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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, 1998
|_| 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 12, 1999 was approximately $662,972.
As of March 12, 1999, 10,825,139 shares of the registrant's Common Stock,
$0.01 par value, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE. None.
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TABLE OF CONTENTS
PART I
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Item 1. Business........................................................... 1
Background......................................................... 1
Company Overview................................................... 1
Brazilian Pay Television Industry.................................. 2
Operating Systems and the Company's Markets........................ 3
Programming........................................................ 4
High Speed Internet Access Service................................. 6
Operations......................................................... 6
Employees.......................................................... 7
Facilities and Equipment........................................... 7
Competition........................................................ 8
Regulatory Environment............................................. 8
Item 2. Properties......................................................... 10
Item 3. Legal Proceedings.................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders................ 11
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters............................................................ 11
Item 6. Selected Financial Data............................................ 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.......................................... 14
Item 7A. Quantitative and Qualitative Disclosures about Market Risk......... 26
Item 8. Financial Statements and Supplementary Data........................ 27
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................... 27
PART III
Item 10. Directors and Executive Officers of the Registrant................. 40
Item 11. Executive Compensation............................................. 41
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 44
Item 13. Certain Relationships and Related Transactions..................... 46
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K... 47
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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, THE BRAZILIAN WIRELESS AUCTION
PROCESS AND TRENDS AFFECTING THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF
OPERATIONS,INCLUDING THE COMPANY'S ABILITY TO MEET FUTURE CASH REQUIREMENTS. 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"), TV Filme Operacoes, TV Filme Sistemas 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
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 was organized in 1996 under the laws of the State of Delaware.
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.
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COMPANY OVERVIEW
The Company develops, owns and operates pay television systems in
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. However, a hardwire cable
license has been issued to a competitor in Belem. The Company expects this
competitor to commence service in the third quarter of 1999. 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. The Company has a subscriber base of approximately 78,000 as of
December 31, 1998. Through a bidding process reinstated in July 1998 following
significant delays resulting from legal challenges to such process, the Company
has been awarded licenses to operate MMDS in the following seven small and
medium markets: Bauru, Campina Grande, Caruaru, Franca, Porto Velho, Uberaba and
Presidente Prudente, which markets encompass, in the aggregate, approximately
490,000 households. Currently, Bauru, Franca and Presidente Prudente have
operating hardwire cable competitors. The Company has paid U.S. $5.0 million for
the seven new licenses. The Company has no outstanding applications pending for
any additional markets. The proposal process for some of the larger markets
commenced on March 10, 1999. The Company is currently evaluating whether it will
participate in these auctions given its current financial situation, the
competitive environment in each auctioned market and the state of the Brazilian
economy. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation - Overview."
The Company primarily targets 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 the markets in Brazil which it is targeting are currently
under penetrated by existing pay television providers.
The Company believes that wireless cable technology is well suited to
its current and potential target 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 generally only 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
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hardwire cable industry and wireless cable industry began developing
concurrently. By December 31, 1998, approximately 185 hardwire cable licenses
and 48 wireless cable licenses had been issued by the Brazilian government. The
Company believes that as of December 31, 1998, fewer than 25% 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, 1998, the Company estimates that there
were approximately 2.6 million pay television subscribers, representing
approximately 7.6% 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.
OPERATING SYSTEMS AND THE COMPANY'S MARKETS
The table below provides information regarding the Company's markets as
of December 31, 1998:
<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......................... 2,060,000 486,000 430,000 37 Feb. 1994(4)
Belem............................ 1,950,000 408,000 354,000 36 Feb. 1995
Goiania.......................... 1,840,000 454,000 338,000 36 Jan. 1995
------------------ --------------------- ------------------
Total in Operating Markets....... 5,850,000 1,348,000 1,122,000
================== ===================== ==================
New Markets (5).................. 2,150,000 490,000 460,000
================== ===================== ==================
</TABLE>
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(1) Represents the Company's estimate of the total population and the total
number of households within the greater metropolitan areas of each of
its markets. The Company's estimates for Brasilia, Goiania and Belem
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. The Company's estimates for the new markets are
based on data provided by Brazil's Telecommunications National Agency
during the bidding process.
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(2) Represents the Company's estimate of the number of LOS households
within the licensed radius in each market (ranging from 15-35
kilometers) 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 authorized
channels.
(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.
(5) Represents the seven markets for which the Company has currently been
awarded licenses to operate new MMDS systems.
BRASILIA SYSTEM. Brasilia, the capital of Brazil, had an estimated
greater metropolitan population of approximately 2.1 million as of December 31,
1998. 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 430,000 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 EBITDA positive in the third quarter of 1994 with approximately
6,000 subscribers. The Brasilia System transmits at 50 watts of power per
channel from a transmission tower which is 300 feet above average terrain. The
principal pay television competitor 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, 1998, it was the largest pay television provider
in Brasilia based on the total number of subscribers. In December 1997, the
Company began providing high speed 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 "- High Speed Internet Access Service."
BELEM SYSTEM. Belem, with an estimated greater metropolitan population
of approximately 2.0 million as of December 31, 1998, 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
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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 354,000 households which
the Company believes can be served by LOS transmission.
The Belem System currently offers a 30 channel package, consisting of
25 wireless cable channels and five local off-air VHF/UHF channels. The Company
also has approval to transmit programming over an additional six wireless cable
channels which have not yet been placed in service. In 1998, the Belem System
began offering the People and Art/Travel Channel to its subscribers. 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. Although
there currently is no hardwire or other wireless cable provider in the city of
Belem, a hardware cable license has been issued. The Company expects the
competitor to commence service in the third quarter of 1999.
GOIANIA SYSTEM. Goiania, with an estimated metropolitan population of
approximately 1.8 million as of December 31, 1998, 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
338,000 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 NET Goiania, a hardwire cable operator and affiliate of the Globo
Organization. The Company believes that, at December 31, 1998, it was the second
largest pay television provider in Goiania based on total number of subscribers.
NEW MARKETS
The Company has been awarded licenses to operate MMDS systems in the
following seven markets: Bauru, Campina Grande, Caruaru, Franca, Porto Velho,
Uberaba and Presidente Prudente. The Company believes that, in the aggregate,
these markets collectively encompass a total population of approximately
2,150,000, total households of approximately 490,000 and LOS households of
approximately 460,000. Bauru, Franca and Presidente Prudente have operating
hardwire cable competitors. Under the terms of the licenses awarded to the
Company for its seven new markets, the entity holding the licenses, TV Filme
Sistemas, is prohibited from transferring the licenses to another party for a
period of three years after the date service is commenced.
PROGRAMMING
The Company currently purchases a large portion of its programming from
Tevecap and its subsidiaries (certain programs are purchased directly from the
programmer) pursuant to an exclusive license to transmit programming available
from Tevecap and its subsidiaries via wireless and hardwire cable in the
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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
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,
and the rights to televise annually through 1999 all of the games of the Para
State Soccer Championship. 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),
has been available in each of the Company's markets as a premium channel since
May 1997. 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, 1998 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 broad-
cast channel from Portugal
CNN International............... International version of CNN
TNT............................. Brazilian version of TNT
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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
People and Art/Travel Channel*** Tourism, biography and art channel
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 (where available)
SBT............................. Local off-air channel (where available)
Bandeirantes.................... Local off-air channel (where available)
Record.......................... Local off-air channel (where available)
Nacional........................ Local off-air channel (where available)
Manchete........................ Local off-air channel (where available)
Cultura......................... Local off-air channel (where available)
* Offered only in Brasilia.
** Offered only in Belem and Goiania.
*** Offered only in Belem.
**** Offered as a premium channel.
HIGH SPEED 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. 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 applying for a license in a potential new market,
the Company has historically conducted pre-marketing surveys to evaluate the
demographics and terrain of such market. Upon receipt of a license, 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 upon several factors, including whether the subscriber is in a single
family home or multiple dwelling unit and the effect of any competition in the
market. This development plan ensures that the quality of installations and
customer service remains high. In each market, the Company's marketing staff has
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historically applied the following types of 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.
In February 1999, the Company changed its marketing strategy to one
focused on customer loyalty. The Company has limited its sales efforts to
passive telemarketing and is directing its marketing expenditures towards
customer loyalty programs such as promotional discounts at retail stores, gifts,
parties and other items given exclusively to customers. The Company believes
that this approach will enable it to significantly reduce expenditures, reduce
churn, increase customer loyalty and target its sales to prospects who truly
want the service and have the financial wherewithal to pay for the service.
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 installation at multiple
dwelling units in which drop lines already have been installed require less time
and, accordingly, are less costly. During 1998, the Company charged its new
subscribers an installation fee typically ranging from $5-$75. In February 1999,
the Company decided to charge, in all of its operations, a standard installation
fee of approximately $60.
CUSTOMER SERVICE. The Company believes that delivering high levels of
customer service in installation and maintenance enables it to maintain customer
satisfaction. 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 programs.
In the fourth quarter of 1998, the Company decided to centralize
various activities in a single service center in Brasilia. Along with
centralizing its billing, accounts payable, human resources administration and
corporate marketing, the Company centralized its customer service hotline and
all routing and scheduling functions. This centralization project is expected to
be completed in April 1999 and the Company believes that this project will
further improve and enhance the quality of its customer service function.
SUBSCRIBER MANAGEMENT SYSTEM. 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 nine employees dedicated to the development,
enhancement, integration and maintenance of the Company's subscriber management
systems.
EMPLOYEES
As of December 31, 1998, the Company had a total of 755 employees,
substantially all of whom are employed by TV Filme's subsidiaries. All of the
Company's employees, except for Messrs. Hermano Lins and Carlos Andre Lins, are
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subject to collective bargaining agreements. The collective bargaining
agreements covering the employees of TV Filme Brasilia and TV Filme Goiania
expire June 30, 1999. The collective bargaining agreements are with the Union
for the Employees of Radio and TV Broadcasting Companies. Employees of TV Filme
Belem are not covered under a collective bargaining agreement; however, the
Company has historically honored the terms of the TV Filme Brasilia and TV Filme
Goiania agreements with employees in Belem. The Company has experienced no work
stoppages in its history. 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.
In connection with the change in marketing strategy implemented in
February 1999, the Company significantly reduced its headcount in the areas of
sales and installations, and reduced headcount in virtually all areas of the
Company. As a result, the Company laid off approximately 250 employees. While
the Company believes that its relationships with its employees have been, and
will continue to be, good, the impact of this lay off on such relationships
cannot be determined.
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. Beginning in the fourth
quarter of 1998, the Company began centralizing its customer service, billing,
accounts payable and certain other administrative functions for all of its
operations in Brasilia. The centralization project is expected to be completed
in April 1999. Functions remaining in the regional offices include sales, local
marketing, installation and technical support services, maintenance and local
administrative functions. As new markets are launched, the Company expects to
use the same centralized model.
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 its license coverage areas. In
certain areas within the Company's markets that are otherwise terrain-blocked,
the Company utilizes signal repeaters to enhance signal coverage. For new
markets, the Company expects to lease space for transmission and headend
facilities and expects to use transmitting antennas which will serve the entire
license coverage areas in each market.
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 each of its 10 licensed markets. The Company
9
<PAGE>
currently provides service via 24 wireless analog cable channels in Brasilia and
Goiania and via 25 wireless analog cable channels in Belem, 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, 1998, 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, 1998, 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 NET Goiania, a hardwire cable
operator and affiliate of the Globo Organization. There currently is no hardwire
cable provider in the city of Belem; however, a hardwire cable license has been
awarded and the Company expects competition to begin in the third quarter of
1999.
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 three DBS providers in Brazil, "Sky," an affiliate of the
Globo Organization, Direct TV, an affiliate of Tevecap, and Tecsat, a privately
held company 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."
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
10
<PAGE>
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. Decree No. 2196 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. Licenses for the seven new
markets are held by TV Filme Sistemas. Although Decree No. 2196 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. Under a Brazilian law designed to
reduce inflation, the prices which the Company may charge to a particular
subscriber may not be increased until the next anniversary of the subscriber's
initial subscription date and may only be increased by a percentage no greater
than the percentage of the increase in the general inflation rate which occurred
during the subscriber's contract year.
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
analog channels are permitted in markets with less than 300,000 inhabitants; 15,
16 or 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.
11
<PAGE>
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 process 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 1997-98 auction process, ANATEL established
specific criteria for evaluating the Applications for Telecommunication Services
filed. The criteria adopted include a combination of technical and financial
criteria. The following technical factors are being 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, are
rated according to certain criteria established in the Revised MMDS Rule and set
forth in the 1997 MMDS tender invitations, as follows: (a) in markets with less
than 300,000 inhabitants, the technical aspects weigh 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 are weighed equally; and,
(c) in markets with more than 700,000 inhabitants, the offer price weighs more
heavily than the technical aspects. Once an MMDS concession is granted by
ANATEL, the license holder is required to submit, within four months, an
installation proposal for its MMDS system's headend. Subsequent to approval of
such proposal, construction is 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
12
<PAGE>
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.
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 16,000 square feet of office space and space for a
transmission tower in Campina Grande, one of the Company's seven new markets. 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.
The Company held its Annual Meeting of Stockholders on October 1, 1998.
Proposals presented for a stockholder vote were (i) the election of three Class
II Directors, (ii) the approval of an amendment to the Company's Stock Option
Plan, and (iii) the ratification of the appointment of Ernst & Young Auditores
Independentes S.C. as independent auditors for the Company for fiscal year 1998.
Each of the incumbent Class II directors nominated by the Company were
elected with the following voting results:
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
Votes Votes Votes
For Against Withheld
----- ------- --------
Carlos Andre Studart Lins de Albuquerque............. 9,813,329 4,185 4,185
Douglas M. Karp...................................... 9,813,329 4,185 4,185
Douglas Duran........................................ 9,813,329 4,185 4,185
</TABLE>
The amendment to the Company Stock Option Plan was approved with the
following voting results:
<TABLE>
<CAPTION>
Votes Votes
Cast Cast
For Against Abstentions
----- ------- -----------
<S> <C> <C> <C>
8,535,404 245,624 2,800
</TABLE>
The appointment of Ernst & Young Auditores Independentes S.C. as the
Company's independent auditors for fiscal year 1998 was approved with the
following voting results:
<TABLE>
<CAPTION>
Votes Votes
Cast Cast Broker
For Against Abstentions Non-votes
----- ------- ----------- ---------
<S> <C> <C> <C> <C>
9,815,214 500 1,800 --
</TABLE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
From July 30, 1996 to February 4, 1999, the Company's common stock,
$0.01 par value per share (the "Common Stock"), was quoted on the Nasdaq
National Market ("Nasdaq") under the symbol "PYTV." Effective February 4, 1999,
the Common Stock was delisted from Nasdaq based on the Company's inability to
comply with certain requirements for continued listing, including the net
tangible assets and minimum bid price requirements. Following delisting, the
Common Stock has been listed on the OTC Bulletin Board, sporadically traded in
the over-the-counter-market and reported in the "pink sheets." The OTC Bulletin
board is a controlled quotation service that offers real-time quotes, last-sale
prices and volume information in over-the-counter equity securities.
