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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 June 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 : 0-28670
Delaware 98-0160214
(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 10,825,139 shares
per share. as of August 12, 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 June 30, 1998 (Unaudited)........................................2
Unaudited Consolidated Statements of Operations for the Three
and Six Months Ended June 30, 1997 and the Three and Six
Months Ended June 30, 1998...........................................3
Unaudited Consolidated Statement of Changes in Stockholders'
Equity at June 30, 1998..............................................4
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1997 and the Six Months Ended June 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...................................................15
ITEM 2. Changes in Securities and Use of Proceeds...........................15
ITEM 3. Defaults Upon Senior Securities.....................................15
ITEM 4. Submission of Matters to a Vote of Security Holders.................15
ITEM 5. Other Information...................................................15
ITEM 6. Exhibits and Reports on Form 8-K....................................15
SIGNATURES
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
----------- ----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $ 80,975 $ 72,676
Accounts receivable, net................... 7,832 5,484
Supplies................................... 5,303 5,126
Prepaid expenses and other current assets.. 3,178 3,765
Interest receivable........................ 679 459
Pledged securities-current................. 16,645 8,323
---------- -----------
Total current assets.................... 114,612 95,833
Property, plant and equipment, net........... 63,405 58,236
Debt issuance costs, net..................... 6,298 6,050
Other assets................................. 2,082 2,338
---------- -----------
Total assets............................ $186,397 $162,457
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 12,724 $ 10,614
Payroll and other benefits payable......... 2,103 2,846
Accrued interest payable................... 751 751
Accrued liabilities and taxes payable...... 1,111 1,196
Payables to affiliates-current............. 200 0
----------- -----------
Total current liabilities............... 16,889 15,407
Deferred installation fees................... 7,178 5,487
Senior Notes................................. 140,000 140,000
Stockholders' equity:
Cumulative translation adjustment.......... -- (966)
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) (43,236)
------------ -----------
Total stockholders' equity.............. 22,330 1,563
----------- -----------
Total liabilities and stockholders'
equity................................ $186,397 $162,457
=========== ===========
</TABLE>
See accompanying notes.
-2-
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ --------------------
1997 1998 1997 1998
------- -------- --------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues ....................... $ 12,237 $ 11,460 $ 23,417 $ 24,078
Operating costs and expenses:
System operating - Note 2 .... 4,453 4,942 8,150 10,037
Selling, general and
administrative ............... 6,265 8,471 11,741 15,978
Depreciation and amortization 2,823 5,349 5,127 10,650
-------- -------- -------- --------
Total operating costs and
expenses ................... 13,541 18,762 25,018 36,665
-------- -------- -------- --------
Operating loss ............. (1,304) (7,302) (1,601) (12,587)
Other income (expense):
Interest and other expense --
Note 2 ....................... (4,782) (4,727) (9,691) (9,449)
Interest income .............. 2,288 3,053 5,236 4,744
Monetary loss ................ -- (1,420) -- (2,509)
Exchange and translation
losses........................ (361) 0 (1,099) 0
--------- -------- --------- --------
Total other expense ........ (2,855) (3,094) (5,554) (7,214)
--------- --------- --------- ---------
Net loss ....................... $(4,159) $(10,396) $(7,155) $(19,801)
========= ========= ========= =========
Net loss per share, basic and
diluted ...................... $ (0.38) $ (0.96) $ (0.65) $ (1.83)
========= ========= ========= =========
Weighted average number of
shares of common stock and
common stock equivalents
outstanding................... 10,984 10,825 10,984 10,825
======== ======== ======== ========
</TABLE>
See accompanying notes.
-3-
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
ADDITIONAL CUMULATIVE
COMMON STOCK PAID-IN TRANSLATION ACCUMULATED
SHARES PAR VALUE CAPITAL ADJUSTMENT 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 ..................... -- -- -- (966) -- (966)
Net loss for the period ........... -- -- -- -- (19,801) (19,801)
----------- ---- ------- ------ --------- -------
BALANCE AT JUNE 30, 1998........... 10,825,139 $108 $45,657 $(966) $(43,236) $ 1,563
=========== ==== ======= ====== ========= =======
</TABLE>
See accompanying notes.
