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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
TV FILME, INC.
(Exact name of Registrant as Specified in its Charter)
COMMISSION FILE NUMBER: 0-28670
DELAWARE 98-016214
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
C/O ITSA-Intercontinental Telecomunicacoes Ltda.
SCS, Quadra 07-Bl.A
Ed. Executive Tower
Sala 601
70.300-911 Brasilia-DF
BRAZIL
(Address, Including Zip Code, of Principal Executive Offices)
011-55-61-314-9908
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
CLASS OUTSTANDING
Common Stock, par value $0.01 10,812,096 shares
per share. as of November 12, 1997
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<PAGE>
TV FILME, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1996
and September 30, 1997 (Unaudited)........................... 2
Unaudited Consolidated Statements of Operations for the
Three and Nine Months Ended September 30, 1996 and the
Three and Nine Months Ended September 30, 1997............... 3
Unaudited Consolidated Statement of Changes in Stockholders'
Equity at September 30, 1997................................. 4
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1996 and the Nine Months
Ended September 30, 1997..................................... 5
Notes to Unaudited Consolidated Financial Statements......... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 9
ITEM 3. Quantitative and Qualitative Disclosure About Market Risk.... 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings............................................ 13
ITEM 2. Changes in Securities and Use of Proceeds.................... 13
ITEM 3. Default Upon Senior Securities............................... 13
ITEM 4. Submission of Matters to a Vote of Security-Holders.......... 13
ITEM 5. Other Information............................................ 14
ITEM 6. Exhibits and Reports on Form 8-K............................. 14
SIGNATURES
<PAGE>
<TABLE>
<CAPTION>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
-------------------- ---------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $116,355 $92,136
Accounts receivable, net.......................................... 3,607 8,137
Supplies.......................................................... 2,721 5,074
Prepaid expenses and other current assets......................... 1,175 3,191
Accrued interest receivable....................................... -- 597
Pledged securities-current........................................ 16,159 16,645
-------------------- ---------------------
Total current assets........................................ 140,017 125,780
Property, plant and equipment, net..................................... 38,333 60,175
Pledged securities..................................................... 17,353 8,755
Debt issuance costs.................................................... 6,036 6,265
Other assets........................................................... 1,190 1,596
-------------------- ---------------------
Total assets................................................ $202,929 $202,571
==================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................. $11,106 $15,201
Short-term debt................................................... 2,926 804
Payroll and other benefits payable................................ 1,538 2,584
Accrued interest payable.......................................... 572 5,326
Accrued liabilities and taxes payable............................. 412 912
Payables to affiliates-current.................................... 200 200
-------------------- ---------------------
Total current liabilities.................................... 16,754 25,027
Payables to affiliates-long term....................................... 200 --
Deferred installation fees............................................. 8,227 7,695
Senior notes........................................................... 140,000 140,000
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued................................. -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 10,166,176 and 10,812,096 shares
issued and outstanding....................................... 102 108
Additional paid-in capital........................................ 41,825 45,582
Deficit........................................................... (4,179) (15,841)
-------------------- ---------------------
Total stockholders' equity................................... 37,748 29,849
-------------------- ---------------------
Total liabilities and stockholders' equity................... $202,929 $202,571
==================== =====================
See accompanying notes.
2
</TABLE>
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<TABLE>
<CAPTION>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1996 1997 1996 1997
--------------- -------------- --------------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues................................................ $8,654 $13,691 $21,287 $37,108
Operating costs and expenses:
System operating - Note 2........................... 2,676 4,771 6,092 12,921
Selling, general and administrative................. 4,421 6,947 11,615 18,688
Depreciation and amortization....................... 1,572 3,290 3,996 8,417
--------------- -------------- --------------- ---------------
Total operating costs and expenses.............. 8,669 15,008 21,703 40,026
--------------- -------------- --------------- ---------------
Operating loss.................................. (15) (1,317) (416) (2,918)
Other income (expense):
Interest expense - Note 2........................... (199) (4,756) (481) (14,446)
Interest income..................................... 314 1,991 174 7,227
--------------- -------------- --------------- ---------------
Interest expense, net........................... 115 (2,765) (307) (7,219)
Other expense....................................... (34) 5 (23) 4
Exchange and translation gains (losses)............. (143) (430) (101) (1,529)
--------------- -------------- --------------- ---------------
Total other income (expense).................... (62) (3,190) (431) (8,744)
--------------- -------------- --------------- ---------------
Net income (loss)....................................... (77) ($4,507) ($847) ($11,662)
=============== ============== =============== ===============
Net income (loss) per share............................. ($0.01) ($0.41) ($0.10) ($1.06)
=============== ============== =============== ===============
Weighted average number of shares of common stock
and common stock equivalents.......................... 9,868 10,978 8,680 10,982
=============== ============== =============== ===============
See accompanying notes.
