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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
(MARK ONE)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number : 0-28670
TV FILME, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 98-0160214
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
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 OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
Registrant's telephone number, including area code: 011-55-61-314-9908
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, par value $0.01 per share
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [X].
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 20, 1998 was approximately $12,358,894.
As of March 20, 1998, 10,825,139 shares of the registrant's Common Stock,
$0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. The information called for by Part III
is incorporated by reference to the definitive Proxy Statement for the Company's
1998 Annual Meeting of Stockholders, which will be filed on or before April 30,
1998.
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TABLE OF CONTENTS
PAGE
Part I
Item 1. Business.......................................................1
Background.............................................................1
Company Overview.......................................................1
Brazilian Pay Television Industry......................................2
Operating Systems and the Company's Markets............................3
Programming............................................................4
Operations.............................................................6
Employees..............................................................7
Facilities and Equipment...............................................7
Competition............................................................7
Regulatory Environment.................................................8
Item 2. Properties...................................................10
Item 3 Legal Proceedings............................................10
Item 4. Submission of Matters to a Vote of Security Holders..........10
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters..............................11
Item 6 Selected Financial Data........................................11
Item 7.Management's Discussion and Analysis of Financial
Condition and Results of Operations............................13
Item 7A. Quantitative and Qualitative Disclosures about
Market Risk.................................................23
Item 8. Financial Statements and Supplementary Data..................24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................36
PART III
Item 10. Directors and Executive Officers of the Registrant..........36
Item 11. Executive Compensation......................................36
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................36
Item 13. Certain Relationships and Related Transactions..............36
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K....................................................37
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CAUTIONARY STATEMENT REGARDING FORWARD - LOOKING STATEMENTS
STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT PURELY
HISTORICAL ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPECTATIONS, HOPES,
INTENTIONS OR STRATEGIES REGARDING THE FUTURE. FORWARD-LOOKING STATEMENTS
INCLUDE: STATEMENTS REGARDING THE COMPANY'S EXPANSION PLANS, THE IMPACT OF
COMPETITION, THE START-UP OF CERTAIN OPERATIONS AND TRENDS AFFECTING THE
COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS. ALL FORWARD-LOOKING
STATEMENTS IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO THE COMPANY (AS
HEREINAFTER DEFINED) AS OF THE DATE THIS REPORT IS FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE ANY SUCH
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, BUT ARE NOT LIMITED TO, THE FACTORS SET FORTH IN "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS."
PART I
Item 1. Business.
Unless the context otherwise requires, reference to (i) "TV Filme" means
TV Filme, Inc., a Delaware corporation, (ii) "ITSA" means ITSA-Intercontinental
Telecomunicacoes Ltda., and (iii) the "Company" means TV Filme, its consolidated
subsidiaries, which include ITSA, TV Filme Goiania Servicos de Telecomunicacoes
Ltda. ("TV Filme Goiania"), TV Filme Belem Servicos de Telecomunicacoes Ltda.
("TV Filme Belem"), TV Filme Brasilia Servicos de Telecomunicacoes Ltda. ("TV
Filme Brasilia"), TV FILME Programadora Ltda. ("TV FILME Programadora") and
their predecessors and successors. References to the "Company" also include TV
Filme Servicos de Telecomunicacoes, Ltda. ("TV Filme Servicos"), a company in
which the Company has a 49% voting interest and an 83% equity interest.
Except as otherwise noted, financial information has been presented in
in U.S. dollars. The Consolidated Financial Statements have been prepared in
accordance with generally accepted accounting principles in the United States
("U.S. GAAP") in U.S. dollars.
Background
The predecessor of TV Filme was founded in 1989 by certain members of the
Company's current senior management team. In September 1989, the Company was
granted a license to operate a wireless cable television system in Brasilia, the
capital of Brazil, and commenced operations in 1990 with a one channel offering.
Licenses to operate the Goiania and Belem Systems were acquired in 1994 from TVA
Sistema de Televisao S.A. ("TVA Sistema"), a subsidiary of Tevecap S.A.
("Tevecap").
TV Filme is a publicly-traded holding company organized in 1996 under the
laws of the State of Delaware (Nasdaq National Market symbol: "PYTV"). Its
largest stockholders include Warburg, Pincus Investors, L.P. ("Warburg,
Pincus"); Tevecap, one of the leading pay television operators in Brazil and one
of the country's largest pay television programming distributors; and certain
members of management and their family.
Company Overview
The Company develops, owns and operates pay television systems in
mid-sized markets in Brazil. The Company is the sole provider of multi-point,
multi-channel distribution systems ("MMDS") in the cities of Brasilia, Goiania
and Belem. Together, these cities have a total population of approximately 5.8
million and encompass approximately 1.3 million households, an estimated 1.1
million of which can be served by the Company's line-of-sight ("LOS")
transmission. There is only one hardwire cable provider in each of Brasilia and
Goiania and no hardwire cable provider in Belem. Of the approximately 1.3
million households in Brasilia, Goiania and Belem, the Company estimates that
approximately 60% of such households are currently unpassed by hardwire cable.
Since the beginning of 1994, the Company's subscriber base has grown
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substantially, increasing from 1,864 subscribers to 111,244 subscribers as of
December 31, 1997. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operation - Overview."
During 1996, 27 requests for licenses were filed by the Company for
licenses to operate MMDS systems. Considering the number of license requests
filed by competing telecommunications companies, in October 1997, the Brazilian
Government instituted an official bidding process for the granting of new MMDS
licenses. As a result of the bidding process, formal applications were required
to be filed by all interested parties. To date, seven license tender
invitations, for 92 markets covering approximately 8.2 million LOS households,
have been issued by the Brazilian Ministry of Communications for MMDS. However,
due to challenges made to the bidding process by several bidders, the date for
submission of proposals has been postponed. This matter is currently pending
before the Brazilian Supreme Court. Although the Company anticipates that the
bidding process will recommence in the first half of 1998, there can be no
assurance that the bidding process will recommence in such time frame. See
"--Regulatory Environment" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Certain Factors Which May
Affect the Company Future Results -- Factors Relating to the Company -- Risks
Associated with New Markets and Growth and Expansion Strategy."
The Company primarily targets mid-sized markets with demographics,
competitive environments and topographies that it believes offer the Company the
opportunity to become the leading provider of pay television services in those
markets. The Company believes that mid-sized markets in Brazil are currently
underpenetrated by existing pay television providers.
The Company believes that wireless cable technology is well suited to its
current and targeted markets and is an attractive alternative to existing
television choices. Wireless cable service can be deployed more rapidly than
most alternative technologies and provides immediate coverage of entire markets,
enabling service to be delivered to all potential subscribers that are in the
unobstructed path of the transmission tower. Wireless cable service can be
deployed at a significantly lower system capital cost per installed subscriber
than hardwire cable because (i) typically the headend for a wireless cable
system has a relatively low cost, (ii) capital expenditures for wireless cable
systems are only generally required at the headend facility and in connection
with installation of subscriber reception equipment and (iii) incremental
investment is generally only undertaken in response to customer demand with the
addition of each new subscriber. The Company believes that subscribers to
television services in Brazil are concerned with such features as programming,
service, reliability and price and are generally indifferent to the method of
delivery.
Brazilian Pay Television Industry
The pay television industry in Brazil began in 1989 with the commencement
of UHF service in Sao Paulo. In contrast to the U.S., the Brazilian hardwire
cable industry and wireless cable industry began developing concurrently. By
December 31, 1997, approximately 100 hardwire cable licenses and 12 wireless
cable licenses had been issued by the Brazilian government. The Company believes
that as of December 31, 1997, fewer than 20% of Brazilian homes were passed by
hardwire cable as compared to over 90% in the U.S. Brazil is the largest
television market in Latin America with an estimated 34 million television
households. As of December 31, 1997, the Company estimates that there were
approximately 2.5 million pay television subscribers, representing approximately
7.4% of Brazilian television households.
As of December 31, 1995, Brazilian television households viewed an average
of more than 6.5 hours of television per day, as compared to an average of 6.8
hours per day in the United States. Viewers prefer Portuguese language
programming, including movies, sports and "novelas" (soap operas). The second
language of many Brazilians is English. U.S. culture generally, and U.S. films,
shows and sports in particular, are popular with Brazilians. The programming
market for pay television is dominated by Brazil's two largest media
conglomerates, Abril S.A. ("Abril") and the Globo Organization. Both groups
offer programming packages including movie, sports and news channels and U.S.
prime time network shows and cartoons. In general, much of the Brazilian
programming transmitted by pay television systems, such as HBO Brazil, ESPN
International and MTV Latino, is based on formats found in the U.S. In addition,
there are channels which include programs directly from the U.S., such as Warner
and Sony, as well as channels from Europe and other countries in Latin America.
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Operating Systems and the Company's Markets
The table below provides information regarding the Company's markets as of
December 31, 1996:
<TABLE>
<CAPTION>
ESTIMATED ESTIMATED ESTIMATED NUMBER FULL
TOTAL TOTAL LOS OF LAUNCH
POPULATION(1) HOUSEHOLDS(1) HOUSEHOLDS(1)(2) CHANNELS(3) DATE
------------- -------------- ------------ --------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING MARKETS:
Brasilia............... 2,000,000 472,000 417,102 37 Feb. 1994(4)
Belem.................. 1,900,000 398,000 345,000 36 Feb. 1995
Goiania................ 1,800,000 444,000 331,000 36 Jan. 1995
------------- -------------- ------------
Total in Operating 5,700,000 1,314,000 1,093,102
Markets................
============= ============== ============
- -----------
</TABLE>
(1) Represents the Company's estimate of the number of total households within
the greater metropolitan areas of Brasilia, Belem and Goiania. The
Company's estimates are based on data from the 1991 Census conducted by
the Brazilian Institute of Geography and Statistics as adjusted to reflect
estimated total household growth.
(2) Represents the Company's estimate of the number of LOS households within a
35 kilometer radius in Brasilia and a 30 kilometer radius in each of Belem
and Goiania that can receive an adequate signal from the Company
(eliminating those homes that the Company estimates are unable to receive
service due to certain physical characteristics of the particular signal
coverage area, such as terrain and foliage, although some of these
households can be served with the aid of signal repeaters).
(3) Includes six local off-air VHF/UHF channels in Brasilia and five local
off-air VHF/UHF channels in each of Goiania and Belem which are offered to
the Company's subscribers in addition to the Company's subscription
channels and includes an additional seven wireless cable channels in such
markets over which the Company is authorized to transmit.
(4) Date when the Brasilia System increased its channel offering from four
channels to eight channels. The Brasilia System began service with one
channel in 1990.
Since the beginning of 1994, the Company's subscriber base has grown
substantially, increasing from 1,864 subscribers to 111,244 subscribers as of
December 31, 1997. See "See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Overview." A description of the
Company's current markets follows.
BRASILIA SYSTEM. Brasilia, the capital of Brazil, had an estimated greater
metropolitan population of approximately 2.0 million as of December 31, 1997.
Brasilia, which is located in the interior of Brazil, was established in the
early 1960's as a planned city when the capital of Brazil was moved from Rio de
Janeiro. Brasilia's generally flat topography is advantageous for MMDS. In
addition, Brasilia's zoning provisions favor MMDS by requiring that residential
buildings be of a similar height and located together. The Company's current 35
kilometer coverage territory encompasses approximately 417,102 households which
the Company believes can be served by LOS transmission.
The Brasilia System currently offers a 30 channel package, consisting of
24 wireless cable channels and six local off-air VHF/UHF channels. The Brasilia
System, launched in 1990 with one channel, increased to three channels in July
1992, to four channels in September 1992, to eight channels in February 1994, to
16 wireless cable channels in November 1994 and to 24 wireless cable channels by
the end of 1997. The Company also has approval to transmit programming over
seven additional wireless cable channels, one of which it currently uses to
transmit data to its internet access customers. The Brasilia System became
system EBITDA positive in the third quarter of 1994 with approximately 6,000
subscribers. In addition to monthly subscriber revenue, the Brasilia system also
generates advertising revenues. The Brasilia System transmits at 50 watts of
power per channel from a transmission tower which is 300 feet above average
terraine. The principal pay television provider in the city of Brasilia is NET
Brasilia, a hardwire cable operator and affiliate of the Globo Organization. The
Company believes that, at December 31, 1997, it was the largest pay television
provider in Brasilia based on the total number of subscribers. In December 1997,
the Company began providing internet access, under the brand name of Link
Express, to its pay-TV customers in Brasilia. This service, which uses wireless
cable modems for delivery of access at much higher speeds than conventional
phone line access to subscribers, is believed to be the first marketed use of
cable modem technology in Brazil. See "- Internet Access Service."
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BELEM SYSTEM. Belem, with an estimated greater metropolitan population of
approximately 2.0 million as of December 31, 1997, lies at the mouth of the
Amazon River and is a major trading port for the rich natural resources of the
Amazon rain forest. The Company launched service in Belem in February 1995.
Although the city is relatively flat, trees block wireless cable transmission in
Belem more often than they do in Brasilia and Goiania and thus, the Belem System
requires increased utilization of signal repeaters. The Belem System reaches the
greater Belem area, including the cities of Mosqueiro, Ananindeua, Icoaraci and
Marituba and the islands of Outeiro and Barcarena. The Company's current 30
kilometer coverage territory encompasses approximately 345,000 households which
the Company believes can be served by LOS transmission.
The Belem System currently offers a 29 channel package, consisting of 24
wireless cable channels and five local off-air VHF/UHF channels. The Company
also has approval to transmit programming over an additional seven wireless
cable channels which have not yet been placed in service. The Belem System
became EBITDA positive in the fourth quarter of 1995 with approximately 5,000
subscribers. The Belem System transmits at 50 watts of power per channel from a
transmission tower which is 300 feet above average terrain. There currently is
no hardwire or other wireless cable provider in the city of Belem.
GOIANIA SYSTEM. Goiania, with an estimated metropolitan population of
approximately 1.8 million as of December 31, 1997, is located approximately 100
miles southwest of Brasilia. Goiania is the capital of the state Goias, and,
like Brasilia, its topography is favorable to LOS transmission because the city
is relatively flat. The Company launched service in Goiania in January 1995. The
Company's current 30 kilometer coverage territory encompasses approximately
331,000 households which the Company believes can be served by LOS transmission.
