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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, 1998
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 : __________
Delaware 98-0160214
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
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 10,825,139 shares
per share. as of November 13, 1998.
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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, 1997 and
September 30, 1998 (Unaudited).........................................2
Unaudited Consolidated Statements of Operations for the Three
and Nine Months Ended September 30, 1997 and the Three and
Nine Months Ended September 30, 1998...................................3
Unaudited Consolidated Statement of Changes in Stockholders'
Equity at September 30, 1998...........................................4
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and the Nine Months Ended
September 30, 1998.....................................................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 Disclosures About Market Risk............15
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.....................................................16
ITEM 2. Changes in Securities and Use of Proceeds.............................16
ITEM 3. Defaults Upon Senior Securities.......................................16
ITEM 4. Submission of Matters to a Vote of Security Holders...................16
ITEM 5. Other Information.....................................................16
ITEM 6. Exhibits and Reports on Form 8-K......................................16
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------------- -----------
(Unaudited)
(In thousands)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 80,975 $ 67,554
Accounts receivable, net....................................... 7,832 4,708
Supplies....................................................... 5,303 5,226
Prepaid expenses and other current assets...................... 3,178 4,003
Interest receivable............................................ 679 584
Pledged securities-current..................................... 16,645 8,323
--------------- ---------------
Total current assets....................................... 114,612 90,398
Property, plant and equipment, net................................ 63,405 53,387
Debt issuance costs, net.......................................... 6,298 4,943
Other assets...................................................... 2,082 2,849
--------------- ---------------
Total assets............................................... $186,397 $151,577
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................ $ 12,724 $ 7,066
Payroll and other benefits payable.............................. 2,103 3,363
Accrued interest payable........................................ 751 5,257
Accrued liabilities and taxes payable........................... 1,111 992
Payables to affiliates-current.................................. 200 --
--------------- ---------------
Total current liabilities.................................. 16,889 16,678
Deferred installation fees........................................ 7,178 4,494
Senior Notes...................................................... 140,000 140,000
Stockholders' equity:
Accumulated other comprehensive loss
Cumulative translation adjustment............................. -- (2,678)
Preferred stock, $.01 par value, 1,000,000
shares authorized, no shares issued......................... -- --
Common stock, $.01 par value, 50,000,000
shares authorized, 10,825,139 and 10,825,139
shares issued and outstanding................................ 108 108
Additional paid-in capital..................................... 45,657 45,657
Accumulated deficit............................................ (23,435) (52,682)
---------------- ----------------
Total stockholders' equity................................. 22,330 (9,595)
--------------- ----------------
Total liabilities and stockholders' equity................. $186,397 $151,577
=============== ===============
</TABLE>
See accompanying notes.
2
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1997 1998 1997 1998
-------- -------- -------- --------
(In thousands, except per share data)
<S> <C> <C> <C> <C>
Revenues ............................... $ 13,691 $ 11,049 $ 37,108 $ 35,127
Operating costs and expenses:
System operating - Note 2 ........... 4,771 5,178 12,921 15,214
Selling, general and administrative . 6,947 6,279 18,688 22,257
Depreciation and amortization ....... 3,290 5,845 8,417 16,496
-------- -------- -------- --------
Total operating costs and expenses 15,008 17,302 40,026 53,967
-------- -------- -------- --------
Operating loss ................... (1,317) (6,253) (2,918) (18,840)
Other income (expense):
Interest and other expense - Note 2 . (4,756) (4,793) (14,446) (14,242)
Interest and other income ........... 1,996 2,680 7,231 7,424
Monetary loss ....................... -- (1,080) -- (3,589)
Exchange and translation losses ..... (430) -- (1,529) --
-------- -------- -------- --------
Total other expense .............. (3,190) (3,193) (8,744) (10,407)
-------- -------- -------- --------
Net loss ............................... $ (4,507) $ (9,446) $(11,662) $(29,247)