3
</TABLE>
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<TABLE>
<CAPTION>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
For the nine months ended September 30, 1997
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
--------------- ---------------- ---------------- --------------- ----------------
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1996....... 10,166,176 $102 $41,825 ($4,179) $37,748
Issuance of common stock for
payment of 1996 non-cash
compensation................... 23,120 -- -- -- --
Conversion of outstanding warrants
into common stock.............. 622,800 6 3,757 -- 3,763
Net loss for the period............ -- -- -- (11,662) (11,662)
--------------- ---------------- ---------------- --------------- ----------------
BALANCE AT SEPTEMBER 30, 1997...... 10,812,096 $108 $45,582 ($15,841) $29,849
=============== ================ ================ =============== ================
See accompanying notes.
4
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<PAGE>
<TABLE>
<CAPTION>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
---------------------------------------
1996 1997
------------ ---------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.............................................. $ (847) $ (11,662)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization...................... 3,996 8,417
Provision for losses on accounts receivable........... 821 2,414
Amortizaton of debt issuance costs.................... -- 590
Increase (decrease) in deferred installation fees..... 2,927 (532)
Changes in operating assets and liabilities:
Increase in accounts receivable................. (2,418) (6,944)
Increase in supplies............................ (1,351) (2,353)
Increase in prepaid expenses and other current
assets......................................... (327) (2,016)
Increase in accrued interest receivable......... -- (597)
Increase in other assets........................ (183) (485)
Decrease in pledged securities.................. -- 8,112
Increase in accounts payable.................... 1,876 4,095
Increase in payroll and other benefits payable.. 773 1,046
Increase in accrued interest payable............ -- 4,754
Increase in accrued liabilities and taxes
payable....................................... 807 500
----------- ------------
Net cash provided by operating activities............. 6,074 5,339
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions:
Property, plant and equipment...................... (17,481) (30,180)
----------- ------------
Net cash used in investing activities................. (17,481) (30,180)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt............. 1,322 (2,122)
Proceeds from initial public offering,
net of costs.................................... 24,372 --
Debt issuance costs................................ -- (819)
Issuance of common stock and warrants.............. 7,151 3,763
Decrease in payables to affiliates................. (1,863) (200)
----------- ------------
Net cash provided by financing activities............. 30,982 622
----------- ------------
Net change in cash and cash equivalents............... 19,575 (24,219)
Cash and cash equivalents at beginning of period...... 43 116,355
----------- ------------
Cash and cash equivalents at end of period............ $ 19,618 $ 92,136
=========== ============
Cash paid during the period for:
Interest........................................... $ 422 $ 8,762
============== ============
See accompanying notes.
5
</TABLE>
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. COMPANY BACKGROUND
In connection with an initial public offering (the "Initial Public
Offering") of its common stock, $.01 par value per share (the "Common Stock"),
TV Filme, Inc. (the "Company") was formed in April 1996 to become the holding
company of and successor to ITSA-Intercontinental Telecomunicacoes S.A. and its
subsidiaries ("ITSA"). The transfer of ITSA to the Company has been accounted
for in a manner similar to a pooling of interests. ITSA was formed in May 1994
as a holding company for and successor to TV Filme Servicos de Telecomunicacoes
S.A. ("TVFSA"). The transfer of TVFSA to ITSA has been accounted for in a manner
similar to a pooling of interests.
In connection with the Initial Public Offering, the Company entered
into a restructuring (the "Restructuring") pursuant to which all of the
preferred stock of ITSA was converted into common stock of ITSA, based on the
conversion rates at the date of issuance of the preferred stock. Each share of
common stock of ITSA was exchanged for 1,844 shares of Common Stock of the
Company. As all of the preferred stock of ITSA has been converted and there were
no preferred dividends paid or due as a result of the conversion, all preferred
and common stock issuances of the predecessor companies have been reflected as
issuances of Common Stock of the Company. Prior to the consummation of the
Initial Public Offering and the Restructuring, TVFSA operated the Company's
wireless cable system in Brasilia, and held the licenses to operate the
Company's wireless cable systems in Brasilia, Goiania and Belem. ITSA owned
substantially all of TVFSA, TV Filme Goiania Servicos de Telecomunicacoes Ltda.
