<PAGE>
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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 March 31, 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 May 11, 1998
================================================================================
<PAGE>
TV FILME, INC.
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE NO.
--------------------- --------
ITEM 1. Financial Statements
<S> <C>
Consolidated Balance Sheets as of December 31, 1997
and March 31, 1998 (Unaudited)........................................................ 2
Unaudited Consolidated Statements of Operations for the Three Months Ended
March 31, 1997 and the Three Months Ended March 31, 1998.............................. 3
Unaudited Consolidated Statement of Changes in Stockholders' Equity
at March 31, 1998..................................................................... 4
Unaudited Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 1997 and March 31, 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............................ 13
PART II. OTHER INFORMATION
-----------------
ITEM 1. Legal Proceedings..................................................................... 13
ITEM 2. Changes in Securities and Use of Proceeds............................................. 13
ITEM 3. Defaults Upon Senior Securities....................................................... 13
ITEM 4. Submission of Matters to a Vote of Security Holders................................... 13
ITEM 5. Other Information..................................................................... 13
ITEM 6. Exhibits and Reports on Form 8-K...................................................... 13
SIGNATURES
</TABLE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------------------- ---------------------
(Unaudited)
(In thousands)
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents............................. $ 80,975 $ 75,741
Accounts receivable, net.............................. 7,832 7,544
Supplies.............................................. 5,303 5,187
Prepaid expenses and other current assets............. 3,178 3,606
Interest receivable................................... 679 921
Pledged securities-current............................ 16,645 16,645
-------------------- ---------------------
Total current assets............................ 114,612 109,644
Property, plant and equipment, net......................... 63,405 61,257
Debt issuance costs, net................................... 6,298 5,979
Other assets............................................... 2,082 2,279
-------------------- ---------------------
Total assets.................................... $186,397 $179,159
==================== =====================
Liabilities and stockholders' equity
Current liabilities:
Accounts payable...................................... $ 12,724 $ 11,675
Payroll and other benefits payable.................... 2,103 2,221
Accrued interest payable.............................. 751 5,257
Accrued liabilities and taxes payable................. 1,111 1,142
Payables to affiliates-current........................ 200 --
-------------------- ---------------------
Total current liabilities........................ 16,889 20,295
Deferred installation fees................................. 7,178 6,416
Senior notes............................................... 140,000 140,000
Stockholders' equity:
Cumulative translation adjustment..................... -- (477)
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) (32,840)
-------------------- ---------------------
Total stockholders' equity....................... 22,330 12,448
-------------------- ---------------------
Total liabilities and stockholders' equity....... $186,397 $179,159
==================== =====================
</TABLE>
See accompanying notes.
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
------------------------------------------
1997 1998
---------------- -----------------
(In thousands, except per share data)
<S> <C> <C>
Revenues............................................... $11,180 $12,618
Operating costs and expenses:
System operating - Note 2.......................... 3,698 5,095
Selling, general and administrative................ 5,475 7,507
Depreciation and amortization...................... 2,304 5,301
--------------- -----------------
Total operating costs and expenses............. 11,477 17,903
--------------- -----------------
Operating loss................................. (297) (5,285)
Other income (expense):
Interest and other expense - Note 2................ (4,909) (4,722)
Interest income.................................... 2,948 1,691
Monetary loss...................................... -- (1,089)
Exchange and translation loss...................... (738) --
--------------- -----------------
Total other expense............................ (2,699) (4,120)
--------------- -----------------
Net loss............................................... $(2,996) $(9,405)
=============== =================
Net loss per share, basic and diluted.................. $ (0.27) $ (0.87)
=============== =================
Weighted average number of shares of
common stock and common stock
equivalents outstanding............................ 10,984 10,825
=============== =================
</TABLE>
See accompanying notes.
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
For the three months ended March 31, 1998
<TABLE>
<CAPTION>
Additional Cumulative
Common Stock Paid-in Translation Accumulated
Shares Par Value Capital Adjustment Deficit Total
--------------------------- ------------ ------------ ------------- -------------
(In thousands)
<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................ -- -- -- (477) -- (477)
Net loss for the period........ -- -- -- -- (9,405) (9,405)
------------ ------------- ------------ ------------ ------------- -------------
Balance at March 31, 1998...... 10,825,139 $108 $45,657 $(477) $(32,840) $12,448
============ ============= ============ ============ ============= =============
</TABLE>
See accompanying notes.