The following table reflects the high and low sale prices for the
Common Stock, as reported by Nasdaq, for the periods indicated:
14
<PAGE>
<TABLE>
HIGH LOW
------ -----
(Per Share)
1998
<S> <C> <C>
Fourth Quarter.................................................. $ 2-1/8 $ 1/4
Third Quarter................................................... 4 7/8
Second Quarter................................................. 5 1-7/8
First Quarter.................................................. 5-7/8 2-3/4
1997
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
</TABLE>
On March 12, 1999, there were approximately 13 stockholders of record
of the Common Stock. The Company believes that it has in excess of 500
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.
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated balance sheet data as of December 31, 1996,
1997 and 1998 and the selected consolidated statement of operations data for
each of the years ended December 31, 1994, 1995, 1996, 1997 and 1998 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 Consolidated Financial Statements have been prepared
in accordance with U.S. GAAP in U.S. dollars. For this purpose, until December
15
<PAGE>
31, 1997 amounts in Brazilian currency were remeasured into U.S. dollars in
accordance with the methodology set forth in Statement of Financial Accounting
Standards No. 52 ("SFAS 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 were remeasured at exchange rates in effect when the assets
were acquired or the liabilities were incurred. All other assets and liabilities
were remeasured at fiscal year end exchange rates; and all other income and
expense items were remeasured at average exchange rates prevailing during the
year. Remeasuring adjustments were included in exchange and translation gains
(losses). Effective January 1, 1998, the Company determined that Brazil ceased
to be a highly inflationary economy under SFAS 52. Accordingly, as of January 1,
1998, the Company began using the REAL as the functional currency of its
Brazilian subsidiaries. As a result, all assets and liabilities are translated
into dollars at period end exchange rates and all income and expense items are
translated into U.S. dollars at the average exchange rate prevailing during the
period. In addition, the Company recorded a loss associated with holding a net
foreign currency monetary liability position. 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)
----------------------------------------------------------------------------
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
(DOLLARS IN THOUSANDS, EXCEPT
OTHER OPERATING DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues ................................................. $ 2,438 $ 11,404 $ 31,388 $ 50,547 $ 45,408
Operating costs and expenses:
System operating ...................................... 773 2,957 9,593 17,631 19,617
Selling, general and administrative ................... 2,394 8,975 16,737 27,965 31,637
Depreciation and amortization ......................... 365 2,049 5,921 12,162 21,651
--------- ---------- --------- --------- ----------
Total operating costs and expenses ................. 3,532 13,981 32,251 57,758 72,905
--------- --------- --------- --------- ----------
Operating loss ........................................... (1,094) (2,577) (863) (7,211) (27,497)
Other income (expense) ................................... 1,612 360 (1,147) (12,045) (12,723)
-------- --------- --------- --------- ----------
Net income (loss) ........................................ $ 518 $ (2,217) $ (2,010) $ (19,256) $ (40,220)
========= ========= ========= ========= ==========
Net income (loss) per share (2) .......................... $ 0.08 $ (0.27) $ (0.22) $ (1.76) $ (3.72)
========= ========= ========= ========= ==========
Weighted average number of common stock and common
stock equivalents (2) ................................. 6,885 8,086 9,256 10,940 10,825
========= ========= ========= ========== ==========
OTHER FINANCIAL DATA:
EBITDA(3) ................................................ $ (729) $ (216) $ 5,330 $ 5,026 $(5,846)
Capital expenditures ..................................... 3,637 16,621 25,225 37,082 14,062
16
<PAGE>
OTHER OPERATING DATA:
Number of subscribers at end of year(4) .................. 7,641 36,594 79,176 111,244 77,069
Average monthly revenue per subscriber(5) ................ $ 34.13 $ 40.00 $ 39.63 $ 37.91 $ 35.39
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)(6) ............................ $ 3,204 $ (6,430) $ 123,263 $ 97,723 $ 58,227
Pledged securities(7) ................................... -- -- 33,512 17,324 ---
Property, plant and equipment, net ...................... 4,182 18,870 38,333 63,405 50,974
Total assets ............................................ 10,008 23,683 202,929 186,397 133,314
Total long-term debt .................................... 600 400 140,200 140,000 140,000
Stockholders' equity (deficit) (8) ...................... 6,500 7,895 37,748 22,330 (21,767)
</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").
(3) EBITDA is defined as operating loss plus depreciation, amortization and
non-cash charges. While EBITDA should not be construed as a substitute
for operating loss or a better measure of liquidity than cash flow from
operating activities, which are determined in accordance with 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 debt service. EBITDA, however, is not
necessarily a measure of the Company's ability to fund its cash needs.
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) For periods prior to 1998, working capital includes current portion of
pledged securities.
17
<PAGE>
(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
markets in Brazil. The Company is the sole provider of MMDS in the cities of
Brasilia, Goiania and Belem and holds the sole MMDS licenses in the cities of
Bauru, Campina Grande, Caruaru, Franca, Porto Velho, Presidente Prudente and
Uberaba.
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 EBITDA positive in the third quarter of 1994 with
approximately 6,000 subscribers. The Company's Belem System became EBITDA
positive in the fourth quarter of 1995 with approximately 5,000 subscribers.
Each of the Company's existing 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 has
required an average incremental investment of approximately $500, 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 a four year period. Prior to 1998, these costs were
depreciated over a five 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 has charged
its subscribers an installation fee typically ranging from $5 - $75. For new
market systems, the Company expects to incur an initial capital investment of
approximately $1.5 million each to build and install a transmission tower,
headend facilities and other equipment. Factoring in the $5.0 million cost of
the licenses for the seven new markets, the total estimated initial expenditures
for these seven markets is expected to be approximately $15.5 million. License
fees for the seven new markets were paid to the Brazilian government in 1998.
The Company defers installation fees, net of direct selling expenses, and is
recognizing these fees as revenues ratably over a four-year period. Prior to
1998, the Company recognized these fees as revenues ratably over a five-year
period.
18
<PAGE>
The Company's historical subscriber growth has resulted from the
addition of subscribers in Brasilia and from the launch of operating systems in
Goiania and Belem. Recent subscriber losses have resulted from the general
economic situation in Brazil, including the strict tightening of consumer credit
and increased levels of unemployment. Revenues primarily consist of monthly fees
paid by subscribers for the programming packages, installation fees recognized
for the period and advertising fees and revenue derived from the provision of
high speed Internet access services. See "Item 1. Business -- High Speed
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 are
currently having, substantial effects on the Company's results of operations and
financial condition. From time to time, the Company purchases hedge contracts to
reduce the risk of having a substantial portion of its cash in REAIS. At the end
of 1998, the Company held approximately $24.1 million of such contracts, which
expired on January 11, 1999. See "-- Certain Factors Which May Affect the
Company's 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 and the former
Soviet Republics during 1997 and 1998 has had an impact on many emerging
markets, including Brazil. As a result of these events, the Brazilian government
originally took significant measures to protect the REAL, as well as the gains
achieved over the past 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, in November 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 were designed to
improve the country's fiscal and current account deficits and relieve pressure
on the REAL. While short-term interest rates declined somewhat during the second
quarter of 1998, they returned to levels approaching 37% per annum by the end of
the year. Even with rates at this level, the government continued to experience
a reduction in foreign currency reserves which were being used to purchase REAIS
as a means to protect the relative value of the REAL versus the U.S. dollar. Due
to the continued reduction in foreign currency reserves, and other reasons, the
Brazilian government sought support from the International Monetary Fund
("IMF"). On November 13, 1998, the IMF announced an aid package of more than $41
billion of which $5.3 billion has been made available to Brazil through February
1999. An additional $9.3 billion is expected to be made available to Brazil in
19
<PAGE>
April 1999. To secure funds from the IMF, in October 1998 the Brazilian
government announced additional austerity measures including pension plan reform
and significant spending cuts, some of which have been approved by the Brazilian
Congress. As part of these additional austerity measures, the government is
attempting to increase the financial transactions tax (CPMF) from 0.2% to 0.38%.
This tax is levied on the value of all financial transactions, including bank
withdrawals, checks, and stock and fund purchases. Also, the Brazilian
government increased the public pension system contribution by corporations from
2% of revenue to 3% of revenue and for the first time, subjected financial
income, including accrued intercompany interest income, to this tax. Despite
these additional austerity measures, in January 1999 the Brazilian government
devalued the REAL and subsequently eliminated the established trading band,
thereby allowing the REAL to float freely against the U.S. dollar. These
measures have had, and will have for the foreseeable future, both a direct and
indirect impact on the Company's financial results. Indirectly, the austerity
measures, in conjunction with high short-term interest rates and the
devaluation, have resulted in tightening of consumer credit and increased rates
of unemployment, causing the Company to have increased difficulty in generating
additional sales and in reducing rates of customer delinquency. Directly, these
measures have reduced the Company's net revenue and increased its cash expenses.
Had these measures been in effect throughout 1998, these measures would have
reduced the Company's net revenue by approximately 1% and increased its cash
expenses by approximately $1.2 million. Soon after the 1997 austerity measures
were initiated, the Company began to experience a significant increase in
customer delinquency rates which, among other things, resulted in the Company
significantly increasing its provisions for doubtful accounts and increasing
service disconnections. This trend continued throughout 1998 and the Company
anticipates that this trend will continue for the foreseeable future. The
Company has undertaken several steps to address the impact of the deterioration
in its operating environment, such as performing credit checks on potential new
subscribers, changing the way it compensates its sales force to emphasize high
quality sales and implementing cost reduction measures, including a headcount
reduction. In addition, as previously discussed the Company has become more
aggressive in cancelling delinquent subscriber accounts. There can be no
assurance that the steps taken by the Company or measures taken by the Brazilian
government will be successful, or that the increase in delinquent payments and
service disconnections will abate. If the steps implemented by the Company and
the Brazilian Government are not effective in the near term, the Company may be
unable to meet future cash requirements. See "-- Liquidity and Capital
Resources."
As a holding company, TV Filme 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."
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.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
% OF % OF % OF
1996 REVENUE 1997 REVENUE 1998 REVENUE
---- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues ............................... $ 31,388 100% $ 50,547 100% $ 45,408 100%
Operating costs and expenses:
System operating ....................... 9,593 31% 17,631 35% 19,617 43%
Selling, general and administrative .... 16,737 53% 27,965 55% 31,637 70%
Depreciation and amortization .......... 5,921 19% 12,162 24% 21,651 48%
--------- ------- --------- -------- --------- --------
Total operating costs and expenses 32,251 103% 57,758 114% 72,905 161%
--------- ------- --------- -------- --------- --------
Operating loss ................... (863) (3%) (7,211) (14%) (27,497) (61%)
--------- ------- --------- -------- --------- --------
Other income (expense):
Interest and other expense ........... (1,049) (3%) (19,167) (38%) (19,810) (44%)
Interest and other income ............ 664 2% 8,985 18% 11,300 25%
Monetary loss......................... -- -- -- -- (4,213) (9%)
Exchange and translation losses ...... (762) (2%) (1,863) (4%) -0- --
--------- -------- --------- --------- --------- --------
Total other expense ............ (1,147) (4%) (12,045) (24%) (12,723) (28%)
--------- ------- --------- --------- --------- --------
Net loss ............................... $ (2,010) (6%) $ (19,256) (38%) $ (40,220) (89%)
--------- ------- --------- --------- --------- --------
Net loss per share ..................... $ (0.22) $ (1.76) $ (3.72)
========= ========= =========
Weighted average number of
shares of common stock and
common stock equivalents ............. 9,256 10,940 10,825
========= ========= =========
Other Data:
EBITDA(a) ............................. $ 5,330 $ 5,026 $ (5,846)
========= ========= =========
Number of subscribers at end
of period ......................... 79,176 111,244 77,069(b)
========= ========= =========
</TABLE>
- ----------------
(a) EBITDA is defined as operating loss plus depreciation, amortization and
non-cash charges. While EBITDA should not be construed as a substitute for
operating loss or a better measure of liquidity than cash flow from operating
activities, which are determined in accordance with 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 debt service.
EBITDA, however, is not necessarily a measure of the Company's ability to fund
its cash needs.
(b) In the second half of 1998, the Company became more aggressive in canceling
the accounts of delinquent subscribers.
NET LOSS. Net loss for 1998 increased to ($40.2) million versus ($19.2)
million in 1997 due to a 34,000 reduction in subscriber count, a change in the
depreciation period from five years to four years, increased costs to support
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<PAGE>
new services and programming and to generate new subscribers to replace those
lost throughout the year, and a monetary loss associated with the Company's net
dollar-denominated monetary liability position. Net loss for 1997 increased to
($19.2) million from ($2.0) million in 1996 due to the issuance of the Senior
Notes in late 1996 and to increased expenses associated with the growth in the
subscriber base of over 32,000.
REVENUES. The Company's revenues in 1998 decreased by 10% compared to
1997, due primarily to lower installation fees and an 8% devaluation of the REAL
against the U.S. dollar. This revenue decrease was partially offset by increased
revenues from the Company's proprietary premium channel and high-speed Internet
access service. Revenues in 1997 increased by 61% compared to 1996, due
primarily to an increase of over 32,000 subscribers during 1997, offset somewhat
(approximately $1.6 million) by an increase in taxes on revenues in Brasilia.
Average monthly revenue decreased to $35.39 in 1998 versus $37.91 in
1997, primarily due to an 8% devaluation of the REAL against the U.S. dollar.
Average monthly revenue decreased to $37.91 in 1997 from $39.63 in 1996, also as
a result of the depreciation of the REAL against the U.S. dollar and increased
soft disconnects resulting from higher delinquency rates.
SYSTEM OPERATING EXPENSES. For 1998 compared to 1997, system operating
expenses increased by 11%, primarily due to higher costs to support the
Company's proprietary premium channel and high speed Internet access service
($1.3 million), along with increases in programming and magazine costs. System
operating expenses increased in 1997 by 84% over 1996 primarily due to growth in
the subscriber base, which was supported by additional programming and
production costs ($3.5 million), development of the Company's proprietary
premium channel ($1.5 million) and employee costs ($2.5 million).