("TV Filme Goiania") and TV Filme Belem Servicos de Telecomunicacoes Ltda. ("TV
Filme Belem"). Pursuant to the Restructuring, (i) 51% of the voting stock of
TVFSA was transferred to an entity, all of which was owned by certain then
existing shareholders of ITSA who were and are Brazilian nationals, with ITSA
retaining 49% of the voting stock and 83% of the economic interests in TVFSA;
(ii) the operating assets of the wireless cable system of Brasilia were
transferred from TVFSA to TV Filme Brasilia Servicos de Telecomunicacoes Ltda.
("TV Filme Brasilia"), which is substantially owned by ITSA; and (iii) TVFSA
entered into various agreements with ITSA and its subsidiaries pursuant to
which, among other things, TVFSA has authorized ITSA to operate the existing
wireless cable systems under its current licenses. As a result of the
Restructuring and the Initial Public Offering, the Company owns 100% of ITSA,
which holds 49% of the voting stock and 83% of the economic interests of TVFSA
and 100% of TV Filme Brasilia, TV Filme Goiania and TV Filme Belem.
Accordingly, the consolidated financial statements of the Company
include ITSA and its subsidiaries on a historical basis since May 1994 as though
they have been part of the Company for all periods presented. All significant
intercompany transactions and balances have been eliminated in consolidation.
The Company develops, owns and operates subscription television systems
in mid-size markets in Brazil. The Company has established wireless cable
operating systems in the cities of Brasilia, Goiania and Belem. Applications
have been made by the Company to operate systems in an additional 27 markets in
Brazil. Although the economic situation in Brazil has improved since July 1994,
when the government introduced an economic stabilization plan designed to reduce
the rate of inflation, a return to high levels of inflation and currency
fluctuations could adversely affect the Company's operations.
B. METHOD OF PRESENTATION
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
in U.S. dollars. Amounts in Brazilian currency have been remeasured into U.S.
dollars in accordance with the methodology set forth in Statement of Financial
Accounting Standards No. 52 ("SFAS 52") as its applies to entities operating in
highly inflationary economies. Supplies, property, plant and equipment,
intangibles and deferred installation fees and the related income statement
accounts are remeasured at exchange rates in effect when the assets were
acquired or the liabilities were incurred. All other assets and liabilities are
remeasured at year end exchange rates, all other income and expense items are
remeasured at average exchange rates prevailing during the year. Remeasurement
adjustments are included in exchange and translation gains (losses).
6
<PAGE>
In management's opinion, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the first nine months are not necessarily
indicative of the results that may be expected for a full year.
C. NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of
shares of common stock outstanding during the period together with the number of
shares issuable upon the exercise of options and warrants issued during the
twelve months prior to the filing of the Initial Public Offering. The
computation of fully diluted pro forma net loss per share of common stock was
antidilutive; therefore, the amounts reported for primary and fully diluted loss
per share are the same.
D. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $666,000
at December 31, 1996 and $1,744,000 at September 30, 1997. Charges to the
allowance during the three months ended September 30, 1997 were $538,000.
E. RECLASSIFICATIONS
Certain 1996 amounts have been reclassified to conform to the 1997
presentation.
2. RELATED PARTY TRANSACTIONS
Substantially all programming is supplied by a subsidiary of Tevecap
S.A. ("Tevecap"), a stockholder of the Company, pursuant to a programming
contract. Amounts paid to such affiliate during the three and nine months ended
September 30, 1996 and 1997 were approximately $1,900,000 and $4,500,000 and
$2,600,000 and $7,900,000, respectively. Through September 1997, the Company
purchased from Tevecap a program guide which it distributed to its subscribers
monthly. Amounts paid to Tevecap for the program guide during the three and nine
months ended September 30, 1996 and 1997 were $111,000 and $289,000 and $323,000
and $679,000, respectively. As of October 1997, the Company no longer purchases
its program guide from Tevecap but has begun to produce and distribute its own
program guide.
The Company purchased two licenses to operate wireless cable systems
from Abril S.A. ("Abril") for $400,000 each, payable in four equal annual
installments, which do not bear interest. The $200,000 which remained
outstanding as of September 30, 1997 is due in February 1998. Since there are no
outstanding borrowings to Tevecap, interest expense paid to Tevecap was $0 for
the nine months ended September 30, 1997 compared to $400,000 for the nine
months ended September 30, 1996.