The Goiania System currently offers a 29 channel package, consisting of 24
wireless cable channels and five local off-air VHF/UHF channels. The Company
also has approval to transmit programming over seven additional wireless cable
channels which have not yet been placed in service. The Goiania System transmits
at 50 watts of power per channel from a transmission tower which is 350 feet
above average terrain. The principal pay television competitor in the city of
Goiania is Multicanal, a hardwire cable operator and affiliate of the Globo
Organization. The Company believes that, at December 31, 1997, it was the second
largest pay television provider in Goiania based on total number of subscribers.
Programming
The Company currently purchases substantially all of its programming from
Tevecap and its subsidiaries pursuant to an exclusive license to transmit
programming available from Tevecap and its subsidiaries via wireless and
hardwire cable in the Company's current markets (the "Programming Agreement").
Under the terms of the Programming Agreement, so long as the Company is
transmitting exclusive TVA programming, the Company has agreed that it shall use
50% of its total channel capacity in its current operating markets where it has
a programming license from Tevecap or its subsidiaries to broadcast TVA Sistema
programming, with certain exceptions, and the Company has a right of first
refusal to carry any new programming channel that is offered by Tevecap or its
subsidiaries. Tevecap may not charge the Company an amount greater than the
minimum rates charged by Tevecap to other pay television operators, nor may such
charges exceed comparable rates for other programming of a similar nature. The
terms of the Programming Agreement terminate on July 2004, with certain limited
exceptions with respect to the Company's application markets.
In addition, pursuant to the Programming Agreement, Tevecap has granted
the Company a non-exclusive license to transmit programming in certain
additional markets if the Company is able to obtain an MMDS license for such
markets, with exclusivity to be negotiated on a case-by-case basis.
The Programming Agreement also provides that if Tevecap obtains a
license to operate hardwire cable systems in any of the Company's current
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operating markets, Tevecap may only develop such hardwire cable systems in a
partnership or joint venture with the Company on mutually agreeable terms. The
Company also has certain rights with respect to marketing satellite television
services in the Company's current operating markets.
The Company also offers selected local programming to supplement its
channel line-up. For example, the Company owns the rights to televise annually
through 2001 all of the games of the Goias State Soccer Championship matches,
which the Company offers to its subscribers in the Goiania market, and the
rights to televise annually through 1999 all of the games of the Para State
Soccer Championship, which the Company offers to its subscribers in the Belem
market. The Company also offers certain exclusive sports programming, including
ESPN Brazil on which selected games of the Sao Paulo Soccer Championship and the
Rio de Janeiro Soccer Championship matches are offered. Further, in 1997 the
Company established TV FILME Programadora to develop and sell additional
programming to the Company's three systems and to other pay-TV operations in
Brazil. The first channel developed by TV FILME Programadora, Canal Adulto
(which provides adult content programming), is now available in each of the
Company's markets as a premium channel. Beginning in October 1997, the Company
also began producing its own programming guide, which it distributes at no
charge to its subscribers. The Company, through TV FILME Programadora, is also
exploring offering other channels, which may contain local news, cultural
events, religious programming, home shopping and additional sporting events,
although there can be no assurance that such channels will be offered.
The Company's channel offerings as of December 31, 1997 are as follows:
CHANNEL DESCRIPTION
- ------- -----------
HBO Brazil............... Brazilian version of HBO
HBO Brazil 2............. HBO Brazil with a six hour time delay
ESPN Brazil.............. Brazilian version of ESPN
Eurochannel.............. Package of programming from free TV in Europe
Mundo.................... Variety channel
CMT Brazil............... Brazilian version of Country Music Television
MTV Brazil............... Brazilian version of MTV
MTV Latino *............ Spanish language version of MTV
RTPi **.................. Radio and Television Portugal, a free broadcast
channel from Portugal
CNN International........ International version of CNN
TNT...................... Brazilian version of TNT
Cartoon Network.......... Cartoon Network produced in the U.S.
Fox...................... General entertainment
Discovery Channel........ Brazilian version of Discovery Channel
ESPN International....... International version of ESPN
Warner................... Warner channel produced in the U.S.
Bravo.................... Brazilian version of Bravo
Sony..................... Sony channel produced in the U.S.
CBS Telenoticias......... Brazilian version of CBS for Latin American (in
Spanish and Portuguese)
Discovery Kids........... Children's version of Discovery
Redevida................. Catholic programming
Cinemax.................. Films and special programming
Hallmark................. Films and special programming
Fox Kids................. Children's version of Fox
Canal Adulto ***......... Adult programming
Globo.................... Local off-air channel
SBT...................... Local off-air channel
Bandeirantes............. Local off-air channel
Record................... Local off-air channel
Nacional................. Local off-air channel
Manchete................. Local off-air channel
Cultura.................. Local off-air channel
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* - Offered only in Brasilia.
** - Offered only in Belem and Goiania.
*** - Offered as a premium channel.
Internet Access Service
In December 1997, the Company began providing internet access service,
under the brand name Link Express, to its pay-TV customers in Brasilia. This
service, which uses wireless cable modems for delivery of access at greatly
increased speeds to subscribers, is believed to be the first marketed use of
cable modem technology in Brazil. Under current telecommunications regulations
in Brazil, only MMDS providers of pay-TV are permitted to offer advanced data
services such as internet access using their networks. Wired cable providers are
prohibited, at this time, from offering similar services. In the future, the
Company intends to offer internet access service to non-pay-TV subscribers, both
residential and corporate, and may also offer this service in Goiania and Belem,
depending on market demand.
Operations
MARKETING. Prior to commencing operations in a potential new market, the
Company conducts pre-marketing surveys to evaluate the demographics and terrain
of such market. The Company then develops a plan designed to manage subscriber
growth by maintaining a manageable backlog of installations. Such backlog is
maintained at a manageable level by adjusting installation capacity to
correspond with sales levels. The amount of time a subscriber waits for the
commencement of service is determined based on several factors, including
whether the subscriber is in a single family home or multiple dwelling unit.
This development plan ensures that the quality of installations and customer
service remains high. In each market, the Company's marketing staff typically
applies the following programs to attract subscribers: (i) door-to-door sales,
(ii) telemarketing, (iii) extensive marketing tied to regional events such as
soccer matches, (iv) neighborhood promotional events featuring large screen
broadcasts of its channel offerings, (v) direct mailings, (vi) television and
newspaper advertisements, (vii) prewiring arrangements with residential housing
developers and (viii) other marketing activities, including referral programs
and promotional gifts.
INSTALLATION. The Company's installation package features a standard
rooftop mount linked to a small antenna and related equipment, including a
decoder, located at the subscriber's location. Installations at single-family
homes require an entire installation package, while installations at multiple
dwelling units in which drop lines already have been installed require less time
and, accordingly, are less costly. The Company charges its subscribers an
installation fee typically ranging from $40 to $105.
CUSTOMER SERVICE. The Company believes that delivering high levels of
customer service in installation and maintenance enables it to maintain customer
satisfaction and to minimize churn. To this end, the Company (i) schedules
installations promptly, (ii) provides a customer service hotline, (iii) provides
quick response repair service and (iv) makes follow-up calls to new subscribers
shortly after installation to ensure customer satisfaction. The Company seeks to
instill a customer service focus in all its employees through ongoing training
and has established an intra-company electronic mail system to provide a forum
for employees to exchange ideas concerning means to increase customer
satisfaction. The Company also has various employee bonus programs linked to
measures of customer satisfaction.
SUBSCRIBER MANAGEMENT SYSTEMS. The Company has developed its
own subscriber management systems. The Company believes that its subscriber
management systems enable it to deliver superior customer service, monitor
customer payment patterns and facilitate the efficient management of each of its
operating systems. The Company has 9 employees dedicated to the development,
enhancement and integration of the Company's subscriber management systems.
6
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Employees
As of December 31, 1997, the Company had a total of 808 employees,
substantially all of whom are employed by TV Filme's subsidiaries. All of the
Company's employees, except for Messrs. Hermano Lins, Carlos Andre Lins and
Alvaro Aguirre, are subject to collective bargaining agreements. The collective
bargaining agreements covering the employees of TV Filme Brasilia and TV Filme
Goiania expire in October 1998. The Company is currently renegotiating the
collective bargaining agreement governing the employees of TV Filme Belem and
expects that a new agreement will be signed in the near future. The collective
bargaining agreements are with the Union for the Employees of Radio and TV
Broadcasting Companies. The Company has experienced no work stoppages. The
Company provides its employees with health insurance (which is not required by
law in Brazil) and certain other benefits which it believes enable it to attract
and retain qualified and motivated employees. The Company believes that its
relationships with its employees are good.
Facilities and Equipment
ADMINISTRATIVE FACILITIES. A centralized corporate administrative facility
is located in Brasilia to handle training, engineering, computer systems
development, financial and controller functions and strategic planning. In
addition, the Company has established regional operating offices in Brasilia,
Goiania and Belem to coordinate sales, billing, general marketing, customer
service and certain other administrative functions on a regional level. Each
facility is connected to the Company's computer network.
TRANSMISSION FACILITIES. The Company's headend and transmitter facilities
are located in leased buildings at the Company's transmission tower sites in
Brasilia, Goiania and Belem. The transmitting antennas generally are able to
serve the maximum regulatory range for license coverage areas of 50 kilometers.
In certain areas within the Company's markets that are otherwise
terrain-blocked, the Company utilizes signal repeaters to enhance signal
coverage.
DIGITAL TECHNOLOGY. The Company currently transmits in analog format.
Should competitive conditions require or if the Company deems such technology to
be cost effective and practical to provide, it may implement digital technology.
Competition
Through its subsidiaries, the Company is the only entity licensed to
operate wireless cable systems in Brasilia, Goiania and Belem. The Company
currently provides service via 24 wireless analog cable channels in Brasilia,
Belem and Goiania, and has authority to provide service using up to 31 wireless
analog cable channels in each such market. The Company believes that, as of
December 31, 1997, it was the largest pay television provider in Brasilia based
on total number of subscribers. The Company's principal competitor in the city
of Brasilia is NET Brasilia, a hardwire cable operator and affiliate of the
Globo Organization. The Company believes that, as of December 31, 1997, it was
the second largest pay television provider in Goiania based on total number of
subscribers. The Company's principal competitor in the city of Goiania is
Multicanal, a hardwire cable operator and affiliate of the Globo Organization.
There currently is no hardwire cable provider in the city of Belem.
In addition to other terrestrial pay television operators, pay television
operators in Brazil face or may face competition from several other sources,
such as direct broadcasting satellite systems ("DBS"), local off-air VHF/UHF
channels, home videocassette recorders and out-of-home theaters. Currently,
there are two DBS providers in Brazil, "Sky," an affiliate of the Globo
Organization, and Direct TV, an affiliate of Tevecap. A third DBS operator is
currently launching service in Brazil. Competition in the pay television
industry is based upon program offerings, customer service, reliability and
pricing. Many actual and potential competitors have greater financial, marketing
and other resources than the Company. No assurance can be given that the Company
will be able to compete successfully. See "--Brazilian Pay Television Industry,"
and "--Operating Systems and the Company's Markets."
7
<PAGE>
Regulatory Environment
GENERAL. In July 1997, the Brazilian government adopted federal Law No.
9472/97, the "General Telecommunications Law." Such law revoked the Brazilian
Telecommunications Code of 1962 pursuant to which the pay television industry
was subject to regulation by the Ministry of Communications. The General
Telecommunications Law provides that the newly-created Telecommunications
National Agency ("ANATEL") has jurisdiction over the regulation of
telecommunications services. ANATEL has been vested with the power to, among
other things, revoke, modify and renew licenses within the spectrum available to
MMDS, approve the assignment and transfer of control of such licenses, approve
the location of channels that comprise MMDS systems, regulate the type,
configuration and operation of equipment used by MMDS systems, and impose
certain other reporting requirements on MMDS license holders and MMDS operators.
Currently, MMDS license holders remain subject to the provisions of
Presidential Decree Number 2196 ("Decree No. 2196"), issued April 8, 1997, which
regulates "Special Services" including MMDS systems and operations. Decree No.
2196 specifies the competitive procedures for the granting of concessions and
licenses for the rendering of Special Services in Brazil. Based on the
provisions of Decree No. 2196, the Ministry of Communications revised Rule
002/94, which specifically regulated MMDS service, by means of Administrative
Rule 254, dated April 16, 1997, hereinafter referred to as the "Revised MMDS
Rule".
Under the terms of the Revised MMDS Rule, each license holder and its
affiliates may be granted permission to operate MMDS systems in different areas
of Brazil, provided that, if the license holder or its affiliates face no
competition from other pay television services, excluding services that utilize
a satellite to transmit their signal, such license holder may be granted
licenses for (i) no more than seven municipalities with a population equal to or
exceeding 700,000 inhabitants or (ii) no more than 12 municipalities with a
population between 300,000 and 700,000 inhabitants. Under the Revised MMDS Rule,
ANATEL has discretion to alter or eliminate such restrictions, taking into
account the level of competition and the ownership of MMDS providers. As the
Company expects to face local competition in most of the markets for which it
has or expects to file an application, it does not believe that these
restrictions should present a substantial limitation on its ability to implement
its expansion plan.
OWNERSHIP OF LICENSES. The General Telecommunications Law, eliminated the
requirement that only companies in which Brazilian nationals own at least 51% of
the voting capital were eligible to be granted a license to operate an MMDS
system. Consequently, under current regulations any company constituted in
accordance with the laws of Brazil and with a head office and management located
in Brazil is eligible to be granted such a license. Until November 1997, TV
Filme Servicos held the licenses to operate the MMDS systems in Brasilia,
Goiania and Belem. As a result of the lifting of the 51% ownership requirement,
in November 1997, TV Filme Servicos transferred the respective license for
Brasilia, Goiania and Belem to TV Filme Brasilia, TV Filme Goiania and TV Filme
Belem, respectively. This transfer was approved by Brazilian regulators.
Although the General Telecommunications Law eliminated the requirement discussed
above, the General Telecommunications Law permits the Executive Branch, through
Presidential Decree, to impose restrictions on foreign capital investments in
telecommunications companies. However, such restrictions may not be imposed
retroactively with respect to outstanding licenses. Decree No. 2196 also
provides that licenses shall be granted for renewable periods of ten or fifteen
years; all the current invitations for bids for MMDS services provide for
15-year terms.