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
---------------------------------------
1997 1998
------------- ---------
(In thousands)
Cash flows from operating activities
<S> <C> <C>
Net loss.............................................. $ (2,996) $ (9,405)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................... 2,304 5,301
Provision for losses on accounts receivable..... 599 2,021
Amortization of debt issuance costs............. 191 204
Decrease in deferred installation fees.......... (14) (955)
Monetary loss................................... -- 1,089
Changes in operating assets and liabilities:
Increase in accounts receivable................. (2,183) (1,733)
Increase (decrease) in supplies................. (702) 116
Increase in prepaid expenses and other current
assets........................................ (417) (428)
Increase in accrued interest receivable......... (454) (242)
Decrease (increase) in other assets............. 45 (367)
Decrease in accounts payable.................... (831) (1,049)
Increase in payroll and other benefits payable.. 235 118
Increase in accrued interest payable............ 4,570 4,506
Increase in accrued liabilities and taxes
payable....................................... 363 31
---------- ----------
Net cash provided by (used in) operating activities... 710 (793)
---------- -----------
Cash flows from investing activities
Property, plant and equipment......................... (10,364) (4,241)
---------- -----------
Net cash used in investing activities................. (10,364) (4,241)
---------- -----------
Cash flows from financing activities
Debt issuance costs................................... (328) 0
Decrease in payables to affiliates.................... (200) (200)
---------- ----------
Net cash provided by financing activities............. (528) (200)
----------- ----------
Net change in cash and cash equivalents............... (10,182) (5,234)
Cash and cash equivalents at beginning of period. 116,355 80,975
---------- ----------
Cash and cash equivalents at end of period............ $ 106,173 $ 75,741
========== ==========
</TABLE>
See accompanying notes.
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. COMPANY BACKGROUND
In connection with an initial public offering (the "Initial Public
Offering") of its common stock, $.01 par value per share (the "Common Stock"),
TV Filme, Inc. (the "Company") was formed in April 1996 to become the holding
company of and successor to ITSA-Intercontinental Telecomunicacoes S.A. and its
subsidiaries ("ITSA"). The transfer of ITSA to the Company has been accounted
for in a manner similar to a pooling of interests. ITSA was formed in May 1994
as a holding company for and successor to TV Filme Servicos de Telecomunicacoes
S.A. ("TVFSA"). The transfer of TVFSA to ITSA has been accounted for in a manner
similar to a pooling of interests.
In connection with the Initial Public Offering, the Company entered
into a restructuring (the "Restructuring") pursuant to which all of the
preferred stock of ITSA was converted into common stock of ITSA, based on the
conversion rates at the date of issuance of the preferred stock. Each share of
common stock of ITSA was exchanged for 1,844 shares of Common Stock of the
Company. As all of the preferred stock of ITSA has been converted and there were
no preferred dividends paid or due as a result of the conversion, all preferred
and common stock issuances of the predecessor companies have been reflected as
issuances of Common Stock of the Company. Prior to the consummation of the
Initial Public Offering and the Restructuring, TVFSA operated the Company's
wireless cable system in Brasilia, and held the licenses to operate the
Company's wireless cable systems in Brasilia, Goiania and Belem. ITSA owned
substantially all of TVFSA, TV Filme Goiania Servicos de Telecomunicacoes Ltda.
("TV Filme Goiania") and TV Filme Belem Servicos de Telecomunicacoes Ltda. ("TV
Filme Belem"). Pursuant to the Restructuring, (i) 51% of the voting stock of
TVFSA was transferred to an entity, all of which was owned by certain then
existing shareholders of ITSA who were or 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-size 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 it 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; all other income and expense items
<PAGE>
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 three 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 $2,695,000 at March 31, 1998. Charges to the allowance
during the three months ended March 31, 1998 were $1,036,000.
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 months ended March 31,
1997 and 1998 were approximately $2,600,000 and $2,748,000, respectively.
Through September 1997, the Company purchased from Tevecap a program guide which
it distributed to its subscribers monthly. Amounts paid to Tevecap for the
program guide during the three months ended March 31, 1997 and 1998 were $53,000
and $0, respectively. As of October 1997, the Company no longer purchases its
program guide from Tevecap but has begun to produce and distribute its own
program guide.