======== ======== ======== ========
Net loss per share, basic and diluted .. $ (0.41) $ (0.87) $ (1.06) $ (2.70)
======== ======== ======== ========
Weighted average number of shares of
common stock and common
stock equivalents outstanding ........ 10,978 10,825 10,982 10,825
======== ======== ======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the nine months ended September 30, 1998
<TABLE>
<CAPTION>
Accumulated
Additional Other
Common Stock Paid-In Comprehensive Accumulated
Shares Par Value Capital Loss Deficit Total
---------- ---------- ---------- ---------- ---------- ----------
(In thousands, except shares)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997 10,825,139 $ 108 $ 45,657 $ -- $ (23,435) $ 22,330
Cumulative translation
adjustment ............... -- -- -- (2,678) -- (2,678)
Net loss for the period ..... -- -- -- -- (29,247) (29,247)
---------- ---------- ---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1998 10,825,139 $ 108 $ 45,657 $ (2,678) $ (52,682) $ (9,595)
========== ========== ========== ========== ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1998
--------- ---------
(In thousands)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................ $ (11,662) $ (29,247)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization .............................. 8,417 16,804
Provision for losses on accounts receivable ................ 2,414 5,845
Amortization of debt issuance costs ........................ 590 1,355
Decrease in deferred installation fees ..................... (532) (2,317)
Monetary loss .............................................. -- 3,589
Changes in operating assets and liabilities:
Increase in accounts receivable ............................ (6,944) (3,178)
Increase in supplies ....................................... (2,353) (233)
Increase in prepaid expenses and other current assets ...... (2,016) (1,010)
Increase (decrease) in accrued interest receivable ......... (597) 95
Increase in other assets ................................... (485) (1,313)
Decrease in pledged securities ............................. 8,112 8,322
Increase (decrease) in accounts payable .................... 4,095 (5,363)
Increase in payroll and other benefits payable ............. 1,046 1,383
Increase in accrued interest payable ....................... 4,754 4,506
Increase (decrease) in accrued liabilities and taxes payable 500 (42)
--------- ---------
Net cash provided by (used in) operating activities ............. 5,339 (804)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment ................................... (30,180) (10,122)
--------- ---------
Net cash used in investing activities ........................... (30,180) (10,122)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in short-term debt ..................................... (2,122) --
Debt issuance costs ............................................. (819) --
Issuance of common stock and warrants ........................... 3,763 --
Decrease in payables to affiliates .............................. (200) (200)
--------- ---------
Net cash provided by (used in) financing activities ............. 622 (200)
--------- ---------
Effect of exchange rate changes on cash ......................... -- (2,295)
--------- ---------
Net change in cash and cash equivalents ......................... (24,219) (13,421)
Cash and cash equivalents at beginning of period ................ 116,355 80,975
--------- ---------
Cash and cash equivalents at end of period ...................... $ 92,136 $ 67,554
========= =========
</TABLE>
See accompanying notes.
5
<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 is owned by certain existing
shareholders of ITSA who 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. Subsequent to 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. As of November 1997, the licenses to operate the
existing wireless cable systems were transferred from TV Filme Servicos to the
respective operating companies, 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-sized markets in Brazil. The Company has established wireless cable
operating systems in the cities of Brasilia, Goiania and Belem.
6
<PAGE>
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. Until December 31, 1997, amounts in Brazilian currency were
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 were remeasured at exchange rates in effect when the assets
were acquired or the liabilities were incurred. All other assets and liabilities
were remeasured at period end exchange rates; and all other income and expense
items were remeasured at average exchange rates prevailing during the period.
Remeasurement adjustments were included in exchange and translation gains
(losses).
Effective January 1, 1998, the Company determined that Brazil ceased to
be a highly inflationary economy under SFAS 52. Accordingly, as of January 1,
1998, the Company began using the REAL as the functional currency of its
Brazilian subsidiaries. As a result, all assets and liabilities are translated
into dollars at period end exchange rates and all income and expense items are
translated into U.S. dollars at the average exchange rate prevailing during the
period. In addition, the Company recorded a loss associated with holding a net
foreign currency monetary liability position.