PRICES. Prices for pay television services currently in operation may be
freely established by the system operator, although ANATEL may intervene in the
event of abusive pricing practices. ANATEL may impose penalties including fines,
suspension or revocation of a license in the event the license holder fails to
comply with applicable regulations or becomes legally, technically or
financially unable to provide MMDS service. ANATEL and CADE, the Brazilian
antitrust authority, also may intervene to the extent operators engage in unfair
practices intended to eliminate competition.
CHANNELS AVAILABLE FOR WIRELESS CABLE. ANATEL grants licenses and
regulates the use of channels by MMDS operators to transmit video programming,
entertainment services, advertising and other information. Under the Revised
MMDS Rule, MMDS licensees are permitted to transmit up to 31 analog MMDS
channels (constituting a spectrum bandwidth of 186 Mhz), the exact number of
channels depending on the number of inhabitants in a particular market. 16
channels are permitted in markets with less than 300,000 inhabitants; 15, 16 or
8
<PAGE>
31 analog channels are permitted in markets with a population between 300,000
and 700,000 inhabitants; and 31 analog channels are permitted in markets with
700,000 inhabitants or more. However, such limits may be changed by ANATEL in
its discretion.
LICENSE PROCEDURES. In accordance with Decree No. 2196 and the Revised
MMDS Rule, a party interested in providing MMDS services must file with ANATEL
an "Application for Telecommunications Services," which specifies the modality
of the services intended to be provided, the geographic area where the services
are to be provided, the technical specifications for the proposed system
(including the radio frequencies to be used) and the intended operation and the
usage of such services. ANATEL may, in its discretion or whenever it receives
such an application, publish public notices requesting comments by interested
parties to determine, among other things, the geographic area where the services
are to be provided and the number of concessions to be granted. In both cases,
interested parties are required to present to or file with ANATEL its comments
or application, as the case may be, containing, among other things, the
technical feasibility of the proposed MMDS system and a demonstration of the
market potential for the targeted area. ANATEL will thereafter ascertain the
public interest in granting the concession and may decide to open the public bid
process for the granting of such licenses. The 1997 bid processes for the
granting of MMDS licenses was begun as a result of the existence of numerous
requests for licenses filed by competing parties.
In connection with the 1997 auction process, ANATEL established specific
criteria for evaluating the Applications for Telecommunication Services filed.
The criteria adoption includes a combination of technical and financial
criteria. The following technical factors will be utilized by ANATEL in
evaluating the technical aspects of a license application: (i) the proposed
length of time for the installation of the transmission system, counted from the
issuance of the authorization for installation until the beginning of the
service's commercial operation; (ii) the number of cultural or educational
channels to be offered; (iii) the percentage of time dedicated to local
programming, calculated on the total time used for all channels, and excluding
the time dedicated to the channels referred in item (ii) above; and, (iv) the
number of local community establishments that would receive cultural and
educational programming free of charge. The Company believes that channels such
as Discovery and Bravo will qualify as cultural and educational programming.
The technical specifications, and the offer price for a license, will be
rated according to certain criteria established in the Revised MMDS Rule and set
forth in the 1997 MMDS tender invitations, as follows: (a) for markets with less
than 300,000 inhabitants, the technical aspects shall weight more heavily than
the offer price; (b) in markets with a population between 300,000 and 700,000
inhabitants, the technical aspects and the offer price will be weighed equally;
and, (c) in markets with more than 700,000 inhabitants, the offer price shall
weigh more heavily than the technical aspects. Once an MMDS concession is
granted by ANATEL, the license holder will be required to submit, within four
months, an installation proposal for its MMDS system's headend. Subsequent to
approval of such proposal, construction will be required to be finalized and
commercial operations commenced within 12 months; however, this period may be
extended for an additional 12 months.
In addition to qualifying under the application and bid process, a license
holder may also be required to demonstrate that its proposed signal will not
violate interference standards in the area of another MMDS license holder. The
Revised MMDS Rule also contains certain other technical criteria designed to
avoid interference between licensed service areas.
OTHER REGULATIONS. MMDS license holders are subject to regulation with
respect to the construction, marking and lighting of transmission towers
pursuant to the Brazilian Aviation Code and certain local zoning regulations
affecting construction of towers and other facilities. There may also be
restrictions imposed by local authorities. The pay television industry also is
subject to the Brazilian Consumer Code. The Consumer Code entitles the
purchasers of goods or services to certain rights, including the right to
discontinue a service and obtain a refund if the services are deemed to be of
low quality or not rendered adequately. For instance, in case of a suspension of
the transmission for a given period, the subscriber shall be entitled to a
discount on the monthly fees. The Revised MMDS Rule also contain certain
provisions relating to consumer rights, including a provision for mandatory
discounts in the event of interruption of service.
Due to the regulated nature of the pay television industry, the adoption
of new, or changes to existing, laws or regulations or the interpretations
thereof may impede the Company's growth and may otherwise have a material
adverse effect on the Company's results of operations and financial condition.
9
<PAGE>
Item 2. Properties.
The Company leases approximately 37,000 square feet of office space for
its corporate headquarters and the Brasilia System in Brasilia. In addition, the
Company leases office space for the Goiania System and Belem System consisting
of approximately 29,000 and 22,000 square feet, respectively. Also, the Company
leases approximately 6,000 square feet of office space in Sao Paulo for TV
FILME Programadora. In addition to leased office space, the Company also owns a
lot in Brasilia, which may, in the future, be used as the site for the Company's
transmission tower and offices in such city, and less than 1,500 square feet of
office space in Goiania. The Company also leases space for transmission towers
located in Brasilia, Goiania and Belem. The Company believes that office space
and space for transmission towers is readily available on acceptable terms in
the markets where the Company operates wireless cable systems.
Item 3. Legal Proceedings.
The Company is from time to time involved in litigation incidental to the
conduct of its business. There is no pending legal proceeding to which the
Company is a party which, in the opinion of the Company, is likely to have a
material adverse effect on the Company's results of operations or financial
condition.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 20, 1998
with respect to each person who is an executive officer of the Company:
NAME POSITION
---- --------
Hermano Studart Lins de Albuquerque Chief Executive Officer, Secretary and
Director
Carlos Andre Studart Lins de
Albuquerque..................... President, Chief Operating Officer,
Treasurer and Director
Alvaro J. Aguirre................. Chief Financial Officer and Director
HERMANO STUDART LINS DE ALBUQUERQUE, one of the co-founders of the
Company, has served as Chief Executive Officer, Secretary and a director of TV
Filme since its incorporation. Mr. Lins received a Master's degree in Artificial
Intelligence from the University of Sussex, England and a Bachelor of Science
degree in Electronic Engineering from the University of Brasilia. Mr. Lins was a
member of the MMDS Regulation Commission, a Brazilian government advisory board
and is a member of the Technical Advisory Board for National Satellite
Publishing Inc. Mr. Lins is the brother of Mr. Carlos Andre Studart Lins de
Albuquerque. Mr. Lins is 35 years old.
CARLOS ANDRE STUDART LINS DE ALBUQUERQUE, one of the co-founders of the
the Company, has served as President, Chief Operating Officer and a director of
TV Filme since its incorporation. Mr. Lins also served as Treasurer of the
Company from its incorporation until July 1997. Mr. Lins received a Bachelor of
Science degree in Physics from the University of Brasilia and a Bachelor of
Science degree in Mathematics from the University of Ceub. Mr. Lins is the
brother of Mr. Hermano Studart Lins de Albuquerque. Mr. Lins is 33 years old.
ALVARO J. AGUIRRE has served as Chief Financial Officer and a director of
TV Filme since June 1996. Prior to joining TV Filme, Mr. Aguirre was a member of
the Latin America Corporate Finance Group of Morgan Stanley & Co. Incorporated
from 1994 to 1996 and a securities attorney at the law firm of Sullivan &
Cromwell from 1991 to 1994. Mr. Aguirre is 31 years old.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
The Company's common stock, $0.01 par value per share (the "Common Stock")
commenced trading on the Nasdaq National Market on July 30, 1996 under the
symbol ("PYTV"). The following table reflects the high and low sale prices for
the Common Stock, as reported by the Nasdaq National Market, for the periods
indicated:
HIGH LOW
---- ---
(Per Share)
11997
-----
Fourth Quarter.................................. $ 8-3/8 $ 4
Third Quarter................................... 10-3/4 7-3/4
Second Quarter.................................. 12-3/4 8-3/8
First Quarter................................... 14-1/4 11
1996
----
Fourth Quarter.................................. $16 $11-1/4
Third Quarter (commencing July 30).............. 15-1/2 10
On March 27, 1998, there were approximately 13 stockholders of record of
the Common Stock. The Company believes that it has in excess of 400 beneficial
owners.
The Company has never declared or paid any cash dividends on the Common
Stock and does not presently anticipate paying any cash dividends on the Common
Stock in the foreseeable future. The Company currently expects that earnings, if
any, will be retained for growth and development of the Company's business. The
Company's ability to declare and pay dividends is (i) affected by the ability of
the Company's present and future subsidiaries to declare and pay cash dividends
or otherwise transfer funds to the Company since the Company conducts its
operations entirely through its subsidiaries, and (ii) restricted by the terms
of the Indenture, dated as of December 20, 1996, between the Company and IBJ
Schroder Bank & Trust Company (the "Indenture"), pursuant to which the Company
issued $140 million aggregate principal amount of 12-7/8% Senior Notes due 2004
(the "Senior Notes").
The Company, as a holding company, depends on receipt of dividends and
other cash payments from its operating subsidiaries in order to meet the
Company's cash requirements. Such receipts are subject to statutory restrictions
pursuant to which the subsidiaries may pay dividends only out of retained
earnings.
Subject to the foregoing and to any restrictions which may be contained in
future indebtedness of the Company, the payment of cash dividends on the Common
Stock will be within the sole discretion of the Company's Board of Directors,
and will depend upon the earnings, capital requirements and financial position
of the Company, applicable requirements of law, general economic conditions and
other factors considered relevant by the Company's Board of Directors.
tem 6. Selected Financial Data.
The selected consolidated balance sheet data as of December 31, 1995, 1996
and 1997 and the selected consolidated statement of operations data for each of
the years ended December 31, 1993, 1994, 1995, 1996 and 1997 are derived from,
and are qualified by reference to, the Consolidated Financial Statements, which
have been audited by Ernst & Young Auditores Independentes S.C., independent
auditors. The selected consolidated balance sheet data as of December 31, 1993
is derived from unaudited financial statements and include all adjustments,
consisting of normal recurring accruals, which the Company considers necessary
for a fair presentation of the financial position for such period. The
Consolidated Financial Statements have been prepared in accordance with U.S.
GAAP in U.S. dollars. For this purpose, amounts in Brazilian currency for all
periods presented have been remeasured into U.S. dollars in accordance with the
methodology set forth in Statement of Financial Accounting Standards No. 52
11
<PAGE>
("SFAS No. 52") as it applies to entities operating in highly inflationary
economies. Pursuant to SFAS No. 52, supplies, property, plant and equipment,
intangibles and deferred installation fees and the related income statement
accounts are remeasured at exchange rates in effect when the assets were
acquired or the liabilities were incurred. All other assets and liabilities are
remeasured at fiscal year end exchange rates, and all other income and expense
items are remeasured at average exchange rates prevailing during the year.
Remeasuring adjustments are included in net income (loss) for the period. The
data presented below should be read in conjunction with the Consolidated
Financial Statements and related notes thereto and "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other information included elsewhere in this Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,(1)
---------------------------------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS, EXCEPT
OTHER OPERATING DATA)
STATEMENT OF OPERATIONS DATA:
Revenues...................................... $ 287 $ 2,438 $ 11,404 $ 31,388 $ 50,547
Operating costs and expenses:
System operating............................ 196 773 2,957 9,593 17,631
Selling, general and administrative......... 558 2,394 8,975 16,737 27,965
Depreciation and amortization.... 43 365 2,049 5,921 12,162
-------- -------- --------- --------- ----------
Total operating costs and
expenses..................... 797 3,532 13,981 32,251 57,758
-------- -------- --------- --------- ----------
Operating loss..................... (510) (1,094) (2,577) (863) (7,211)
Other (expense) income............. (6) 1,612 360 (1,147) (12,045)
-------- -------- --------- --------- ----------
Net (loss) income.................. $ (516) $ 518 $ (2,217) $ (2,010) $ (19,256)
========= ========= ========= ========== ==========
Net (loss) income per share (2).... $ (0.10) $ 0.08 $ (0.27) $ (0.22) $ (1.76)
========= ========= ========= ========== ==========
Weighted average number of common
stock and common stock
equivalents (2).................. 5,295 6,885 8,086 9,256 10,940
======== ========= ========= ========== =========
OTHER FINANCIAL DATA:
EBITDA(3).......................... $ (467) $ (729) $ (216) $ 5,330 $ 5,026
Capital expenditures............... 852 3,637 16,621 25,225 37,082
OTHER OPERATING DATA:
Number of subscribers at end of
year(4).......................... 1,864 7,641 36,594 79,176 111,244
Average monthly revenue per
subscriber(5).................... $ 30.43 $ 34.13 $ 40.00 $ 39.63 $ 37.91
AS OF DECEMBER 31,
----------------------------------------------------------------------------------
1993 1994 1995 1996 1997
----- ----- ---- ----- ----
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit)(6)...... $ 279 $ 3,204 $ (6,430) $ 123,263 $ 97,723
Pledged securities(7)............. -- -- -- 33,512 17,324
Property, plant and equipment, net. 895 4,182 18,870 38,333 63,405
Total assets...................... 1,795 10,008 23,683 202,929 186,397
Total long-term debt............... -- 600 400 140,200 140,000
Stockholders' equity(8)......... 982 6,500 7,895 37,748 22,330
</TABLE>
- -----------
(1) The Selected Consolidated Financial Data includes (i) TV Filme Servicos on
a historical basis and (ii) ITSA and its subsidiaries since May 1994 and
the predecessor of ITSA on a historical basis, as though they had been
part of TV Filme for all periods presented. See Note 1a to the
Consolidated Financial Statements.
(2) Net income (loss) per share (after giving effect to the Restructuring (as
defined below)) is calculated using the weighted average number of shares
of stock outstanding during the period together with the number of shares
issuable upon the exercise of options and warrants issued during the
twelve months prior to the Company's initial public offering of Common
Stock which occurred in August 1996 (the "Initial Public Offering").
