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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
TV FILME, INC.
(Exact name of Registrant as Specified in its Charter)
COMMISSION FILE NUMBER: 0-28670
DELAWARE 98-0160214
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation or Organization)
C/O ITSA-INTERCONTINENTAL TELECOMUNICACOES LTDA.
SCS, QUADRA 07-BL.A
ED. EXECUTIVE TOWER, SALA 601
70.300-911 BRASILIA-DF
BRAZIL
(Address, Including Zip Code, of Principal Executive Offices)
011-55-61-314-9908
(Registrant's Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X]Yes [ ]No
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. [ ]Yes [X]No*
*Although a bankruptcy plan has been confirmed by the U.S. Bankruptcy Court for
the District of Delaware, no securities have yet been distributed under such
plan.
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, 2000
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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, 1999
and March 31, 2000 (Unaudited).................................... 2
Unaudited Consolidated Statements of Operations for the Three
Months Ended March 31, 1999 and the Three Months Ended
March 31, 2000.................................................... 3
Unaudited Consolidated Statement of Changes in Stockholders'
Equity at March 31, 2000.......................................... 4
Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1999 and March 31, 2000.................... 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
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
DECEMBER 31, MARCH 31,
1999 2000
--------------------- --------------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 42,175 40,232
Accounts receivable, net.............................. 2,474 2,060
Supplies.............................................. 2,750 2,760
Prepaid expenses and other current assets............. 5,700 5,868
--------------------- --------------------
Total current assets.............................. 53,099 50,920
Property, plant and equipment, net......................... 25,005 24,328
Other assets............................................... 5,218 7,114
--------------------- --------------------
Total assets...................................... $ 83,322 82,362
===================== ====================
LIABILITIES AND CAPITAL DEFICIENCY Current liabilities:
Accounts payable...................................... $ 6,168 $ 5,745
Payroll and other benefits payable.................... 1,577 1,758
Accrued interest payable.............................. 18,776 23,282
Accrued liabilities and taxes payable................. 7,543 9,100
Senior notes in default............................... 140,000 140,000
--------------------- --------------------
Total current liabilities......................... 174,064 179,885
Deferred installation fees................................. 900 695
Capital deficiency:
Cumulative translation adjustment..................... (7,182) (7,733)
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................................... (130,225) (136,250)
--------------------- --------------------
Total capital deficiency.......................... (91,642) (98,218)
--------------------- --------------------
Total liabilities and capital deficiency.......... $ 83,322 $82,362
===================== ====================
See accompanying notes.
</TABLE>
2
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TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1999 2000
---------- -----------
(In thousands, except
per share data)
Revenues.......................................... $ 6,576 $ 5,911
Operating costs and expenses:
System operating - Note 2..................... 3,229 2,600
Selling, general and administrative........... 3,606 4,018
Depreciation and amortization................. 4,032 3,095
------------ ------------
Total operating costs and expenses........ 10,867 9,713
------------ ------------
Operating loss............................ (4,291) (3,802)
Other income (expense):
Interest and other expense ................... (5,871) (5,794)
Interest and other income..................... 2,143 1,382
Interest income (expense), net................ (3,728) (4,412)
Monetary (loss) gain.......................... (26,994) 2,189
------------ ------------
Total other expense (income), net......... (30,722) (2,223)
------------ ------------
Net loss.......................................... $(35,013) $ (6,025)
============ ============
Net loss per share................................ $ (3.23) $ (0.56)
============ ============
Weighted average number of shares of
common stock and common stock
equivalents outstanding....................... 10,825 10,825
============ ============
See accompanying notes.
3
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TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN CAPITAL DEFICIENCY
(UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<S> <C> <C> <C> <C> <C>
ADDITIONAL OTHER
COMMON STOCK PAID-IN COMPREHENSIVE ACCUMULATED
SHARES PAR VALUE CAPITAL LOSS DEFICIT TOTAL
------------------------- ------------ ---------------- ------------- -------------
(IN THOUSANDS)
BALANCE AT DECEMBER 31, 1999 10,824,594 $ 108 $ 45,657 $ (7,182) $ (130,225) $ (91,642)
Cumulative translation
adjustment................ -- -- -- (551) -- (551)
Net loss for the period........ -- -- -- -- (6,025) (6,025)
============= =========== ============ ================ ============= =============
BALANCE AT MARCH 31, 2000...... 10,824,594 $ 108 $ 45,657 $ (7,733) $ (136,250) $ (98,218)
============= =========== ============ ================ ============= =============
See accompanying notes.