The Company purchases equipment and supplies from vendors under
irrevocable letters of credit. Abril and a subsidiary of Tevecap guarantee such
obligations from time to time. Total issued and outstanding letters of credit at
September 30, 1997 were $10,800,000. At September 30, 1997, issued and
outstanding letters of credit secured by affiliates were $3,600,000. The
maturity date of such letters of credit range from 270 days to 360 days.
3. STOCK OPTION PLAN
In connection with the Initial Public Offering, the Board of Directors
of the Company adopted and the stockholders of the Company approved the 1996
Stock Option Plan (such plan, as subsequently amended in September 1997, is
hereinafter referred to as the "Plan"). The Plan provides for the grant of stock
options to officers, key employees, consultants and directors of the Company.
The Plan is administered by the Compensation Committee of the Board and the
total number of shares of Common Stock for which options may be granted pursuant
to the Plan is 936,432, subject to certain adjustments reflecting changes in the
Company's capitalization. The Plan allows the granting of incentive stock
options, which may not have an exercise price below the greater of par value or
the market value on the date of grant, and non-qualified stock options, which
have no restrictions as to exercise price other than the exercise price cannot
be below par value. All options must be exercised no later than 10 years from
the date of grant. Options to purchase 407,000 shares of Common Stock were
granted upon the consummation of the Initial Public Offering, 297,000 of which
are exercisable at $10.00 per share and 110,000 of which are exercisable at
$11.00 per share, and which generally vest 20% per year for five years beginning
on the first anniversary of consummation of the Initial Public Offering. Options
to purchase 10,000 shares of Common Stock were granted in each of December 1996
and February 1997 at an exercise price of $11.75. Options to purchase 15,000
shares of Common Stock were granted in July 1997 at an exercise price of
$10.125.
7
<PAGE>
4. LONG-TERM DEBT
On December 20, 1996, the Company issued $140 million principal amount
of 12-7/8% Senior Notes due December 15, 2004 (the "Senior Notes"). The proceeds
of the Senior Notes were loaned to ITSA and evidenced by an intercompany note.
Interest is payable semi-annually in arrears on June 15 and December 15 of each
year, commencing on June 15, 1997. Of the $140 million loaned to ITSA,
approximately $33.5 million was used to purchase U.S. government securities,
scheduled interest and principal payments on which is in an amount sufficient to
provide for payment in full when due of the first four scheduled interest
payments on the Senior Notes. Debt issuance costs are capitalized and amortized
over the period of the debt under the effective yield method.
The Senior Notes are redeemable on or after December 15, 2000 at the
option of the Company, in whole or in part from time to time, at specified
redemption prices declining annually to 100% of the principal amount on or after
December 15, 2003, plus accrued interest. The Senior Notes contain certain
covenants that, among other things, limit the ability of the Company to incur
additional indebtedness and pay dividends or make certain other distributions.
Upon a change of control, the Company is required to make an offer to purchase
the Senior Notes at a purchase price equal to 101% of the aggregate principal
amount thereof, plus accrued and unpaid interest, if any. In accordance with the
covenants of the Senior Notes and the Company's current level of leverage, at
September 30, 1997 it is unable to make any dividend payments.
The Company believes that the recorded value of the Senior Notes
approximates the fair value at September 30, 1997.
5. STOCKHOLDERS' EQUITY
During 1996, the Company issued warrants to purchase 794,764 shares of
Common Stock to certain stockholders of the Company to replace warrants held by
these stockholders in a subsidiary of the Company. Such warrants were
exercisable until September 28, 1997 at an exercise price of $6.52 per share.
The warrants were exercisable either for cash, the cancellation of indebtedness
or on a cashless exercise basis.
In September 1997, 577,172 of the warrants were exercised for cash for
a total purchase price of $3,763,161. In addition, the remaining 217,592
warrants were exchanged for an aggregate of 45,628 shares of Common Stock
on a cashless exercise basis. Such warrants were converted into shares
of Common Stock based on the difference between the exercise price of $6.52 per
share and the average closing price of the Common Stock on the Nasdaq National
Market during the five trading days preceding the date of exercise ($8.25).
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS FORM 10-Q.
RESULTS OF OPERATIONS
Although the Company's financial statements are presented pursuant to
United States generally accepted accounting principles in U.S. dollars, the
Company's transactions are consummated in both REAIS and U.S. dollars. Inflation
and devaluation in Brazil have had, and may continue to have, substantial
effects on the Company's results of operations and financial condition. See "--
Inflation and Exchange Rates."