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased during 1998 by 13% over 1997
primarily due to an increase in the provision for litigation and taxes ($2.8
million), a higher bad debt provision associated with the reduction in
subscribers ($1.7 million), and higher payroll costs to support the Company's
proprietary premium channel and high-speed Internet access service ($1.3
million). These increases were partially offset by a reduction in advertising
and promotion expense ($1.2 million). SG&A expenses increased in 1997 by 67%
over 1996, primarily due to the growth in the number of subscribers throughout
1997. This growth fueled increases in advertising and promotion to attract
new subscribers ($2.0 million), payroll to support the new subscribers ($2.0
million) and an increase in the bad debt provision ($3.7 million).
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased
in 1998 by 78% over 1997 primarily due to the change in the depreciation period
from five years to four years (effective January 1, 1998) and the acquisition of
over $14 million in additional equipment to support the Company's existing
operations and to prepare for launching new markets which were awarded at the
end of 1998. Depreciation and amortization increased in 1997 by 105% over 1996
primarily due to growth in the number of installed subscribers during 1997.
INTEREST INCOME AND INTEREST EXPENSE. Interest income increased in 1998
by 26% over 1997 primarily as a result of holding a higher proportion of the
Company's cash in Brazil, which earned significantly higher rates of return
compared to interest which could be earned in the U.S. Both interest income and
22
<PAGE>
interest expense increased in 1997 over 1996 (interest income by 1,251% and
interest expense by 1,727%) due to the Company's Senior Notes offering in late
1996 and the investment of a significant portion of the proceeds from the Senior
Notes offering which generated interest income.
MONETARY LOSS AND EXCHANGE AND TRANSLATION LOSS. The Company generated
a monetary loss in 1998 of $4.2 million due to its net dollar-denominated
monetary liability position throughout the year. As of January 1, 1998, the
Company determined that Brazil ceased to be a highly inflationary economy under
the provisions of SFAS 52. Accordingly, no monetary gain or loss was recorded in
1997.
In 1997, the Company reported exchange and translation losses of $1.9
million due to the remeasurement of short-term assets and liabilities from REAIS
to U.S. dollars in accordance with SFAS 52 for companies in highly inflationary
economies. Reports of exchange and translation gains and losses ceased as of
January 1, 1998 due to the provisions of SFAS 52. Unless Brazil returns to a
highly inflationary status, the Company does not believe it will record future
exchange and translation gains or losses.
LIQUIDITY AND CAPITAL RESOURCES
The pay television business is capital intensive. 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 financings, (ii) capital markets
financings, (iii) vendor financing which generally requires payment within 360
days of shipment, some of which had 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, 1998, the Company had no
outstanding borrowings from Abril and its affiliates and the Company does not
expect to borrow from Abril or its affiliates in the future.
As of December 31, 1998, approximately $0.5 million was outstanding
under letters of credit with a maturity of 420 days. As of December 31, 1998,
the Company had import lines of credit in the aggregate amount of $30.5 million
with four commercial banks, of which approximately $30.0 million was available
on such date. In January 1999, in conjunction with the devaluation of the REAL,
all import lines of credit were cancelled by the banks. Further import purchases
by the Company will have to be individually negotiated with the banks. While the
Company believes that lines of credit, additional vendor financing and other
credit facilities are available, the terms and conditions of such financing
vehicles are uncertain and may not be available on terms acceptable to the
Company. As a result of the Initial Public Offering and the Senior Notes
offering, the Company had positive working capital at December 31, 1998 of $58.2
million. Net cash used in operating activities for the twelve months ended
December 31, 1998 was $6.3 million.
On February 4, 1999, the Company received notice from the Nasdaq Stock
Market, Inc. that its Common Stock was delisted, effective on the close of
trading that day. The delisting was a consequence of the Company's failure to
meet certain standards for continued listing on Nasdaq, including the net
tangible assets and minimum bid price requirements. The Company's Common
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<PAGE>
Stock was immediately quoted on the OTC Bulletin Board. The effects of the
Nasdaq delisting include, without limitation, the limited release of market
prices of the Common Stock, limited news coverage of the Company, and
restriction of investors' interest in the Company, and may have a material
adverse effect on the trading market and prices for the Common Stock, thereby
affecting the Company's ability to issue additional securities or secure
additional financing. In addition, because the Common Stock is deemed penny
stock under the Securities Enforcement Penny Stock Reform Act of 1990,
additional disclosure is required in connection with trading in the Common
Stock, including delivery of a disclosure schedule explaining the nature and
risk of the penny stock market. Such requirements could severely limit the
liquidity of the Common Stock.
In order to select a financial advisor to assist the Company in
evaluating strategic alternatives, including a possible debt restructuring, and
issues associated with the Company's debt service requirements, the Company is
currently evaluating proposals submitted by various financial advisors. There
can be no assurance that any transaction will result from this process or that
any transaction pursued will be completed successfully. In addition, there can
be no assurance that the Company will be able to meet future cash requirements.
The Company made capital expenditures of approximately $14.0 million
during 1998. Such capital expenditures were financed with the proceeds from the
Senior Notes offering and from cash generated from the Company's operations.
In September 1997, the Brazilian Ministry of Communications announced
the bidding process by which additional pay-TV licenses would be awarded
throughout the country. This award process commenced in October 1997. Due to
legal challenges made to the bidding process by several bidders, the bidding
process had been postponed for all markets. However, on May 13, 1998, the
Superior Justice Tribunal issued a favorable ruling allowing the bidding process
with respect to a number of the smaller markets to go forward. In July 1998, the
license process for the smaller markets was reinstated and in the fourth quarter
of 1998, the Company was awarded licenses to operate pay-TV systems in the
following seven cities: Bauru, Campina Grande, Caruaru, Franca, Porto Velho,
Uberaba and Presidente Prudente. The Company has paid an aggregate of $5.0
million for these seven licenses. Following a favorable ruling by the Superior
Justice Tribunal in the fourth quarter of 1998, with respect to the remaining
markets, on March 10, 1999 ANATEL initiated the bid process for these markets.
The Company is currently evaluating whether it will participate in these
auctions given its current financial situation, the competitive environment in
each auctioned market and the state of the Brazilian economy. The Company from
time to time may selectively pursue joint ventures or acquisitions in the pay
television industry, although it currently has no understanding, commitment or
agreement with respect to any such joint venture or acquisitions. The Company
currently believes that its cash and internally generated funds will be
sufficient to fund its debt service obligations, the cash requirements for its
three existing systems and seven new markets for at least the next twelve
months. As of December 31, 1998, of the Company's approximately $57.5 million in
cash and cash equivalents, approximately $17.1 million (30%) was invested in
U.S. dollar denominated securities. As of March 21, 1999, of the Company's
approximately $48.0 million in cash and cash equivalents, approximately $16.5
million (34%) was invested in U.S. dollar denominated securities. In the longer
term, the Company's funding needs are subject to a variety of factors, including
its ability to obtain new financing and/or successfully complete a debt
restructuring, the number and size of new system launches or acquisitions, the
implementation of alternative transmission technologies and the offering of
additional telecommunications services. Accordingly, there can be no assurance
that the Company will be able to meet its future funding needs.
INFLATION AND EXCHANGE RATES
Inflation and exchange rate variations have had, and are expected to
continue to have for the foreseeable future, 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 a Brazilian law designed to reduce inflation, the prices which the Company
24
<PAGE>
may charge to a particular subscriber may not be increased until the next
anniversary of the subscriber's initial subscription date and may only be
increased by a percentage no greater than the percentage of the increase in the
general inflation rate which occurred during the subscriber's contract year.
Thus, the Company is less able to offset expense increases with revenue
increases. Accordingly, inflation may have a material adverse effect on the
Company's results of operations and financial condition.
Generally, inflation in Brazil has been accompanied by devaluation of
the Brazilian currency relative to the U.S. dollar. The Company collects
substantially all of its revenues in REAIS, but pays certain of its expenses,
including a significant portion of its equipment costs, substantially all
interest expense and most of its programming costs, in U.S. dollars. To the
extent the REAL depreciates at a rate greater than the rate at which the Company
is able to raise prices, the value of the Company's revenues (as expressed in
U.S. dollars) is adversely affected. This effect on the Company's revenues also
negatively impacts the Company's ability to fund U.S. dollar-based expenditures.
As a result of the devaluation of the REAL in January 1999, the Company expects
to report a substantial monetary loss and higher expenses and lower revenues for
the first quarter of 1999. The full impact of the devaluation cannot currently
be estimated.
As of January 1, 1998, the Company's financial statements reflect
foreign exchange gains and losses associated with monetary assets and
liabilities denominated in currencies other than the REAL. As a result, the
devaluation of the REAL against the U.S. dollar has caused, and is expected to
cause, for the foreseeable future, the Company to record a loss associated with
its U.S. dollar monetary liabilities and a gain associated with its U.S. dollar
monetary assets. Given that the Company has a net U.S. dollar monetary liability
position, the net effect of the devaluation of the REAL against the U.S. dollar
is to generate losses in the Company's financial statements. In order to protect
against a possible further devaluation of the REAL, the Company may from time to
time enter into certain foreign exchange contracts. See "Item 7A. Quantitative
and Qualitative Disclosures about Market Risk."
RECENT ECONOMIC EVENTS
The economic and financial turmoil in Southeast Asia and the former
Soviet Republics during 1997 and 1998 has had an impact on many emerging
markets, including Brazil. As a result of these events, the Brazilian government
originally took significant measures to protect the REAL, as well as the gains
achieved over the last several years by the REAL Plan. Among other actions, in
October 1997, Brazil's Central Bank significantly raised short-term interest
rates, and, in November 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 were designed to improve the country's fiscal and current account
deficits and relieve pressure on the REAL. While short-term interest rates
declined somewhat during the second quarter of 1998, they returned to levels
approaching 37% per annum by the end of the year. Even with rates at this level,
the government continued to experience a reduction in foreign currency reserves
which were being used to purchase REAIS as a means to protect the relative value
of the REAL versus the U.S. dollar. Due to the continued reduction in foreign
25
<PAGE>
currency reserves, and other reasons, the Brazilian government sought
support from the IMF. On November 13, 1998, the IMF announced an aid package of
more than $41 billion, of which $5.3 billion has been made available to Brazil
through February 1999. An additional $9.3 billion is expected to be made
available to Brazil in April 1999. To secure funds from the IMF, in October 1998
the Brazilian government announced additional austerity measures including
pension plan reform and significant spending cuts, some of which have been
approved by the Brazilian Congress. As part of these additional austerity
measures, the government is attempting to increase the financial transactions
tax (CPMF) from 0.2% to 0.38%. This tax is levied on the value of all financial
transactions, including bank withdrawals, checks, and stock and fund purchases.
Also, the Brazilian government increased the public pension system contribution
by corporations from 2% of revenue to 3% of revenue and for the first time,
subjected financial income, including accrued intercompany interest income, to
this tax. Despite these additional austerity measures, in January 1999 the
Brazilian government devalued the REAL and subsequently eliminated the
established trading band, thereby allowing the REAL to float freely against the
U.S. dollar. These measures have had, and will have for the foreseeable future,
both a direct and indirect impact on the Company's financial results.
Indirectly, the austerity measures, in conjunction with high short-term interest
rates and devaluation, have resulted in tightening of consumer credit and
increased rates of unemployment, causing the Company to have increased
difficulty in generating additional sales and in reducing rates of customer
delinquency. Directly, these measures have reduced the Company's net revenue and
increased its cash expenses. Had these measures been in effect throughout 1998,
these measures would have reduced the Company's net revenue by approximately 1%
and increased its cash expenses by approximately $1.2 million. Soon after the
1997 austerity measures were initiated, the Company began to experience a
significant increase in customer delinquency rates which, among other things,
resulted in the Company significantly increasing its provisions for doubtful
accounts and increasing service disconnections. This trend continued throughout
1998, and the Company anticipates that this trend will continue for the
foreseeable future. The Company has undertaken several steps to address the
impact of the deterioration in its operating environment, such as performing
credit checks on potential new subscribers, changing the way it compensates its
sales force to emphasize high quality sales and implementing cost reduction
measures, including a headcount reduction. In addition, as previously discussed
the Company has become more aggressive in canceling delinquent subscriber
accounts. There can be no assurance that the steps taken by the Company or
measures taken by the Brazilian government will be successful, or that the
increase in delinquent payments and service disconnections will abate.
YEAR 2000 COMPLIANCE
GENERAL DESCRIPTION OF THE YEAR 2000 ISSUE AND THE NATURE AND EFFECTS
OF THE YEAR 2000 ON INFORMATION TECHNOLOGY ("IT") AND NON-IT SYSTEMS. The Year
2000 issue is the result of computer programs being written using two digits
rather than four to define the applicable year. Any of the Company's computer
programs or hardware that have date-sensitive software or embedded chips may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or miscalculations causing disruptions of
operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
Based on recent assessments, the Company determined that it will be
required to modify or replace certain hardware and software so that those
systems will properly utilize dates beyond December 31, 1999. The Company
26
<PAGE>
presently believes that with modifications or replacements of certain existing
hardware and software, the Year 2000 issue can be mitigated. However, if such
modifications and replacements are not made, or are not completed timely, the
Year 2000 issue could have a material adverse impact on the operations of the
Company.
The Company's plan to resolve its Year 2000 issues involves the
following four phases: assessment, remediation, testing and implementation. To
date, the Company has fully completed its assessment of all systems that could
be significantly affected by the Year 2000 issue. The completed assessment
indicated that most of the Company's significant IT systems could be affected,
particularly the Subscriber Management System ("SMS"), the accounting system and
video transmission system. However, based upon a review of the SMS and the video
transmission system, the Company believes that its core product, television
programming, will not require remediation to be Year 2000 issue compliant.
Accordingly, the Company does not believe that the Year 2000 issue presents a
material exposure as it relates to the Company's products. In addition, the
Company has gathered information about the Year 2000 compliance status of its
significant suppliers and continues to monitor their compliance.
STATUS OF PROGRESS IN BECOMING YEAR 2000 COMPLIANT, INCLUDING TIMETABLE
FOR COMPLETION OF EACH REMAINING PHASE. For its IT exposures, to date the
Company is approximately 75% complete on the remediation phase and has completed
all necessary reprogramming for the SMS and video transmission system. The
Company is currently evaluating if any reprogramming of the accounting system
will be necessary and expects to complete any necessary remediation no later
than June 30, 1999. Testing of the accounting system will commence immediately
after any necessary remediation is complete. Other systems, such as the
Company's internal network and electronic mail system required no remediation
and have passed the testing phase successfully.
