with the by-laws of the companies, except in the case of RES TV de FlorianC~polisS.A., a statutory reserve for investments and working capital should be established based on 10% of net income after appropriations to the legal reserve and the minimum annual dividend. The total of the legal and statutory reserves cannot exceed the amount of each company's capital. At December 31, 2006, 2005 and 2004, the boards of directors decided not to make this appropriation. The respective Annual General Stockholders Meetings confirmed these decisions. F-63 Brasil Sul - RES - Credit Notes to the Special-Purpose Statements at December Group Combined Financial 31, 2006 , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) Inthousandsof Brazilianreals,unlessotherwisestated RES - Zero Hora Editora Jornalistica S.A., Televisso GaQchaS.A., RES n/ de Florianbpolis S.A.and RgdioGatichaS.A.didnot pay any interestto theirstockholdersin 2006. In2005 and 2004,onlyRESn/de Florian6polis S.A1andRBdioGaOchaS.A. paidintereston capital described in item (b) below, which exceeded the minimumannual dividend. At the Annual General Stockholders Meetings held on years 2007, 2006 and 2005, stockholders of Televis~oGalicha S.A., R~dioGaljcha S.A. and RES n/ de Florian6polisS.A. approved,respectively, theproposalofthemanagement to transferthebalanceofthe statutorynetincomefortheyears2006,2005and2004,afterdeducting legalreservesand dividends, to the Guaranty Reserve for Payment of Dividends. At the Annual General Stockholders Meetings of Rgdio GaQchaS.A. and RES n/ de Florianbpolis S.A.heldonApril30,2004,theirstockholders decidedto distribute dividends in the amountsof R$ 1,840and R~ 10.950relatingto the year 2003 and R$ 6,420(onlyfor RES n/ de Florianbpolis S.A.) relating to the year 2002. On September16,2004,RESTVde FlorianC~polis S.A.'sboardofdirectorsdecidedto distribute interim dividends totaling R$ 1,000 related to this year. On December 31, 2005, Televis~o GaQcha S.A.'s, Rgdio Galjcha's and RES TV de Florian6polis S.A'sboardsofdirectorsdecidedto distributedividendsin the amountof R~ 10,000, R$ 3,500 and R$ 20,000 relatingto the year 2005; decisions which were subsequently approved at the respective Annual General Meetings. On December 31, 2006, Televis~oGaljcha S.A.'s, Rgdio Ga6cha's and RES n/ de FlorianC~polis S.A'sboardsofdirectorsdecidedto distribute dividends intheamountof R$ 24,000, R$ 3.000 and R$ 25,000 relating to the year 2006. (b) Law9249introduced as from1996an optionforcompanies to calculatea nominalinterest charge on capitalinvestedand utilizedin operationsforthe period(definedas total stockholders'equityless revaluationreserves)calculatedon a pro rata basis based on the Taxade Joros de LongoPrate - TJLP(long-terninterestrate).Thischarge,limitedto 50%of the net income for the period or of retained earnings, is deductible for income tax purposes and socialcontribution, but is subjectto 15%withholding tax; such interestamountsmaybe used to increasecapitalor be paiddirectlyto stockholderseitheras interestor as prepayment of the minimum statutory dividend. TheCreditGrouphas takenthislatteroptionand has chargedtheamountsdirectlyto retained earnings and has considered them as additionaldividend distributions. F-64 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) in thousands of Brazilian reals, unless otherwise stated Retainedearningsavailablefordistribution are restrictedto the amountspresentedineach individual company'sstatutoryfinancial statements.Theindividual statutoryfinancial statements,preparedinaccordancewithaccounting principles prescribedbyBrazilian CorporationLaw,are the primaryfinancialstatementsfor purposesof incometax and dividend determinations. (c) Thesumofthe retainedearnings(accumulated