As a result of the development and rapid growth of the Company's
business during the periods presented, the period-to-period comparisons of the
Company's results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1996 % OF REVENUE 1997 % OF REVENUE
--------------- -------------- --------------- ----------------
(IN THOUSANDS, EXCEPT SUBSCRIBER, PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $8,654 100% $13,691 100%
Operating costs and expenses:
System operating 2,676 31% 4,771 35%
Selling, general and administrative 4,421 51% 6,947 51%
Depreciation and amortization 1,572 18% 3,290 24%
--------------- -------------- --------------- ---------------
Total operating costs and expenses 8,669 100% 15,008 110%
--------------- -------------- --------------- ---------------
Operating loss (15) (0%) (1,317) (10%)
Other income (expense):
Interest expense (199) (2%) (4,756) (35%)
Interest income 314 4% 1,991 15%
--------------- -------------- --------------- ---------------
Interest expense, net 115 1% (2,765) (20%)
Other expense (34) (0%) 5 0%
Exchange and translation gains (losses) (143) (2%) (430) (3%)
--------------- -------------- --------------- ---------------
Total other income (expense) (62) (1%) (3,190) (23%)
--------------- -------------- --------------- ---------------
Net income (loss) ($77) (1%) ($4,507) (33%)
=============== ============== =============== ===============
Net income (loss) per share ($0.01) ($0.41)
=============== ===============
Weighted average number of shares of
common stock and common stock
equivalents 9,868 10,978
=============== ===============
Other Data:
EBITDA (a) $1,557 $1,973
=============== ===============
Number of subscribers at end of period 70,591 114,913
=============== ===============
</TABLE>
9
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<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------------------------------------
1996 % OF REVENUE 1997 % OF REVENUE
--------------- -------------- --------------- ---------------
(IN THOUSANDS, EXCEPT SUBSCRIBER, PER SHARE AND SHARE DATA)
<S> <C> <C> <C> <C>
Revenues $21,287 100% $37,108 100%
Operating costs and expenses:
System operating 6,092 29% 12,921 35%
Selling, general and administrative 11,615 55% 18,688 50%
Depreciation and amortization 3,996 19% 8,417 23%
--------------- -------------- --------------- ---------------
Total operating costs and expenses 21,703 102% 40,026 108%
--------------- -------------- --------------- ---------------
Operating loss (416) (2%) (2,918) (8%)
Other income (expense):
Interest expense (481) (2%) (14,446) (39%)
Interest income 174 1% 7,227 19%
--------------- -------------- --------------- ---------------
Interest expense, net (307) (1%) (7,219) (19%)
Other expense (23) (0%) 4 0%
Exchange and translation gains (losses) (101) (0%) (1,529) (4%)
--------------- -------------- --------------- ---------------
Total other income (expense) (431) (2%) (8,744) (24%)
--------------- -------------- --------------- ---------------
Net income (loss) ($847) (4%) ($11,662) (31%)
=============== ============== =============== ===============
Net income (loss) per share ($0.10) ($1.06)
=============== ===============
Weighted average number of shares of
common stock and common stock
equivalents 8,680 10,982
=============== ===============
Other Data:
EBITDA (a) $3,580 $5,499
=============== ===============
Number of subscribers at end of period 70,591 114,913
=============== ===============
</TABLE>
(a) EBITDA is defined as operating loss plus depreciation, amortization and
non-cash charges. While EBITDA should not be construed as a substitute for
operating loss or a better measure of liquidity than cash flow from operating
activities, which are determined in accordance with United States GAAP, it is
included herein to provide additional information regarding the ability of the
Company to meet its capital expenditures, working capital requirements and debt
service. EBITDA, however, is not necessarily a measure of the Company's ability
to fund its cash needs.
REVENUES. The Company's revenues primarily consist of monthly fees paid
by subscribers for the programming package, as well as installation fees
recognized for the period, net of sales taxes. For the three months ended
September 30, 1997 compared to the same period in 1996, revenues increased by
$5.0 million, or 58%, primarily due to an increase of 48,000 in the average
number of subscribers. This increase was offset, in part, by an increase in
taxes on revenues from approximately 2.7% to 7.7% in Brasilia (effective January
1, 1997) which represented a net revenue reduction of $0.5 million for this
period. For the nine months ended September 30, 1997 compared to the same period
in 1996, revenues increased by approximately $15.8 million, or 74%, primarily
due to an increase of 43,000 in the average number of subscribers. The effect of
the Brasilia revenue tax increase for this period was $1.3 million.