12
<PAGE>
(3) EBITDA is defined as operating income (loss) plus depreciation,
amortization and non-cash charges. EBITDA is a commonly used measure of
performance in the pay television industry. While EBITDA should not be
construed as a substitute for operating income (loss) or a better measure
of liquidity than cash flow from operating activities, each of which is
determined in accordance with U.S. GAAP, it is included herein to provide
additional information regarding the ability of the Company to meet its
capital expenditures, working capital requirements and any future debt
service. EBITDA, however, is not necessarily a measure of the Company's
ability to fund its cash needs, because it does not include capital
expenditures, which the Company expects to continue to be significant. See
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Overview."
(4) See "Item 1. Business -- Operating Systems and the Company's Markets."
(5) Average monthly revenue per subscriber is calculated by dividing
subscription revenue for the month by the average number of subscribers
for the month.
(6) Working capital includes current portion of pledged securities.
(7) The pledged securities were purchased as collateral for the Senior Notes.
See Note 6 to the Consolidated Financial Statements.
(8) TV Filme has never paid cash dividends on its Common Stock. See
"Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters."
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
OVERVIEW
The Company develops, owns and operates pay television systems in
mid-sized markets in Brazil. The Company is the sole provider of MMDS in the
cities of Brasilia, Goiania and Belem. Since the beginning of 1994, the
Company's subscriber base has grown substantially, increasing from 1,864
subscribers to 111,244 subscribers as of December 31, 1997.
Historically, the Company has generated operating losses, which may
increase to the extent that operations of additional systems are commenced or
acquired. As the Company continues to develop systems, positive EBITDA from more
developed systems is expected to be partially or completely offset by corporate
overhead, negative EBITDA from less developed systems and from development costs
associated with establishing new systems. This trend is expected to continue
until the Company has a sufficiently large subscriber base to absorb operating
and development costs of new systems. There can be no assurance that the Company
will be able to achieve or sustain net income in the future. The Company's
Brasilia System became system EBITDA positive in the third quarter of 1994 with
approximately 6,000 subscribers. The Company's Belem System became system EBITDA
positive in the fourth quarter of 1995 with approximately 5,000 subscribers.
Each of the Company's systems has required an initial capital investment
of approximately $1.0 million to $1.5 million to build and install a
transmission tower, headend facilities and other equipment. These costs are
generally depreciated over ten years. In addition, each new subscriber requires
an average incremental investment of approximately $470, which includes the cost
of a decoder box, installation labor and materials, other equipment and
supplies, marketing and selling costs. The Company capitalizes installation
costs, including installation labor, decoders and other direct costs, and
depreciates these costs over five years. Beginning in the first quarter of 1998,
the Company will depreciate these costs over a four year period. The Company
charges new subscribers installation fees which vary from market to market,
depending on factors which include the subscriber's access to other forms of pay
television and whether the installation is the first installation in a building.
The Company charges its subscribers an installation fee typically ranging from
13
<PAGE>
$40 - $105. The Company defers installation fees, net of direct selling
expenses, and recognizes these fees as revenues ratably over a five-year period.
Beginning in the first quarter of 1998, the Company will recognize these fees as
revenues ratably over a four-year period.
The Company's substantial subscriber growth has resulted from the addition
of subscribers in Brasilia and from the launch of operating systems in Goiania
and Belem. Revenues primarily consist of monthly fees paid by subscribers for
the programming packages as well as installation fees recognized for the period
and advertising fees. In the future, the Company also anticipates deriving
revenue from the provision of internet access services. See "Item 1. Business --
Internet Access Service." System operating expenses include programming costs, a
portion of the costs of compensation and benefits for the Company's employees,
transmitter site rentals and certain repair and maintenance expenditures.
Depreciation and amortization expenses consist primarily of depreciation of
decoder boxes, headend facilities and installation costs.
The development of a new system requires significant expenditures, a
substantial portion of which are incurred before the realization of revenues.
These expenditures, together with the associated early operating expenses,
result in negative cash flow until an adequate revenue generating subscriber
base is established. As the subscriber base increases, revenue, as well as
certain costs such as programming costs, generally increase while other costs,
such as tower rental and related maintenance costs, remain constant or increase
at proportionately lower levels. Accordingly, although costs increase in the
aggregate as the subscriber base grows, costs as a percentage of revenues
decrease and operating margins should generally increase.
Although the Company's financial statements are presented pursuant to U.S.
GAAP 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. The Company does not seek to hedge currency risks in the
financial markets or otherwise. See "-- Certain Factors Which May Affect the
Company Future Results -- Factors Relating to the Company -- Risks Associated
with New Markets and Growth and Expansion Strategy."
The economic and financial turmoil in Southeast Asia has had an impact on
many emerging markets, including Brazil. As a result of these events, the
Brazilian government has taken significant measures to protect the country's
currency, the REAL, as well as the gains achieved over the last several years by
Brazil's economic stabilization plan, the Real Plan. Among other actions, on
October 27, 1997, Brazil's Central Bank significantly raised short-term interest
rates, and, on November 10, 1997, the Brazilian government announced a series of
austerity measures, generally including budget cuts, restrictions on public
indebtedness, tax increases, export incentives and restrictions on imports.
These measures, which are 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. Shortly after the Brazilian government implemented
the austerity measures, the Company began experiencing increases in delinquent
payments and service disconnections. As a result, during November and December
of 1997 the Company undertook a review of its past due accounts and terminated
approximately 12,000 additional subscribers (over and above the Company's
quarterly churn) prior to year-end, resulting in a slight decrease in the number
of subscribers from September 30, 1997. In connection with this termination of
subscribers, the Company also wrote-off approximately $2.1 million of account
receivables. During the quarter, the Company also added approximately $1.9
million to its provision for doubtful accounts. In addition, effective with the
first quarter of 1998, the Company is also changing its depreciation policy with
respect to installation costs, including installation labor, decoders and other
direct costs from five to four years. The Company intends to carefully monitor
the credit worthiness of its existing customer base and that of any new
subscriber and anticipates that there will be little to no growth in its
subscriber base during the first half of 1998. While the Company believes that
the negative impact on Brazil's economic growth should be temporary in nature,
there can be no assurance that the measures taken by the Company or the
Brazilian government will be successful.
TV Filme, as a holding company, is dependent on the receipt of dividends
and payment of intercompany obligations from its operating subsidiaries in order
to meet its cash requirements. The payment of dividends from the subsidiaries of
TV Filme to TV Filme and the payment of any interest on or the repayment of any
principal of any loans or advances made by TV Filme to any of its subsidiaries
may be subject to statutory or contractual restrictions, are contingent on the
earnings and performance of such subsidiaries and are subject to various
business considerations. See "Item 5. Market For Registrant's Common Equity and
Related Stockholder Matters."
14
<PAGE>
RESULTS OF OPERATIONS
SELECTED OPERATING DATA. The following table sets forth certain expense and
other data derived from the Consolidated Financial Statements as a percentage of
the Company's revenues for each year presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
% OF % OF % OF
1995 REVENUE 1996 REVENUE 1997 REVENUE
---- ------- ---- -------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues................................. $11,404 100% $31,388 100% $ 50,547 100%
Operating costs and expenses:
System operating......................... 2,957 26% 9,593 31% 17,631 35%
Selling, general and administrative...... 8,975 79% 16,737 53% 27,965 55%
Depreciation and amortization............ 2,049 18% 5,921 19% 12,162 24%
-------- ---- -------- ---- -------- -----
Total operating costs and expenses... 13,981 123% 32,251 103% 57,758 114%
-------- ----- -------- ------ -------- -----
Operating loss....................... (2,577) (23%) (863) (3%) (7,211) (14%)
-------- ----- --------- ------ -------- -----
Other income (expense):
Interest and other expense........... (49) (0%) (1,049) (3%) (19,183) (38%)
Interest and other income.............. 475 4% 664 2% 8,969 18%
Exchange and translation gains (losses). (66) (1%) (762) (2%) (1,863) (4%)
--------- ----- --------- ------- --------- ------
Total other income(expense)....... 360 3% (1,147) (4%) (12,045) (24%)
--------- ------ --------- ------- --------- ------
Net income (loss).......................... $(2,217) (19%) $(2,010) (6%) $(19,256) (38%)
-------- ------ --------- ------- --------- ------
Net income (loss) per share................ $ (0.27) $ (0.22) $ (1.76)
========= ========= =========
Weighted average number of
shares of common stock and
common stock equivalents................. 8,086 9,256 10,940
========= ========= =========
Other Data:
EBITDA(a) ................................ $ (216) $ 5,330 $ 5,026
========= ========= =========
Number of subscribers at end
of period ............................ 36,594 79,176 111,244
========= ========= ==========
</TABLE>
(a) EBITDA is defined as operating income (loss) plus depreciation, amortization
and non-cash charges. EBITA is a commonly used measure of performance in the pay
television industry. While EBITDA should not be construed as a substitute for
operating income (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 future debt service. EBITDA, however, is not necessarily a
measure of the Company's ability to fund its cash needs, because it does not
include capital expenditures, which the Company expects to continue to be
significant.
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 1997 compared to 1996, revenues
increased by approximately $19.2 million, or approximately 61%, primarily due to
an aggregate increase of 36,342 in the average number of subscribers in the
Company's three operating systems. This increase was offset, in part, by an
increase in taxes on revenues from approximately 2.7% to 7.7% in Brasilia
(effective January 1, 1997) which represented a net revenue reduction of
approximately $1.6 million for 1997. Average monthly revenue per subscriber
decreased $1.72 to $37.91 in 1997, primarily as a result of the depreciation of
the REAL to the U.S. dollar and increased soft disconnects resulting from higher
delinquency rates. For 1996 compared to 1995, revenues increased by
approximately $20.0 million, or approximately 175%, primarily due to an
aggregate increase of approximately 39,000 in the average number of subscribers
in the Company's three operating systems. Average monthly revenue per subscriber
remained essentially constant from 1995 to 1996.
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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, repairs and
maintenance expenditures and service call costs. For 1997 compared to 1996,
system operating expenses increased by approximately $8.0 million, or
approximately 84%, primarily due to additional programming and production costs
directly associated with the increase in the Company's installed subscriber base
(approximately $3.5 million), costs associated with the development of the
Company's proprietary programming initiatives (approximately $1.5 million),
higher programming guide expenses (approximately $0.6 million) as a result of an
increase in circulation as well as in the per issue cost of the programming
guide and compensation and benefits (approximately $2.5 million). For 1996
compared to 1995, system operating expenses increased by approximately $6.6
million, or 220%, primarily due to an increase in programming expense associated
with an increase in the subscriber base (approximately $6.0 million) and an
increase in compensation and benefits (approximately $0.4 million), primarily
due to additional employees in the customer service and engineering departments.
During 1995, programming expenses were mitigated by volume discounts obtained
from Tevecap during the first ten months of the year aggregating $539,000. The
Company did not receive any such discounts in either 1996 or 1997 and such
discounts are not expected to recur.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. For 1997 compared to 1996,
selling, general and administrative ("SG&A") expenses increased by approximately
$11.2 million, or approximately 67%, primarily due to growth in the average
number of installed subscribers which was supported by an increase in
advertising and promotion (approximately $2.0 million) and resulted in increases
in compensation and benefits (approximately $2.0 million), provision for
doubtful accounts (approximately $3.7 million), bank fees (approximately $0.5
million) and all other SG&A expenses (approximately $3.0 million). For 1996
compared to 1995, SG&A expenses increased by approximately $7.7 million, or
approximately 85.6%, primarily due to increases in compensation and benefits
(approximately $3.4 million) resulting from additions to management, additional
employees in the sales department and more commissions paid to sales employees,
provision for doubtful accounts (approximately $1.0 million), advertising
expenses (approximately $0.8 million) and bank fees and property rental expense
(approximately $0.8 million).
The termination of subscriber accounts for nonpayment resulted in the
write-off of accounts receivables of approximately $3.9 million in 1997 compared
to $0.95 million in 1996. See "-- Overview." As of December 31, 1997, the
Company's accounts receivable totaled approximately $9.5 million before an
allowance for doubtful accounts of $1.7 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
consist primarily of depreciation of decoder boxes, headend facilities and
installation costs. Beginning with 1998, these costs will be capitalized and
depreciated over a four year period. During 1997 and all prior years, these
costs were capitalized and depreciated over a five year period. For 1997
compared to 1996, depreciation and amortization expenses increased by
approximately $6.2 million, or approximately 105%, primarily due to growth in
the number of installed subscribers in each of the Company's three operating
systems. For 1996 compared to 1995, depreciation and amortization expense
increased by approximately $3.9 million, or approximately 195%, also primarily
due to increases in the number of installed subscribers in each of the Company's
three operating systems.
OPERATING LOSS. Operating loss increased from 1995 to 1996 and from 1996
to 1997 primarily due to increases in expenses in connection with the
development of the Company's business, as explained below. The Company may
continue to generate operating losses as it expands its systems and develops
additional systems.
INTEREST EXPENSE. For 1997 compared to 1996, interest expense increased by
approximately $18.1 million, primarily as a result of accrued interest
associated with the Senior Notes. For 1996 compared to 1995, interest expense
increased by $1.0 million, primarily as a result of higher average short-term
borrowings from Abril and certain of its affiliates and accrued interest
associated with the Senior Notes.
INTEREST INCOME. Interest income increased by approximately $8.3 million
for 1997 compared to 1996, primarily as a result of interest income derived from
investing a portion of the net proceeds from the Company's initial public
offering of Common Stock in August 1996 (the "Initial Public Offering") and the
Senior Notes offering. Interest income increased by approximately $0.3 million
for 1996 compared to 1995, primarily from earnings on additional investments.
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EXCHANGE AND TRANSLATION GAINS (LOSSES). Exchange and translation gains
(losses) have arisen primarily as a result of converting short-term investments
and borrowings in REAIS to U.S. dollars in accordance with SFAS No. 52. These
amounts can fluctuate significantly as a result of changes in the exchange rate
of the REAL relative to the U.S. dollar. Exchange and translation losses
increased in 1997 compared to 1996 as a result of additional short-term
investments in REAIS.
INCOME TAXES. At December 31, 1997, the Company had approximately $45.4
million of net operating loss carryforwards, of which approximately $1.2 million
were attributable to TV Filme Servicos. As a result of the restructuring (the
"Restructuring"), the net operating loss carryforwards of TV Filme Servicos,
which is no longer a wholly-owned subsidiary of the Company, are available only
to offset its own income and are not available to offset any profits generated
by TV Filme and its consolidated subsidiaries. Under Brazilian law, the
carryforward period for net operating losses is unlimited. Use of these losses,
however, is restricted to 30% of taxable income in a tax period. The Company has
not recorded a tax benefit for any period. The Company expects to generate
operating losses for the foreseeable future. Brazilian marginal corporate tax
rates are approximately 33.0%.