</TABLE>
4
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TV FILME, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
THREE MONTHS ENDED MARCH 31,
1999 2000
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss................................................ $ (35,013) $ (6,025)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 4,032 3,095
Provision for losses on accounts receivable....... 162 236
Authorization of debt issuance costs.............. (605) 0
Increase (decrease) in deferred installation fees. 215 (305)
Monetary loss (gain).............................. 26,994 (2,169)
Changes in operating assets and liabilities:
Increase (decrease) in accounts receivable........ (592) 295
Decrease in supplies.............................. 241 69
Increase in prepaid expenses and other current
assets............................................ (926) (121)
Decrease (increase) in other assets............... 238 (1,771)
Increase (decrease) in accounts payable........... 528 (498)
Decrease (increase) in payroll and other benefits (547) 150
Payable
Increase in accrued interest payable.............. 4,506 4,506
Increase in accrued liabilities and taxes payable. 235 1,537
========== =========
Net cash provided by operating activities............... (532) (1,001)
========== =========
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions:
Property, plant and equipment..................... (2,032) (1,514)
========== =========
Net cash used in investing activities................... (2,032) (1,514)
========== =========
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in payables to affiliates...................... 0 0
========== =========
Net cash provided by financing activities............... 0 0
========== =========
Effect of exchange rate changes on cash................. (10,453) 572
========== =========
Net change in cash and cash equivalents................. (13,017) (1,943)
========== =========
Cash and cash equivalents at beginning of period........ 57,492 42,175
========== =========
Cash and cash equivalents at end of period.............. $ 44,475 $ 40,232
========== =========
See accompanying notes.
5
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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, Belem and
Campina Grande and has been awarded licenses to operate pay television systems
in eight additional markets in Brazil. All significant intercompany transactions
and balances have been eliminated in consolidation.
As discussed in Note 4, on June 15, 1999, the Company failed to make
the required interest payment on its Senior Notes which caused an event of
default to occur. In connection therewith, the Company 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 requirement. On August 12, 1999, the Company
reached an agreement in principle with a committee representing holders of the
Company's outstanding 12-7/8% Senior Notes due 2004. Under the terms of the
agreement in principle, the senior noteholders will receive a $25 million cash
payment and their existing notes will be converted into (i) new Senior Secured
Notes in the aggregate principal amount of $35 million, subject to adjustment,
with a five year maturity and interest of 12% per annum (interest
payable-in-kind at the Company's option through the first 24 months), and (ii)
80% of the new common equity of the reorganized company. Current management will
receive 15% of the new common equity, and the existing common stockholders of
the Company will receive 5% of the new common equity of the reorganized company
in exchange for their current stake. All outstanding stock options will be
cancelled. The reorganized company will be a newly-formed Cayman Islands holding
company, and the new Senior Secured Notes will be issued by
ITSA-Intercontinental Telecomunicacoes Ltda., a wholly-owned subsidiary of TV
Filme, Inc.
On January 26, 2000, the Company filed a voluntary petition under
chapter 11 of the United States Bankruptcy Code, together with a pre-negotiated
Plan of Reorganization implementing the agreed upon restructuring and the
Disclosure Statement relating to such Plan, with the U.S. Bankruptcy Court for
the District of Delaware. The court approved the Disclosure Statement on March
1, 2000. Following approval of the adequacy of the Disclosure Statement, ballots
respecting the Plan were circulated to those parties entitled to vote on the
Plan, and the Plan was confirmed at a hearing by the court on April 10, 2000.