The Company purchased two licenses to operate wireless cable systems
from Abril S.A. ("Abril") for $400,000 each, payable in four equal annual
installments, which do not bear interest. The $200,000 which remained
outstanding as of 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 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
<PAGE>
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 an additional 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 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
March 31, 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 March 31, 1998.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS AND
UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE
RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FOLLOWING DISCUSSION
SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL STATEMENTS,
INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS FORM 10-Q.
RESULTS OF OPERATIONS
Although the Company's financial statements are presented pursuant to
United States generally accepted accounting principles in U.S. dollars, the
Company's transactions are consummated in both reais and U.S. dollars. Inflation
and devaluation in Brazil have had, and may continue to have, substantial
effects on the Company's results of operations and financial condition. See "--
Inflation and Exchange Rates."
As a result of the development and rapid growth of the Company's
business during the periods presented, the period-to-period comparisons of the
Company's results of operations are not necessarily meaningful and should not be
relied upon as an indication of future performance.
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------------------------------------------
1997 % of Revenue 1998 % of Revenue
---- ------------ ---- ------------
(In thousands, except subscriber, per share and share data)
<S> <C> <C> <C> <C>
Revenue........................................... $11,180 100% $ 12,618 100%
Operating costs and expenses
System operating............................... 3,698 33% 5,095 40%
Selling, general and administrative............ 5,475 49% 7,507 59%
Depreciation and amortization.................. 2,304 21% 5,301 42%
-------- -------- ---------- --------
Total operating costs and expenses........ 11,477 103% 17,903 142%
-------- -------- ---------- --------
Operating loss........................... (297) (3)% (5,285) (42)%
Other income (expense):
Interest and other expense...................... (4,909) (44)% (4,722) (37)%
Interest and other income....................... 2,948 26% 1,691 13%
Monetary loss..................................... -- -- (1,089) (9)%
Exchange and translation loss..................... (738) (7)% -- (0)%
-------- -------- ---------- -------
Total other income (expense)................ (2,699) (24)% (4,120) (33)%
--------- -------- ---------- -------
Net loss.......................................... $ (2,996) (27)% $ (9,405) (75)%
========= ======== ========= =======
Net loss per share................................ $ (0.27) $ (0.87)
========= =========
Weighted average number of shares of
Common stock and common stock
Equivalents.................................... 10,984 10,825
========= =========
Other Data:
EBITDA (a)..................................... $ 2,007 $ 24
========= =========
Number of subscribers at end of period ........ 92,097 112,443
========= ========
</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.
<PAGE>
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 March
31, 1998 compared to the same period in 1997, revenues increased by $1.4
million, or approximately 13%, primarily due to an increase of 26,200 in the
average number of subscribers in the Company's three operating systems.
SYSTEM OPERATING EXPENSES. System operating expenses consist of
programming costs (including costs associated with developing and producing
proprietary programming content), costs for the programming guide distributed to
subscribers, a portion of costs of compensation and benefits for the Company's
employees, vehicle rental costs, transmitter site rentals, repair and
maintenance expenditures and service call costs. For the three months ended
March 31, 1998 compared with the same period in 1997, system operating expenses
increased by approximately $1.4 million, or 38%, primarily due to additional
programming and production costs directly associated with the increase in the
Company's installed subscriber base ($0.2 million), costs associated with the
development of the Company's proprietary programming initiatives ($0.2 million),
higher programming guide expenses ($0.3 million) reflecting the full cost of the
programming guide compared to the first quarter of 1997, when the Company
received a one-time credit from the publisher, higher salary expense ($0.4
million) associated with the addition of customer service and collection
personnel and higher other expenses ($0.3 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months
ended March 31, 1998 compared to the same period in 1997, selling, general and
administrative ("SG&A") expenses increased by approximately $2.0 million, or
37%, primarily due to an increase in the provision for doubtful accounts ($1.4
million) resulting from an increase in customer delinquency rates and due to an
increase in compensation and benefits ($0.5 million) incurred as a result of
salary increases and headcount increases to support the growth of the Company.
The higher customer delinquency rates also resulted in a significant increase 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 March 31, 1998 compared to the same period in 1997, depreciation
and amortization expense increased by approximately $3.0 million, or 130%,
primarily due to the Company's change in its depreciation schedule for decoder
boxes and installation costs from a five to a four year period and due to growth
in the number of installed subscribers in each of the Company's three operating
systems.