NET LOSSES. As explained above, net losses in the years presented, is
primarily attributable to the significant expenses incurred in connection with
the future 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 affiliates. As of December 31, 1997, 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 December 31, 1997, the Company had a payable to Abril of $200,000 in
connection with the Company's purchase of the Belem and Goiania licenses from
Abril. The $200,000 which remained outstanding at December 31, 1997 was repaid
in February 1998.
As of December 31, 1997, approximately $7.7 million was outstanding under
letters of credit with maturities ranging from 270 days to 360 days, of which
approximately $0.1 million was guaranteed by affiliates of TV Filme. As of
December 31, 1997, 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
December 31, 1997 in the amount of $97.7 million. Net cash provided by operating
activities for the twelve months ended December 31, 1997 was approximately $1.9
million.
The Company made capital expenditures of approximately $37.1 million
during 1997. Such capital expenditures were financed through the proceeds from
the Initial Public Offering and the Senior Notes offering and from cash
generated from the Company's operations. In addition to expanding its subscriber
base in its existing systems, the Company is seeking to launch additional
systems. In September 1997, the 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. However, due to
challenges made to the bidding process by several bidders, the bidding process
has been postponed. 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
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such concessions and licenses and the timing of any such grants generally. See
"Item 1. Business - Company Overview" and "- Regulatory Environment." The
Company also from time to time may selectively pursue the acquisition of
existing pay television systems, although it currently has no understanding,
commitment or agreement with respect to any such acquisitions. The Company
believes that its current cash and internally generated funds will be sufficient
to fund the cash requirements of its existing business for at least the next
twelve months and has invested its available cash predominantly in U.S. dollar
denominated short-term marketable securities. As of December 31, 1997, of the
Company's $98.3 million in cash and cash equivalents, approximately $85.5
million (approximately 87.0%) of which 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 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 the 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 of its expenses and may set its prices without
governmental 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 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
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.
The recent economic and financial turmoil in Southeast Asia has had an
impact on many emerging markets, including Brazil. As a result of these events,
the Brazilian government has taken significant measures to protect the 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
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 an increase in the rate
of delinquent customers and service disconnections. While the Company believes
these difficulties are temporary 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.
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YEAR 2000
The Company has conducted an evaluation of its computer systems 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.
CERTAIN FACTORS WHICH MAY AFFECT THE COMPANY'S FUTURE RESULTS
FACTORS RELATING TO BRAZIL GENERALLY
GENERAL. Social, economic or political instability, among other
developments in Brazil, could adversely affect the financial condition and
results of operations of the Company. In the past, Brazil has suffered from high
levels of inflation, low real growth rates and political uncertainty. Brazil is
generally considered by investors to be an "emerging market" and thus political,
economic, social or other developments in other such markets may adversely
affect the Company. Recent events in Southeast Asia and the anticipated impact
on the REAL have caused the Brazilian government to implement a number of
significant measures to protect the value of the REAL. Through these austerity
measures, the Brazilian government has been able to sustain the rate of
devaluation of the REAL at levels prior to the Southeast Asian events
(approximate devaluations against the U.S. dollar of 0.6%-0.7% per month).
However, there can be no assurance that these policies will continue to be
successful.
ECONOMIC UNCERTAINTY; EFFECTS OF EXCHANGE RATE FLUCTUATIONS. Until the
past several years, Brazil has experienced extremely high rates of inflation for
many years. Inflation, as measured by the Getulio Vargas Foundation's General
Index of Market Prices (the "IGPM Index"), was approximately 458% in 1991,
1,175% in 1992, 2,567% in 1993, 870% in 1994, 15% in 1995, 9% in 1996 and 8%
1997. Inflation, government actions to combat inflation and public speculation
about future actions have had significant negative effects on the Brazilian
economy in general and have also contributed materially to economic uncertainty
in Brazil. 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.
Brazil's rate of inflation and the government's actions to combat
inflation have also affected the relationship of the value of Brazil's currency
to the value of the U.S. dollar. Historically, Brazil's currency frequently had
been devalued in relation to the U.S. dollar. However, after its introduction,
the REAL initially appreciated against the U.S. dollar. In an effort to address
concerns about the possible overvaluation of the REAL relative to the U.S.
dollar, and in light of the economic upheaval in Mexico that resulted from the
rapid devaluation of the Mexican peso, the Brazilian government in March 1995
introduced new exchange rate policies which established a trading band for the
REAL against the U.S. dollar. This band has been adjusted frequently, and, as of
December 31, 1997, was between 1.1149 REAIS and 1.1157 REAIS per U.S. dollar.
From December 31, 1996 to December 31, 1997, the REAL declined in value relative
to the U.S. dollar by approximately 7%. There can be no assurance that the REAL
will not again be devalued relative to the U.S. dollar, or that the REAL will
not fluctuate significantly relative to the U.S. dollar.
Substantially all of the Company's revenues are denominated in reais. A
substantial portion of the Company's indebtedness is, and may be expected to
continue to be, denominated in U.S. dollars. In addition, certain of the
Company's operating expenses, including a substantial portion of its equipment
costs and a portion of its programming costs, are denominated in U.S. dollars.
Any devaluation of the Brazilian currency relative to any foreign currency in
which debt or other obligations of the Company are denominated could result in a
foreign exchange loss with respect to such indebtedness or obligations, if such
devaluation were in excess of inflation and the rate at which the Company raises
prices. Any devaluation could also force the Company to seek additional
financing although the Company's ability to obtain such financing may be
impaired by such event. As a result, the relationship of Brazil's currency to
the value of the U.S. dollar and other currencies, and the rates of devaluation
of Brazil's currency relative to the prevailing rates of inflation, may
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adversely affect the Company's financial condition and reported results of
operations, as well as its ability to meet its debt service obligations and
operating expenses. Moreover, if the Company cannot increase its prices to match
the rate of inflation, even if the rate of inflation matches the rate of
devaluation, the Company's ability to meet its debt service obligations and
operating expenses may be impaired.
The Company does not currently seek to hedge exchange rate risks in the
financial markets or otherwise, as it believes that the costs of such hedging
outweigh the related risks. As a result, the Company may experience economic
loss with respect to its investments and fluctuations in its reported results of
operations solely as a result of currency rate fluctuations, which may have a
material adverse effect on the Company's financial condition.
FOREIGN EXCHANGE CONTROLS AND EXCHANGE RATES. There are two legal foreign
exchange markets in Brazil: the commercial rate exchange market (the "Commercial
Market") and the floating rate exchange market (the "Floating Market"). Prior to
the implementation of the Real Plan, the Commercial Market Rate and the Floating
Market Rate differed significantly. There can be no assurance that there will
not be significant differences between such rates in the future.
RESTRICTIONS ON CONVERSION AND U.S. REMITTANCES ABROAD. The Brazilian
Government has the authority under current legislation to impose restrictions on
the remittance abroad of capital when a serious deficit in Brazil's balance of
payments is seriously threatened or occurs, as it did for approximately six
months in 1989 and early 1990, and on the conversion of REAIS into foreign
currencies. Such restrictions may hinder or prevent the Company's Brazilian
subsidiaries from purchasing equipment required to be paid for in U.S. dollars
and from converting dividends or distributions or scheduled interest and
principal payments into U.S. dollars and remitting U.S. dollars to TV Filme and
from making payment on judgments obtained in a court in Brazil. Such
restrictions could adversely affect the Company. The Company could also be
adversely affected by delays in, or a refusal to grant, any required Brazilian
governmental approval for conversion of REAL payments and remittances abroad in
respect of such dividends, distributions, interest and principal payments.
There can be no assurance that the Brazilian Government will not in the
future impose more restrictive foreign exchange regulations that would have the
effect of eliminating or restricting the Company's or any of its subsidiaries
access to foreign currency that would be required to meet its foreign currency
obligations. Although no such regulations were imposed in 1997, the likelihood
of the imposition of such restrictions by the Brazilian Government may be
affected by, among other factors, the extent of Brazil's foreign currency
reserves, the availability of foreign currency in the foreign exchange markets
on the date a payment is due, the size of Brazil's debt service burden relative
to the economy as a whole, and Brazil's policy toward the International Monetary
Fund and political constraints to which Brazil may be subject.
POLITICAL UNCERTAINTY. Historically, the Brazilian Government has often
changed monetary, credit, tariff and other policies to influence the course of
Brazil's economy. Such government actions have included wage and price controls
as well as other measures, such as freezing bank accounts, imposing capital
controls and inhibiting imports and exports. A primary objective of the
Brazilian Government in recent years has been to control government spending.
Some progress has been made, but fiscal deficits remain high. Reducing the
deficit is made more difficult by Brazil's Constitution, which requires the
Brazilian Government to make substantial funds available to the state
administrations, while limiting the Brazilian Government's ability to raise
sufficient funds from taxes. Changes in policy involving, among other things,
tariffs, exchange controls, regulatory policy and taxation, as well as events
such as inflation, devaluation, social instability or other political, economic
or diplomatic developments, could adversely affect the Brazilian economy and
have a material adverse effect on the Company's results of operations and
financial condition. In 1997 and 1998, the Brazilian government instituted
additional austerity measures, including a 10% increase in income tax rates, the
proposed elimination of certain government positions, and changes to retirement
benefits, to attempt to reduce the fiscal deficit of the Brazilian Government.
The success of these measures cannot be assured, however.
The Brazilian political environment has been marked by high levels of
uncertainty since Brazil returned to civilian rule in 1985 after 20 years of
military government. The death of a President-elect in 1985 and the resignation
of another President in 1992 in the midst of his impeachment trial, as well as
frequent turnover at and immediately below the cabinet level, have contributed
to delays in the adoption of coherent and sustained policies to confront the
country's economic issues. Mr. Fernando Henrique Cardoso, Brazil's Finance
Minister at the time of the implementation of the Real Plan, was elected
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President of Brazil in October 1994 and took office in January 1995. President
Cardoso was elected by a coalition of political parties, and, as a result, his
administration may be required to accept more compromises than if his party
controlled the Brazilian legislature. A new election for President and Congress
will be held in the last quarter of 1998; President Cardoso has announced his
intention to stand for reelection. President Cardoso has supported the Real
Plan, the reduction of inflation, privatization measures and certain free-market
policies and has successfully implemented many of his desired policies. However,
many political factions oppose certain of the administration's policies, and
there can be no assurance that any of the administration's policies, including
the Real Plan, will continue to be supported by the legislature.
FACTORS RELATING TO THE COMPANY
SUBSTANTIAL LEVERAGE. In December 1996, TV Filme issued $140 million
aggregate principal amount of Senior Notes. At December 31, 1997, the Company
had total long-term debt of $140 million and stockholders' equity of
approximately $22.3 million. The Company's leverage could: (i) impair the
Company's ability to obtain additional financing for working capital, capital
expenditures, acquisitions, general corporate purposes or other purposes in the
future; (ii) require that a substantial portion of the Company's future cash
flow from operations be dedicated to the payment of principal and interest on
its indebtedness; (iii) hinder the Company's ability to adjust rapidly to
changing market conditions; and (iv) make the Company more vulnerable in the
event of a downturn in general economic conditions or its business. The long
term growth of the Company depends, in part, on its ability to expand by the
development or acquisition of new operating systems or expansion into other
telecommunications businesses and, therefore, an inability to finance such
development or acquisitions through borrowed funds could have a material adverse
effect on the Company's operations.
HOLDING COMPANY STRUCTURE; DEPENDENCE ON SUBSIDIARIES. TV Filme conducts
its operations through, and substantially all of TV Filme's assets are owned by,
TV Filme's direct and indirect subsidiaries. Because TV Filme is a holding
company, its ability to distribute dividends and meet its debt obligations will
be primarily dependent upon the earnings of its subsidiaries and the
distribution of those earnings to, or upon loans or other payment of funds by
the subsidiaries to, the Company. The subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay any
amounts to creditors of the Company or to make any funds available therefor,
whether by dividends, loans or other payments. In addition, the payment of
dividends from such subsidiaries and the payment of any interest on or the
repayment of any principal of any loans or advances made to TV Filme by its
subsidiaries, or by TV Filme to its subsidiaries (i) may be subject to statutory
or contractual restriction, (ii) are contingent upon the earnings of such
subsidiaries and (iii) are subject to various business considerations.
LIMITED OPERATING HISTORY; LACK OF PROFITABLE OPERATIONS; MANAGEMENT OF
GROWTH. The Company commenced operations in Brasilia in October 1990, in Goiania
in January 1995 and in Belem in February 1995. Since inception, the Company has
sustained substantial operating losses, due primarily to start-up costs and
charges for depreciation and amortization of capital expenditures to develop its
wireless cable systems. The Company expects to experience net losses as it
expands its existing systems and develops additional systems. There can be no
assurance that the Company will be profitable or will generate positive cash
flow in future years. The Company is experiencing rapid growth, which could
place a significant strain on its operational and personnel resources. The
Company's growth will require it to continue to improve its operational and
financial systems and to train, motivate and manage its employees. If management
is unable to manage the Company's growth effectively, or if the productivity of
its employees falls below expectations, it could have a material adverse effect
on the Company's results of operations and financial condition.
NEED FOR ADDITIONAL FINANCING FOR GROWTH. The growth of the Company's
business requires substantial investment on a continuing basis to finance (i)
capital expenditures and expenses related to subscriber growth and system
development, (ii) the acquisition of new pay television licenses and operations
and (iii) net losses. There can be no assurance that the Company will be able to
obtain additional debt and equity capital on satisfactory terms, or at all, to
meet its future financing needs. Furthermore, the Indenture restricts the amount
of additional Indebtedness (as defined therein) the Company may incur, subject
to certain qualifications and exceptions. Failure to obtain any required
additional financing could adversely affect the growth of the Company and,
ultimately, could have a material adverse effect on the Company.