Overwhelming majorities of holders of the Company's 12-7/8% Senior Notes due
2004 and holders of the Company's common stock voted in favor of the
restructuring set forth in the Plan. Effectuation of the Plan is contingent upon
obtaining approval of the restructuring contemplated by the Plan from Agencia
Nacional de Telecomunicacoes, the Brazilian government agency that regulates
telecommunications services in Brazil, and the Central Bank of Brazil. The
Brazilian Telecommunications Agency ("ANATEL") issued a response on April 28,
2000, indicating full support for the restructuring and indicating that no
further approval is necessary from the Agency. The Company continues to operate
and manage its affairs as debtor in possession. No trustee has been appointed.
These conditions raise substantial doubt as to 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.
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.
6
<PAGE>
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $651,000 at
December 31, 1999 and $727,000 at March 31, 2000. Charges to the allowance
during the three months ended March 31, 2000 were $159,000.
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,
1999 and 2000 were approximately $1,968,000 and $652,000, respectively.
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
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:
NUMBER OF EXERCISE
DATE OPTIONS PRICE
============== ============== =============
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
Of the total number of options which were exercisable as of March 31,
2000, 210,000 options have expired in accordance with their terms.
Pro forma disclosure information has not been presented as all
outstanding options are expected to be cancelled in conjunction with the
Company's restructuring process under Chapter 11 of the U.S. Bankruptcy Code
(see Note 1).
4. LONG-TERM DEBT IN DEFAULT
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 Telecomunicacoes 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
7
<PAGE>
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. Until the
third quarter of 1999, debt issuance costs were capitalized and amortized over
the period of the debt under the effective yield method (see below).
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, 2000 it is unable to make any dividend payments.
Under the provisions of the Senior Note indenture, the Company is
required to make semi-annual interest payments on June 15 and December 15 of
each year to the noteholders. On June 15, 1999, the Company failed to make the
required interest payment, and did not make the payment within the subsequent 30
day grace period allowable under the terms of the indenture, which caused an
event of default to occur. While the Company has reached an agreement in
principle with a committee representing holders of the Senior Notes to
restructure this obligation, and a pre-arranged plan implementing such
restructuring has been approved by the bankruptcy court (as described in Note
1), the restructuring transaction contemplated by the plan has not yet been
effected. As a result of this event of default, the Company has classified the
Senior Notes as a current liability in the accompanying balance sheet. The
agreement in principle was reached in August 1999; accordingly, the Company
wrote off the deferred debt issuance cost of $3.3 million in the third quarter
1999.
5. FOREIGN EXCHANGE CONTRACTS
At December 31, 1999 and March 31, 2000, the Company had $28.0 million
and $28.0 million, respectively, of foreign exchange contracts. The Company
regularly enters into such contracts typically with a duration of six months or
less. The contracts held at December 31, 1999 expired in February 2000 and the
contracts held as of March 31, 2000 expired in April 2000. 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 losses as of March 31, 2000 totaled $0.7 million.
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."
8
<PAGE>
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>
Three Months Ended March 31
---------------------------------------------------------------
<S> <C> <C> <C> <C>
1999 % OF REVENUE 2000 % OF REVENUE
(In thousands, except subscriber, per share and share data)
Revenue........................................... $ 6,576 100% $ 5,911 100%
Operating costs and expenses
System operating............................... 3,229 49% 2,600 44%
Selling, general and administrative............ 3,606 55% 4,018 68%
Depreciation and amortization.................. 4,032 61% 3,095 52%
========== =========== ========== ==========
Total operating costs and expenses........ 10,867 165% 9,713 164%
========== =========== ========== ==========
Operating loss............................ (4,291) (65)% (3,802) (64)%
Other income (expense):
Interest and other expense..................... (5,871) (89)% (5,794) (98)%
Interest and other income...................... 2,143 33% 1,382 23%
Monetary loss..................................... (26,994) (410)% 2,189 37%
Total other expense (income), net........... (30,722) (467)% (2,223) (38)%
========== ========== ========== ==========
Net loss.......................................... (35,013) (532)% (6,025) (102)%
========== ========== ========== ==========
Net loss per share................................ $ (3.23) $ (0.56)
Weighted average number of shares of ========== ==========
Common stock and common stock
Equivalents.................................... 10,825 10,825
Other Data: ========== ==========
EBITDA (a)..................................... $ (895) $ (707)
========== ==========
Number of subscribers at end of period ........ 75,413 72,282
========== ==========
Exchange rate (R $: US $) at end of period..... 1.722:1 1.747:1
========== ==========
</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.
