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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ---------------- to ------------------
TV FILME, INC.
(Exact name of Registrant as Specified in its Charter)
COMMISSION FILE NUMBER: 0-28670
DELAWARE 98-0160214
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
C/O ITSA-INTERCONTINENTAL TELECOMUNICACOES LTDA.
SCS, QUADRA 07-BL.A
ED. EXECUTIVE TOWER, SALA 601
70.300-911 BRASILIA-DF
BRAZIL
(Address, Including Zip Code, of Principal Executive Offices)
011-55-61-314-9908
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.[ |X| ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of Common Stock, as of the latest practicable date.
CLASS OUTSTANDING
Common Stock, par value $0.01 10,824,594 shares
per share. as of May 11, 1999
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<PAGE>
TV FILME, INC.
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1. Financial Statements
Consolidated Balance Sheets as of December 31, 1998
and March 31, 1999 (Unaudited)............................. 2
Unaudited Consolidated Statements of Operations for
the Three Months Ended March 31, 1998 and the Three
Months Ended March 31, 1999................................ 3
Unaudited Consolidated Statement of Changes in
Stockholders' Equity at March 31, 1999..................... 4
Unaudited Consolidated Statements of Cash Flows
for the Three Months Ended March 31, 1998 and
March 31, 1999............................................. 5
Notes to Unaudited Consolidated Financial Statements....... 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 8
ITEM 3. Quantitative and Qualitative Disclosures About
Market Risk................................................ 13
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings.......................................... 14
ITEM 2. Changes in Securities and Use of Proceeds.................. 14
ITEM 3. Defaults Upon Senior Securities............................ 14
ITEM 4. Submission of Matters to a Vote of Security Holders........ 14
ITEM 5. Other Information.......................................... 14
ITEM 6. Exhibits and Reports on Form 8-K........................... 14
SIGNATURES
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
--------------------- --------------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $ 57,492 $ 44,475
Accounts receivable, net.............................. 4,736 3,010
Supplies.............................................. 4,930 3,229
Prepaid expenses and other current assets............. 2,560 2,611
--------------------- --------------------
Total current assets............................ 69,718 53,325
Property, plant and equipment, net......................... 50,974 34,380
Debt issuance costs, net................................... 4,731 3,602
Other assets............................................... 7,891 5,323
--------------------- --------------------
Total assets.................................... $133,314 $96,630
===================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...................................... $ 3,315 $ 2,450
Payroll and other benefits payable.................... 2,892 1,766
Accrued interest payable.............................. 751 5,257
Accrued liabilities and taxes payable................. 4,533 4,407
--------------------------------------------
Total current liabilities........................ 11,491 13,880
Deferred installation fees................................. 3,590 2,016
Senior notes............................................... 140,000 140,000
Stockholders' equity:
Accumulated other comprehensive loss
cumulative translation adjustment................ (3,877) (6,363)
Preferred stock, $.01 par value, 1,000,000 shares
authorized, no shares issued..................... -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 10,824,594 and 10,824,594 shares
issued and outstanding.......................... 108 108
Additional paid-in capital............................ 45,657 45,657
Accumulated deficit................................... (63,655) (98,668)
--------------------- --------------------
Total stockholders' equity....................... (21,767) (59,266)
--------------------- --------------------
Total liabilities and stockholders' equity....... $ 133,314 $96,630
===================== ====================
</TABLE>
See accompanying notes.
2
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------------
1998 1999
--------------- ----------------
(In thousands, except per share data)
<S> <C> <C>
Revenues............................................... $12,618 $6,576
Operating costs and expenses:
System operating - Note 2.......................... 5,095 3,229
Selling, general and administrative................ 7,507 3,606
Depreciation and amortization...................... 5,301 4,032
-------------- ----------------
Total operating costs and expenses............. 17,903 10,867
-------------- ----------------
Operating loss................................. (5,285) (4,291)
Other income (expense):
Interest and other expense ........................ (4,722) (5,871)
Interest income.................................... 1,691 2,143
Monetary loss...................................... (1,089) (26,994)
Total other expense............................ (4,120) (30,722)
-------------- ----------------
Net loss............................................... $(9,405) $(35,013)
============== ================
Net loss per share, basic and diluted.................. $ (0.87) $ (3.23)
============== ================
Weighted average number of shares of
common stock and common stock
equivalents........................................ 10,825 10,825
============== ================
</TABLE>
See accompanying notes.