NATURE AND LEVEL OF IMPORTANCE OF THIRD PARTIES AND THEIR EXPOSURE TO
THE YEAR 2000 ISSUE. The Company's billing system interfaces directly with
significant third party vendors (primarily banks) who provide electronic billing
services using credit cards and direct debits to customers' bank accounts. The
Company is in the process of working with third party vendors to ensure that the
Company's systems that interface directly with third parties are Year 2000
compliant by December 31, 1999. Each bank has a unique interface for both credit
cards and direct debit transactions. As a result, the Company is attempting to
create a single standard interface for all banks and has offered to produce this
interface using its own resources. The Company is uncertain if all banks will
accept a standard interface and cannot begin the remediation phase until
determining if a single solution can be utilized or if separate solutions will
be required for each bank. In any event, as each bank controls and dictates its
own unique interface, remediation is dependent upon the individual bank. The
Company has no means of ensuring that these interfaces will be Year 2000
compliant and has prepared a contingency plan in the event the interfaces are
not timely compliant.
The Company has queried its significant suppliers that do not share
information systems with the Company (external agents). To date, the Company is
not aware of any external agent with a Year 2000 issue that would materially
impact the Company's operations. However, the Company has no means of ensuring
that external agents will be Year 2000 compliant. The inability of external
agents to complete their Year 2000 remediation process in a timely fashion could
materially impact the Company. The effect of non-compliance by external agents
is not determinable.
27
<PAGE>
COSTS. The Company plans to primarily use internal resources to
reprogram, or replace, test and implement the software and operating equipment
for Year 2000 modifications. The total cost of the Year 2000 project is
estimated at $200,000. To date, the Company has solely used internal, existing
labor on the various phases of the Year 2000 project.
RISKS. Management of the Company believes it has an effective program
in place to resolve the Year 2000 issue in a timely manner. As noted above, the
Company has not yet completed all necessary phases of the Year 2000 program. In
the event the Company does not complete any additional phases, the Company may
not be able to collect payments from customers using direct debit or credit
cards and/or face delays in accounting and other management reporting systems.
In addition, in the unlikely event that television program distributors are not
Year 2000 compliant, the Company could be unable to receive and retransmit
television programming to its customers. Further, disruptions in the economy
generally resulting from Year 2000 issues could also materially adversely affect
the Company. The amount of any potential liability and/or lost revenue cannot be
reasonably estimated at this time.
CONTINGENCY PLANS. The Company has contingency plans for certain
critical applications and is working on such plans for others. These contingency
plans involve, among other actions, billing all customers by invoice, manual
workarounds and adjusting staffing as needed.
FACTORS RELATING TO BRAZIL GENERALLY
OUR BUSINESS COULD SUFFER FROM POLITICAL AND ECONOMIC UNCERTAINTIES IN
BRAZIL. Changes in policies involving, among, other things, tariffs, exchange
controls, regulatory policy, and taxation, as well as events such as inflation,
currency devaluation, social instability or other political, economic or
diplomatic developments could adversely affect our business, results of
operations and financial conditions.
GOVERNMENT RESTRICTIONS ON THE CONVERSION AND REMITTANCE OF FUNDS
ABROAD COULD HINDER OUR ABILITY TO OPERATE OUR BUSINESS. The Brazilian
government has the authority to restrict the transfer of funds abroad. If the
Brazilian government were to exercise this power, as it has done in the past,
our subsidiaries could be prevented from purchasing equipment required to be
paid for in U.S. dollars and from transferring funds to TV Filme which are
required in order for TV Filme to make scheduled interest payments on its
outstanding Notes. Either of these events could have a material adverse impact
on our business, operating results and financial condition.
28
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FACTORS RELATING TO THE COMPANY
OUR SUBSTANTIAL LEVERAGE COULD ADVERSELY AFFECT OUR ABILITY TO RUN OUR
BUSINESS. We currently have a significant amount of indebtedness. This
substantial indebtedness could have important consequences. For example, it
could:
o limit our ability to obtain additional financing in the future to
refinance existing indebtedness, for working capital, capital expenditures,
acquisitions and general corporate purposes or other purposes in the
future;
o require us to dedicate a substantial portion of our cash flow from
operations and cash and/or marketable securities on hand to the payment of
principal and interest on our indebtedness thereby reducing funds available
for market expansion and additional market development;
o hinder our ability to adjust rapidly to changing market conditions;
and
o make us more vulnerable to economic downturns, limiting our ability to
withstand competitive pressures and reduce our flexibility in responding to
changing business and economic conditions.
OUR ABILITY TO DISTRIBUTE DIVIDENDS AND MEET DEBT OBLIGATIONS ARE
DEPENDENT ON OUR SUBSIDIARIES. Because we are a holding company, our ability to
distribute dividends and meet our debt obligations are dependent upon the
earnings of our subsidiaries and the distribution of those earnings to, or upon
loans or other payment of funds by the subsidiaries to, us. Our subsidiaries are
separate and distinct legal entities and have no obligation to pay any amounts
to our creditors or to make any funds available to our creditors. The payment of
dividends from our subsidiaries and the payment of any interest on or the
repayment of any principal of any loans or advances made to us by our
subsidiaries, or by us to our subsidiaries (1) may be subject to statutory or
contractual restriction, (2) are contingent upon the earnings of such
subsidiaries and (3) are subject to various business considerations.
WE HAVE A LIMITED OPERATING HISTORY AND A HISTORY OF LOSSES AND MAY
NEVER ACHIEVE PROFITABILITY. We were incorporated in April 1996. Therefore, we
have a limited operating history upon which to evaluate our current business and
prospects. We have incurred net losses since our foundation. At December 31,
1998, we had an accumulated deficit of $63.7 million. In 1998, we had net losses
of $40.2 million. We expect that we will continue to incur losses from
operations for the forseeable future. We cannot assure you that we will ever
become profitable in the future.
29
<PAGE>
A FAILURE TO EFFECTIVELY MANAGE OUR INTERNAL GROWTH WOULD ADVERSELY
AFFECT OUR BUSINESS. Our growth has placed, a significant strain on managerial
and operational resources. Any inability to manage growth effectively, or a drop
in productivity of our employees could have a material adverse effect on our
business, operations and financial condition.
WE WILL NEED ADDITIONAL CAPITAL TO FINANCE GROWTH. Our business
requires substantial investment on a continuing basis to finance:
o debt service obligations,
o capital expenditures and expenses related to subscriber growth and
system development,
o the acquisition of new pay television licenses and operations, and
o net losses.
The amount and timing of our future capital requirements will depend
upon a number of factors, many of which are not within our control, including:
o the grant of new licenses,
o programming costs,
o capital costs,
o competitive conditions, and
o the costs of any necessary implementation of technological
nnovations or alternative technologies.
We can make no assurance that we will be able to obtain additional debt
or equity capital on satisfactory terms, or at all, to meet our future financing
needs. Furthermore, the indenture under which our outstanding debt was issued
restricts the amount of additional indebtedness which we may incur. Failure to
obtain any required additional financing could adversely affect our growth and,
ultimately, could have a material adverse effect on our business, results of
operations and financial condition.
OUR ABILITY TO EXPAND INTO NEW MARKETS IS SUBJECT TO A NUMBER OF
FACTORS. Our ability to expand successfully into new markets depends on many
factors, including:
o the successful identification and acquisition of such systems,
and
o management's ability to integrate and operate the acquired
businesses effectively.
We may compete for new system opportunities with other companies that
have significantly greater financial and managerial resources. We can make no
assurance that we will be successful in obtaining new licenses or launching or
acquiring any new pay television systems or that we will be able to integrate
successfully any acquired systems into our current business and operations. Our
failure to obtain new licenses or launch or acquire new pay television systems
could impede our growth. The failure to integrate successfully acquired systems
could have a material adverse effect on our results of operations and financial
condition.
30
<PAGE>
WE ARE IN A COMPETITIVE BUSINESS. We face potential competition from
other wireless cable and hardwire cable operators, DBS, local off-air VHF/UHF
channels, home videocassette recorders and out-of-home theaters. Currently,
there are three DBS providers 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 of our actual and potential
competitors have greater financial, marketing and other resources than we do. We
cannot provide any assurance that we will be able to compete successfully.
OUR BUSINESS COULD SUFFER FROM CHANGES IN GOVERNMENT REGULATION.
Changes in the regulation of our business activities, including decisions by
regulators affecting our operations, could have an adverse effect on our
business. Any new regulations could have a material adverse effect on the pay
television industry, as a whole, and on us, in particular.
WE ARE DEPENDENT ON CERTAIN KEY SUPPLIERS. We are dependent on certain
key suppliers for our programming. We currently purchase a large portion of our
programming from one source under the terms of a programming agreement. Although
we have no reason to believe that the agreement will be canceled or will not be
renewed, if the agreement is canceled or not renewed, we will have to seek
programming from other sources. We cannot provide any assurances that other
programming will be available to us on acceptable terms or at all or, if
available, that such programming will be acceptable to our subscribers.
We currently purchase decoders and antennas from a limited number of
sources. Our inability to obtain sufficient components as required from these
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 our results of operations and financial
condition.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
The Company's primary market risk exposure is foreign currency exchange
rate risk between the U.S. dollar and the Brazilian REAL due to the Company
having all of its operations based in Brazil, and most of its revenues and some
of its expenses denominated in REAIS while substantially all of its debt and
many of its expenses and capital equipment needs are denominated in dollars. In
addition, for operating purposes, the Company holds a significant portion of its
available cash in REAIS.
The Company manages its risk exposure on its available cash held in
REAIS by purchasing, from time to time, foreign currency exchange contracts
which have the effect of "locking-in" a dollar based exchange rate for the
Company's cash held in Brazil. The Company believes that the cost of managing
risk exposure to its dollar-denominated debt and expenses is too high to warrant
an attempt at mitigating this risk.
31
<PAGE>
In an effort to protect against a possible devaluation of the REAL, the
Company entered into the following foreign currency hedge contracts which were
outstanding as of December 31, 1998 (these contracts were entered into for
purposes other than trading purposes):
<TABLE>
<CAPTION>
Contract Value Contract Value Exchange Premium % Contract
R$ at 12/31/98 US$ Rate % CDI Date Expiration Date
- -------------- --------------- ----------- ------- --- -------- ---------------
<S> <C> <C> <C> <C> <C> <C>
R$16,613,571 US$13,744,991 R$1.18/US$1 +11.51% 93% Sep. 11, 1998 Jan. 11, 1999
R$12,504,248 US$10,345,204 R$1.18/US$1 +11.17% 92% Sep. 11, 1998 Jan. 11, 1999
</TABLE>
In 1999, the Company entered into the following foreign currency hedge contracts
to protect against further devaluation of the REAL:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Contract Value R$ Exchange Rate Premium % % CDI Contract Date Expiration Date
- ----------------- ------------- --------- ----- ------------- ---------------
R$20,000,000 R$1.3193/US$1 +0.5% 93% Jan. 14, 1999 Jul. 13, 1999
R$17,000,000 R$1.50/US$1 +2.0% 100% Jan. 15, 1999 Jul. 14, 1999
</TABLE>
The above contracts (both tables) require the Company to pay, on the expiration
date, an amount equal to the calculated interest (CDI--see below) on the
contract value. On the expiration date, the Company is to receive or pay an
amount, in REAIS, calculated as follows: the "Contract Value R$" divided by the
"Exchange Rate" times (the R$/US$ exchange rate in effect on the expiration date
plus the "Premium %") less the "Contract Value R$." If the Company receives a
net gain from such a transaction, it is required to pay 20% of the net gain in
Brazilian federal income tax.
"CDI" is the CERTIFICADO DE DEPOSITO INTERBANCARIO, or the interbank lending
rate within Brazil.
The Company has not entered into contracts for market risk sensitive instruments
for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following statements are filed as part of this Annual Report on
Form 10-K:
<TABLE>
<CAPTION>
<S> <C>
FORM 10-K
PAGE NO.
----------
FINANCIAL STATEMENTS:
TV FILME, INC.:
Report of Independent Auditors.................................................... 33
Consolidated Balance Sheets as of December 31, 1997 and 1998...................... 34
Consolidated Statements of Operations for the years ended December 31, 1996,
1997, and 1998................................................................... 35
Consolidated Statements of Changes in Stockholders' Equity for
the years ended December 31, 1996, 1997 and 1998................................. 36
Consolidated Statements of Cash Flows for the years ended December 31,
1996, 1997 and 1998.............................................................. 37
Notes to Consolidated Financial Statements........................................ 38
All schedules have been omitted because they are inapplicable or the
requested information is shown in the consolidated financial statements
or related notes.
</TABLE>
32
<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, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for each of the three years ended December 31, 1998. 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, 1998 and 1997, and the
consolidated results of its operations and its cash flows for the three years
ended December 31, 1998, in conformity with generally accepted accounting
principles in the United States.
The accompanying financial statements have been prepared assuming that
TV Filme, Inc. will continue as a going concern. As more fully described in Note
1, the Company is in the process of selecting a financial advisor to assist it
in evaluating strategic alternatives, including a possible debt restructuring,
and issues associated with the Company's debt service requirements. This raises
substantial doubt about the Company's ability to continue as a going concern.
The financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty.
/s/ERNST & YOUNG
-----------------------------
AUDITORES INDEPENDENTES S. C.
Sao Paulo, Brazil
March 12, 1999
33
<PAGE>
<TABLE>
<CAPTION>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------------------
1997 1998
---- ----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 80,975 $ 57,492
Accounts receivable, net.................................. 7,832 4,736
Supplies.................................................. 5,303 4,930
Prepaid expenses and other current assets................. 3,178 2,560
Interest receivable....................................... 679 --
Pledged securities-current................................ 16,645 --
------------- ------------
Total current assets................................. 114,612 69,718
Property, plant and equipment, net........................... 63,405 50,974
Debt issuance costs, net..................................... 6,298 4,731
Other assets................................................. 2,082 7,891
------------- ------------
Total assets......................................... $186,397 $133,314
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................................. $ 12,724 $ 3,315
Payroll and other benefits payable........................... 2,103 2,892
Accrued interest payable..................................... 751 751
Accrued liabilities and taxes payable........................ 1,111 4,533
Payables to affiliates-current............................... 200 --
------------ -----------
Total current liabilities............................ 16,889 11,491
Deferred installation fees................................... 7,178 3,590
Senior Notes................................................. 140,000 140,000
Stockholders' equity:
Accumulated other comprehensive loss
Cumulative transaction adjustment...................... -- (3,877)
Preferred stock, $.01 par value, 1,000,000
Shares authorized, no shares issued.................... -- --
Common stock, $.01 par value, 50,000,000
Shares authorized, 10,825,139 and 10,825,139
Shares issued and outstanding ......................... 108 108
Additional paid-in capital............................. 45,657 45,657
Accumulated deficit.................................... (23,435) (63,655)
-------------- -------------
Total stockholders' equity........................... 22,330 (21,767)
------------- -------------
Total liabilities and stockholders' equity........... $ 186,397 $ 133,314
============= ============
See accompanying notes.