NET LOSS. Net loss for the three months ended March 31, 2000 decreased
to $6.0 million versus $35.0 million for the three months ended March 31, 1999,
due to a monetary loss associated with the company's net dollar-denominated
liability position caused by a 51% devaluation of the REAL against the U.S.
dollar.
REVENUES. The Company's revenues for the three months ended March 31,
2000 decreased by 10% compared to the three months ended March 31, 1999, due
primarily to converting from a post-paid to a pre-paid subscription model in our
largest market, Brasilia. This change had no effect on the Company's cash flow;
however, recognize revenues were reduced by $0.7 million in March and will be
reduced by approximately $0.6 million in April as a result of this transition.
SYSTEM OPERATING EXPENSES. For the three months ended March 31, 2000
compared to the three months ended March 31, 1999, system operating expenses
decreased by 19%, primarily due to a decrease in programming costs (12%) and a
decrease in compensation and benefits expenses (20%) related to lower priced
packages now offered by the Company.
9
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative ("SG&A") expenses increased during the three months ended March
31, 2000 by 11% compared to the three months ended March 31, 1999, primarily due
to the restructuring costs associated with the Company's restructuring as well
as due to expenses related to the transition to the new pre-paid subscription
model in the Brasilia system.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
in the three months ended March 31, 2000 by 23% over the three months ended
March 31, 1999, primarily due to the reduction in asset values on a dollar
basis, and assets becoming fully depreciated.
INTEREST INCOME AND INTEREST EXPENSE. Interest income decreased in the
three months ended March 31, 2000 by 36% over the three months ended March 31,
1999, primarily due to a decrease in the average cash balance between the two
periods. Interest expense decreased slightly in the three months ended March 31,
2000 by 1.3% over the three months ended March 31, 1999.
MONETARY LOSS. The Company generated a monetary gain in the three
months ended March 31, 2000 of $2.2 million due to its net dollar-denominated
monetary liability position throughout the period compared to a monetary loss of
$26.7 million in the months ended March 31, 1999.
EVENT OF DEFAULT ON SENIOR NOTES
Under the provisions of the Senior Note indenture, the Company was
required to make a semi-annual interest payment on June 15, 1999; however, the
Company failed to make this payment which caused an event of default upon the
expiration of the 30 day grace period permitted under the indenture. While the
Company has reached an agreement in principle with a committee representing
holders of the Senior Notes to restructure this obligation and a pre-arranged
plan implementing such restructuring has been approved by the bankruptcy court
(see Notes 1 and 4), the transaction has not yet been effected and there can be
no assurance that the transaction will be completed successfully. The Company
does not expect to make the past due interest payment, or any future interest
payments, on the currently outstanding Senior Notes.