3
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED
SHARES PAR VALUE CAPITAL LOSS DEFICIT TOTAL
-------------------------- ------------ ------------ ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 10,824,594 $108 $45,657 $(3,877) $(63,655) $21,767
Cumulative translation
adjustment................ -- -- -- (2,486) -- (2,486)
Net loss for the period........ -- -- -- -- (35,013) (35,013)
------------- ------------ ------------ ------------ ------------- -------------
BALANCE AT MARCH 31, 1999...... 10,824,594 $108 $45,657 $(6,363) $(98,668) $(59,266)
============= ============ ============ ============ ============= =============
</TABLE>
See accompanying notes.
4
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
--------------------------------------------
1998 1999
--------------------------------------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $ (9,405) ($35,013)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................... 5,301 4,032
Provision for losses on accounts receivable....... 2,021 162
Authorization of debt issuance costs....... 204 (605)
(Decrease) increase in deferred installation fees. (955) 215
Monetary loss..................................... 1,089 26,994
Changes in operating assets and liabilities:
Increase in accounts receivable................... (1,733) (592)
Decrease in supplies.............................. 116 241
Increase in prepaid expenses and other current
assets........................................ (428) (926)
Increase in accrued interest receivable........... (242) 0
Increase (decrease) in other assets............... (367) 238
(Decrease) increase in accounts payable........... (1,049) 528
Increase (decrease) in payroll and other benefits
payable...................................... 118 (547)
Increase in accrued interest payable.............. 4,506 4,506
Increase in accrued liabilities and taxes payable. 31 235
-------------- -------------------
Net cash used in operating activities................... (793) (532)
-------------- -------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions:
Property, plant and equipment..................... (4,241) (2,032)
-------------- -------------------
Net cash used in investing activities................... (4,241) (2,032)
-------------- -------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in payables to affiliates...................... (200) 0
------------- -------------------
Net cash used for financing activities.................. (200) 0
------------- -------------------
Effect of exchange rate changes on cash................. 0 (10,453)
-------------- -------------------
Net change in cash and cash equivalents................. (5,234) (13,017)
Cash and cash equivalents at beginning of period. 80,975 57,492
---------- -------------------
Cash and cash equivalents at end of period.............. $ 75,741 $44,475
========== ===================
</TABLE>
See accompanying notes.
5
<PAGE>
TV FILME, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. COMPANY BACKGROUND
The Company develops, owns and operates pay television systems in
markets in Brazil. Through its subsidiaries, the Company has established
wireless cable operating systems in the cities of Brasilia, Goiania and Belem
and has been awarded licenses to operate pay television systems in seven
additional markets in Brazil. All significant intercompany transactions and
balances have been eliminated in consolidation.
The Company has selected a financial advisor, BT Alex. Brown, Inc., 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.
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. Effective January 1, 1998, the Company determined that Brazil
ceased to be a highly inflationary economy under Statement of Financial
Accounting Standards No. 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. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $387,000 at
December 31, 1998 and $181,000 at March 31, 1999. Charges to the allowance
during the three months ended March 31, 1999 were $368,000.
2. RELATED PARTY TRANSACTIONS
Substantially all programming is supplied by a subsidiary of Tevecap
S.A. ("Tevecap"), a stockholder of the Company, pursuant to a programming
contract. Amounts paid to such affiliate during the three months ended March 31,
1998 and 1999 were approximately $2,748,000 and $1,968,000, 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 did not bear interest. The $200,000 which remained
outstanding as of December 31, 1997 was repaid in February 1998.
3. STOCK OPTION PLAN
In connection with the Company's initial public offering in August
1996, 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
6
<PAGE>
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 Company's 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 March 31,
1999, 210,000 options have expired in accordance with their terms.
4. LONG-TERM DEBT
On December 20, 1996, the Company issued $140 million principal amount
of 12-7/8% Senior Notes due December 15, 2004 (the "Senior Notes"). The proceeds
of the Senior Notes were loaned to ITSA-Intercontinental Telecomicacoes S.A. and
its subsidiaries ("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
March 31, 1999 it is unable to make any dividend payments.
The Company believes that the Senior Notes, as of March 31, 1999, were
trading at approximately 20% of the principal value.
5. FOREIGN EXCHANGE CONTRACTS
At December 31, 1998 and March 31, 1999, the Company had $24.1 million
and $21.5 million, respectively, of foreign exchange contracts. The contracts
held as of December 31, 1998 expired January 11, 1999 and the contracts held as
of March 31, 1999 will expire in July 1999. In general, these contracts permit
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 using
the Brazilian interbank lending rate during the life of the contract. Net
contract gains, if any, are subject to a 20% tax levied in Brazil. Realized
gains and losses are reported in "Interest and other expense." Unrealized gains
as of March 31, 1998 totaled $3.7 million.