OPERATING LOSS. For the three month period ended March 31, 1998, the
Company generated a loss of approximately $5.3 million, 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 decreased from the three month
period ended March 31, 1997 to the three month period ended March 31, 1998,
primarily as a result of decreases is short-term borrowings of the Company.
INTEREST INCOME. Interest income decreased from the three month period
ended March 31, 1997 to the three month period ended March 31, 1998, primarily
as a result of reductions in available 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, which caused net losses associated with dollar-denominated monetary
assets and liabilities held by the Company's Brazilian subsidiaries.
<PAGE>
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
three-month period ended March 31, 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 further 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 March 31, 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 March 31, 1998, approximately $7.7 million was outstanding under
letters of credit with maturities ranging from 270 days to 360 days. As of March
31, 1998, the Company had import lines of credit in the aggregate amount of
$23.6 million with three commercial banks, of which approximately $15.9 million
was available on such date. The Company currently believes that import 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 March 31, 1998 in
the amount of $89.4 million. Net cash used in operating activities for the three
months ended March 31, 1998 was approximately $0.8 million.
The Company made capital expenditures of approximately $4.2 million in
the three months ended March 31, 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 nine months of 1998, the Company
anticipates that its aggregate capital expenditures in its existing operating
markets will be approximately $17.0 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 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
<PAGE>
industry, although it is currently has no understanding, commitment or agreement
with respect to any such joint ventures 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 March 31, 1998, of the Company's $93.3 million in cash and cash equivalents,
$55.8 million (60%) was invested in U.S. dollar denominated securities. The
Company expects that the percentage of its cash and cash equivalents invested in
U.S. dollar denominated securities will significantly decrease during 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.
Generally, inflation in Brazil has been accompanied by devaluation of
the Brazilian currency relative to the U.S. dollar. Devaluation of the real may
also have an adverse effect on the Company. The Company collects substantially
all of its revenues in reais, but pays certain of its expenses, including a
significant portion of its equipment costs, substantially all interest expense
and most of its programming costs, in U.S. dollars. To the extent the real
depreciates at a rate greater than the rate at which the Company is able to
raise prices, the value of the Company's revenues (as expressed in U.S. dollars)
will be adversely affected. This effect on the Company's revenues may negatively
impact the Company's ability to fund U.S. dollar-based expenditures.
Accordingly, devaluation of the real may have a material adverse effect on the
Company's results of operations and financial condition. Further, as of January
1, 1998, the Company's financial statements will reflect foreign exchange gains
and losses associated with monetary assets and liabilities denominated in
currencies other than the real. See footnote "b. 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 LOSSES
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 first quarter of 1998, short-term interest rates declined somewhat
but remain substantially higher than the rates in effect prior to the Brazilian
<PAGE>
government's October and November initiatives. 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 quarter of
1998 and the Company anticipates that this trend will continue for the
foreseeable future. While the Company believes these difficulties are short-term
in nature, there can be no assurance that the measures taken by the government
will be successful, or that the increase in delinquent payments and service
disconnections will abate.
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.
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 March 31, 1998.
<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: May 13, 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. Aguirre
----------------------------------------------
Alvaro J. Aguirre
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 March 31, 1998
and the consolidated statements of operations for the three months ended
March 31, 1998 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 75,742
<SECURITIES> 0
<RECEIVABLES> 10,239
<ALLOWANCES> 2,695
<INVENTORY> 5,188
<CURRENT-ASSETS> 109,644
<PP&E> 87,689
<DEPRECIATION> 26,432
<TOTAL-ASSETS> 179,159
<CURRENT-LIABILITIES> 20,295
<BONDS> 140,000
0
0
<COMMON> 108
<OTHER-SE> 12,340
<TOTAL-LIABILITY-AND-EQUITY> 179,159
<SALES> 12,618
<TOTAL-REVENUES> 12,618
<CGS> 5,095
<TOTAL-COSTS> 5,486
<OTHER-EXPENSES> 5,301
<LOSS-PROVISION> 2,021
<INTEREST-EXPENSE> (4,722)
<INCOME-PRETAX> (9,405)
<INCOME-TAX> 0
<INCOME-CONTINUING> (9,405)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,405)
<EPS-PRIMARY> (0.87)
<EPS-DILUTED> (0.87)
</TABLE>