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, 2000, 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, 2000, 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
reclassifying its Senior Notes as a current liability (see "Event of Default on
Senior Notes"), the Company had negative working capital at March 31, 2000 of
$129 million. Net cash used in operating activities for the three months ended
March 31, 2000 was $1 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
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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. (now Deutsche Bank) as its financial advisor. On August 13, 1999, the
Company reached an agreement in principle with a committee representing holders
of the Company's outstanding 12-7/8% Senior Notes due 2004. Under the terms of
the agreement in principle, the senior noteholders will receive a $25 million
cash payment and their existing notes will be converted into (i) new Senior
Secured Notes in the aggregate principal amount of $35 million, subject to
adjustment, with a five year maturity and interest of 12% per annum (interest
payable-in-kind at the Company's option through the first 24 months), and (ii)
80% of the new common equity of the reorganized company. Current management will
receive 15% of the new common equity, and the existing common stockholders of
the Company will receive 5% of the new common equity of the reorganized company
in exchange for their current stake. All outstanding stock options will be
cancelled. The reorganized company will be a newly-formed Cayman Islands holding
company, and the new Senior Secured Notes will be issued by
ITSA-Intercontinental Telecomunicacoes Ltda., a wholly-owned subsidiary of TV
Filme, Inc. This agreement in principle is subject to execution of definitive
documentation, and is to be effected pursuant to a pre-arranged plan which has
received court approval under Chapter 11 of the U.S. Bankruptcy Code. In
addition, the Agencia Nacional de Telecomunicacoes, the Brazilian government
agency that regulates telecommunications in Brazil, and the Central Bank of
Brazil must approve the proposed restructuring. In the process of reviewing the
proposed restructuring, the Central Bank may examine the original approvals
granted when the Secured Notes were issued and there is a risk that the Central
Bank may impose charges or additional taxes with respect to the original
transaction relating to the Secured Notes. There can be no assurance that
approval of the restructuring will be given or as to whether any charges or
taxes may be imposed. Moreover, charges or taxes imposed by the Central Bank may
result in the restructuring not being feasible and may have a material adverse
effect on the Company's financial condition and results of operations. There can
be no assurance that the proposed restructuring transaction will be completed
successfully.
The Company made capital expenditures of approximately $1.5 million
during the three months ended March 31, 2000. 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 paid an aggregate of $5.0 million
for these seven licenses, and launched its operation in Campina Grande during
the second quarter of 1999. 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 at that time. However, in
October 1999, the Company participated in a bidding process for the cities of
Belo Horizonte, Campinas, Sao Jose dos Campos and Vitoria. The Company was
successful in its bids for Belo Horizonte and Vitoria, for which it offered a
total of approximately $2.3 million.
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 obligations pursuant to the
11
<PAGE>
agreement in principle with the committee of noteholders and the cash
requirements for its four existing systems and eight new markets for at least
the next twelve months. As of March 31, 2000, of the Company's approximately
$40.2 million in cash and cash equivalents, approximately $12.6 million (31%)
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 successfully complete the debt restructuring and plan of
reorganization under chapter 11 of the Bankruptcy Code, 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.
As described in Notes 1 and 4 to the financial statements, the Company
is in default on its Senior Notes and has entered into a Restructuring Agreement
with certain Specified Holders and filed a voluntary petition under chapter 11
of the United States Bankruptcy Code, together with a pre-negotiated Plan of
Reorganization and the Disclosure Statement relating to such Plan, with the U.S.
Bankruptcy Court for the District of Delaware. The effect of this bankruptcy
proceeding on the Company's future liquidity and capital resources cannot be
determined at this time.
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
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
12
<PAGE>
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. 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, effective in June 1999, the
government increased 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,
an impact on the Company's financial results.
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 1999 and the first quarter of 2000. 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.
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, 2000 (these contracts were entered into for
purposes other than trading purposes):
- --------------------------------------------------------------------------------
CONTRACT VALUE EXCHANGE RATE PREMIUM % % CDI CONTRACT DATE EXPIRATION DATE
US$28,000,000 R$1.770:US$1 +6.8% 100% Feb. 11, 2000 April 11, 2000
- --------------------------------------------------------------------------------
Upon expiration of the above contract, the Company entered into the following
foreign currency hedge contracts to protect against further devaluation of the
REAL.
- --------------------------------------------------------------------------------
CONTRACT VALUE EXCHANGE RATE PREMIUM % % CDI CONTRACT DATE EXPIRATION DATE
US$28,000,000 R$1.739:US$1 +2.8% 99.5% April 11, 2000 June 12, 2000
- --------------------------------------------------------------------------------
The above contracts require the Company to pay, on the expiration date, an
amount equal to the calculated interest (CDI--see below) on the contract value.
13
<PAGE>
On the expiration date, the Company is to receive or pay an amount, in REAIS,
calculated as follows: the "Contract Value R$" divided by the "Exchange Rate"
times the sum of (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.