losses)balancesineach of the Credit Group's statutoryfinancial statementsis reconciled to the balanceinthesespecial-purpose combined financial statements as follows: December 2006 Balances perstatutory financial statements 20.158 2005 31 2004 March 2007 (Unaudited) 31 2006 (Unaudited) (6.165) (26.190) 40,325 22,205 Adjustmentsarisingfromthe constantcurrency accounting methodology (9,110) (7.025) (4.540) (9.355) (7.360) 5,784 2.957 5,479 Further adjustments to conform the financial statements to accounting principlesgenerally acceptedinBrazil Balances inthese financial statements F-65 6.542 2.807 16.832 (6.648)(2_7,923) _36,927 20,324 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated 16 Financial income (expenses) Years ended December 31 2006 2005 Quarters 2004 Financial income 2007 ended March 31 2006 (Unaudited) (Unaudited) Earnings onfinancial investments 1,949 Interest onrelated companies (Note 8) 21 16.708 71.709 Exchange variations onassets Interestontaxes 4.700 1,380 Interestrate swap Otherfinancialincome 1.615 1,657 28,009 13 1,146 1,932 4.433 949 124 5 3,930 3,976 (288) 5,898 128 2,007 1.307 377 485 8.492 7.815 9.613 3.055 49 2.089 17.425 ~ Financial expenses Interest andcharges onloans andfinancing (41,858) (29.241) (13,657) (11,338) (11,794) Exchangevan'ationson loansand financing andlossfrominterestrateswap,net (13.584) (36.750) Interest ontaxes Interest onrelated companies (Note8) Other financial expenses (3.397) ~4,701) (2.443) (8,098) (1.951) (3.532) (538) (431) (3,446) (1.180) (1,331) (1,046) (2.762) (2,467) ~841) (74,785) (27,711) (15,007) (16,598) 17 Social contribution and income tax The concept of consolidated income tax returns for companies comprising a group, such as the RES Group, does not exist in Brazil. Each company maintains its own tax records and files its own tax returns. The tax information in the special-purpose combined financial statements and in this note is thus the summation of the information relatingto each of the fourcompanies includedin the special-purposecombinedfinancialstatements. F-66 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated (6) Reconciliationof social contribution and income tax Years ended December 31 ?006 2005 Quarters ended March 31 2004 2007 (Unaudited) (I) Social 2006 (Unaudited) contribution ~oenleq~efore taxes onincome 149.894 112.750 74.756 28.990 38.085 9 (13,491) 9 (30.148) 9 (6,728) 9 (2,609) 9 (3.428) Effects of permanent differences: Non~eductible expenses Non-taxableincome Effect of provisionfor losses on the investment (754) 76 inNetServi~os de ComunicaFbes S.A. (470) 197 (768) 234 (142) (120) 16 23 (80) (309) 1,073 Other (527) Expenseiorthsyear (~) Current (12,148) (2,548) Deferred (14.696) F-67 449 (168) ~8.8991_n.430) (2.815) __(3.834) (10.820) 1,921 (8,899)_ (8.273) 843 (3,242) 427 (2.964) (870) (7,430) (2.815) (3,834) Brasil Sul - RES - Credit Group Notes to the Special-Purpose Statements at December Combined 31, 2006 , 2005 Financial and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated (II) Income tax Years ended December 2006 2005 Quarters 31 2004 2007 (Unaudited) Income before taxes on income 149,894 Rate-% Effects of permanent differences: Non-deductible expenses Non-taxable for losses (28,188) 74.756 ~ (1,314) 553 31 2006 (Unaudited) 28,990 38,085 25 25 25 (18.689) (7.247) (9,521) (2.136) (65) 648 46 (7) 67 14.564 8,038 9.836 272 1,967 49 2.976 2.037 908 212 (487) on the investment in Net Servi~os de Comunica~es Other S.A. Expense for the year ~23,328) (15,898) (9.433) (6,782) (7.981) Current (16,538) (19.843) (11.162) (7,020) (5,249) Deferred (6,790) 3,945 1.729 238 (2,732) (b) Nature (I) Prepaid income (15.898~_ (9,433) (6,782)_ (7,981) 2,255 927 1,256 535 15 370 