-4-
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------
1997 1998
----------- ----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ............................................... $ (7,155) $ (19,801)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization ....................... 5,127 10,836
Provision for losses on accounts receivable ......... 1,223 4,662
Amortization of debt issuance costs ................. 390 386
Decrease in deferred installation fees .............. (206) (1,471)
Monetary loss ....................................... -- 2,509
Changes in operating assets and liabilities:
Increase in accounts receivable ..................... (4,433) (2,588)
Increase in supplies ................................ (816) (9)
Increase in prepaid expenses and other current assets (646) (698)
Increase (decrease) in accrued interest receivable .. (245) 220
Decrease (increase) in other assets ................. 1 (810)
Decrease in pledged securities ...................... 8,112 8,322
Decrease in accounts payable ........................ (914) (1,933)
Increase in payroll and other benefits payable ...... 620 817
Increase in accrued interest payable ................ 374 0
Increase in accrued liabilities and taxes payable ... 123 131
--------- ---------
Net cash provided by (used in) operating activities .... 1,555 573
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Property, plant and equipment .......................... (18,406) (7,578)
--------- ---------
Net cash used in investing activities .................. (18,406) (7,578)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Debt issuance costs .................................... (717) --
Decrease in payables to affiliates ..................... (200) (200)
--------- ---------
Net cash provided by financing activities .............. (917) (200)
--------- ---------
Effect of exchange rate changes on cash ................ -- (1,094)
--------- ----------
Net change in cash and cash equivalents ................ (17,768) (8,299)
Cash and cash equivalents at beginning of period ....... 116,355 80,975
--------- ---------
Cash and cash equivalents at end of period ............. $ 98,587 $ 72,676
========= =========
</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.
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).
-6-
<PAGE>
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 six 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 $4,142,000 at June 30, 1998. Charges to the allowance
during the three months ended June 30, 1998 were $1,194,000.
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 six months ended
June 30, 1997 and 1998 were approximately $2,700,000 and $5,300,000 and
$2,748,000 and $5,455,000, 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 during the three and six months
ended June 30, 1997 and 1998 were $118,000 and $303,000 and $0 and $0,
respectively.
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.
-7-
<PAGE>
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, options to purchase 308,500 shares of Common Stock were granted in
October 1997 at an exercise price of $6.00 per share and options to purchase
150,000 shares of Common Stock were granted in December 1997 at an exercise
price of $5.625 per share.
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
June 30, 1998 it is unable to make any dividend payments.
The Company believes that the recorded value of the Senior Notes
approximates the fair value at June 30, 1998.
-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,
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 June 30,
-------------------------------------------
% of % of
1997 Revenue 1998 Revenue
----------- --------- -------- -------
(In thousands, except subscriber, per
share and share data)
<S> <C> <C> <C> <C>
Revenues........................... $12,237 100% $11,460 100%
Operating costs and expenses:
System operating............... 4,453 36% 4,942 43%
Selling, general and administrative 6,265 51% 8,471 74%
Depreciation and amortization.. 2,823 23% 5,349 47%
------- ---- ------ -----
Total operating costs and
expenses..................... 13,541 111% 18,762 164%
------- ---- ------ -----
Operating loss............ (1,304) (11%) (7,302) (64%)
Other income (expense):
Interest and other expense..... (4,782) (39%) (4,727) (41%)
Interest and other income...... 2,288 19% 3,053 27%
Monetary loss.................. -- -- (1,420) (12%)
Exchange and translation losses (361) (3%) -- --
-------- ----- ------ -----
Net loss........................... $(4,159) (34%) $(10,396) (91%)
======== ===== ========== =======
Net loss per share, basic and diluted $(0.38) $ (0.96)
======== =========
Weighted average number of common
stock and common stock equivalents 10,984 10,825
======= =========
Other Data:
EBITDA(a)...................... $1,519 $ (1,953)
======= =========
Number of subscribers at
end of period................. 103,770 111,090
======= ========
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
---------------------------------------------
% of % of
1997 Revenue 1998 Revenue
---------- ---------- ---------- ---------
(In thousands, except subscriber, per share
and share data)
<S> <C> <C> <C> <C>
Revenues............................ $23,417 100% $24,078 100%
Operating costs and expenses:
System operating................ 8,150 35% 10,037 42%
Selling, general and
administrative.................. 11,741 50% 15,978 66%
Depreciation and amortization... 5,127 22% 10,650 44%
--------- --------- --------- --------
Total operating costs and
expenses.................... 25,018 107% 36,665 152%
--------- --------- --------- --------
Operating loss................ (1,601) (7%) (12,587) (52%)