RISKS ASSOCIATED WITH NEW MARKETS AND GROWTH AND EXPANSION STRATEGY. In
September 1997, the Ministry of Communications announced the bidding process by
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which additional pay-TV licenses will be awarded throughout the country. The
official bidding process commenced in October 1997 and, to date, seven license
tender invitations, for 92 markets covering approximately 8.2 million LOS
households, have been issued by the Brazilian Ministry of Communications for
MMDS. However, due to challenges made to the bidding process by several bidders,
the date for submission of proposals has been postponed. Although the Company
anticipates that the bidding process will recommence in the first half of 1998,
there can be no assurance that the bidding process will recommence in such time
frame. The Company intends to actively pursue such licenses as they became
available for bid; however, there can be no assurance as to the grant of any
such concessions and licenses and the timing of such grants generally. The
Company also may seek to enter into operating agreements with pay television
license holders or seek to acquire licenses granted to others, but there can be
no assurance that the Company will be able to enter into any such operating
agreements or consummate any such license acquisitions. The Company believes
that the cost of purchasing or acquiring licenses has increased substantially in
recent years and will continue to increase, due to increased competition.
Similarly, the cost of operating wireless cable systems has increased due to
competition. The Company's ability to expand successfully through acquisitions
depends on many factors, including the successful identification and acquisition
of such systems and management's ability to integrate and operate the acquired
businesses effectively. The Company may compete for new system opportunities
with other companies that have significantly greater financial and managerial
resources. There can be no assurance that the Company will be successful in
obtaining new licenses or launching or acquiring any new pay television systems
or that the Company will be able to integrate successfully any acquired systems
into its current business and operations. The failure of the Company to obtain
new licenses or launch or acquire new pay television systems could impede its
growth. The failure of the Company to integrate successfully acquired systems
could have a material adverse effect on the Company's results of operations and
financial condition.
In order to finance further subscriber growth, capital expenditures and
related expenses for additional system development and acquisitions, the Company
may require additional funds in the future. The amount and timing of the
Company's future capital requirements will depend upon a number of factors, many
of which are not within the Company's control, including the grant of new
licenses, programming costs, capital costs, competitive conditions and the costs
of any necessary implementation of technological innovations or alternative
technologies. There can be no assurance that the Company's future capital
requirements will be met or will not increase as a result of future
acquisitions, if any. Failure to obtain any required additional financing could
adversely affect the growth of the Company and, ultimately, could have a
material adverse effect on the Company's results of operations and financial
condition.
In the future, the Company may expand its operations into other
telecommunications businesses. However, the ability of the Company to
successfully expand its operations is subject to a number of factors including
its ability to secure additional financing and the current inexperience of the
Company's management team in operating such telecommunications businesses. In
addition, competition in such businesses is likely to be fierce and many of the
actual and potential competitors in such telecommunications businesses will
likely have greater financial, marketing and other resources than the Company.
No assurance can be given that the Company will be able to compete successfully
in any new telecommunications business venture.
COMPETITION. Through its subsidiaries, the Company is the only entity
licensed to operate wireless cable systems in Brasilia, Goiania and Belem. The
Company's principal pay television competitor in the city of Brasilia is NET
Brasilia, and in the city of Goiania is Multicanal, both of which are hardwire
cable operators and are affiliates of the Globo Organization. There currently is
no hardwire or other wireless cable provider in the city of Belem. In addition
to other wireless cable and hardwire cable operators, wireless cable operators
in Brazil face or may face competition from several other sources, DBS, local
off-air VHF/UHF channels, home videocassette recorders and out-of-home theaters.
Currently, there are two DBS providers in Brazil, "Sky," an affiliate of the
Globo Organization, and Direct TV, an affiliate of Tevecap. A third DBS operator
is currently launching service in Brazil. Legislative, regulatory and
technological developments may result in additional and significant competition.
Competition in the pay television industry is based upon program offerings,
customer service, reliability and pricing. Many actual and potential competitors
have greater financial, marketing and other resources than the Company. No
assurance can be given that the Company will be able to compete successfully.
GOVERNMENT REGULATION. The Company's business activities are regulated by
ANATEL. Such regulation relates to, among other things, licensing, local access
22
<PAGE>
to MMDS systems, commercial advertising and foreign investment in MMDS systems.
Changes in the regulation of the Company's business activities, including
decisions by regulators affecting the Company's operations (such as the granting
or renewal of licenses or decisions as to the subscription rates the Company may
charge its customers) or changes in interpretations of existing regulations by
courts or regulators, could adversely affect the Company. The Company's MMDS
licenses may not be transferred without regulatory approval, although its three
licenses were successfully transferred in 1997 from TV Filme Servicos to TV
Filme Brasilia, TV Filme Goiania and TV Filme Belem. Any new regulations could
have a material adverse effect on the pay television industry, as a whole, and
on the Company, in particular.
DEPENDENCE ON SUPPLIERS. The Company is dependent on certain suppliers of
its programming and equipment. The Company currently purchases substantially all
of its programming from Tevecap and its subsidiaries pursuant to the Programming
Agreement. The terms of the Programming Agreement terminate in July 2004.
Although the Company has no reason to believe that such agreement will be
canceled or will not be renewed upon its expiration, if such agreement is
canceled or not renewed, the Company will have to seek programming from other
sources. In addition, there can be no assurance that other programming will be
available to the Company on acceptable terms or at all or, if so available, that
such programming will be acceptable to the Company's subscribers. Additionally,
there can be no assurance that programming will be available to the Company in
its application markets on acceptable terms, although Tevecap has agreed to
provide programming on a non-exclusive basis in certain additional markets if
the Company is able to obtain an MMDS license for such markets, with exclusivity
to be negotiated on a case-by-case basis. There also can be no assurance that
Tevecap's and its subsidiaries' contracts with their individual program
suppliers are or will remain exclusive, will not be canceled or will be renewed
upon expiration. There can be no assurance that if Tevecap's contracts are
canceled or not renewed, other programming will be available to Tevecap on
acceptable terms or at all.
The Company currently purchases decoders and antennas from a limited
number of sources. The inability to obtain sufficient components as required
from such sources, or to develop alternative sources if and as required in the
future, could result in delays or reductions in customer installations which, in
turn, could have a material adverse effect on the results of operations and
financial condition of the Company.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not currently applicable to the Company.
23
<PAGE>
Item 8. Financial Statements and Supplementary Data.
The following statements are filed as part of this Annual Report on Form
10-K:
FORM 10-K
PAGE NO.
----------
FINANCIAL STATEMENTS:
TV FILME, INC.:
Report of Independent Auditors.......................... 25
Consolidated Balance Sheets as of December 31, 1996 and
1997.................................................... 26
Consolidated Statements of Operations for the years
ended December 31, 1995, 1996, and 1997................. 27
Consolidated Statements of Changes in Stockholders'
Equity for the years ended December 31, 1995,
1996 and 1997......................................... 28
Consolidated Statements of Cash Flows for the years
ended December 31, 1995, 1996 and 1997................ 29
Notes to Consolidated Financial Statements.............. 30
All schedules have been omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements or
related notes.
24
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
TV Filme, Inc.
We have audited the accompanying consolidated balance sheets of TV Filme,
Inc. and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
TV Filme, Inc. and subsidiaries at December 31, 1997 and 1996, and the
consolidated results of its operations and its cash flows for the three years
ended December 31, 1997, in conformity with generally accepted accounting
principles in the United States.
ERNST & YOUNG
AUDITORES INDEPENDENTES S.C.
Sao Paulo, Brazil
March 27, 1998
25
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------
1996 1997
-------- --------
(IN THOUSANDS OF DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents....................... $116,355 $ 80,975
Accounts receivable, net........................ 3,607 7,832
Supplies........................................ 2,721 5,303
Prepaid expenses and other current assets....... 1,175 3,178
Interest receivable............................. -- 679
Pledged securities-current...................... 16,159 16,645
-------- --------
Total current assets........................ 140,017 114,612
Property, plant and equipment, net................ 38,333 63,405
Pledged securities................................ 17,353 --
Debt issuance costs............................... 6,036 6,298
Other assets...................................... 1,190 2,082
-------- --------
Total assets................................ $202,929 $186,397
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 11,106 $ 12,724
Short-term debt................................... 2,926 --
Payroll and other benefits payable................ 1,538 2,103
Accrued interest payable.......................... 572 751
Accrued liabilities and taxes payable............. 412 1,111
Payables to affiliates-current.................... 200 200
-------- ---------
Total current liabilities................... 16,754 16,889
Payables to affiliates-long term.................. 200 --
Deferred installation fees........................ 8,227 7,178
Senior Notes...................................... 140,000 140,000
Stockholders' equity:
Preferred stock, $.01 par value, 1,000,000
shares authorized, no shares issued........... -- --
Common stock, $.01 par value, 50,000,000
shares authorized, 10,166,176 and 10,825,139
shares issued and outstanding ................ 102 108
Additional paid-in capital.................... 41,825 45,657
Accumulated deficit........................... (4,179) (23,435)
------- --------
Total stockholders' equity.................. 37,748 22,330
Total liabilities and stockholders' equity.. -------- --------
$202,929 $186,397
======== ========
See accompanying notes.
26
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues......................................... $ 11,404 $ 31,388 $ 50,547
-------- -------- --------
Operating costs and expenses:
System operating-Note 3........................ 2,957 9,593 17,631
Selling, general and administrative............ 8,975 16,737 27,965
Depreciation and amortization.................. 2,049 5,921 12,162
-------- -------- --------
Total operating costs and expenses......... 13,981 32,251 57,758
-------- -------- --------
Operating loss............................. (2,577) (863) (7,211)
Other income (expense):
Interest and other expense - Note 3............ (49) (1,049) (19,151)
Interest and other income - Note 3............. 475 664 8,969
Exchange and translation losses................ (66) (762) (1,863)
-------- -------- --------
Total other income (expense)............... 360 (1,147) (12,045)
-------- -------- --------
Net loss......................................... $(2,217) $(2,010) (19,256)
======== ======== ========
Net loss per share, basic and diluted............ $ (0.27) $ (0.22) $ (1.76)
======== ======== ========
Weighted average number of shares of common stock
and Common stock equivalents................... 8,086 9,256 10,940
======== ========= ========
</TABLE>
See accompanying notes.
27
<PAGE>
<TABLE>
<CAPTION>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1997
COMMON STOCK ADDITIONAL
------------------------ PAID-IN ACCUMULATED
SHARES PAR VALUE CAPITAL DEFICIT TOTAL
------ --------- ---------- ----------- -----
(IN THOUSANDS OF DOLLARS, EXCEPT SHARES)
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994......... 4,997,240 $ 50 $ 6,470 $ (20) $ 6,500
Issuance of common stock............. 1,052,924 11 3,289 -- 3,300
Non-cash compensation................ -- -- 312 -- 312
Exercise of stock options............ 143,832 1 (1) -- --
Net loss for the year................ -- -- -- (2,217) (2,217)
----------- --------- ---------- -------- --------
BALANCE AT DECEMBER 31, 1995......... 6,193,996 62 10,070 (2,237) 7,895
Issuance of common stock and
warrants........................... 1,097,180 11 7,140 -- 7,151
Non-cash compensation................ -- -- 272 -- 272
Initial public offering of
common stock, net of costs......... 2,875,000 29 24,343 -- 24,372
Equity adjustment for
restructuring....................... -- -- -- 68 68
Net loss for the year............... -- -- -- (2,010) (2,010)
------------ --------- ---------- ---------- --------
BALANCE AT DECEMBER 31, 1996........ 10,166,176 102 41,825 (4,179) 37,748
Issuance of common stock for
payment of non-cash compensation... 36,163 -- 75 -- 75
Conversion of outstanding
warrants into common stock......... 622,800 6 3,757 -- 3,763
Net loss for the year................ -- -- -- (19,256) (19,256)
------------ ---------- ----------- ------------- --------
BALANCE AT DECEMBER 31, 1997......... 10,825,139 $ 108 $45,657 $(23,435) $ 22,330
============ ========== =========== ============= ========
</TABLE>
See accompanying notes.
28
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
---- ---- ----
(IN THOUSANDS OF DOLLARS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................... $(2,217) $(2,010) $(19,256)
Adjustments to reconcile net loss to net
cash provided by operating activities:
Depreciation and amortization............. 2,049 5,921 12,162
Provision for losses on accounts
receivable.............................. 315 1,296 4,989
Non-cash compensation..................... 312 272 75
Amortization of debt issuance costs....... -- 14 805
Increase (decrease) in deferred
installation fees....................... 3,884 3,222 (1,049)
Changes in operating assets and liabilities:
Increase in accounts receivable........... (1,669) (3,122) (9,214)
Increase in supplies...................... (980) (1,089) (2,582)
Increase in prepaid expenses and other
current assets............................ (419) (678) (2,003)
Increase in accrued interest receivable... -- -- (679)
Increase in other assets.................. (77) (421) (1,292)
Decease in pledged securities............. -- -- 16,867
Increase in accounts payable.............. 5,803 4,230 1,618
Increase in payroll and other benefits
payable................................ 815 255 565
Increase in accrued interest payable...... -- 502 179
Increase in accrued liabilities and taxes
payable................................. 315 51 649
------- ------- --------
Net cash provided by operating activities... 8,131 8,443 1,884
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions:
Property, plant and equipment............. (16,621) (25,225) (37,082)
------- ------- --------
Net cash used in investing activities....... (16,621) (25,225) (37,082)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term debt...... -- 2,996 (2,926)
Proceeds from initial public offering, net
of costs .................................. -- 24,372 --
Proceeds from issuance of senior notes, net
of costs.................................... -- 133,950 --
Pledged securities.......................... -- (33,512) --
Debt issuance costs......................... -- -- (819)
Issuance of common stock and warrants....... 3,300 7,151 3,763
Increase (decrease) in payables from
affiliates................................ 1,463 (1,863) (200)
Decrease in receivables from affiliates..... 2,111 -- --
-------- -------- --------
Net cash provided by financing activities... 6,874 133,094 (182)
-------- -------- -------
Net change in cash and cash equivalents..... (1,616) 116,312 (35,380)
Cash and cash equivalents at beginning of
year...................................... 1,659 43 116,355
-------- ------- --------
Cash and cash equivalents at end of year.... $ 43 $116,355 $ 80,975
======= ======== ========
See accompanying notes.
29
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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 pay 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. Amounts in Brazilian currency have been remeasured into U.S.
dollars in accordance with the methodology set forth in Statement of Financial
Accounting Standards No. 52 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 are
remeasured at exchange rates in effect when the assets were acquired or the
liabilities were incurred. All other assets and liabilities are remeasured at
30
<PAGE>
year end exchange rates, and all other income and expense items are remeasured
at average exchange rates prevailing during the year. Remeasurement adjustments
are included in exchange and translation gains (losses).
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 earning
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. CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents.