SYSTEM OPERATING EXPENSES. System operating expenses consist of
programming costs (including costs associated with developing and producing
proprietary programming content), costs for the programming guide distributed to
subscribers, a portion of costs of compensation and benefits for the Company's
employees, vehicle rental costs, transmitter site rentals, repair and
maintenance expenditures and service call costs. For the three months ended
September 30, 1997 compared with the same period in 1996, system operating
expenses increased by approximately $2.1 million, or 78%, primarily due to
10
<PAGE>
additional programming costs directly associated with the increase in the
Company's installed subscriber base ($0.8 million), costs associated with the
development of the Company's proprietary programming initiatives ($0.2 million),
programming guide expenses ($0.2 million) and compensation and benefits ($0.5
million). For the nine months ended September 30, 1997 compared to the same
period in 1996, system operating expenses increased by approximately $6.8
million, or 112%, also due to additional programming and production costs
directly associated with the increase in the Company's installed subscriber base
($3.5 million), costs associated with the development of the Company's
proprietary programming initiatives ($0.4 million), higher programming guide
expenses as a result of an increase in circulation as well as in the per issue
cost of the programming guide ($0.4 million) and compensation and benefits ($2.0
million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months
ended September 30, 1997 compared to the same period in 1996, selling, general
and administrative ("SG&A") expenses increased by approximately $2.5 million, or
57%, primarily due to growth in the average number of installed subscribers.
This growth was supported by an increase in advertising and promotion ($0.6
million) and resulted in increases in compensation and benefits ($0.2 million),
provision for doubtful accounts ($1.2 million), bank fees ($0.4 million) and all
other SG&A expenses ($0.1 million). For the nine months ended September 30, 1997
compared to the same period in 1996, SG&A expenses increased by approximately
$7.0 million, or 61%, also due to growth in the average number of installed
subscribers which was supported by an increase in advertising and promotion
($1.4 million) and resulted in increases in compensation and benefits ($1.4
million), provision for doubtful accounts ($1.6 million), bank fees ($0.4
million) and all other SG&A expenses ($2.2 million).
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses consist primarily of depreciation of decoder boxes, headend facilities
and installation costs. These costs are capitalized and depreciated over a five
year period. For the three months ended September 30, 1997 compared to the same
period in 1996, depreciation and amortization expense increased by $1.7 million,
or 109%. For the nine months ended September 30, 1997 compared to the same
period in 1996, depreciation and amortization expense increased by $4.4 million,
or 111%. In each case, the increase is primarily due to growth in the number of
installed subscribers in each of the Company's three operating systems.
OPERATING LOSS. For the three and nine month periods ended September
30, 1997, the Company generated a loss of approximately $1.3 million and $2.9
million, respectively, primarily due to expenses in connection with the
development of the Company's business, as explained above. The Company may
continue to generate operating losses as it expands its existing systems and
develops additional systems.
INTEREST EXPENSE. Interest expense increased from the three and nine
month periods ended September 30, 1996 to the three and nine month periods ended
September 30, 1997, primarily as a result of accrued interest associated with
the Senior Notes.
INTEREST INCOME. Interest income increased from the three and nine
month periods ended September 30, 1996 to the three and nine month periods ended
September 30, 1997, primarily as a result of interest income derived from
investing a portion of the proceeds from the Initial Public Offering and the
Senior Notes.
EXCHANGE AND TRANSLATION GAINS (LOSSES). Exchange and translation gains
(losses) have arisen primarily as a result of converting short-term investments
and borrowings denominated in REAIS to U.S. dollars in accordance with SFAS No.
52. These amounts can fluctuate significantly as a result of changes in the
exchange rate of the REAL relative to the U.S. dollar. Exchange and translation
losses increased from the three and nine months ended September 30, 1996 to the
three and nine months ended September 30, 1997 as a result of additional
short-term investments in REAIS.
INCOME TAXES. The Company did not have taxable income during the
nine-month period ended September 30, 1997 and expects to generate losses for
the foreseeable future. Brazilian marginal corporate tax rates are
approximately 33.0%.
NET LOSS. As explained above, net losses in the periods presented are
primarily attributable to the significant expenses incurred in connection with
the further development of the Company's business and net interest expenses
associated with the Senior Notes.