Other Income (expense):
Interest and other expense...... (9,691) (41%) (9,449) (39%)
Interest and other income....... 5,236 22% 4,744 20%
Monetary loss................... -- -- (2,509) (10%)
Exchange and translation
(losses)........................ (1,099) (5%) -- --
--------- --------- --------- --------
Net loss............................ $(7,155) (31%) $(19,801) (82%)
========= ========= ========= ========
Net loss per share, basic and
diluted......................... $ (0.65) $ (1.83)
========= =========
Weighted average number of common
stock and common stock equivalents 10,984 10,825
========= =========
Other Data:
EBITDA(a)....................... $ 3,526 $(1,937)
========= =========
Number of subscribers at
end of period................... 103,770 111,090
========= =========
</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 June 30, 1998
compared to the same period in 1997, revenues decreased by approximately $0.8
million, or approximately 6.3%, primarily due to the loss of revenue associated
with higher levels of delinquency, lower installation fees and the effects of a
7.4% average devaluation of the real against the U.S. dollar between the
respective periods paritally offset by revenues associated with the Company's
proprietary premium channel. See "-- Recent Economic Events." For the six months
ended June 30, 1998 compared to the same period in 1997, revenues increased by
approximately $0.7 million, or approximately 2.8%, primarily due to an increase
of 19,694 in average installed subscribers for the period and additional revenue
from the Company's proprietary premium channel, substantially offset by higher
levels of delinquency, lower installation fees and the effects of a 7.4% average
devaluation of the real against the dollar between the respective periods.
-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 June 30, 1998 compared with the same period in 1997, system
operating expenses increased by approximately $0.5 million, or 11%, primarily
due to operating expenses associated with the Company's proprietary premium
channel (approximately $0.3 million) and higher compensation expenses
(approximately $0.1 million) associated with additional customer service and
collection personnel. For the six months ended June 30, 1998 compared to the
same period in 1997, system operating expenses increased by approximately $1.9
million, or approximately 23%, primarily due to higher compensation expenses
(approximately $0.6 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 $0.6 million), higher
programming guide expenses (approximately $0.3 million) reflecting the full cost
of the programming guide compared to the first six months of 1997 when the
Company received a one-time credit from the publisher, and higher other expenses
(approximately $0.2 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended
June 30, 1998 compared to the same period in 1997, selling, general and
administrative ("SG&A") expenses increased by approximately $2.2 million, or
approximately 35%, primarily due to a higher provision for doubtful accounts
(approximately $2.0 million) resulting from an increase in customer delinquency
rates, and due to an increase in compensation and benefits (approximately $0.7
million) incurred as a result of salary increases and costs associated with the
termination of employement of a portion of the Company's work force pursuant to
the Company's cost reduction efforts partially offset by a decrease in
advertising and promotion expense (approximately $0.5 million). For the six
months ended June 30, 1998 compared to the same period in 1997, SG&A expenses
increased by approximately $4.2 million, or approximately 36%, primarily due to
a higher provision for doubtful accounts (approximately $3.4 million) resulting
from an increase in customer delinquency rates, an increase in compensation and
benefits expenses (approximately $1.2 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 and
higher other expenses (approximately $0.1 million), partially offset by a
decrease in advertising and promotion expense (approximately $0.5 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 June 30, 1998 compared to the same period in 1997, depreciation and
amortization expense increased by approximately $2.5 million, or approximately
89%. For the six months ended June 30, 1998 compared to the same period in 1997,
depreciation and amortization expense increased by approximately $5.5 million,
or approximately 108%. 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 and to new subscriber
installations in each of the Company's three operating systems.
OPERATING LOSS. For the three- and six-month periods ended June 30, 1998,
the Company generated a loss of approximately $7.3 million and $12.6 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 was essentially unchanged during the
three month period ended June 30, 1998 compared to the three month period ended
June 30, 1997. Interest expense decreased from the six-month period ended June
30, 1997 to the six-month period ended June 30, 1998, primarily as a result of
decreases in short-term borrowings of the Company.
-11-
<PAGE>
INTEREST INCOME. Interest income increased from the three-month period
ended June 30, 1997 to the three-month period ended June 30, 1998, primarily as
a result of a higher proportion of the Company's cash denominated in reais which
earn higher rates of interest. Interest income decreased from the six-month
period ended June 30, 1997 to the six-month period ended June 30, 1998,
primarily as a result of overall reductions in available cash partially offset
by higher levels of reais denominated cash.