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
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS 128"), for year-end 1997. SFAS
128, which supersedes APB Opinion No. 15, "Earnings Per Share," was issued in
February 1997. SFAS 128 requires dual presentation of basic and diluted earnings
per share ("EPS") for complex capital structures on the face of the statement of
operations. Basic EPS is computed by dividing income or loss by the weighted
average number of common shares outstanding for the period. Diluted EPS reflects
the potential dilution from the exercise or conversion of securities into common
stock. The basic or diluted EPS measured under SFAS 128 are not materially
different than if measured under APB No. 15.
d. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $1,710,000 at
December 31, 1997 and $2,331,000 at September 30, 1998. Charges to the allowance
during the three months ended September 30, 1998 were $2,992,000.
e. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's net
income or shareholders' equity. SFAS 130 requires foreign currency translation
adjustments to be included in other comprehensive income.
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, 1997 and 1998 were approximately $2,600,000 and $ 7,900,000 and
$2,700,000 and $8,100,000, respectively. Through September 1997, the Company
purchased from Tevecap a program guide which it distributed to its subscribers
monthly. In October 1997, the Company discontinued purchasing the program guide
produced by Tevecap and began producing and distributing its own program guide.
Amounts paid to Tevecap for the program guide
7
<PAGE>
during the three and nine months ended September 30, 1997 and 1998 were $323,000
and $679,000 and $ 0 and $ 0, res.pectively.
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 December 31, 1997 was repaid in February 1998.
3. STOCK OPTION PLAN
In connection with the Initial Public Offering, the Board of Directors
of the Company (the "Board") 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, as of October 1, 1998, the total number of shares of Common Stock for
which options may be granted pursuant to the Plan is 1,736,432, 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.
Additional options to purchase Common Stock were granted as follows:
Number of Exercise
Date Options Price
---- ------- -----
Dec. 1996 10,000 $11.750
Feb. 1997 10,000 $11.750
July 1997 15,000 $10.125
Oct. 1997 308,500 $6.000
Dec. 1997 150,000 $5.625
July 1998 10,000 $3.875
4. LONG-TERM DEBT
On December 20, 1996, the Company issued $140.0 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
8
<PAGE>
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, 1998 it is unable to make any dividend payments.
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, devaluation and general economic conditions 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" and "-Recent
Economic Events."
<TABLE>
<CAPTION>
Three Months Ended September 30,
----------------------------------------------------------
% of % of
1997 Revenue 1998 Revenue
--------- --------- --------- ---------
(In thousands, except subscriber, per share and share data)
<S> <C> <C> <C> <C>
Revenues ................................. $ 13,691 100% $ 11,049 100%
Operating costs and expenses:
System operating ................... 4,771 35% 5,178 47%
Selling, general and administrative 6,947 51% 6,279 57%
Depreciation and amortization ...... 3,290 24% 5,845 53%
--------- --------- --------- ---------
Total operating costs and expenses 15,008 110% 17,302 157%
--------- --------- --------- ---------
Operating loss ................ (1,317) (10%) (6,253) (57%)
Other income (expense):
Interest and other expense ......... (4,756) (35%) (4,793) (43%)
Interest and other income .......... 1,996 15% 2,680 24%
Monetary loss ...................... -- -- (1,080) (10%)
Exchange and translation losses .... (430) (3%) -- --
--------- --------- --------- ---------
Net loss ................................. $ (4,507) (33%) $ (9,446) (86%)
========= ========= ========= =========
Net loss per share, basic and diluted .... $ (0.41) $ (0.87)
========= =========
Weighted average number of common
stock and common stock equivalents ..... 10,978 10,825
========= =========
Other Data:
EBITDA(a) .......................... $ 1,973 $ (408)
========= =========
Number of subscribers at
end of period(b) ................. 114,913 93,273
========= =========
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------
% of % of
1997 Revenue 1998 Revenue
--------- --------- --------- ---------
(In thousands, except subscriber, per share and share data)
<S> <C> <C> <C> <C>
Revenues .................................. $ 37,108 100% $ 35,127 100%
Operating costs and expenses:
System operating .................... 12,921 35% 15,214 43%
Selling, general and administrative . 18,688 50% 22,257 63%
Depreciation and amortization ....... 8,417 23% 16,496 47%
--------- --------- --------- ---------
Total operating costs and expenses 40,026 108% 53,967 154%
--------- --------- --------- ---------
Operating loss ................... (2,918) (8%) (18,840) (54%)
Other Income (expense):
Interest and other expense .......... (14,446) (39%) (14,242) (41%)
Interest and other income ........... 7,231 19% 7,424 21%
Monetary loss ....................... -- -- (3,589) (10%)
Exchange and translation losses ..... (1,529) (4%) -- --
--------- --------- --------- ---------
Net loss .................................. $ (11,662) (31%) $ (29,247) (83%)
========= ========= ========= =========
Net loss per share, basic and diluted ..... $ (1.06) $ (2.70)
========= =========
Weighted average number of common
stock and common stock equivalents .... 10,982 10,825
========= =========
Other Data:
EBITDA(a) ........................... $ 5,499 $ (2,344)
========= =========
Number of subscribers at
end of period(b) .................... 114,913 93,273
========= =========
</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 generally
accepted accounting principles, 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.