2,790 942 1.626 2,485 3,054 1.580 1,974 715 1.390 2.361 5.669 1,886 2.276 5.539 3,554 2.105 8,030 4,162 taxes - current Income tax Provision Current (23,328) of balances Social contribution (II) (37.473) 310 Credit for electoral advertising (Note 4 (d)) Effect of provision 25 (778) income 112,750 25 ended March for income taxes 358 358 - current liabilities Social contribution Income tax F-68 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands (III) Deferred of Brazilian reals. unless othennrise stated income taxes Years ended December 31 2006 2005 2004 Quarters 2007 (Unaudited) ended March 31 2006 (Unaudited) Social contribution Indexation of permanent assets TaxlosscanyfoMlards 12.153 Temporary differences Income 1,491 12.641 14,096 11.873 3.516 634 2,858 12.560 2.893 13.644 16,157 14,730 _14.731 15.453 40,350 42,713 48.295 41;845 tax Indexation of permanent assets TaxlosscanyfoMlards Temporarydifferences 4.438 Current assets 38,646 1,760 8,242 8,344 44,788 52.783 50,056 46,888 50.189 58.432 68.940 64,786 61,619 65,642 64.786 52,214 60,149 (7.800) Long-term receivables 10.070 50.632., 68,940 (9,405) (5.493) Long-term liabilities Social contribution Deferred social contribution on revaluation reserve 1,948 Indexation ofpermanent assets 2,080 Temporary differences Income 2.672 1.897 2,578 2.012 502 320 919 4,816 5,074 5.570 4,828 5.544 6.508 788 tax 2,286 2,286 2,202 2.250 704 Deferred income taxes on revaluation reserve Indexation ofpermanent assets 5.610 Temporary differences 2.190 F-69 6.353 7.422 7.160 5.270 6.266 5,584 6,251 1.395 890 2,553 1,961 13.344 14,256 15,472 13.407 14,478 18,160 19,330 21.042 18,235 19,634 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless otherwise stated The Credit Group expect to offset the deferred income tax assets against future taxable income according to the following schedule: December Year 31, March 31, 2006 2007 (Unaudited) 2007 7,800 7,991 2008 2009 2010 8,412 6,110 9,029 8,380 6,254 8,340 2011 10,603 9,580 2012 2013 11,286 5,192 10,387 10,687 58,432 61,619 Currentassets (7.800) (9,405) Long-termreceivable 50,632 52,214 Consideringthat taxableincomeencompassesnotonlythe accountingprofitthat can be generated, but also the existence of non-taxable income and non-deductible expense, tax creditsand otherdifferences,there is no directrelationshipbetweenthe accountingprofitand the taxableincome.As a result,the CreditGroup'sexpectedtimingto offsetdeferredincome tax assets shouldnot be takenas an indicatoroffutureprofitsofthe CreditGroup. (c) Deferred tax on revaluation reserve Accountingpractices adopted in Brazilrequire the recognitionof deferred tax liabilitieson revaluationsrecordedas fromJuly 1, 1995.Thisrequirementwas not applicableat the time that Televisso Galicha S.A. recorded the revaluations of certain fixed assets in December 1994,the reservesfromwhichwere capitalizedin 1995;the relatedunrecognizeddeferred incometax liabilityat December31, 2006 amountsto R$ 5,152(December31, 2005 R$ 5,533; December 31, 2004 - R$ 5,767; March 31, 2007 - R$ 5,095; March 31, 2006 R$ 5,475). F-70 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 ,2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othemrise stated 18 Contingencies (a) TheCreditGroupis partiesto variouscivillawsuitsthathavearisenin the ordinarycourseof its business,includingactionsfor libel.Provisionsforestimatedprobablelosses from contingencieshave been recordedbased on the opinionsof externaland in-houselegal advisors.Duringthe year ended December31, 2006,the CreditGrouppaid,eitheras a result of unfavorablejudicialdecisionsor settlement,the amountof R$ 2,475 (December31, 2005 R$ 1.865;December31, 2004- R$ 2,004;quarterended March31, 2007 - R$ 176,quarter ended March 31, 