11
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The pay television business is a capital intensive business. From 1993
through the first part of 1996, the Company raised an aggregate of approximately
$16.8 million through a series of private equity placements to Tevecap and
Warburg, Pincus Investors, L.P. In August 1996, TV Filme completed the Initial
Public Offering with net proceeds to the Company of $24.4 million and in
December 1996 TV Filme completed the sale of the Senior Notes. In the past,
working capital requirements have been primarily met by (i) venture capital,
(ii) capital markets financings, (iii) vendor financing which generally requires
payment within 360 days of shipment, some of which has been supported by
irrevocable letters of credit guaranteed by Abril and certain of its affiliates
and (iv) borrowings from Abril and certain of its affiliates. As of September
30, 1996, the Company had repaid working capital borrowings from Abril and
certain of its affiliates in their entirety with a portion of the net proceeds
from the Initial Public Offering. As a result of the Initial Public Offering and
the Senior Notes offering, the Company does not expect to continue borrowing
from Abril or its affiliates. As of September 30, 1997, the Company has a
payable to Abril of $200,000 in connection with the Company's purchase of the
Belem and Goiania licenses from Abril. Such amount is due in February 1998.
As of September 30, 1997, approximately $10.8 million was outstanding
under letters of credit with maturities ranging from 270 days to 360 days, of
which approximately $3.6 million was guaranteed by affiliates of TV Filme. As of
September 30, 1997, the Company had importation lines of credit in the aggregate
amount of $23.6 million with three commercial banks, of which approximately
$12.8 million was available on such date. The Company currently believes that
importation lines of credit, additional vendor financing and other credit
facilities are available on acceptable terms. As a result of the Initial Public
Offering and the Senior Notes offering, the Company had positive working capital
at September 30, 1997 in the amount of $100.3 million. Net cash provided by
operating activities for the three months ended September 30, 1997 was
approximately $3.8 million.
The Company made capital expenditures of approximately $30.2 million in
the nine months ended September 30, 1997. Such capital expenditures were
financed through the proceeds from offerings of equity and debt in 1996 and from
cash generated from the Company's operations. For the fourth quarter of 1997,
the Company anticipates that its aggregate capital expenditures in its existing
operating markets will be approximately $7.0 million comprised primarily of
subscriber installation equipment. In addition to expanding its subscriber base
in its existing systems, the Company is seeking to launch additional systems. In
September 1997, the Brazilian Ministry of Communications announced the bidding
process by which additional pay-TV licenses will be awarded throughout the
country. This award process commenced in October 1997 and is expected to
continue, market-by-market, throughout most of 1998. The Company intends to
actively pursue such licenses as they become available for bid; however, there
can be no assurance as to the grant of any such concessions and licenses and the
timing of any such grants generally. The Company also from time to time may
selectively pursue the acquisition of existing pay television systems, although,
it is currently has no understanding, commitment or agreement with respect to
any such acquisitions. The Company believes that its current cash and internally
generated funds will be sufficient to fund its cash requirements for at least
the next twelve months and has invested its available cash predominantly in U.S.
dollar denominated short-term marketable securities. As of September 30, 1997,
of the Company's $118.0 million in cash, cash equivalents and pledged
securities, $101.4 million (86%) was invested in U.S. dollar denominated
securities. In the longer term, the Company's funding needs are subject to a
variety of factors, including the number and size of new system launches or
acquisitions, the implementation of alternative transmission technologies and
the offering of additional communications services. Accordingly, there can be no
assurance that the Company will be able to meet its funding needs in the longer
term.
INFLATION AND EXCHANGE RATES
Inflation and exchange rate variations have had, and may continue to
have, substantial effects on the Company's results of operations and financial
condition. In periods of inflation, many of the Company's expenses will tend to
increase. Generally, in periods of inflation, a company is able to raise its
prices to offset the rise in its expenses and may set its prices without
government regulation. However, under Brazilian law designed to reduce
inflation, the rates which the Company may charge to a particular subscriber may
not be increased until the next anniversary of the subscriber's initial
subscription date. Thus, the Company is less able to offset expense increases
with revenue increases. Accordingly, inflation may have a material adverse
effect on the Company's results of operations and financial condition.