(b) In the third quarter of 1998, the Company became more aggressive in
cancelling delinquent subscriber accounts. The Company expects to generate
additional write-offs in the fourth quarter of 1998, but the quantity of such
write-offs is as yet undetermined.
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, 1998 compared to the same period in 1997, revenues decreased by
approximately $2.6 million, or approximately 19%, primarily due to the loss of
revenue associated with higher levels of delinquency, lower installation fees
and the effects of an 8% average devaluation of the REAL against the U.S. dollar
between the respective periods, partially offset by revenues associated with the
Company's proprietary premium channel. See "-Recent Economic Events". For the
nine months ended September 30, 1998 compared to the same period in 1997,
revenues decreased by approximately $2.0 million, or approximately 5.3%,
primarily due to loss of revenue associated with higher levels of delinquency,
lower installation fees and the effects of an 8% average devaluation of the REAL
against the U.S. dollar between the respective periods, offset in part by
revenues from the Company's proprietary premium channel.
10
<PAGE>
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, transmitter site rentals and other miscellaneous costs. For the three
months ended September 30, 1998 compared with the same period in 1997, system
operating expenses increased by approximately $0.4 million, or 8.5%, primarily
due to additional programming costs associated with the Company's proprietary
premium channel (approximately $0.2 million) and higher other expenses
(approximately $0.2 million). For the nine months ended September 30, 1998
compared to the same period in 1997, system operating expenses increased by
approximately $2.3 million, or approximately 17.7%, primarily due to higher
compensation expenses (approximately $0.7 million) associated with the addition
of customer service, collection and other personnel, additional programming
costs primarily associated with the Company's proprietary premium channel
(approximately $0.2 million), costs associated with the development and on-going
operation of the Company's proprietary premium channel (approximately $0.8
million), higher programming guide expenses (approximately $0.2 million)
reflecting the full cost of the programming guide compared to the first nine
months of 1997 when the Company received a one-time credit from the publisher,
and higher other expenses (approximately $0.4 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months
ended September 30, 1998 compared to the same period in 1997, selling, general
and administrative ("SG&A") expenses decreased by approximately $0.7 million, or
approximately 9.6%, primarily due to a decrease in advertising and promotional
expense (approximately $0.4 million) and other expenses (approximately $0.3
million). For the nine months ended September 30, 1998 compared to the same
period in 1997, SG&A expenses increased by approximately $3.6 million, or
approximately 19%, primarily due to (i) a higher provision for doubtful accounts
(approximately $3.3 million) resulting from an increase in customer delinquency
rates, and (ii) an increase in compensation and benefits expenses (approximately
$1.3 million) incurred as a result of salary increases and costs associated with
the termination of employment of a portion of the Company's work force pursuant
to the Company's cost reduction efforts. This increase was partially offset by a
decrease in advertising and promotion expense (approximately $1.0 million). In
each of the periods, the higher customer delinquency rates also resulted in
significant increases in service disconnections. See "--Recent Economic Events."
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses consist primarily of depreciation of decoder boxes, headend facilities
and installation costs. Beginning with the first quarter of 1998, these costs
are being capitalized and depreciated over a four-year period. For the three
months ended September 30, 1998 compared to the same period in 1997,
depreciation and amortization expense increased by approximately $2.6 million,
or approximately 78%. For the nine months ended September 30, 1998 compared to
the same period in 1997, depreciation and amortization expense increased by
approximately $8.1 million, or approximately 96%. In each case, the increase is
primarily due to the Company's change in its depreciation schedule for decoder
boxes and installation costs from a five-year to a four-year period.