On January 26, 2000, the Company filed a voluntary petition under
chapter 11 of the United States Bankruptcy Code, together with a pre-negotiated
Plan of Reorganization and the Disclosure Statement relating to such Plan, with
the U.S. Bankruptcy Court for the District of Delaware. The court approved the
Disclosure Statement on March 1, 2000. Following approval of the adequacy of the
Disclosure Statement, ballots respecting the Plan were circulated to those
parties entitled to vote on the Plan, and the Plan was confirmed at a hearing by
the court on April 10, 2000. Overwhelming majorities of holders of the Senior
Notes and holders of the Company's common stock voted in favor of the
restructuring set forth in the Plan. Effectuation of the Plan is contingent upon
obtaining approval of the restructuring contemplated by the Plan from Agencia
Nacional de Telecomunicacoes, the Brazilian government agency that regulates
telecommunications services in Brazil, and the Central Bank of Brazil. The
Brazilian Telecommunications Agency ("ANATEL") issued a response on April 28,
2000, indicating full support for the restructuring and indicating that no
further approval is necessary from the Agency. The Company continues to operate
and manage its affairs as debtor in possession. No trustee has been appointed.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No defaults upon senior securities occurred during the quarter ended
March 31, 2000. An event of default which occurred in June 1999 has been
previously reported in Item 3 of Part II of the Company's Quarterly Report on
Form 10-Q for the period ended June 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On March 7, 2000, ballots respecting the Company's Plan of
Reorganization under chapter 11 of the Bankruptcy Code were circulated to the
Company's security holders entitled to vote on the Plan. Overwhelming majorities
of holders of the Senior Notes and holders of the Company's common stock voted
in favor of the restructuring set forth in the Plan, which was then confirmed by
the bankruptcy court on April 10, 2000. The following are the results of the
vote:
<TABLE>
<CAPTION>
Accepting Rejecting
--------- ---------
# of holders Amount # of holders Amount
------------ ------ ------------ ------
<S> <C> <C> <C> <C>
Class 2 (Senior Secured Claims): 71 108,361,000 1 910,000
Class 4 (Equity Intrests): 36 6,711,388 5 14,000
</TABLE>
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 2000, the Company filed a Current Report
on Form 8-K on February 10, 2000, pursuant to Item 3 thereof, announcing that,
on January 26, 2000, the Company filed a voluntary petition under chapter 11 of
14
<PAGE>
the United States Bankruptcy Code, together with a pre-negotiated Plan of
Reorganization and the Disclosure Statement relating to such Plan, with the
United States Bankruptcy Court for the District of Delaware.
15
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DATED: May 12, 2000
TV FILME, INC.
(Registrant)
/s/ Hermano Studart Lins de Albuguerque
---------------------------------------
Hermano Studart Lins de Albuquerque
Chief Executive Officer (Principal
Executive Officer)
/s/ Carlos Andre Studar Lins de Albuquerque
-------------------------------------------
Carlos Andre Studart Lins de Albuquerque
Acting Chief Financial Officer (Principal
Financial and Accounting Officer)
16
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
condensed consolidated balance sheet of TV Filme, Inc. at March 31, 2000 and the
condensed consolidated statement of operations for the three months ended March
31, 2000 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-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 40,232
<SECURITIES> 0
<RECEIVABLES> 2,788
<ALLOWANCES> 727
<INVENTORY> 2,760
<CURRENT-ASSETS> 50,920
<PP&E> 67,544
<DEPRECIATION> 43,216
<TOTAL-ASSETS> 82,362
<CURRENT-LIABILITIES> 179,885
<BONDS> 0
0
0
<COMMON> 108
<OTHER-SE> (98,326)
<TOTAL-LIABILITY-AND-EQUITY> 82,362
<SALES> 5,911
<TOTAL-REVENUES> 5,911
<CGS> 2,600
<TOTAL-COSTS> 3,782
<OTHER-EXPENSES> 3,095
<LOSS-PROVISION> 236
<INTEREST-EXPENSE> (5,794)
<INCOME-PRETAX> (6,025)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,025)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,025)
<EPS-BASIC> (0.56)
<EPS-DILUTED> (0.56)
</TABLE>