</TABLE>
34
<PAGE>
<TABLE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues ............................................ $ 31,388 $ 50,547 $ 45,408
Operating costs and expenses:
System operating-Note 3 .......................... 9,593 17,631 19,617
Selling, general and administrative ............. 16,737 27,965 31,637
Depreciation and amortization .................... 5,921 12,162 21,651
-------- -------- ------
Total operating costs and expenses .......... 32,251 57,758 72,905
-------- -------- ------
Operating loss .............................. (863) (7,211) (27,497)
Other income (expense):
Interest and other expense - Note 3 .............. (1,049) (19,167) (19,810)
Interest and other income - Note 3 ............... 664 8,985 11,300
Monetary Loss .................................... -- -- (4,213)
Exchange and translation losses .................. (762) (1,863) --
Total other expense ......................... (1,147) (12,045) (12,723)
--------- --------- ---------
Net loss ............................................ $ (2,010) $(19,256) $(40,220)
========= ========= =========
Net loss per share, basic and diluted ............... $ (0.22) $ (1.76) $ (3.72)
======== ========= ==========
Weighted average number of shares of common stock
and common stock equivalents ................... 9,256 10,940 10,825
======== ========= ==========
</TABLE>
See accompanying notes.
35
<PAGE>
<TABLE>
<CAPTION>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE THREE YEARS ENDED DECEMBER 31, 1998
COMMON STOCK ADDITIONAL OTHER
--------------------- PAID-IN COMPREHENSIVE ACCUMULATED
SHARES PAR VALUE CAPITAL LOSS DEFICIT TOTAL
------ --------- ------- ------------- ----------- --------
(IN THOUSANDS OF DOLLARS, EXCEPT SHARES)
<S> <C> <C> <C> <C> <C> <C>
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
Cumulative translation adjustment ...... -- -- -- (3,877) -- (3,877)
Net loss for the year .................. -- -- -- -- (40,220) (40,220)
---------- -------- --------- ---------- ------------ ----------
BALANCE AT DECEMBER 31, 1998 ........... 10,825,139 $ 108 $ 45,657 $ (3,877) $ (63,655) $ (21,767)
========== ======== ========= ========== ============ ==========
</TABLE>
See accompanying notes.
36
<PAGE>
<TABLE>
<CAPTION>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31
1996 1997 1998
---- ---- ----
(IN THOUSANDS OF DOLLARS
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss........................................................ $ (2,010) $ (19,256) $ (40,220)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization................................ 5,921 12,162 22,050
Provision for losses on accounts receivable.................. 1,296 4,989 6,674
Non-cash compensation........................................ 272 75 --
Amortization of debt issuance costs.......................... 14 805 1,567
Increase (decrease) in deferred installation fees............ 3,222 (1,049) (3,107)
Monetary loss................................................ -- -- 4,213
Changes in operating assets and liabilities:
Increase in accounts receivable.............................. (3,122) (9,214) (4,176)
Increase in supplies......................................... (1,089) (2,582) (32)
(Increase) decrease in prepaid expenses and other current
assets....................................................... (678) (2,003) 375
(Increase) decrease in accrued interest receivable........... -- (679) 679
Increase in other assets..................................... (421) (1,292) (6,449)
Decease in pledged securities............................... -- 16,867 16,645
Increase (decrease) in accounts payable...................... 4,230 1,618 (9,023)
Increase in payroll and other benefits payable............... 255 565 950
Increase in accrued interest payable......................... 502 179 ---
Increase in accrued liabilities and taxes payable........... 51 649 3,522
----------- ------------- -----------
Net cash provided by (used in) operating activities............. 8,443 1,884 (6,332)
----------- ------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions:
Property, plant and equipment................................ (25,225) (37,082) (14,062)
----------- ------------ -----------
Net cash used in investing activities........................... (25,225) (37,082) (14,062)
----------- ------------ -----------
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........................... 7,151 3,763 --
Increase (decrease) in payables from affiliates................. (1,863) (200) (200)
------------ ------------ -----------
Net cash provided by (used in) financing activities............. 133,094 (182) (200)
------------ ------------ -----------
Effect of exchange rate changes on cash......................... -- -- (2,889)
------------ ------------ -----------
Net change in cash and cash equivalents......................... 116,312 (35,380) (23,483)
Cash and cash equivalents at beginning of year.................. 43 116,355 80,975
------------ ------------ -----------
Cash and cash equivalents at end of year........................ $116,355 $ 80,975 $ 57,492
============ ============ ===========
</TABLE>
See accompanying notes.
37
<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 has authorized ITSA to operate the existing wireless cable systems
under its current licenses. Subsequent to the Restructuring and the Initial
Public Offering, the Company owns 100% of ITSA, which holds 49% of the voting
stock and 83% of the economic interests of TVFSA and 100% of TV Filme Brasilia,
TV Filme Goiania and TV Filme Belem. As of November 1997, the licenses to
operate the existing wireless cable systems were transferred from TV Filme
Servicos to the respective operating companies, TV Filme Brasilia, TV Filme
Goiania and TV Filme Belem.
Accordingly, the consolidated financial statements of the Company
include ITSA and its subsidiaries on a historical basis 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
markets in Brazil. The Company has established wireless cable operating systems
38
<PAGE>
in the cities of Brasilia, Goiania and Belem and has been awarded licenses to
operate pay television systems in seven additional markets in Brazil.
The Company is in the process of selecting a financial advisor to
assist it in evaluating strategic alternatives, including a possible debt
restructuring, and issues associated with the Company's debt service
requirements. There can be no assurance that any transaction will result from
this process or that any transaction pursued will be completed successfully. In
addition, there can be no assurance that the Company will be able to meet future
cash requirements.
B. METHOD OF PRESENTATION
The consolidated financial statements of the Company have been prepared
in accordance with generally accepted accounting principles in the United States
in U.S. dollars. Until December 31, 1997, amounts in Brazilian currency were
remeasured into U.S. dollars in accordance with the methodology set forth in
Statement of Financial Accounting Standards No. 52 ("SFAS 52") as it applies to
entities operating in highly inflationary economies. Supplies, property, plant
and equipment, intangibles and deferred installation fees and the related income
statement accounts were remeasured at exchange rates in effect when the assets
were acquired or the liabilities were incurred. All other assets and liabilities
were remeasured at year end exchange rates, and all other income and expense
items were remeasured at average exchange rates prevailing during the year.
Remeasurement adjustments were included in exchange and translation gains
(losses).
Effective January 1, 1998, the Company determined that Brazil ceased
to be a highly inflationary economy under SFAS 52. Accordingly, as of January 1,
1998, the Company began using the REAL as the functional currency of its
Brazilian subsidiaries. As a result, all assets and liabilities are translated
into dollars at period end exchange rates and all income and expense items are
translated into U.S. dollars at the average exchange rate prevailing during the
period. In addition, the Company recorded a loss associated with holding a net
foreign currency monetary liability position.
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.
39
<PAGE>
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 4
years for installation costs. Prior to 1998, installation costs were depreciated
over a 5 year period.
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, 1997 and 1998 was $449,000 and
$817,000, 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 four year period. Prior to 1998, such fees were amortized over a five year
period.
I. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $1,710,000 and
$387,000 at December 31, 1997 and 1998, respectively. Charges to the allowance
during 1996, 1997 and 1998 were $945,000, $3,945,100 and $8,000,000,
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.
K. INTEREST EXPENSE
Interest expense approximates the amount of cash interest paid.
L. FOREIGN EXCHANGE CONTRACTS
The Company enters into foreign exchange contracts as a hedge against
potential exchange rate variations on cash and cash equivalents held in foreign
currency. Realized gains and losses are recognized, and the resulting credit or
debit is recorded, in interest and other expense.
M. 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.
N. COMPREHENSIVE INCOME
The Company has adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 establishes new
40
<PAGE>
rules for the reporting and display of comprehensive income and its components;
however, the adoption of this statement had no impact on the Company's net
income or shareholders' equity. SFAS 130 requires foreign currency translation
adjustments to be included in other comprehensive income.
O. IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued Statement No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES". The Company expects to adopt the
new Statement effective January 1, 2000. The Statement will require the Company
to recognize all derivatives on the balance sheet at fair value. The Company
does not anticipate that the adoption of this Statement will have a significant
effect on its results of operations or financial position.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is comprised of the following at December
31:
<TABLE>
<CAPTION>
1997 1998
---- ----
(IN MILLIONS OF
DOLLARS)
<S> <C> <C>
Land..................................................... $ 1.0 $ 1.0
Building and leasehold improvements...................... 0.7 2.1
Machinery and equipment.................................. 35.2 35.1
Furniture and fixtures................................... 1.1 1.4
Installation costs....................................... 45.4 50.2
-------- -------
83.4 89.8
Accumulated depreciation................................. (20.0) (38.8)
--------- --------
$ 63.4 $ 51.0
========= ========
</TABLE>
Depreciation expense of $5,762,000, $12,009,000 and $21,651,000 is
included in the statements of operations for the years ended December 31, 1996,
1997 and 1998, 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 1996, 1997 and 1998 were $6,731,000,
$10,394,000 and $10,607,000 respectively. Through September 1997, the Company
purchased from Tevecap a program guide which it distributed to its subscribers
monthly. In October 1997, the Company discontinued purchasing the program guide
produced by Tevecap and began producing and distributing its own program guide.
Amounts paid to Tevecap for the program guide during 1996 and 1997 were $750,000
and $679,000, respectively.
The Company purchased two licenses to operate wireless cable systems
from Abril S.A. ("Abril") for $400,000 each, payable in four equal annual
installments, which do not bear interest. The $200,000 which remained
outstanding as of December 31, 1997 was repaid in February 1998.
41
<PAGE>
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, 1997 and 1998 were $7,665,000 and $500,000, respectively. At
December 31, 1997 and 1998, issued and outstanding letters of credit secured by
affiliates were $110,000 and $0, respectively. The maturity of outstanding
letters of credit at December 31, 1998 was 420 days.
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
42
<PAGE>
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).
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 and
October 1998, 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 1,736,432, subject to certain adjustments
reflecting changes in the Company's capitalization. The Plan allows the granting
of incentive stock options, which may not have an exercise price below the
greater of par value or the market value on the date of grant, and non-qualified
stock options, which have no restrictions as to exercise price other than the
exercise price cannot be below par value. All options must be exercised no later
than 10 years from the date of grant. Options to purchase 407,000 shares of
Common Stock were granted upon the consummation of the Initial Public Offering,
297,000 of which are exercisable at $10.00 per share, and 110,000 of which were
exercisable at $11.00 per share, and which generally vest 20% per year for five
years beginning on the first anniversary of consummation of the Initial Public
Offering.
Additional options to purchase Common Stock were granted as follows:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE
DATE OPTIONS PRICE
---------- --------- ---------
<S> <C> <C>
Dec. 1996 10,000 $11.750
Feb. 1997 10,000 $11.750
July 1997 15,000 $10.125
Oct. 1997 308,500 $6.000
Dec. 1997 150,000 $5.625
July 1998 10,000 $3.875
</TABLE>
Of the total number of options which were exercisable as of December
31, 1998, 210,000 options have expired in accordance with their terms.
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 1997 and 1998, respectively: risk-free interest
43
<PAGE>
rate of 5.5% and 5.7%, dividend yield of 0% and 0%; volatility factor of the
expected market price of the Common Stock of .46 and .68; 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):
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
Pro forma net loss $(19,812) $ (41,059)
Pro forma loss per share (1.81) $ (3.79)
</TABLE>
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 U.S. government securities,
scheduled interest and principal payments on which was in an amount sufficient
to provide for payment in full when due of the first four scheduled interest
payments on the Senior Notes, the last of which occurred on December 15, 1998.
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, 1998 it is unable to make any dividend payments.
The Company believes that the Senior Notes, as of December 31, 1998,
were trading at approximately 20% - 25% of the principal value.
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:
44
<PAGE>
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
(IN THOUSANDS OF DOLLARS)
<S> <C> <C> <C>
Income taxes (benefit) at effective
Brazilian rate.................................. $ (613) $ (6,354) $(13,273)
Effect of monetary adjustments under
Brazilian tax law............................... -- -- --
Nondeductible compensation expense.................... 78 215 1,651
Effect of change in tax rate.......................... (232) 103 --
Other................................................. -- -- --
Increase (decrease) in valuation allowance............ 767 6,036 11,622
--------- --------- ---------
Tax expense (benefit)................................. $ -- $ -- $ --
========= ========= =========
</TABLE>
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 $66,921 at December 31,
1998. 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, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
(IN THOUSANDS OF
DOLLARS)
<S> <C> <C>
Deferred tax assets
Net operating loss carryforwards................... $14,544 $21,414
Deferred installation fees......................... 2,369 1,185
Other.............................................. 225 2,912
--------- ---------
17,138 25,511
Valuation allowance................................ (7,216) (18,838)
--------- ---------
$ 9,922 $ 6,673
========= =========
Deferred tax liabilities
Fixed assets....................................... $ 9,922 $ 6,673
Other.............................................. -- --
-------- ---------
$ 9,922 $ 6,673
========= =========
</TABLE>
45
<PAGE>
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.
8. Commitments
The Company leases office space, vehicles and satellite transponder
space, and has entered into various transmission tower rental agreements. Rent
expense amounted to approximately $2,062,000, $2,091,080 and $3,508,000 for the
years ended December 31, 1996, 1997 and 1998, 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, 1998 are as follows:
1999................................................. $ 2,340,000
2000................................................. 1,830,000
2001................................................. 1,150,000
2002................................................. 1,020,000
9. Foreign Exchange Contracts
At December 31, 1998, the Company had $24.1 million of contracts
maturing January 11, 1999. These contracts allow the Company to receive in
REAIS, at maturity, the dollar equivalent of the contract value calculated using
the exchange rate as of the maturity date. At maturity, the Company is required
to pay the contract value plus interest calculated using the interbank lending
rate during the life of the contract. Net contract gains, if any, are subject to
a 20% tax levied in Brazil. Unrealized losses as of December 31, 1998 totaled
$852,000.
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.