OPERATING LOSS. For the three- and nine-month periods ended September
30, 1998, the Company generated a loss of approximately $6.3 million and $18.8
million, respectively, primarily due to expenses in connection with the
Company's business and the decrease in revenue, 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 was essentially unchanged during the
three-month period ended September 30, 1998 compared to the three-month period
ended September 30, 1997. Interest expense decreased slightly for the
nine-month period ended September 30, 1998 compared to the nine-month
11
<PAGE>
period ended September 30, 1997, primarily as a result of decreases in
short-term borrowings of the Company.
INTEREST INCOME. Interest income increased for both the three- and
nine-month periods ended September 30, 1998 compared to the three- and
nine-month periods ended September 30, 1997, respectively, primarily as a result
of a higher proportion of the Company's cash denominated in REAIS which earn
higher rates of interest.
MONETARY LOSS. Beginning on January 1, 1998, in accordance with SFAS
52, monetary losses resulted from the depreciation of the REAL against the U.S.
dollar, given the Company's net dollar-denominated monetary liability position.
See footnote 1b. "Method of Presentation" contained in the Notes to Consolidated
Financial Statements and " - Inflation and Exchange Rates."
EXCHANGE AND TRANSLATION LOSSES. Exchange and translation losses arose
prior to January 1, 1998, due to the remeasurement of short-term assets and
liabilities from REAIS to U.S. dollars in accordance with SFAS 52 for companies
in highly inflationary economies. Unless Brazil returns to a highly inflationary
status, the Company does not believe it will record future exchange and
translation gains or losses.
INCOME TAXES. The Company did not have taxable income during the
nine-month period ended September 30, 1998 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 development of the Company's business and net interest expenses associated
with the Senior Notes.
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 with net proceeds
to the Company of approximately $134.0 million. 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, 1998,
the Company had no outstanding borrowings from Abril and its affiliates and the
Company does not expect to borrow from Abril or its affiliates in the future.
As of September 30, 1998, approximately $3.2 million was outstanding
under letters of credit with maturities ranging from 270 days to 360 days. As of
September 30, 1998, the Company had import lines of credit in the aggregate
amount of $30.5 million with four commercial banks, of which approximately $27.3
million was available on such date. The Company currently believes that lines of
credit as described above and additional vendor financing 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, 1998
in the amount of $72.3 million. Net cash used in operating activities for the
three months ended September 30, 1998 was approximately $0.8 million.
12
<PAGE>
The Company made capital expenditures of approximately $10.1 million
during the nine months ended September 30, 1998. Such capital expenditures were
financed with the proceeds from the Senior Notes offering and from cash
generated from the Company's operations. For the remaining three months of 1998,
the Company anticipates capital expenditures of approximately $9.0 million, of
which $3.0 million will be incurred in its existing operating markets, and an
additional $6.0 million (see discussion below) will be incurred in connection
with the development of new markets awarded to the Company in October and
November of this year.
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. Due to
legal challenges made to the bidding process by several bidders, the bidding
process had been postponed for all markets. However, on May 13, 1998, the
Superior Justice Tribunal issued a favorable ruling allowing the bidding process
with respect to a number of the smaller markets to go forward. The status of the
bidding process with respect to the remaining markets requires further judicial
action. The Company cannot predict when such judicial action will occur. In July
1998, the license process for the smaller markets was reinstated and in October
and November 1998, the Company was awarded licenses to operate pay-TV systems in
the following six cities: Bauru, Campina Grande, Caruaru, Franca, Porto Velho
and Uberaba. The Company will pay an aggregate of $3.8 million for its six new
licenses. The Company intends to continue to pursue licenses as they become
available for bid; however, there can be no assurance as to the grant of any
additional concessions and licenses and the timing of any additional grants
generally. The Company also from time to time may selectively pursue joint
ventures or acquisitions in the pay television industry, although it currently
has no understanding, commitment or agreement with respect to any such joint
venture or acquisitions. The Company believes that its cash and internally
generated funds will be sufficient to fund the cash requirements for its three
existing systems and six new markets for at least the next twelve months. As of
September 30, 1998, of the Company's approximately $76.5 million in cash and
cash equivalents, approximately $26.2 million (34%) 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 telecommunications 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.