E. SUPPLIES
Supplies are recorded at the lower of cost or market.
F. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. The Company capitalizes
materials, subcontractor costs, labor and overhead incurred associated with
initial subscriber installations. The Company continues to depreciate the full
installation cost subsequent to any subscriber disconnections.
Depreciation is computed on the straight-line basis using estimated useful
lives ranging from 5 to 10 years for buildings and leasehold improvements, 5
years for machinery and equipment, furniture and fixtures and installation
costs.
G. INTANGIBLE ASSETS
Intangible assets are comprised primarily of pay television licenses,
which are amortized on a straight-line basis over a period of 10 years.
Accumulated amortization at December 31, 1996 and 1997 was $159,000 and
$449,000, respectively.
H. REVENUE RECOGNITION
Revenues from subscribers are recognized in the period service is
rendered. Installation fees are recognized as revenue to the extent of direct
selling costs incurred, with the remainder deferred and amortized to income over
a five year period.
I. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $666,000 and
$1,710,000 at December 31, 1996 and 1997, respectively. Charges to the allowance
during 1996 and 1997 were $945,000 and $3,945,100, respectively.
J. STOCK OPTIONS
The Company accounts for stock options granted to employees in accordance
with the provisions of Accounting Principles Board Opinion 25, "Accounting for
Stock Issued to Employees" ("APB 25"). Under APB 25, because the exercise price
of the Company's employee stock option grants is greater than or equal to the
market price on the date of grant, no compensation is recognized.
31
<PAGE>
K. INTEREST EXPENSE
Interest expense approximates the amount of cash interest paid.
L. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
2. Property, Plant and Equipment
Property, plant and equipment is comprised of the following at December
31:
1996 1997
---- ----
(IN THOUSANDS OF
DOLLARS)
Land..................................................... $ -- $1,033
Building and leasehold improvements...................... 665 665
Machinery and equipment.................................. 19,956 35,181
Furniture and fixtures................................... 610 1,096
Installation costs....................................... 25,136 45,473
--------- ---------
46,367 83,448
Accumulated depreciation................................. (8,034) (20,043)
--------- ---------
$38,333 $ 63,405
========= ==========
Depreciation expense of $1,933,000, $5,762,000 and $12,009,000 is included
in the statements of operations for the years ended December 31, 1995, 1996 and
1997, respectively.
3. 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 in 1995, 1996 and 1997 were $1,334,000,
$6,731,000, and $10,394,000 respectively, net of discounts in 1995 of $539,000
on programming fees compared to list prices. No discounts were received in 1996
or 1997 and no such discounts are expected in the future. 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
1995, 1996 and 1997 were the $113,000, $750,000 and $679,000, respectively.
The Company purchased two licenses to operate wireless cable systems from
Abril for $400,000 each, payable in four equal annual installments, which do not
bear interest. Included in payables to affiliates at December 31, 1996 and 1997
is $400,000 and $200,000, respectively, related to this purchase. The $200,000
which remained outstanding as of December 31, 1997 was repaid in February 1998.
Since there was no outstanding borrowings to Tevecap, interest expense to
Tevecap was $0 for 1997 compared to $433,000 for 1996.
The Company purchases equipment and supplies from vendors under
irrevocable letters of credit. Abril and a subsidiary of Tevecap guarantee such
obligations from time to time. Total issued and outstanding letters of credit at
December 31, 1996 and 1997 were $7,296,000 and $7,665,000, respectively. At
December 31, 1996 and 1997, issued and outstanding letters of credit secured by
affiliates were $4,097,000 and $110,000, respectively. The maturity date of such
letters of credit range from 270 days to 360 days.
32
<PAGE>
4. Stockholders' Equity
In July 1994, the Company issued and sold 2,126,132 shares of Common Stock
to Warburg, Pincus Investors, L.P. for a purchase price of $5,000,000.
In August 1995, the Company issued and sold 1,052,924 shares of Common
Stock to Warburg, Pincus Investors, L.P. for a purchase price of $3,300,000.
In 1994 and 1995, the Company issued options to purchase 125,392 and
99,576 shares of Common Stock, respectively, to officers of the Company. All
options were vested at the date of grant. The fair value of the stock at the
date of the 1995 grant was deemed to be $312,000 and, therefore, a charge for
non-cash compensation of $312,000 was recorded in 1995 and included in selling,
general and administrative expenses. All options were exercised in the year of
grant.
As a finders' fee in connection with the equity offerings in 1994 and
1995, the Company granted options to purchase 193,620 shares of Common Stock to
two advisers at a nominal exercise price. In 1994 and 1995, such options for
149,364 and 44,256 shares, respectively, were exercised.
In March 1996, the Company issued and sold 783,700 shares of Common Stock
and warrants to purchase an additional 567,952 shares of Common Stock to
Warburg, Pincus Investors, L.P. for approximately $5.1 million, and issued and
sold 287,664 shares of Common Stock and warrants to purchase an additional
208,372 shares of Common Stock to Tevecap for approximately $1.9 million. Such
warrants had an exercise price of $6.52 per share.
Immediately prior to the consummation of the Initial Public Offering, in
connection with the Restructuring, the Company issued 3,962,756, 1,456,760,
254,472, 254,472 and 1,069,520 shares of Common Stock to Warburg, Pincus
Investors, L.P., Tevecap, Mr. Hermano Studart Lins de Albuquerque, Mr. Carlos
Andre Studart Lins de Albuquerque and Mrs. Maria Nise Studart Lins de
Albuquerque, respectively, with a value at the initial public offering price of
$10.00 per share of $39,627,560, $14,567,600, $2,544,720, $2,544,720 and
$10,695,200, respectively. Such shares were issued in exchange for all of their
shares of common stock of ITSA, which have the same value as the shares of
Common Stock received in the exchange.
The Company recorded non-cash compensation of $272,000 in 1996 in
connection with the issuance of 23,121 shares of Common Stock to officers of the
Company, which amount has been included in selling, general and administrative
expenses.
Immediately prior to the consummation of the Initial Public Offering, in
connection with the Restructuring, the Company issued warrants to purchase
567,952 shares of Common Stock to Warburg, Pincus, warrants to purchase 208,372
shares of Common Stock to Tevecap and warrants to purchase 18,440 shares of
Common Stock to two other stockholders of the Company in exchange for all of
their warrants to purchase shares of common stock of ITSA. The warrants were
exercisable either for cash, the cancellation of indebtedness or on a cashless
exercise basis. In September 1997, 577,172 of the warrants were exercised for
cash for a total purchase price of $3,763,161. In addition, the remaining
217,592 warrants were exchanged for an aggregate of 45,628 shares of Common
Stock on a cashless exercise basis. Such warrants were converted into shares of
Common Stock based on the difference between the exercise price of $6.52 per
share and the average closing price of the Common Stock on the Nasdaq National
Market during the five trading days preceding the date of exercise ($8.25).
33
<PAGE>
5. 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 an additional 10,000 shares of Common Stock were granted in 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 per share, option to purchase 308,500 shares of Common Stock were
granted in October 1997 at an exercise price of $6.00 and options to purchase
150,000 shares of Common stock were granted in December 1997 at an exercise
price of $5.625.
Pro forma information regarding net loss and loss per share has been
determined as if the Company had accounted for its employee stock options under
the fair value method of FASB Statement No. 123, "Accounting for Stock-Based
Compensation." The fair value for these options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1996 and 1997, respectively: risk-free interest
rate of 6.3% and 5.5%, dividend yield of 0% and 0%; volatility factor of the
expected market price of the Common Stock of .46 and .46; and a weighted-average
expected life of the option of 7.5 and 7.5 years.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options vesting period. The Company's
pro forma information for the year ended December 31, 1997 follows (in thousands
of dollars):
1996 1997
-------- ---------
Pro forma net loss $(2,208) $(19,812)
Pro forma loss per share (.22) (1.81)
6. 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. In connection with the transfer of the proceeds
of the Senior Notes to ITSA and remittance of REAIS to U.S. dollars, the Company
incurred exchange losses of approximately $600,000. This amount was reflected in
exchange and translation gain (losses) at December 31, 1996. 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
December 31, 1997, it is unable to make any dividend payments.
34
<PAGE>
The Company believes the recorded value of the Senior Notes approximates
the fair value at December 31, 1997.
7. Income Taxes
The reasons for the difference between total tax expense (benefit) and the
amount computed by applying the effective Brazilian tax rate to income before
income taxes are as follows:
1995 1996 1997
---- ---- ----
(IN THOUSANDS OF DOLLARS)
Income taxes (benefit) at effective
Brazilian rate........................... $(1,064)$ (613) $(6,354)
Effect of monetary adjustments under
Brazilian tax law........................ 765 -- --
Nondeductible compensation expense......... 150 78 215
Effect of change in tax rate............... 267 (232) 103
Other...................................... 198 -- --
Increase (decrease) in valuation allowance. (316) 767 6,036
-------- ------ -------
Tax expense (benefit)...................... $ -- $ -- $ --
======== ======= =======
The Company has not recognized any future income tax benefit for its net
operating loss carryforwards in excess of net deferred tax liabilities as it is
not assured that it will be able to realize a benefit for such losses in the
future. The net operating loss carryforwards amounted to $45.4 million at
December 31, 1997, of which approximately $1.2 million was attributable to TV
Filme Servicos. As a result of the Restructuring, the net operating loss
carryforwards of TV Filme Servicos, which is no longer a wholly-owned subsidiary
of the Company, are available only to offset its own income and are not
available to offset any profits generated by TV Filme and its consolidated
subsidiaries. Under Brazilian law, net operating losses may be carried forward
for an unlimited period of time. Use of these losses, however, is restricted to
30% of taxable income in a tax period.
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The approximate effect of
temporary differences as of December 31, 1996 and 1997 is as follows:
1996 1997
------- -------
(IN THOUSANDS OF
DOLLARS)
Deferred tax assets
Net operating loss carryforwards..................... $ 4,155 $14,544
Deferred installation fees........................... 2,715 2,369
Other................................................ 623 225
------- ------
7,493 17,138
Valuation allowance.................................. (1,180) (7,216)
-------- -------
$ 6,313 $9,922
========= =======
Deferred tax liabilities
Fixed assets......................................... $ 6,313 $9,922
Other................................................ -- --
------- -------
$ 6,313 $9,922
========= =======
Effective January 1, 1997, the effective Brazilian tax rate increased from
30.5% to 33%. This has been reflected in the deferred tax assets and liabilities
at December 31, 1996.
35
<PAGE>
8. Commitments
The Company leases office space and vehicles and has entered into various
transmission tower rental agreements. Rent expense amounted to approximately
$1,395,000, $2,062,000 and $2,091,080 for the years ended December 31, 1995,
1996 and 1997, respectively. A substantial number of these rental agreements are
renewed on a continuous basis. The Company also has entered into various
contracts to secure programming. These agreements are readjusted periodically.
Lease commitments at December 31, 1997 are as follows:
1998.......................................................... $1,758,000
1999.......................................................... 1,097,000
2000.......................................................... 135,000
2001.......................................................... 132,000
At December 31, 1997, payables to affiliates include $200,000 related to
the purchase by the Company of two licenses to operate wireless cable systems
(see Note 3). The $200,000 which remained outstanding as of December 31, 1997
was repaid in February 1998.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Information with respect to executive officers of the Company is presented
in Item 4 of this Report under the caption "Executive Officers of the Company."
The information appearing under the captions "Proposal 1 - Election of
Directors", "Certain Transactions" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's Proxy Statement for its 1998 Annual
Meeting of Stockholders (the "1998 Proxy Statement") is incorporated herein by
reference.
Item 11. Executive Compensation.
Information appearing under the caption "Executive Compensation" in the
1998 Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Information appearing under the caption "Security Ownership of Beneficial
Owners and Management" in the 1998 Proxy Statement is incorporated herein by
reference.
Item 13. Certain Relationships and Related Transactions.
Information appearing under the caption "Certain Transactions" in the 1998
Proxy Statement is incorporated herein by reference.
36
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(A) 1. FINANCIAL STATEMENTS.
The financial statements are included in Part II, Item 8. of this
Report.
2. FINANCIAL STATEMENT SCHEDULES AND SUPPLEMENTARY INFORMATION
REQUIRED TO BE SUBMITTED.
All schedules have been omitted because they are inapplicable or the
required information is shown in the consolidated financial statements or
notes.
(B) REPORTS ON FORM 8-K.
No Reports on Form 8-K were filed by the Company during the fourth quarter
of 1997.
(C) INDEX TO EXHIBITS.
The following is a list of all Exhibits filed as part of this Report:
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ------- -----------------------
*3.1(i) Certificate of Incorporation of TV Filme (incorporated herein by
reference to Exhibit 3.1 to TV Filme's Registration Statement on Form
S-1, dated May 3, 1996, Registration No. 333-4512 ("TV Filme's S-1").
*3.1(ii) Amended and Restated By-Laws of TV Filme (incorporated herein by
reference to Exhibit 3.1(ii) to TV Filme's Form 10-Q for the fiscal
quarter ended June 30, 1997, File No. 0-28670).
*4.1 Indenture, dated as of December 20, 1996, between TV Filme and IBJ
Schroder Bank & Trust Company, as Trustee (including the form of the
Senior Notes) (incorporated herein by reference to Exhibit 4.1 to TV
Filme's Registration Statement on Form S-4, dated February 4, 1997,
Registration No. 333-21057 ("TV Filme's S-4").
*4.2 Registration Rights Agreement, dated December 20, 1996, between TV
Filme and Bear, Stearns & Co. Inc., BT Securities Corporation, J.P.
Morgan Securities Inc. and Alex. Brown & Sons Incorporated
(incorporated herein by reference to Exhibit 4.2 to TV Filme's S-4).
*4.3 Purchase Agreement, dated December 16, 1996, between TV Filme and
Bear, Stearns & Co. Inc., BT Securities Corporation, J.P. Morgan
Securities Inc. and Alex. Brown & Sons Incorporated, as the Initial
Purchasers (incorporated herein by reference to Exhibit 4.3 to TV
Filme's S-4).
*4.4 Note, dated December 20, 1996, of ITSA to TV Filme (incorporated
herein by reference to Exhibit 4.4 to TV Filme's S-4).
*4.5 Note Pledge Agreement, dated as of December 20, 1996, between TV
Filme and IBJ Schroder Bank & Trust Company, as Collateral Agent
(incorporated herein by reference to Exhibit 4.5 to TV Filme's S-4).