The following table sets forth certain information with respect to the
persons who are members of the Board of Directors or are executive officers of
the Company as of March 23, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Hermano Studart Lins de Albuquerque 36 Chief Executive Officer, Secretary
and Director
Carlos Andre Studart Lins de Albuquerque 34 President, Chief Operating Officer,
acting Chief Financial Officer and
Director
Douglas M. Karp 43 Managing Director of E.M. Warburg,
Pincus & Co. LLC
Gary D. Nusbaum 32 Managing Director of E.M. Warburg,
Pincus & Co. LLC
Jose Augusto Pinto Moreira 55 President of Tevecap S.A.
Douglas Duran 45 Chief Financial Officer of Tevecap
S.A.
</TABLE>
46
<PAGE>
The business experience of each of the directors and executive officers
of the Company during the last five years is as follows:
HERMANO STUDART LINS DE ALBUQUERQUE, one of the co-founders of the
Company, has served as Chief Executive Officer, Secretary and a director of the
Company 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.
CARLOS ANDRE STUDART LINS DE ALBUQUERQUE, one of the co-founders of the
Company, has served as President, Chief Operating Officer and a director of the
Company since its incorporation and as the acting Chief Financial Officer since
October 1998. 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.
DOUGLAS M. KARP has served as Chairman of the Board of the Company
since its incorporation. Mr. Karp has been a General Partner of Warburg, Pincus
& Co. and a Member and Managing Director of E.M. Warburg, Pincus & Co., LLC and
its predecessors since May 1991. Prior to joining E.M. Warburg, Pincus & Co.,
LLC, Mr. Karp held several positions with Salomon Inc., including Managing
Director from January 1990 to May 1991, Director from January 1989 to December
1989 and Vice President from October 1986 to December 1988. Mr. Karp is a
director of Journal Register Company, Qwest Communications International, Inc.,
Golden Books Family Entertainment, Inc., Primus Telecommunications Group,
Incorporated, Paging Network do Brasil S.A. and several privately held
companies.
GARY D. NUSBAUM has served as a director of the Company since July
1998. Mr. Nusbaum also served as a director of the Company from its
incorporation to March 1997 and as Vice President of the Company from its
incorporation to December 1996. Mr. Nusbaum has been a General Partner of
Warburg, Pincus & Co. and a Member and Managing Director of E.M. Warburg, Pincus
& Co., LLC since January 1997. Mr. Nusbaum was a Vice President of Warburg,
Pincus Ventures, Inc. from January 1995 to January 1997 and was an Associate at
Warburg, Pincus Ventures, Inc. from September 1989 to December 1994. Mr. Nusbaum
is a director of Journal Register Company, Paging Network do Brasil S.A. and
several privately held companies.
JOSE AUGUSTO PINTO MOREIRA has served as a director of the Company
since its incorporation. Mr. Moreira has been President of Tevecap S.A. since
February 1999 and prior to that served as the Executive Vice-President of
Finance and Administration of Abril S.A. since 1982. Mr. Moreira is a director
of several privately held companies.
DOUGLAS DURAN has served as a director of the Company since August
1998. Mr. Duran has been the Chief Financial Officer of Tevecap S.A. since 1994
and served as TVA Related Companies' Director of Tevecap S.A. from October 1991
to 1994. Prior to joining Tevecap S.A., Mr. Duran was employed by Abril S.A. for
more than 20 years, most recently as its Treasury Director.
The number of directors of the Company, as determined by the Board of
Directors is seven. There is currently one open Board seat. The Board consists
47
<PAGE>
of three classes: Class I, Class II and Class III, as nearly equal in number as
possible. One of the three classes, comprising approximately one-third of the
directors, is elected each year to succeed the directors whose terms are
expiring. Directors hold office until the annual meeting for the year in which
their terms expire and until their successors are elected and qualified unless,
prior to that date, they have resigned, retired, or otherwise left office. In
accordance with the Company's Certificate of Incorporation, Class III directors
are to be elected at the 1999 Annual Meeting of Stockholders, Class I directors
are to be elected at the 2000 Annual Meeting of Stockholders and Class II
directors are to be elected at the 2001 Annual Meeting of Stockholders.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") requires the Company's directors, certain officers and persons holding
more than 10% of a registered class of the Company's equity securities to file
reports of ownership and reports of changes in ownership with the Securities and
Exchange Commission (the "Commission") and any exchange on which the Company's
securities are traded. Directors, certain officers and greater than 10%
stockholders are also required by Commission regulations to furnish the Company
with copies of all such reports that they file. Based on the Company's review of
copies of such forms provided to it, the Company believes that all filing
requirements were complied with during the fiscal year ended December 31, 1998.
Item 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning compensation for
services in all capacities awarded to, earned by, or paid to, any person acting
as the Company's Chief Executive Officer during 1998, regardless of the amount
of compensation paid, and the other most highly compensated executive officers
of the Company whose aggregate cash and cash equivalent compensation exceeded
$100,000 (collectively, the "Named Executive Officers"):
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
-------------------------------------------------- ------------
OTHER SECURITIES ALL OTHER
ANNUAL UNDERLYING COMPENSATION
NAME AND POSITION YEAR SALARY ($) BONUS ($) COMPENSATION(1) OPTIONS (#) ($)(2)
----------------- ---- ---------- --------- --------------- ----------- ------
<S> <C> <C> <C> <C> <C> <C>
Hermano Studart
Lins de Albuquerque,.... 1998 $201,748 $125,000 $ -- -- $6,425
Chief Executive Officer 1997 143,750 150,000(3) -- 100,000 6,250
1996 113,979 200,000(3) -- 110,000 --
Carlos Andre Studart
Lins de Albuquerque,.... 1998 201,748 125,000 -- -- $6,425
President, Chief 1997 143,750 150,000(3) -- 100,000 6,250
Operating Officer and 1996 113,979 200,000(3) -- 110,000 --
acting Chief Financial
Officer
Alvaro J. Aguirre,
Chief Financial
Officer(5).............. 1998 151,000 -0- 22,712(2) -- --
1997 143,750 150,000(3) -- 100,000 --
1996 62,499 200,000(3) -- 110,000 --
</TABLE>
48
<PAGE>
- ---------------------
(1) The amount reflected for Mr. Aguirre for 1998 includes $13,500.00 of
housing allowance expense and $9,212 of car allowance. No other amounts
have been reflected in this column for any Named Executive Officer because
the aggregate value of perquisites and other personal benefits for each
officer in the specified years was below the Commission's threshold for
disclosure (i.e., the lesser of $50,000 or 10% of the total of annual
salary and bonus for such officer).
(2) Represents Company paid life insurance premiums.
(3) Includes non-cash bonus payments made to the Named Executive Officers in
the form of Common Stock in the following amounts (i) for 1997, $25,000 to
each Named Executive Officer and (ii) for 1996, $123,333 to Messrs. Hermano
Lins and Carlos Andre Lins and $25,000 to Mr. Aguirre.
(4) Mr. Carlos Andre Lins assumed the duties of acting Chief Financial Officer
following Mr. Aguirre's resignation in October 1998.
(5) Mr. Aguirre joined the Company in June 1996 and resigned in October 1998.
EMPLOYMENT AGREEMENTS
The Company and ITSA have entered into employment agreements with each
of Messrs. Hermano Lins and Carlos Andre Lins, pursuant to which Mr. Hermano
Lins serves full time as Chief Executive Officer of the Company, Mr. Carlos
Andre Lins serves full time as President and Chief Operating Officer of the
Company, and each has agreed to serve in comparable executive positions at ITSA.
The minimum annual base salary under such agreements for each of Messrs. Lins is
$125,000. Such salaries are reviewed at least annually by the Board and may be
increased but not decreased. In addition, each of Messrs. Lins is eligible to
receive an annual bonus, payable by ITSA, in amounts determined by the Board
taking into consideration, among other things, the financial and operating
performance of the Company. Pursuant to each of Messrs. Lins's employment
agreements, if the Company terminates the executive's employment either without
"cause" (as defined therein) or because of the death of the executive, ITSA is
required to pay the executive any unpaid base salary accrued through the date of
termination, plus an amount equal to an additional 12 months' base salary.
Although Brazilian law does not permit employment agreements of this type to be
for a fixed term, each agreement does include a non-competition provision and a
prohibition on the solicitation of clients and employees.
STOCK OPTIONS
STOCK OPTION PLAN
In July 1998 the Board adopted, and in October 1998 the stockholders of
the Company approved, the Amended and Restated Stock Option Plan which provides
for the grant to officers, key employees and consultants of the Company of both
"incentive stock options", within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended, and stock options that are non-qualified for
U.S. federal income tax purposes. The total number of shares of Common Stock for
which options may be granted pursuant to the Stock Option Plan is 1,736,432,
subject to certain adjustments reflecting changes in the Company's
capitalization. In addition, no employee may receive options for more than
200,000 shares of Common Stock in the aggregate in any fiscal year. The Stock
49
<PAGE>
Option Plan is administered by the Compensation Committee. The Compensation
Committee determines, among other things, which officers, employees and
consultants receive options under the plan, the time when options are granted,
the type of option (incentive stock options or non-qualified stock options, or
both) to be granted, the number of shares subject to each option, the time or
times when the options become exercisable, and, subject to certain conditions
discussed below, the option price and duration of the options. Members of the
Company's Compensation Committee are not eligible to receive options under the
Stock Option Plan.
The exercise price for incentive stock options is determined by the
Compensation Committee, but may not be less than the fair market value on the
date of grant and the term of any such option may not exceed ten years from the
date of grant. With respect to any participant in the Stock Option Plan who owns
stock representing more than 10% of the voting power of the outstanding capital
stock of the Company, the exercise price of any incentive stock option may not
be less than 110% of the fair market value of such shares on the date of grant
and the term of such option may not exceed five years from the date of grant.
The exercise price of non-qualified stock options is determined by the
Compensation Committee on the date of grant, but may not be less than the par
value of the Common Stock on the date of grant, and the term of such option may
not exceed ten years from the date of grant.
Payment of the option price may be made by certified or bank cashier's
check, by tender of shares of Common Stock then owned by the optionee or by any
other means acceptable to the Company. Options granted pursuant to the Stock
Option Plan are not transferrable, except by will or the laws of descent and
distribution in the event of death. During an optionee's lifetime, the options
are exerciseable only by the optionee.
The Board has the right at any time and from time to time to amend or
modify the Stock Option Plan, without the consent of the Company's stockholders
or optionees; provided that no such action may adversely affect options
previously granted without the optionee's consent, and provided further than no
such action, without the approval of the stockholders of the Company, may
increase the total number of shares of Common Stock which may be purchased
pursuant to options granted under the plan, expand the class of persons eligible
to receive grants of options under the plan, decrease the minimum option price,
extend the maximum term of options granted under the plan or extend the term of
the plan. The expiration date of the Stock Option Plan after which no option may
be granted thereunder is 2006.
YEAR-END VALUE TABLE
The following table sets forth information regarding the number and
year end value of unexercised options held at December 31, 1998 by each of the
Named Executive Officers. No options or stock appreciation rights were exercised
by the Named Executive Officers during fiscal 1998.
50
<PAGE>
<TABLE>
<CAPTION>
FISCAL 1998 OPTION VALUES
<S> <C> <C>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED "IN-THE-MONEY" (1)
OPTIONS AT FISCAL OPTIONS AT FISCAL
YEAR-END (#) YEAR-END ($)
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
Hermano Studart Lins
de Albuquerque........................ 64,000/146,000 $0/$0
Carlos Andre Studart Lins
de Albuquerque........................ 64,000/146,000 $0/$0
Alvaro J. Aguirre........................ 130,000/80,000(2) $0/$0
</TABLE>
- ------------
(1) Options are "in-the-money" if the fair market value of the underlying
securities exceeds the exercise price of the options. The amounts set
forth represent the difference between $0.375 per share, the fair
market value of the Common Stock issuable upon exercise of options at
December 31, 1998, and the exercise price of the option, multiplied by
the applicable number of options.
(2) All options which were exercisable by Mr. Aguirre as of December 31,
1998 have expired in accordance with their terms.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1998, the members of the Compensation Committee were Messrs.
Karp, Moreira, Libowitz (from January through June) and Nusbaum (from June
through December). Mr. Karp is the Chairman of the Board, a position which was
an officer position of the Company until December 1996, and Mr. Nusbaum was a
Vice President of the Company. Messrs. Karp and Nusbaum are general partners of
Warburg, Pincus & Co., a New York general partnership ("WP") which is the sole
general partner of Warburg, Pincus Investors, L.P. ("Warburg, Pincus"). Mr.
Moreira is the Executive Vice-President of Finance and Administration of Abril
S.A. Mr. Libowitz, who resigned as a director in June 1998, is a general partner
of Warburg Pincus.
COMPENSATION OF DIRECTORS
Independent directors are eligible to receive an annual fee of $10,000,
a meeting fee of $1,000 for every meeting of the Board of Directors attended and
each committee meeting held separately and a $500 fee for each meeting of the
Board and each committee meeting participated in by telephone. All directors are
reimbursed for out-of-pocket expenses. Under the Stock Option Plan, the Company
may, from time to time and in the sole discretion of the Board, grant options to
directors who are not members of the Compensation Committee.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the Common Stock, as of March 23, 1999, by (i) each
person known to the Company to be the beneficial owner of more than 5% of the
Common Stock, (ii) each of the Company's directors, (iii) each of the Named
51
<PAGE>
Executive Officers, and (iv) all directors and executive officers as a group.
All information with respect to beneficial ownership has been furnished to the
Company by the respective stockholders of the Company.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENTAGE
BENEFICIAL OF
NAME AND ADDRESS (1) OWNERSHIP (2) CLASS (2)
- -------------------- ------------------ -----------
<S> <C> <C>
Warburg, Pincus Investors, L.P.
466 Lexington Avenue
New York, New York 10017(3)............... 4,937,008 45.6%
Tevecap S.A.
Rua do Rocio, 313
Suite 101
Sao Paulo, Brazil......................... 1,500,455 13.9
Maria Nise Studart Lins de Albuquerque....... 1,069,520 9.9
Hermano Studart Lins de Albuquerque(4)....... 333,134 3.1
Carlos Andre Studart Lins de Albuquerque(4).. 333,134 3.1
Douglas M. Karp(5)........................... 4,937,008 45.6
Jose Augusto Pinto Moreira(6)................ 1,500,455 13.9
Douglas Duran (6)............................ 1,500,455 13.9
Gary D. Nusbaum (5).......................... 4,937,008 45.6
Alvaro J. Aguirre............................ 9,294 *
All executive officers and directors
as a group (6 persons)..................... 7,103,731 65.4
</TABLE>
- --------------------------
* Less than 1%.