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
-------------------------------------------------
THIS FORM 10-Q CONTAINS FORWARD-LOOKING STATEMENTS WHICH INVOLVE RISKS
AND UNCERTAINTIES. THE COMPANY'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM
THE RESULTS DISCUSSED IN THE FORWARD-LOOKING STATEMENTS. THE FOLLOWING
DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS FORM 10-Q.
RESULTS OF OPERATIONS
Although the Company's financial statements are presented pursuant to
United States generally accepted accounting principles in U.S. dollars, the
Company's transactions are consummated in both REAIS and U.S. dollars. Inflation
and devaluation in Brazil have had, and are currently having, substantial
effects on the Company's results of operations and financial condition. See "--
Inflation and Exchange Rates."
As a result of the changes in exchange rates during the periods
presented, the period-to-period comparisons of the Company's results of
operations are not necessarily meaningful and should not be relied upon as an
indication of future performance.
<TABLE>
<CAPTION>
Three Months Ended March 31
---------------------------------------------------------------
1998 % OF REVENUE 1999 % OF REVENUE
---- ------------ ---- ------------
(In thousands, except subscriber, per share and share data)
<S> <C> <C> <C> <C>
Revenue........................................... $ 12,618 100% $ 6,576 100%
Operating costs and expenses
System operating............................... 5,095 40% 3,229 49%
Selling, general and administrative............ 7,507 59% 3,606 55%
Depreciation and amortization.................. 5,301 42% 4,032 61%
---------- ----------- ----------- -----------
Total operating costs and expenses........ 17,903 142% 10,867 165%
--------- ----------- ----------- ----------
Operating loss........................... (5,285) (42)% (4,291) (65)%
Other income (expense):
Interest and other expense...................... (4,722) (37)% (5,871) (89)%
Interest and other income....................... 1,691 13% 2,143 33%
Monetary loss..................................... (1,089) (9)% (26,694) (406)%
Total other income (expense)................ (4,120) (33)% (30,722) (467)%
--------- ----------- ----------- ----------
Net loss.......................................... $ (9,405) (75)% (35,013) (532)%
========= =========== =========== =========
Net loss per share................................ $ (0.87) $ (3.23)
========= ===========
Weighted average number of shares of
Common stock and common stock
Equivalents.................................... 10,825 10,825
========= ==========
Other Data:
EBITDA (a)..................................... $ 24 $ (895)
=========== ===========
Number of subscribers at end of period ........ 112,443 75,413
======== ==========
Exchange rate (R $: US $) at end of period..... 1.137 : 1 1.722 : 1
========== ==========
</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.
8
<PAGE>
NET LOSS. Net loss for the three months ended March 31, 1999 increased
to $(35,013) million versus $(9,405) million for the three months ended March
31, 1998, due to a 37,000 reduction in subscriber count, and a monetary loss
associated with the Company's net dollar-denominated monetary liability position
due to a 51% devaluation of the REAL against the U.S. dollar.
REVENUES. The Company's revenues for the three months ended March 31,
1999 decreased by 48% compared to the three months ended March 31, 1998, due
primarily to a 51% devaluation of the REAL against the U.S. dollar. This revenue
decrease was partially offset by revenues from the Company's proprietary premium
channel and high-speed Internet access service.
SYSTEM OPERATING EXPENSES. For the three months ended March 31, 1999
compared to the three months ended March 31, 1998, system operating expenses
decreased by 37%, primarily due to the 51% devaluation of the real, offset in
part by programming costs, which are almost totally dollar-based.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses decreased during the three months ended March
31, 1999 by 52% over the three months ended March 31, 1998, primarily due to the
51% devaluation of the REAL against the U.S. dollar.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
in the three months ended March 31, 1999 by 24% over the three months ended
March 31, 1998, primarily due to the reduction in asset values on a dollar
basis, offset in part by a higher level of assets acquired during the comparison
year.
INTEREST INCOME AND INTEREST EXPENSE. Interest income increased in the
three months ended March 31, 1999 by 27% over the three months ended March 31,
1998 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 income which could be earned in the U.S. Interest expense increased by
24% in the three months ended March 31, 1999 over the three months ended March
31, 1998, primarily due to realized losses on hedge contracts which expired in
January 1999.
MONETARY LOSS AND EXCHANGE AND TRANSLATION LOSS. The Company generated
a monetary loss in the three months ended March 31, 1999 of $26.7 million due to
its net dollar-denominated monetary liability position throughout the period
compared to a monetary loss of $1.1 million in the months ended March 31, 1998.