12
<PAGE>
Generally, inflation in Brazil has been accompanied by devaluation of
the Brazilian currency relative to the U.S. dollar. Devaluation of the REAL may
also have an adverse effect on the Company. The Company collects substantially
all of its revenues in REAIS, but pays certain of its expenses, including a
significant portion of its equipment costs, substantially all interest expense
and most of its programming costs, in U.S. dollars. To the extent the REAL
depreciates at a rate greater than the rate at which the Company is able to
raise prices, the value of the Company's revenues (as expressed in U.S. dollars)
will be adversely affected. This effect on the Company's revenues may negatively
impact the Company's ability to fund U.S. dollar-based expenditures.
Accordingly, devaluation of the REAL may have a material adverse effect on the
Company's results of operations and financial condition.
RECENT DEVELOPMENTS
The recent economic and financial turmoil in Southeast Asia has had an
impact on many emerging markets, including Brazil. As a result of these events,
the Brazilian government has taken significant measures to protect the country's
currency, the Real, as well as the gains achieved over the last several years by
Brazil's economic stabilization plan, the Real Plan. Among other actions, on
October 27, 1997, Brazil's Central Bank significantly raised short-term interest
rates, and, on November 10, 1997, the Brazilian government announced a series of
austerity measures, generally including budget cuts, restrictions on public
indebtedness, tax increases, export incentives and restrictions on imports.
These measures, which are expected to have a negative impact on Brazil's
economic growth, are designed to improve the country's fiscal and current
account deficits and relieve pressure on the Real. There can be no assurance
that such measures will be successful or that the expected slowdown of the
Brazilian economy will not adversely impact the Company's business and results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
This requirement is not currently applicable to the Company.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
On September 29, 1997, the Company issued an aggregate of 622,800
shares of its Common Stock as a result of the exercise of outstanding warrants.
The sale of the 622,800 shares of Common Stock was effected in reliance upon the
exemption from the registration requirements provided by Section 4(2) of the
Securities Act of 1933, as amended, on the basis that such transactions did not
involve a public offering. There were no underwriters employed in connection
with the sale of the 622,800 shares of Common Stock. The proceeds derived from
the sale of such shares will be used by the Company for general corporate
purposes. See footnote 5 to the Company's financial statements included herein.
ITEM 3. DEFAULT UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS.
The Company held its Annual Meeting of Stockholders on September 9,
1997. Proposals presented for a stockholder vote were (i) the election of two
Class I Directors, and (ii) the ratification of the appointment of Ernst & Young
Auditores Independentes S.C. as independent auditors for the Company for the
fiscal year 1997.
13
<PAGE>
Each of the incumbent Class I directors nominated by the Company were
elected with the following voting results:
VOTES VOTES
FOR WITHHELD
----- --------
Hermano Studart Lins de Albuquerque 7,458,962 0
David E. Libowitz 7,458,962 0
The appointment of Ernst & Young Auditores Independentes S.C. as the
Company's independent auditor's for the fiscal year 1997 was approved with the
following voting results:
VOTES VOTES
CAST CAST BROKER
FOR AGAINST ABSTENTIONS NON-VOTES
----- ------- ----------- ---------
7,458,962 0 0 --
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1997.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: November 13, 1997
TV FILME, INC.
--------------------------------------------
(Registrant)
/S/ HERMANO STUDART LINS DE ALBUQUERQUE
--------------------------------------------
Hermano Studart Lins de Albuquerque
Chief Executive Officer (Principal
Executive Officer)
/S/ ALVARO J. AGUIRRE
--------------------------------------------
Alvaro J. Aguirre
Chief Financial Officer (Principal Financial
and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION
- --- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET OF TV FILME, INC. AT SEPTEMBER 30, 1997,
AND THE CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<CASH> 92,136
<SECURITIES> 0
<RECEIVABLES> 9,881
<ALLOWANCES> 1,744
<INVENTORY> 5,074
<CURRENT-ASSETS> 126,780
<PP&E> 76,546
<DEPRECIATION> 16,371
<TOTAL-ASSETS> 202,571
<CURRENT-LIABILITIES> 25,027
<BONDS> 140,000
0
0
<COMMON> 108
<OTHER-SE> 29,741
<TOTAL-LIABILITY-AND-EQUITY> 202,571
<SALES> 37,108
<TOTAL-REVENUES> 37,108
<CGS> 12,921
<TOTAL-COSTS> 16,275
<OTHER-EXPENSES> 8,417
<LOSS-PROVISION> 2,413
<INTEREST-EXPENSE> (14,446)
<INCOME-PRETAX> (11,662)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,662)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,662)
<EPS-PRIMARY> (1.06)
<EPS-DILUTED> (1.06)
</TABLE>