2006 - R$ 408). (b) TheCreditGroupis defendantincertainlaborandtaxsuits.Provisions forestimatedprobable losses fromcontingenceshave been recordedbased on the opinionsof externaland in-house legal advisors. Provision for probable losses December 2006 Tax matters Laborand socialmatters Civilmatters Current liabilities Long-term liabilities 2005 31 2004 1,600 9.268 4.421 1,600 7,124 4,348 1,600 7,921 3,317 15.289 13.072 12,838 (12,986) (10,795) 2,303 2,277 March 31 2007 2006 (Unaudited) (Unaudited) 1,600 13.111 7,462 (9,131) 22,173 1,600 6,877 4,398 12,875 (19,864) (10,593) 3,707 2,309 2,282 The activityin the provisionfor probable losses in 2006 and 2007 was as follows: December 31, 2006 March 31, 2007 (Unaudited) Atthe beginning oftheyear/quarter Increase Reversal Amounts paid 13,072 15,289 16,680 (11,988) 10,818 (3,758) 15.289 22,173 (2,475) Atthe end of yearlquarter F-71 (176) Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006, 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands Possible of Brazilian reals, unless othen~vise stated losses The Credit Group is defendant in certain civiland labor suits which are estimated as possible losses based on the opinionof external and in-house advisors. For these suits no provisions have been recorded by the Credit Group, and the respective amounts at December 31, 2006 and March 31, 2007 are presented below: December 31, March 31, 2006 2007 (Unaudited) Civilmatters Labor and social matters 19 Pension 3,276 4,407 3,152 4,400 7.683 7,552 fund The Credit Group, together with RES Comunica~es S.A. and other associated companies (the "Sponsors"), have formed RES Prev-Sociedade Previdencisria, a private pension fund (the "Fund"),to provide employees with supplementary pension and disabilitybenefits, in addition to those paid by the NationalSocial Security System. The Fund was approved by the Ministryof Social Security in October 1996 and was implemented as from January 1997. The Fund is a defined contributionplan, with contributionsfrom Sponsors and participants calculated based on variable amounts and percentages at the option of each participant. The normal contributionsof the Sponsors are based on the basic contributionof the participants at rates of up to 300% depending on the participant's age. These contributionswillautomatically cease when the participantterminates employmentfor any reason, reaches retirement age, dies or becomes disabled. Past service benefits willbe funded by the Sponsors over twenty years through monthlypayments adjusted by the indice Nacional de Pre~os ao Consumidor INPC (National Consumer Price Index). Furthermore,the Sponsorsmayopt to make additionalcontributionsat any time,and the normal and additional contributionsmay be revised by the Sponsors in February of each year. The Sponsorsmayalso temporarilyreduce or suspendtheircontributions,maintainingonly those necessary to cover the minimumbenefits mentioned below, the payments related to the past service benefits and the Fund's administrative F-72 costs. Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 , 2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othennrise stated The plan grants all the participants a minimum one-time retirement benefit equal to a maximum of 3 times the participant's monthly salary for participants with 30 years of service upon retirement. Participants with less than 30 years of service are entitled to a proportional amount, based on their years of service. Except for this minimum benefit, the Sponsors do not have any responsibility to guarantee the minimum level of the benefits to the participants when they terminate their employment. The Credit Group's contributions in the year ended December 31, 2006 amounted to R$ 4,408 (December 31, 2005 - R$ 3,916; December 31, 2004 - R$ 3,839; quarter ended March 31, 2007 - R$ 1,202; quarter ended March 31, 2006 - R$ 1,037). The Fund's financial statements at December 31, 2006, 2005 and 2004 were examined by independent auditors, and the actuarial reserves were determined by an actuary. The independent auditors issued an unqualified opinion on those financial statements. 