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 six-month
period ended June 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 June 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 June 30, 1998, approximately $7.5 million was outstanding under
letters of credit with maturities ranging from 270 days to 360 days. As of June
30, 1998, the Company had import lines of credit in the aggregate amount of
$33.0 million with four commercial banks, of which approximately $25.5 million
was available on such date. The Company currently believes that 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 June 30, 1998 in the
amount of $78.2 million. Net cash provided by operating activities for the three
months ended June 30, 1998 was approximately $0.6 million.
-12-
<PAGE>
The Company made capital expenditures of approximately $7.6 million during
the six months ended June 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 six months of 1998, the Company
anticipates that the aggregate capital expenditures in its existing operating
markets will be approximately $9.0 million. 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.
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 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. The
Company intends to actively pursue 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 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 current operations for at least the next twelve
months. As of June 30, 1998, of the Company's approximately $81.5 million in
cash and cash equivalents, approximately $36.7 million (45%) was invested in
U.S. dollar denominated securities. The Company expects that the percentage of
its cash and cash equivalents denominated in dollars will continue to decrease
during the remainder of 1998. 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.
-13-
<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 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 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.
RECENT ECONOMIC EVENTS
The economic and financial turmoil in Southeast Asia during 1997 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 are having 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. During the second
quarter of 1998, short-term interest rates began declining significantly
reaching levels that are near to those in effect prior to the Brazilian
government's October and November initiatives. Nonetheless, the Brazilian
government continues to attempt to protect its currency through various
mechanisms. These include maintaining high short-term interest rates and
maintaining high levels of import duties on various products, including many
products used by the Company. The short-term effect of these policies has been a
tightening of consumer credit and increased rates of unemployment. Soon after
the 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 half 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. While the Company believes its
current difficulties are short-term in nature 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.
-14-
<PAGE>
YEAR 2000 COMPLIANCE
The Company has conducted an evaluation of its computer system and network
for Year 2000 compliance. Based on such evaluation, the Company believes that a
substantial portion of its software and hardware systems are Year 2000
compliant. The Company does not anticipate that it will be required to make any
significant capital expenditures in order to make its remaining systems Year
2000 compliant.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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.
------------------------------------------
None.
Item 3. DEFAULTS UPON SENIOR SECURITIES.
--------------------------------
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
-----------------------------------------------------
None.
Item 5. OTHER INFORMATION.
------------------
In accordance with the advance notice provisions contained in the Company's
By-laws, the Company must receive notice of a stockholder's intent to make a
nomination for the election of directors or to propose certain other business
for consideration at an annual meeting not less than 60 days nor more than 90
days prior to such meeting except in the event that less than 70 days' notice or
public disclosure of the date of the meeting is given or made to the
stockholders, in which event such notice must be received no later than the
close of business on the tenth day following the day on which notice is given or
disclosure is made, whichever first occurs. In order for a nomination or
proposal to be presented at the 1998 Annual Meeting of Stockholders, such
proposal must be received by the Company by September 10, 1998.
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
June 30, 1998.
-15-
<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: August 12, 1998
TV FILME, INC.
----------------------------------------------
(Registrant)
/s/ Hermano Studart Lins de Albuquerque
----------------------------------------------
Hermano Studart Lins de Albuquerque
Chief Executive Officer (Principal
Executive Officer)
/s/ Alvaro J. Aquirre
---------------------------------------------
Alvaro J. Aquirre
Chief Financial Officer (Principal
Financial and Accounting Officer)
<PAGE>
EXHIBIT INDEX
-------------
No. DESCRIPTION
- --- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets of TV Filme, Inc. at June 30, 1998 and the
consolidated statement of operations for the six months ended June 30, 1998
and is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 72,676
<SECURITIES> 0
<RECEIVABLES> 9,626
<ALLOWANCES> 4,142
<INVENTORY> 5,126
<CURRENT-ASSETS> 95,833
<PP&E> 87,885
<DEPRECIATION> 29,649
<TOTAL-ASSETS> 162,457
<CURRENT-LIABILITIES> 15,407
<BONDS> 140,000
0
0
<COMMON> 108
<OTHER-SE> 1,455
<TOTAL-LIABILITY-AND-EQUITY> 162,457
<SALES> 24,078
<TOTAL-REVENUES> 24,078
<CGS> 10,037
<TOTAL-COSTS> 11,316
<OTHER-EXPENSES> 10,650
<LOSS-PROVISION> 4,662
<INTEREST-EXPENSE> (9,449)
<INCOME-PRETAX> (19,801)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,801)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,801)
<EPS-PRIMARY> (1.83)
<EPS-DILUTED> (1.83)
</TABLE>