(1) Unless otherwise indicated above or in footnote 5 below, the address
for each stockholder identified above is TV Filme, Inc. c/o
ITSA-Intercontinental Telecomunicacoes Ltda, SCS Quadra 07-Bl.A, Ed.
Executive Tower, Sala 601, 70.300-911 Brasilia-DF, Brazil.
(2) Beneficial ownership is determined in accordance with the rules of the
Commission. In computing the number of shares beneficially owned by a
person and the percentage ownership of that person, shares of Common
Stock subject to options and warrants held by that person that are
currently exercisable or exercisable within 60 days of March 23, 1999
are deemed outstanding. Such shares, however, are not deemed
outstanding for the purposes of computing the percentage ownership of
any other person. Except as indicated in the footnotes to this table,
each stockholder named in the table has sole voting and investment
power with respect to the shares set forth opposite such stockholder's
name.
(3) E.M. Warburg, Pincus & Co., LLC, a New York limited liability company
("E.M. Warburg"), manages Warburg, Pincus. WP, the sole general partner
of Warburg, Pincus, has a 20% interest in the profits of Warburg,
Pincus. Lionel I. Pincus is the managing partner of WP and the managing
member of E.M. Warburg and may be deemed to control both WP and E.M.
Warburg. The members of E.M. Warburg are substantially the same as the
partners of WP.
52
<PAGE>
(4) Includes the following number of shares of Common Stock which the
executive officers have the right to acquire through the exercise of
options within 60 days of March 23, 1999: Mr. Hermano Lins, 64,000; and
Mr. Carlos Andre Lins, 64,000.
(5) All of the shares indicated as owned by Messrs. Karp and Nusbaum are
owned directly by Warburg, Pincus and are included because of their
affiliation with Warburg, Pincus. Mr. Karp, the Chairman of the Board
of the Company, and Mr. Nusbaum, a Director of the Company, are
Managing Directors and Members of E.M. Warburg and General Partners of
WP. As such, Messrs. Karp and Nusbaum may be deemed to have an indirect
pecuniary interest, within the meaning of Rule 16a-1 under the Exchange
Act, in an indeterminate portion of the shares of Common Stock
beneficially owned by Warburg, Pincus and WP. Messrs. Karp and Nusbaum
disclaim "beneficial ownership" of these shares within the meaning of
Rule 13d-3 under the Exchange Act. The address of Messrs. Karp and
Nusbaum is c/o E.M. Warburg, Pincus & Co., LLC, 466 Lexington Avenue,
New York, New York 10017.
(6) All of the shares indicated as owned by Mr. Moreira and Mr. Duran are
owned directly by Tevecap and are included because of Mr. Moreira's and
Mr. Duran's respective affiliations with Tevecap. Messrs. Moreira and
Duran each disclaim "beneficial ownership" of these shares within the
meaning of Rule 13d-3 under the Exchange Act.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
From time to time during January 1994 to March 1996, Tevecap and
certain of its affiliates made short-term loans to the Company for working
capital purposes. During this period, the maximum amount outstanding pursuant to
such loans was approximately $6.4 million. During April 1996, the Company
resumed borrowing from Tevecap and its affiliates for working capital purposes,
all of which borrowings were repaid with the proceeds of the Company's initial
public offering with the exception of $200,000 which was due in February 1997
and 1998, each of which has been repaid in full.
In July 1994, the Company, Tevecap and certain other parties thereto
entered into an agreement pursuant to which Tevecap agreed to provide
programming exclusively to the Company in certain areas (the "Programming
Agreement"). In June 1996, the Programming Agreement was amended and restated
effective August 2, 1996. In the years ended December 31, 1996, 1997 and 1998,
TVA Sistema's and its affiliates' revenues from the Company aggregated
approximately $6.7 million, $10.4 million and $10.6 million, respectively.
In late 1994, TV Filme Servicos purchased licenses to operate the
Company's wireless cable systems in Goiania and Belem from an affiliate of TVA
Sistem for a purchase price of $400,000 each. The Company believes such prices
were below fair market value. Such purchase prices were payable in equal annual
installments of $100,000 per license, due in February of each of the years 1995,
1996, 1997 and 1998. The final installment was paid by the Company in February
1998.
In connection with the Company's initial public offering, the Company
entered into the restructuring (the "Restructuring") pursuant to which all of
the preferred stock of ITSA was converted into common stock of ITSA and each
share of common stock of ITSA was exchanged for 1,844 shares of Common Stock of
the Company. Pursuant to the Restructuring, (i) 51% of the voting stock of TV
53
<PAGE>
Filme Servicos was transferred to TVTEL Ltda., an entity all the stock of which
is owned by certain stockholders of the Company who are Brazilian nationals,
including certain directors and executive offices of the Company (namely
Tevecap, Mrs. Maria Nise Lins, Messrs. Hermano Lins and Carlos Andre Lins and
Ms. Maria Veronica Lins), with ITSA retaining 49% of the voting stock and 83% of
the economic interests in TV Filme Servicos; (ii) the operating assets of the
wireless cable systems of Brasilia were transferred from TV Filme Servicos to TV
Filme Brasilia; and (iii) TV Filme Servicos entered into various agreements with
ITSA and its subsidiaries pursuant to which, among other things, TV Filme
Servicos has authorized ITSA to operate the existing wireless cable systems
under its current licenses. The Company has a representative on the executive
management team of TV Filme Servicos and any sale or transfer of any current or
future license held by TV Filme Servicos is prohibited. ITSA entered into
various agreements with TV Filme Servicos which authorize ITSA's subsidiaries to
operate the existing wireless cable systems under its current licenses and all
other pay television systems under future licenses. As of November 1997, the
licenses to operate the existing wireless cable system were transferred from TV
Filme Servicos to the respective operating companies, TV Filme Brasilia Servicos
de Telecomunicacoes Ltda., TV Filme Goiania Brasilia Servicos de
Telecomunicacoes Ltda and TV Filme Belem Brasilia Servicos de Telecomunicacoes
Ltda.
The Company believes that the above transactions were or are on terms
no less favorable to the Company than could have been obtained in transactions
with independent third parties. All future transactions between the Company and
its officers, directors, principal stockholders or their respective affiliates,
will be on terms no less favorable to the Company than can be obtained from
unaffiliated third parties.
54
<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.
During the fourth quarter of 1998, the Company filed two Current
Reports on Form 8-K. The first Form 8-K was filed by the Company on November 25,
1998, pursuant to Item 5 thereof, announcing its intention to commence a tender
offer for its outstanding 12-7/8% Senior Notes due 2004 and also announcing that
the Company had received notice from the Nasdaq Stock Market that it had
determined that delisting of the Company's common stock was appropriate due to
the Company's inability to satisfy certain Nasdaq maintenance requirements. The
second Form 8-K was filed by the Company on December 16, 1998, also pursuant to
Item 5 thereof announcing that it had amended certain terms of the Company's
proposed tender offer.
(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).
55
<PAGE>
*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 Amended and Restated Stock Option Plan.+
*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 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).
*10.8 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).
*10.9 Articles of Association of TV Filme Servicos (incorporated
herein by reference to Exhibit 10.14 to TV Filme's S-4).
*10.10 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 List of 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.
56
<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 13th day of April, 1999.
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
Carlos Andre Studart Lins de Albuquerque 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 13th day of April, 1999.
SIGNATURE TITLE(S)
/s/ HERMANO STUDART LINS DE Chief Executive Officer,
ALBUQUERQUE Secretary and Director
- ----------------------------------------- (Principal Executive Officer)
Hermano Studart Lins de Albuquerque
/s/ CARLOS ANDRE STUDART LINS DE President, Chief Operating Officer,
ALBUQUERQUE acting Chief Financial Officer
- ----------------------------------------- (Principal Financial and Accounting
Carlos Andre Studart Lins de Albuquerque Officer) and Director
/S/ DOUGLAS M. KARP Chairman and Director
- -----------------------------------------
Douglas M. Karp
/S/ JOSE AUGUSTO PINTO MOREIRA Director
- -----------------------------------------
Jose Augusto Pinto Moreira
/S/ DOUGLAS DURAN Director
- -----------------------------------------
Douglas Duran
/S/ GARY D. NUSBAUM Director
- -----------------------------------------
Gary D. Nusbaum
57
<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 Amended and Restated Stock Option Plan .+
*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).
58
<PAGE>
*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 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).
*10.8 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).
*10.9 Articles of Association of TV Filme Servicos (incorporated
herein by reference to Exhibit 10.14 to TV Filme's S-4).
*10.10 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 List of 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.
</TABLE>
Exhibit 10.1
TV FILME, INC.
AMENDED AND RESTATED STOCK OPTION PLAN
ARTICLE I
PURPOSE
This TV Filme, Inc. Amended and Restated Stock Option Plan (the
"Plan") is intended as an incentive and to encourage stock ownership by
officers, key employees and consultants of TV Filme, Inc. (the "Company") to
provide them with a more direct stake in the Company's future welfare and to
encourage them to continue to provide services to the Company.
The term "Company," when used in the Plan with reference to
eligibility and employment, shall include the Company and its subsidiaries. The
word "subsidiary," when used in the Plan, shall mean any subsidiary of the
Company within the meaning of Section 424(f) of the Internal Revenue Code of
1986, as amended (the "Code").
It is intended that certain options granted under the Plan will
qualify as "incentive stock options" under Section 422 of the Code.
ARTICLE II
ADMINISTRATION
The Plan shall be administered by the Company's Compensation Committee
(the "Committee") appointed by the Board of Directors of the Company (the
"Board") that shall consist solely of two or more non-employee director members
within the meaning of the rules promulgated under Section 16(b) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Subject to the
provisions of the Plan, the Committee shall have sole authority, in its absolute
discretion: (a) to determine which of the eligible officers, employees and
consultants of the Company shall be granted options; (b) to authorize the
granting of both incentive stock options and nonstatutory stock options; (c) to
determine the times when options shall be granted and the number of shares to be
optioned and the times when options shall be repurchased and the number of
options to be repurchased; (d) to determine the option price of the shares
subject to each option, which price shall not be less than the minimum specified
in ARTICLE V (or ARTICLE VII, if applicable); (e) to determine the time or times
when each option becomes exercisable, the duration of the exercise period and
any other restrictions on the exercise of options issued hereunder (subject to
the provisions of ARTICLE VI and, if applicable, ARTICLE VII); (f) to prescribe
the form or forms of the option agreements under the Plan (which forms shall be
consistent with the terms of the Plan but need not be identical); (g) to adopt,
amend and rescind such rules and regulations as, in its opinion, may be
advisable in the administration of the Plan; and (h) to construe and interpret
the Plan, the rules and regulations and the option agreements under the Plan and
to make all other determinations deemed necessary or advisable for the
administration of the Plan. All decisions, determinations and interpretations of
the Committee shall be final and binding on all optionees.
A-1
<PAGE>
ARTICLE III
COMMON STOCK
The stock to be optioned under the Plan shall be authorized shares of
common stock, par value $.01 per share, of the Company (the "Common Stock").
Under the Plan, the total number of shares of Common Stock which may be issued
pursuant to options granted hereunder shall not exceed, in the aggregate,
1,736,432 shares, except as such number of shares shall be adjusted in
accordance with the provisions of ARTICLE X hereof. The Company shall at all
times reserve a sufficient number of shares of Common Stock for issuance
pursuant to the Plan and any stock option agreements issued pursuant to the
Plan.
The number of shares of Common Stock available for grant of options
under the Plan shall be decreased by the sum of the number of shares with
respect to which options have been issued and are then outstanding, and the
number of shares issued upon exercise of options under the Plan. In the event
that any outstanding option under the Plan for any reason expires, is terminated
or is cancelled prior to the end of the period during which options may be
granted, the shares of Common Stock called for by the unexercised portion of
such option may again be subject to an option grant under the Plan.
ARTICLE IV
ELIGIBILITY OF PARTICIPANTS
Subject to ARTICLE VII, in the case of incentive stock options,
officers and key employees of the Company (excluding any person who is a member
of the Committee) shall be eligible to receive options under the Plan. Options
which are not incentive stock options may be granted to officers, key employees
and consultants (excluding any person who is a member of the Committee);
provided, however that no employee may receive options to purchase more than
200,000 shares of Common Stock in the aggregate in any fiscal year of the
Company. For purposes of this Plan, an "employee" shall mean any person,
including officers of the Company, employed by the Company or any subsidiary of
the Company. Neither service as a director nor the payment of a director's fee
by the Company shall be sufficient to constitute a person an "employee" of the
Company.
ARTICLE V
OPTION PRICE
In the case of each incentive stock option granted under the Plan,
subject to ARTICLE VII, the option price shall be at least equal to the greater
of (i) the fair market value of the Common Stock at the time the option was
granted or (ii) the par value of the Common Stock. The fair market value shall
be deemed for all purposes of the Plan to be the mean between the highest and
lowest sale prices reported as having occurred on any national securities
exchange (an "Exchange") on which the Common Stock may be listed and traded on
the last business day prior to the date the option is granted, or, if there is
no such sale on that date, then on the last preceding date on which such a sale
was reported. If the Common Stock is not listed on any Exchange but the Common
Stock is quoted in the National Market System of the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") on a last sale basis,
then the fair market value of the Common Stock shall be deemed to be the mean
between the high and low price reported on the last business day prior to the
date the option is granted, or, if there is no such sale on that date, then on
the last preceding date on which a sale was reported. If the Common Stock is not
quoted in the National Market System of NASDAQ on a last sale basis, but the
Common Stock is otherwise quoted on NASDAQ, then the fair market value of the
Common Stock shall be deemed to be
A-2
<PAGE>
the mean between the high and low bid prices on NASDAQ for the Common Stock on
the last business day prior to the date the option is granted. If the Common
Stock is not listed on an Exchange or quoted on NASDAQ, then the fair market
value of the Common Stock shall mean the amount determined by the Board to be
the fair market value based upon a good faith attempt to value the Common Stock
accurately and computed in accordance with applicable regulations of the
Internal Revenue Service. In no event shall the option price be less than the
par value per share of Common Stock on the date an option is granted.
In the case of each nonstatutory stock option granted under the Plan,
the option price shall be such price as may be determined by the Committee in
its sole discretion, provided that the option price shall be at least equal to
the par value of the Common Stock.
ARTICLE VI
EXERCISE AND TERMS OF OPTIONS
If an option is exercisable in installments, installments or portions
thereof which are exercisable and not exercised shall remain exercisable.
Any other provision of the Plan to the contrary notwithstanding, but
subject to ARTICLE VII in the case of incentive stock options, no option shall
be exercised after the date ten years from the date of grant of such option (the
"Termination Date").