20 Financial instruments The Credit Group has financial assets and liabilities recorded in the balance sheet which are characterized as financial instruments. Except for the interest rate swaps mentioned in Note 14, the investment in NET mentioned in Note 11, and the accounts receivable from related companies bearing no interest (Notes 8 (a) and (b)), the balances of other financial assets and liabilities are stated based on their contractual conditions, which are equivalent to the respective 21 market values. Insurance The Credit Group's policyof insurance risk management seeks coverage compatible with their responsibilities and its operations. The insurance was contracted for amounts which were considered sufficientfor the Credit Group to cover eventual losses, considering the nature of its activity, the risks involved in its operations and its insurance consultants' recommendations. F-73 Brasil Sul - RES - Credit Group Notes to the Special-Purpose Combined Financial Statements at December 31, 2006 ,2005 and 2004 and March 31, 2007 and 2006 (Unaudited) In thousands of Brazilian reals, unless othemise stated On March 31, 2007, the Credit Group had the followingprincipalinsurance policies with third parties: Insured Type amount (Unaudited) Fire damage to property, plant and equipment Civilliability Diverse risks 22 344,161 13,000 37,497 Tax Recovery Program (PAES) A Noticia S.A. Empresa Jornalistica, whichwas merged into RES - Zero Hora Editora Jornalistica S.A. in January 2007, joined the PAES program tin July, 2003) for its federal tax debts in the amount of R$ 6,874, to be paid in 180 monthlyinstallments plus interest based on the TJLP (long-terminterest rate). On March31, 2007 the balance was R$ 9,499, R$ 1,594 classifiedin Othertaxes payable- currentliabilitiesand R$ 7,904in Specialtax payment installments- PAES-long-term liabilities. Property, plant and equipment are pledged in guarantee of this fiscal program, in the amount of R$ 1,925. F-74 PRINCIPAL OFFICE OF ISSUER Av. Érico Veríssimo, 400 2º andar Porto Alegre, Brazil 90160-180 LEGAL ADVISERS To the Issuer As to United States law As to Brazilian law Arnold & Porter LLP 399 Park Avenue New York, New York 10022 United States of America Tozzini Freire Teixeira & Silva Advogados Rua Borges Lagoa, 1328 04038-904 - São Paulo, SP Brazil To the Initial Purchaser As to United States law As to Brazilian law Linklaters LLP 1345 Avenue of the Americas New York, New York 10105 United States of America Lefosse Advogados Rua General Furtado do Nascimento, 66 05465-070, São Paulo, SP Brazil AUDITORS To the Issuer PricewaterhouseCoopers Auditores Independentes Avenida Francisco Matarazzo, 1400 São Paulo, SP 05001-903 Brazil Rua Mostardeiro, 800 – 9th floor Porto Alegre 90430-000 Brazil TRUSTEE, PAYING AGENT, CALCULATION AGENT AND SECURITY REGISTRAR The Bank of New York 101 Barclay Street, Floor 4E New York, New York 10286 United States of America IRISH PAYING AGENT, TRANSFER AGENT AND LISTING AGENT Transfer and Listing Agent Paying Agent The Bank of New York, London One Canada Square, 40th floor, London E14 5AL United Kingdom BNY Fund Services (Ireland) Limited Guild House, Guild Street IFSC, Dublin 1 Ireland RBS–Zero Hora Editora Jornalística S.A. BRL 300,000,000 11.25% GUARANTEED NOTES DUE 2017 OFFERING MEMORANDUM JUNE 26, 2007 Standard Bank Plc