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 raises 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
13
<PAGE>
effect on the Company's results of operations and financial condition. Further,
as of January 1, 1998, the Company's financial statements reflect foreign
exchange gains and losses associated with monetary assets and liabilities
denominated in currencies other than the REAL. See footnote 1b. "Method of
Presentation" contained in the Notes to Consolidated Financial Statements. As a
result, the devaluation of the REAL against the U.S. dollar will cause the
Company to record a loss associated with its U.S. dollar monetary liabilities
and a gain associated with its U.S. dollar monetary assets. Given that the
Company has a net U.S. dollar monetary liability position, the net effect of the
devaluation of the REAL against the U.S. dollar is to generate losses in the
Company's financial statements. In order to protect against a possible
devaluation of the real the Company may from time to time enter into certain
foreign exchange contracts.
RECENT ECONOMIC EVENTS
The economic and financial turmoil in Southeast Asia and the Soviet
Union during 1997 and 1998 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 real, as well as the gains achieved over the
last several years by 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 continue to have a negative impact on Brazil's economic growth, were
designed to improve the country's fiscal and current account deficits and
relieve pressure on the real. While short-term interest rates declined somewhat
during the second quarter of 1998, they have since returned to levels
approaching 42% per annum. Even with rates at this level, the government
continues to experience a reduction in foreign currency reserves which are being
used to purchase reais as a means to protect the relative value of the real
versus the U.S. dollar. Due to the continued reduction in foreign currency
reserves, and other reasons, the Brazilian government has sought support from
the International Monetary Fund ("IMF"). On November 13, 1998, the IMF announced
an aid package of more than $41 billion of which $37 billion will be available
to Brazil over the next twelve months. To secure funds from the IMF, in October
1998 the Brazilian government announced additional austerity measures including
pension plan reform and significant spending cuts which have yet to be approved
by the Brazilian Congress. As part of the austerity package, the government is
also seeking to increase its financial transactions tax (CPMF)from 0.2% to
0.38%. This tax is levied on the value of all financial transactions, including
bank withdrawals, checks, and stock and fund purchases. Also, the Brazilian
government intends to increase the public pension system contribution by
corporations from 2% of revenue to 3% of revenue. These measures, if approved,
will have both a direct and indirect impact on the Company's financial results.
Indirectly, these measures, in conjunction with high short-term interest rates,
will result in continued tightening of consumer credit and increased rates of
unemployment, causing the Company to have increased difficulty in generating
additional sales and in reducing rates of customer delinquency. Directly, these
measures will reduce the Company's net revenue by approximately 1% and increase
its cash expenses by approximately 0.18%. Had these measures been introduced as
of January 1, 1998, the effect on the Company's results through September 30,
1998 would have been a reduction of net revenues of $400,000 and an increase in
expenses of $250,000. Soon after the 1997 austerity measures were initiated, the
Company began to experience a significant increase in customer delinquency rates
which, among other things, resulted in the Company significantly increasing its
provisions for doubtful accounts and increasing service disconnections. This
trend has continued during the first three quarters of 1998 and the Company
anticipates that this trend will continue for the foreseeable future. The
Company has undertaken several steps to address the impact of the deterioration
in its operating environment, such as performing credit checks on potential new
subscribers, changing the way it compensates its sales force to emphasize high
quality sales and implementing cost reduction measures, including a headcount
reduction. In addition, as previously discussed the Company has become more
aggressive in cancelling delinquent subscriber accounts. While the Company
believes its current difficulties are short-term in nature
14
<PAGE>
and the steps it has undertaken are adequate to address these issues, there can
be no assurance that the steps taken by the Company or measures taken by the
government will be successful, or that the increase in delinquent payments and
service disconnections will abate.
YEAR 2000 COMPLIANCE
Similar to all businesses, the Company may be affected by the inability
of certain computer software and firmware to distinguish between the years 1900
and 2000 due to a commonly-used programming convention. Unless such programs are
modified or replaced prior to January 1, 2000, calculations based on date
arithmetic or logical operations performed by such programs may be incorrect.