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 an 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 420
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 March 31, 1999, the Company had no
outstanding borrowings from Abril and its affiliates and the Company does not
expect to borrow from Abril or its affiliates in the future.
As of March 31, 1999, the Company had no amounts outstanding under
letters of credit. As of January 1, 1999, the Company had import lines of credit
in the aggregate amount of $30.5 million with four commercial banks. 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 its
initial public offering and the Senior Notes offering, the Company had positive
9
<PAGE>
working capital at March 31, 1999 of $39.4 million. Net cash used in operating
activities for the three months ended March 31, 1999 was $0.5 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 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 assist the Company in evaluating strategic alternatives,
including a possible debt restructuring, and issues associated with the
Company's debt service requirements, the Company has selected BT Alex. Brown,
Inc. as its financial advisor. 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 $2.0 million
during the three months ended March 31, 1999. 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 decided not to participate in this process. 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 and the cash requirements for its three existing
systems and seven new markets for at least the next twelve months. As of March
31, 1999, of the Company's approximately $44.5 million in cash and cash
equivalents, approximately $16.5 million (37%) 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
10
<PAGE>
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
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 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 3. 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 and have only recently begun to
decline. 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 (the
"IMF"). On November 13, 1998, the IMF announced an aid package of more than $41
billion, of which $14.6 billion has been made available to Brazil through 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, which have been approved by the Brazilian Congress.
As part of these additional austerity measures, the government increased,
effective in June 1999, 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, effective in
January 1999, 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 by
$70,000 in the first quarter
11
<PAGE>
of 1999. 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
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 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 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
12
<PAGE>
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.
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.
ITEM 3. 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.
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 March 31, 1999 (these contracts were entered into for
purposes other than trading purposes):
13
<PAGE>
<TABLE>
- --------------------------------------------------------------------------------------------------------------
<CAPTION>
CONTRACT VALUE R$ EXCHANGE RATE PREMIUM % % CDI CONTRACT DATE EXPIRATION DATE
<S> <C> <C> <C> <C> <C>
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$1 +2.0% 100% Jan. 15, 1999 Jul. 14, 1999
- --------------------------------------------------------------------------------------------------------------
</TABLE>
The above contracts require the Company to pay, on the expiration date, an
amount equal to the calculated interest (CDI--see below) on the contract value.
On the expiration date, the Company is to receive or pay an amount, in REAIs,
calculated as follows: the "Contract Value R$" 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.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
During the first quarter of 1999, the Company filed a Current Report on
Form 8-K on February 5, 1999, pursuant to Item 5 thereof, announcing that the
Nasdaq Stock Market had informed the Company that its securities were deleted
from listing on Nasdaq effective with the close of business on February 4, 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 13, 1999
TV FILME, INC.
---------------------------------------------
(Registrant)
/S/ HERMANO STUDART LINS DE ALBUQUERQUE
---------------------------------------------
Hermano Studart Lins de Albuquerque
Chief Executive Officer (Principal
Executive Officer)
/S/ CARLOS ANDRE STUDART LINS DE ALBUQUERQUE
---------------------------------------------
Carlos Andre Studart Lins de Albuquerque
Acting Chief Financial Officer (Principal
Financial and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION
- --- -----------
27 Financial Data Schedule
16
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of Dictaphone Corporation at March 31, 1999
and the condensed consolidated statement of operations for the 3 months ended
March 31, 1999 and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 44,475
<SECURITIES> 0
<RECEIVABLES> 3,191
<ALLOWANCES> 181
<INVENTORY> 3,229
<CURRENT-ASSETS> 53,325
<PP&E> 65,279
<DEPRECIATION> 30,899
<TOTAL-ASSETS> 96,630
<CURRENT-LIABILITIES> 13,880
<BONDS> 140,000
0
0
<COMMON> 108
<OTHER-SE> (59,374)
<TOTAL-LIABILITY-AND-EQUITY> 96,630
<SALES> 6,576
<TOTAL-REVENUES> 6,576
<CGS> 3,229
<TOTAL-COSTS> 3,444
<OTHER-EXPENSES> 4,031
<LOSS-PROVISION> 162
<INTEREST-EXPENSE> (5,871
<INCOME-PRETAX> (35,013)
<INCOME-TAX> 0
<INCOME-CONTINUING> (35,013)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (35,013)
<EPS-PRIMARY> (3.23)
<EPS-DILUTED> (3.23)
</TABLE>