*4.6 Collateral Pledge and Security Agreement, dated as of December 20,
1996, among ITSA, TV Filme and IBJ Schroder Bank & Trust Company, as
Collateral Agent (incorporated herein by reference to Exhibit 4.6 to
TV Filme's S-4).
*4.7 Subsidiary Guarantee, dated as of December 20, 1996, made by TV Filme
Brasilia Servicos de Telecomunicacoes (incorporated herein by
reference to Exhibit 4.7 to TV Filme's S-4).
*4.8 Subsidiary Guarantee, dated as of December 20, 1996, made by TV Filme
Belem Servicos de Telecomunicacoes (incorporated herein by reference
to Exhibit 4.8 to TV Filme's S-4).
*4.9 Subsidiary Guarantee, dated as of December 20, 1996, made by TV Filme
Goiania Servicos de Telecomunicacoes (incorporated herein by
reference to Exhibit 4.9 to TV Filme's S-4).
*10.1 1996 Stock Option Plan (incorporated herein by reference to
Exhibit 10.1 to TV Filme's S-4).+
*10.2 Form of Stock Option Agreement (incorporated herein by reference to
Exhibit 10.2 to TV Filme's S-1).+
37
<PAGE>
*10.3 Stockholders Agreement, dated as of July 26, 1996, entered into by
and among Warburg, Pincus, Tevecap, Mrs. Maria Nise Studart Lins
de Albuquerque, Mr. Hermano Studart Lins de Albuquerque, Mr. Carlos
Andre Studart Lins de Albuquerque and Ms. Maria Veronica Studart
Lins de Albuquerque (incorporated herein by reference to Exhibit 10.3
to TV Filme's S-4).
*10.4 Registration Rights Agreement, dated as of July 26, 1996,
entered into by and among Warburg, Pincus, Tevecap, Mrs. Maria
Nise Studart Lins de Albuquerque, Mr. Hermano Studart Lins de
Albuquerque, Mr. Carlos Andre Studart Lins de Albuquerque, Ms.
Maria Veronica Studart Lins de Albuquerque, Joseph Wallach,
Donald Deely Pearson and TV Filme (incorporated herein by
reference to Exhibit 10.4 to TV Filme's S-4).
*10.5 Employment Agreement, dated as of July 26, 1996, entered into by and
among TV Filme, ITSA and Mr. Hermano Studart Lins de Albuquerque
(incorporated herein by reference to Exhibit 10.5 to TV Filme's
S-4).+
*10.6 Employment Agreement, dated as of July 26, 1996, entered into by and
among TV Filme, ITSA and Mr. Carlos Andre Studart Lins de Albuquerque
(incorporated herein by reference to Exhibit 10.6 to TV Filme's
S-4).+
*10.7 Employment Agreement, dated as of July 26, 1996, entered into by
and between TV Filme and Mr. Aguirre (incorporated herein by
reference to Exhibit 10.7 to TV Filme's S-4).+
*10.8 Programming License Agreement, dated as of June 27, 1996, entered
into by and between TV Filme and Tevecap (incorporated herein by
reference to Exhibit 10.12 to TV Filme's S-4).
*10.9 Master Operating Agreement, dated as of July 26, 1996, entered into
by and among TV Filme, ITSA and TV Filme Servicos (incorporated
herein by reference to Exhibit 10.13 to TV Filme's S-4).
*10.10 Articles of Association of TV Filme Servicos (incorporated herein by
reference to Exhibit 10.14 to TV Filme's S-4).
*10.11 Form of Indemnification Agreement between TV Filme and the directors
and officers parties thereto (incorporated herein by reference to
Exhibit 10.12 to TV Filme's S-1).+
**21 Subsidiaries of TV Filme.
**23.1 Consent of Ernst & Young Auditores Independentes S.C.,
independent auditors.
**24 Powers of Attorney (Appears on signature page).
**27.1 Financial Data Schedule.
- --------------
+ Management contract or compensatory plan or arrangement.
* Incorporated herein by reference.
** Filed herewith.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of New York,
State of New York, on the 27th day of March, 1998.
TV FILME, INC.
By: /S/ HERMANO STUDART LINS DE ALBUQUERQUE
-----------------------------------------
Hermano Studart Lins de Albuquerque
Chief Executive Officer
KNOWN BY ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Hermano Studart Lins de Albuquerque and
Alvaro J. Aguirre his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this Annual
Report on Form 10-K, and to file the same, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorney-in-fact and agent, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or their or
his substitutes or substitute, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities indicated on the 27th day of March, 1998.
SIGNATURE TITLE(S)
/s/ HERMANO STUDART LINS DE Chief Executive Officer,
ALBUQUERQUE Secretary and Director
- --------------------------------------------- (Principal Executive
Hermano Studart Lins de Albuquerque Officer)
/s/ CARLOS ANDRE STUDART LINS DE President, Chief
ALBUQUERQUE Operating Officer and
- --------------------------------------------- Director
Carlos Andre Studart Lins de Albuquerque
/S/ ALVARO J. AGUIRRE Chief Financial Officer
- -------------------------------------------- (Principal Financial
Alvaro J. Aguirre and Accounting Officer)
and Director
/S/ DOUGLAS M. KARP Chairman and Director
- ---------------------------------------------
Douglas M. Karp
Director
- ---------------------------------------------
Jose Augusto Pinto Moreira
/S/ RAUL ROSENTHAL Director
- ----------------------------------------------
Raul Rosenthal
/S/ DAVID E. LIBOWITZ Director
- ----------------------------------------------
David E. Libowitz
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NUMBER DESCRIPTION OF DOCUMENT NUMBERED PAGE
- -------- ----------------------- -------------
<S> <C> <C>
*3.1(i) Certificate of Incorporation of TV Filme (incorporated herein by
reference to Exhibit 3.1 to TV Filme's Registration Statement on
Form S-1, dated May 3, 1996, Registration No. 333-4512 ("TV Filme's
S-1").
*3.1(ii) Amended and Restated By-Laws of TV Filme (incorporated herein by
reference to Exhibit 3.1(ii) to TV Filme's Form 10-Q for the fiscal
quarter ended June 30, 1997, File No. 0-28670).
*4.1 Indenture, dated as of December 20, 1996, between TV Filme and IBJ
Schroder Bank & Trust Company, as Trustee (including the form of the
Senior Notes) (incorporated herein by reference to Exhibit 4.1 to TV
Filme's Registration Statement on Form S-4, dated February 4, 1997,
Registration No. 333-21057 ("TV Filme's S-4").
*4.2 Registration Rights Agreement, dated December 20, 1996, between TV
Filme and Bear, Stearns & Co. Inc., BT Securities Corporation, J.P.
Morgan Securities Inc. and Alex. Brown & Sons Incorporated
(incorporated herein by reference to Exhibit 4.2 to TV Filme's S-4).
*4.3 Purchase Agreement, dated December 16, 1996, between TV Filme and
Bear, Stearns & Co. Inc., BT Securities Corporation, J.P. Morgan
Securities Inc. and Alex. Brown & Sons Incorporated, as the Initial
Purchaser (incorporated herein by reference to Exhibit 4.3 to TV
Filme's S-4).
*4.4 Note, dated December 20, 1996, of ITSA to TV Filme (incorporated
herein by reference to Exhibit 4.4 to TV Filme's S-4).
*4.5 Note Pledge Agreement, dated as of December 20, 1996, between TV
Filme and IBJ Schroder Bank & Trust Company, as Collateral Agent
(incorporated herein by reference to Exhibit 4.5 to TV Filme's S-4).
*4.6 Collateral Pledge and Security Agreement, dated as of December 20,
1996, among ITSA, TV Filme and IBJ Schroder Bank & Trust Company, as
Collateral Agent (incorporated herein by reference to Exhibit 4.6 to
TV Filme's S-4).
*4.7 Subsidiary Guarantee, dated as of December 20, 1996, made by TV
Filme Brasilia Servicos de Telecomunicacoes (incorporated herein
by reference to Exhibit 4.7 to TV Filme's S-4).
*4.8 Subsidiary Guarantee, dated as of December 20, 1996, made by TV
Filme Belem Servicos de Telecomunicacoes (incorporated herein by
reference to Exhibit 4.8 to TV Filme's S-4).
*4.9 Subsidiary Guarantee, dated as of December 20, 1996, made by TV
Filme Goiania Servicos de Telecomunicacoes (incorporated herein by
reference to Exhibit 4.9 to TV Filme's S-4).
*10.1 1996 Stock Option Plan (incorporated herein by reference to
Exhibit 10.1 to TV Filme's S-4).+
*10.2 Form of Stock Option Agreement (incorporated herein by reference
to Exhibit 10.2 to TV Filme's S-1).+
*10.3 Stockholders Agreement, dated as of July 26, 1996, entered into by
and among Warburg, Pincus, Tevecap, Mrs. Maria Nise Studart
Lins de Albuquerque, Mr. Hermano Studart Lins de Albuquerque,
Mr. Carlos Andre Studart Lins de Albuquerque and Ms. Maria Veronica
Studart Lins de Albuquerque (incorporated herein by reference to
Exhibit 10.3 to TV Filme's S-4).
*10.4 Registration Rights Agreement, dated as of July 26, 1996,
entered into by and among Warburg, Pincus, Tevecap, Mrs. Maria Nise
Studart Lins de Albuquerque, Mr. Hermano Studart Lins de
Albuquerque, Mr. Carlos Andre Studart Lins de Albuquerque, Ms. Maria
Veronica Studart Lins de Albuquerque, Joseph Wallach, Donald Deely
Pearson and TV Filme (incorporated herein by reference to Exhibit
10.4 to TV Filme's S-4).
*10.5 Employment Agreement, dated as of July 26, 1996, entered into by and
among TV Filme, ITSA and Mr. Hermano Studart Lins de Albuquerque
(incorporated herein by reference to Exhibit 10.5 to TV Filme's
S-4).+
*10.6 Employment Agreement, dated as of July 26, 1996, entered into by and
among TV Filme, ITSA and Mr. Carlos Andre Studart Lins de
Albuquerque (incorporated herein by reference to Exhibit 10.6 to TV
Filme's S-4).+
*10.7 Employment Agreement, dated as of July 26, 1996 enteres into by and
between TV Filme and Mr. Aguirre (incorporated herein by reference
to Exhibit 10.7 to TV Filme's S-4).+
*10.8 Programming License Agreement, dated as of June 27, 1996, entered
into by and between TV Filme and Tevecap (incorporated herein by
reference to Exhibit 10.12 to TV Filme's S-4).
*10.9 Master Operating Agreement, dated as of July 26, 1996, entered into
by and among TV Filme, ITSA and TV Filme Servicos (incorporated
herein by reference to Exhibit 10.13 to TV Filme's S-4).
*10.10 Articles of Association of TV Filme Servicos (incorporated herein by
reference to Exhibit 10.14 to TV Filme's S-4).
*10.11 Form of Indemnification Agreement between TV Filme and the directors
and officers parties thereto (incorporated herein by reference to
Exhibit 10.12 to TV Filme's S-1).+
**21 Subsidiaries of TV Filme.
**23.1 Consent of Ernst & Young Auditores Independentes S.C., independent
auditors.
**24 Powers of Attorney (Appears on signature page).
**27.1 Financial Data Schedule.
</TABLE>
- ------------
+ Management contract or compensatory plan or arrangement.
* Incorporated herein by reference.
** Filed herewith.
40
Exhibit 21
SUBSIDIARIES
% of
Ownership
by
Name of Company TV Filme, Inc.
- ------------------------------------------------------------- --------------
ITSA-Intercontinental Telecomunicacoes Ltda., 99(1)
a Brazilian limited liability company
Filme Sub, Inc., a Delaware corporation 100
TV Filme Servicos de Telecomunicacoes Ltda., 49(2)
a Brazilian limited liability company
TV Filme Brasilia de Telecomunicacoes Ltda., a Brazilian
limited liability company 99(1)
TV Filme Goiania de Telecomunicacoes Ltda., a Brazilian 99(1)
limited liability company
TV Filme Belem de Telecomunicacoes Ltda., a Brazilian 99(1)
limited liability company
TV Filme of Cayman, Ltd., a Cayman Island limited partnership 99(1)
ITSA of Cayman, Ltd., a Cayman Island limited partnership (3)
TV FILME Programadora Ltda., a Brazilian limited liability
company 99(4)
- ---------------------
(1) The remaining 1% interest is held by Filme Sub, Inc.
(2) The remaining 51% is owned by TVTEL Ltda.
(3) Owned 99% by ITSA-Intercontinental Telecomunicacoes Ltda. and 1% by TV
Filme Brasilia de Telecomunicacoes Ltda.
(4) Owned 99% by ITSA-Intercontinental Telecomunicacoes Ltda. and 1% by
Filme Sub., Inc.
EXHIBIT 23.1
Consent of Independent Auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-18201) pertaining to the 1996 Stock Option Plan of TV Filme, Inc. of
our report dated March 31, 1998 with respect to the consolidated financial
statements of TV Filme, Inc. included in the Annual Report (Form 10-K) for the
year ended December 31, 1997.
/s/ Ernst & Young
Auditores Independentes, S.C.
Sao Paulo, Brazil
March 31, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets of TV Filme at December 31, 1997 and the
consolidated statements of operations for the year ended December 31, 1997 and
is qualified in its entirety by reference to such financial statements
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 80,975
<SECURITIES> 0
<RECEIVABLES> 9,542
<ALLOWANCES> 1,710
<INVENTORY> 5,303
<CURRENT-ASSETS> 114,612
<PP&E> 83,448
<DEPRECIATION> 20,043
<TOTAL-ASSETS> 186,397
<CURRENT-LIABILITIES> 16,889
<BONDS> 140,000
0
0
<COMMON> 108
<OTHER-SE> 22,222
<TOTAL-LIABILITY-AND-EQUITY> 186,397
<SALES> 50,547
<TOTAL-REVENUES> 50,547
<CGS> 17,631
<TOTAL-COSTS> 22,977
<OTHER-EXPENSES> 12,162
<LOSS-PROVISION> 4,988
<INTEREST-EXPENSE> (19,167)
<INCOME-PRETAX> (19,256)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,256)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,256)
<EPS-PRIMARY> (1.76)<F1>
<EPS-DILUTED> (1.76)<F1>
<FN>
<F1>There was no change in primary and diluted EPS for 1995 and 1996 as a result
of the adoption of SFAS 128.
</FN>
</TABLE>