Management's plan to address the effect of the Year 2000 issue focuses
on the following areas: applications systems (including the Company's billing
system and accounting software), transmission systems (including the encoding
and decoding processes used in transmission of the television signals to
customers), infrastructure (including personal computers and servers used
throughout the Company), and other third party business partners and suppliers.
Management's analysis and review of these areas is comprised primarily of the
following five phases: developing an inventory of hardware, software and
embedded chips; assessing the degree to which each area is currently compliant
with Year 2000 requirements; performing renovations, repairs and replacements as
needed to attain compliance; testing to ensure compliance; and, developing a
contingency plan for each area if the Company's initial efforts to attain
compliance are either unsuccessful or untimely.
Management is currently in the process of concluding its inventory and
assessment phases and expects to complete these phases by February 1999. The
renovation, repair and replacement phase and the testing phase have commenced;
however, the Company expects to continue these phases throughout 1999. Costs
incurred to date have primarily consisted of labor from the redeployment of
existing information services and operational resources. The Company expects to
spend approximately $1.0 million for these Year 2000 compliance efforts which
will be expenses as incurred.
Further, the Company has completed evaluation and testing of its
proprietary Subscriber Management System (SMS) which controls internal processes
such as telemarketing and sales control, customer service, dispatch, service
orders and billing. The Company believes that the SMS is Year 2000 compliant on
a stand-alone basis. However, certain third-party software and hardware which
interact with the SMS remain in the inventory and assessment phases.
Accordingly, complete compliance for the Company's SMS has yet to be determined.
Also, the Company has formed a contingency team to develop a work plan
in the event that certain programs and hardware are not fully compliant and
operational before January 1, 2000. The costs associated with this effort are
currently being evaluated and cannot yet be determined. In the event that
certain, or all, of the contingency plans are deployed, the Company will incur
additional costs; however, as the contingency plans are not yet developed, these
costs are indeterminable at present.
Although the Company does not presently anticipate a material business
interruption as a result of the Year 2000 issue, the worst case scenario if all
of the Company's Year 2000 efforts fail would result in a daily loss of revenues
of approximately $130,000, calculated based upon 1998 revenues through September
30, 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
This requirement is not currently applicable to the Company.
15
<PAGE>
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.
-----------------
None.
Item 2. Changes in Securities and Use of Proceeds.
------------------------------------------
None.
Item 3. Defaults Upon Senior Securities.
--------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
None.
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, 1998.
16
<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 12, 1998
TV FILME, INC.
(Registrant)
/s/ Hermano Studart Lins de Albuquerque
---------------------------------------
Hermano Studart Lins de Albuquerque
Chief Executive Officer (Principal Executive
Officer)
/s/ Carlos Andre Studart Lins de Albuquerque
---------------------------------------
Carlos Andre Studart Lins de Albuquerque
Acting Chief Financial Officer (Principal
Financial and Accounting Officer)
17
<PAGE>
Exhibit Index
-------------
No. Description
- - --- -----------
27 Financial Data Schedule
18
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE
COMPANY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 67,554
<SECURITIES> 0
<RECEIVABLES> 7,039
<ALLOWANCES> 2,331
<INVENTORY> 5,226
<CURRENT-ASSETS> 90,398
<PP&E> 88,014
<DEPRECIATION> 34,627
<TOTAL-ASSETS> 151,577
<CURRENT-LIABILITIES> 16,678
<BONDS> 140,000
0
0
<COMMON> 108
<OTHER-SE> (9,703)
<TOTAL-LIABILITY-AND-EQUITY> 151,577
<SALES> 35,127
<TOTAL-REVENUES> 35,127
<CGS> 15,214
<TOTAL-COSTS> 16,412
<OTHER-EXPENSES> 16,496
<LOSS-PROVISION> 5,845
<INTEREST-EXPENSE> (14,242)
<INCOME-PRETAX> (29,247)
<INCOME-TAX> 0
<INCOME-CONTINUING> (29,247)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (29,247)
<EPS-PRIMARY> (2.70)
<EPS-DILUTED> (2.70)
</TABLE>