ARTICLE VII
SPECIAL PROVISIONS APPLICABLE
TO INCENTIVE STOCK OPTIONS ONLY
To the extent the aggregate fair market value (determined as of the
time the option is granted) of the Common Stock with respect to which any
incentive stock options granted under the Plan may be exercisable for the first
time by the optionee in any calendar year (under the Plan or any other stock
option plan of the Company), exceeds $100,000, such options shall not be
considered incentive stock options, but shall be considered nonstatutory stock
options for purposes of the Code. This Article VII shall be applied by taking
options into account in the order in which they were granted.
No incentive stock option may be granted to an individual who, at the
time the option is granted, owns directly, or indirectly within the meaning of
Section 424(d) of the Code, stock possessing more than 10 percent of the total
combined voting power of all classes of stock of the Company or of any parent or
subsidiary thereof unless such option (i) has an option price of at least 110
percent of the fair market value of the Common Stock on the date of the grant of
such option; and (ii) cannot be exercised more than five years after the date it
is granted.
Each optionee who receives an incentive stock option must agree to
notify the Company in writing immediately after the optionee makes a
disqualifying disposition of any Common Stock acquired pursuant to the exercise
of an incentive stock option. A disqualifying disposition is any disposition
(including any sale) of such Common Stock before the later of (a) two years
after the date the optionee was granted the incentive stock option or (b) one
year after the date the optionee acquired Common Stock by exercising the
incentive stock option.
A-3
<PAGE>
ARTICLE VIII
PAYMENT FOR SHARES
Payment for shares of Common Stock purchased under an option granted
hereunder shall be made in full upon exercise of the option, by certified or
bank cashier's check payable to the order of the Company or by any other means
(including, without limitation, tender of shares of Common Stock then owned by
the optionee) acceptable to the Company. The Common Stock purchased shall
thereupon be promptly delivered; provided, however, that the Company may, in its
discretion, require that an optionee pay to the Company, at the time of
exercise, such amount as the Company deems necessary to satisfy its obligation,
if any, to withhold Federal, state or local income or other taxes incurred by
reason of the exercise or the transfer of shares thereupon.
ARTICLE IX
NON-TRANSFERABILITY OF OPTION RIGHTS
Except for the transfer of options to corporations where any such
corporation is wholly-owned by an optionee, no option shall be transferable
except by will or the laws of descent and distribution. During the lifetime of
the optionee, the option shall be exercisable only by him.
ARTICLE X
ADJUSTMENT FOR RECAPITALIZATION, MERGER, ETC.
The aggregate number of shares of Common Stock which may be purchased
pursuant to options granted hereunder, the number of shares of Common Stock
covered by each outstanding option and the price per share of each such option
shall be appropriately adjusted for any increase or decrease in the number of
outstanding shares of stock resulting from a stock split, reverse stock split or
other subdivision or consolidation of shares of Common Stock or for other
capital adjustments or payments of stock dividends or distributions or other
increases or decreases in the outstanding shares of Common Stock without receipt
of consideration by the Company. Any adjustment shall be conclusively determined
by the Committee.
In the event of any change in the outstanding shares of Common Stock
by reason of any recapitalization, merger, consolidation, spin-off, combination
or exchange of shares or other corporate change, or any distributions to common
stockholders other than cash dividends, the Committee shall make such
substitution or adjustment, if any, as it deems to be equitable, as to the
number or kind of shares of Common Stock or other securities issued or reserved
for issuance pursuant to the Plan, and the number or kind of shares of Common
Stock or other securities covered by outstanding options, and the option price
thereof. In instances where another corporation or other business entity is
being acquired by the Company, and the Company has assumed outstanding employee
option grants and/or the obligation to make future or potential grants under a
prior existing plan of the acquired entity, similar adjustments are permitted at
the discretion of the Committee. The Committee shall notify optionees of any
intended sale of all or substantially all of the Company's assets within a
reasonable time prior to such sale.
The foregoing adjustments and the manner of application of the
foregoing provisions shall be determined by the Committee in its sole
discretion. Any such adjustment may provide for the elimination of any
fractional share which might otherwise become subject to an option.
A-4
<PAGE>
ARTICLE XI
NO OBLIGATION TO EXERCISE OPTION
Granting of an option shall impose no obligation on the recipient to
exercise such option.
ARTICLE XII
USE OF PROCEEDS
The proceeds received from the sale of Common Stock pursuant to the
Plan shall be used for general corporate purposes.
ARTICLE XIII
RIGHTS AS A COMMON STOCKHOLDER
An optionee or a transferee of an option shall have no rights as a
stockholder with respect to any share covered by his option until he shall have
become the holder of record of such share, and he shall not be entitled to any
dividends or distributions or other rights in respect of such share for which
the record date is prior to the date on which he shall have become the holder of
record thereof.
ARTICLE XIV
EMPLOYMENT RIGHTS
Nothing in the Plan or in any option granted hereunder shall confer on
any optionee any right to continue in the employ of the Company or any of its
subsidiaries, or to interfere in any way with the right of the Company or any of
its subsidiaries to terminate the optionee's employment at any time.
ARTICLE XV
COMPLIANCE WITH THE LAW
The Company is relieved from any liability for the non-issuance or
non-transfer or any delay in issuance or transfer of any shares of Common Stock
subject to options under the Plan which results from the inability of the
Company to obtain or any delay in obtaining, from any regulatory body having
jurisdiction, all requisite authority to issue or transfer shares of Common
Stock of the Company either upon exercise of options under the Plan or upon a
request for transfer of shares of Common Stock issued as a result of such
exercise if counsel for the Company deems such authority necessary for lawful
issuance or transfer of any such shares. Appropriate legends may be placed on
the stock certificates evidencing shares issued upon exercise of options to
reflect such transfer restrictions.
Each option granted under the Plan is subject to the requirement that
if at any time the Committee determines, in its discretion, that the listing,
quotation, registration or qualification of shares of Common Stock issuable upon
exercise of options is required by any securities exchange, automated quotation
service or under any state or Federal law, or that the consent or approval of
any governmental regulatory body is necessary or desirable as a condition of, or
in connection with, the grant of options or the issuance of shares of Common
Stock, no shares of Common Stock shall be issued, in whole or in part, unless
such listing, registration, qualification, consent or approval has been effected
or obtained free of any conditions or with such conditions as are acceptable to
the Committee.
A-5
<PAGE>
ARTICLE XVI
EFFECTIVE DATE AND EXPIRATION DATE OF PLAN
The Plan was effective as of July 26, 1996, the date of approval by
the stockholders of the Company in a manner which complies with both Rule 16b-3
under the Exchange Act and Section 422(b)(1) of the Code and the Treasury
Regulations thereunder. The expiration date of the Plan, after which no option
may be granted hereunder, shall be July 25, 2006.
ARTICLE XVII
AMENDMENT OR DISCONTINUANCE OF PLAN
The Board may, without the consent of the Company's stockholders or
optionees under the Plan, at any time, terminate the Plan entirely and at any
time or from time to time amend or modify the Plan, provided that no such action
shall adversely affect options theretofore granted hereunder without the
optionee's consent, and provided further that no such action by the Board,
without approval of the stockholders, may: (a) increase the total number of
shares of Common Stock which may be purchased pursuant to options granted under
the Plan, except as contemplated in ARTICLE X; (b) expand the class of officers,
employees or consultants eligible to receive options under the Plan; (c)
decrease the minimum option price; (d) extend the maximum term of options
granted hereunder; or (e) extend the term of the Plan.
ARTICLE XVIII
MISCELLANEOUS
(a) Options shall be evidenced by option agreements (which need not be
identical) in such forms as the Committee may from time to time approve. Such
agreements shall conform to the terms and conditions of the Plan and may provide
that the grant of any option under the Plan and Common Stock acquired pursuant
to the Plan shall also be subject to such other conditions (whether or not
applicable to the option or Common Stock received by any other optionee) as the
Committee determines appropriate, including, without limitation, provisions to
assist the optionee in financing the purchase of Common Stock through the
exercise of options, provisions for the forfeiture of, or restrictions on,
resale or other disposition of shares under the Plan, and provisions to comply
with Federal and state securities laws and Federal, state and local income tax
withholding requirements.
(b) If the Committee shall find that any person to whom any amount is
payable under the Plan is unable to care for his affairs because of illness or
accident, or is a minor, or has died, then any payment due to such person or his
estate (unless a prior claim therefor has been made by a duly appointed legal
representative), may, if the Committee so directs the Company, be paid to his
spouse, child, relative, an institution maintaining or having custody of such
person, or any other person deemed by the Committee to be a proper recipient on
behalf of such person otherwise entitled to payment. Any such payment shall be a
complete discharge of the liability of the Committee and the Company therefor.
(c) No member of the Committee shall be personally liable by reason of
any contract or other instrument executed by such member or on his behalf in his
capacity as a member of the Committee nor for any mistake of judgment made in
good faith, and the Company shall indemnify and hold harmless each member of the
Committee and each other employee, officer or director of the Company to whom
any duty or power relating to the administration or interpretation of the Plan
may be
A-6
<PAGE>
allocated or delegated, against any cost or expense (including counsel fees) or
liability (including any sum paid in settlement of a claim) arising out of any
act or omission to act in connection with the Plan unless arising out of such
person's own fraud or bad faith; provided, however, that approval of the
Company's Board shall be required for the payment of any amount in settlement of
a claim against any such person. The foregoing right of indemnification shall
not be exclusive of any other rights of indemnification to which such persons
may be entitled under the Company's Certificate of Incorporation or By-Laws, as
a matter of law, or otherwise, or any power that the Company may have to
indemnify them or hold them harmless.
(d) The Plan shall be governed by and construed in accordance with the
internal laws of the State of Delaware without reference to the principles of
conflicts of law thereof.
(e) No provision of the Plan shall require the Company, for the
purpose of satisfying any obligations under the Plan, to purchase assets or
place any assets in a trust or other entity to which contributions are made or
otherwise to segregate any assets, nor shall the Company maintain separate bank
accounts, books, records or other evidence of the existence of a segregated or
separately maintained or administered fund for such purposes.
(f) Each member of the Committee and each member of the Company's
Board shall be fully justified in relying, acting or failing to act, and shall
not be liable for having so relied, acted or failed to act in good faith, upon
any report made by the independent public accountant of the Company and upon any
other information furnished in connection with the Plan by any person or persons
other than such member.
(g) Except as otherwise specifically provided in the relevant plan
document, no payment under the Plan shall be taken into account in determining
any benefits under any pension, retirement, profit-sharing, group insurance or
other benefit plan of the Company.
(h) The expenses of administering the Plan shall be borne by the
Company.
(i) Masculine pronouns and other words of masculine gender shall refer
to both men and women.
As adopted by the Board of
Directors of TV Filme, Inc. as
of July 18, 1996 and approved
by the stockholders of TV
Filme, Inc. as of July 26,
1996; as further amended by
the Board of Directors on June
15, 1997; and as further
amended and restated by the
Board of Directors as of July
1998 and approved by the
stockholders of TV Filme, Inc.
as of October 1, 1998.
<TABLE>
Exhibit 21
ITEMS 4(A) AND 4(B): SUBSIDIARY INFORMATION
- --------------------------------------------------------------------------------
<CAPTION>
NATURE OF PERCENTAGE STATE/COUNTRY
NAME BUSINESS OWNED OF INCORPORATION
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
ITSA Pay television 100% Brazil
- --------------------------------------------------------------------------------
TV Filme Brasilia Pay television 100% Brazil
- --------------------------------------------------------------------------------
TV Filme Goiania Pay television 100% Brazil
- --------------------------------------------------------------------------------
TV Filme Belem Pay television 100% Brazil
- --------------------------------------------------------------------------------
TV Filme Servicos Pay television 49% equity Brazil
83% financial
- --------------------------------------------------------------------------------
TV Filme Programadora Pay television 100% Brazil
programming
- --------------------------------------------------------------------------------
TV Filme Operacoes Pay television 100% Brazil
- --------------------------------------------------------------------------------
TV Filme Sistemas Pay television 100% Brazil
- --------------------------------------------------------------------------------
TVF Telecomunicacoes Pay television 49% equity Brazil
83% financial
- --------------------------------------------------------------------------------
ITSA Operacoes Pay television 80% Brazil
- --------------------------------------------------------------------------------
</TABLE>
Note: for all Brazilian subsidiaries listed above, the following persons serve
as directors (there are no officers for Brazilian companies):
Hermano Studart Lins de Albuquerque
Carlos Andre Studart Lins de Albuquerque
<TABLE>
Additional Subsidiaries:
- --------------------------------------------------------------------------------
<CAPTION>
NATURE OF PERCENTAGE STATE/COUNTRY
NAME BUSINESS OWNED OF INCORPORATION
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
TV Filme Cayman Holding co. 100% Cayman Islands
- --------------------------------------------------------------------------------
ITSA Cayman Holding co. 100% Cayman Islands
- --------------------------------------------------------------------------------
</TABLE>
Note: for the Cayman Islands subsidiaries listed above, the following persons
serve as directors and officers:
Hermano Studart Lins de Albuquerque (Director and Treasurer)
Carlos Andre Studart Lins de Albuquerque (Director and President)
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 12, 1999 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, 1998.
/s/ ERNST & YOUNG
Auditores Independentes, S. C.
Sao Paulo, Brazil
April 14, 1999
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Exhibit 27
Financial Data Schedule
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information
extracted from the consolidated balance sheets of TV
Filme, Inc. At December 31, 1998 and the consolidated
statements of operations for the year ended December 31,
1998 and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<CIK> 0001013608
<NAME> TV FILME, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 57,492
<SECURITIES> 0
<RECEIVABLES> 5,123
<ALLOWANCES> 387
<INVENTORY> 4,930
<CURRENT-ASSETS> 69,718
<PP&E> 89,814
<DEPRECIATION> 38,840
<TOTAL-ASSETS> 133,314
<CURRENT-LIABILITIES> 11,491
<BONDS> 140,000
0
0
<COMMON> 108
<OTHER-SE> (17,998)
<TOTAL-LIABILITY-AND-EQUITY> 133,314
<SALES> 45,408
<TOTAL-REVENUES> 45,408
<CGS> 19,617
<TOTAL-COSTS> 24,964
<OTHER-EXPENSES> 21,651
<LOSS-PROVISION> 6,674
<INTEREST-EXPENSE> (19,654)
<INCOME-PRETAX> (40,220)
<INCOME-TAX> 0
<INCOME-CONTINUING> (40,220)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (40,220)
<EPS-PRIMARY> (3.72)
<EPS-DILUTED> (3.72)
</TABLE>
