FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a or 15d - 16 of
the Securities Exchange Act of 1934
For the month of August 1998
Tevecap S.A.
(Exact Name as Specified in its Charter)
Tevecap Inc.
(Translation of Name into English)
SEC FILE NUMBER: 0-22267
Rua do Rocio, 313
Sao Paulo, SP Brazil
04552-904
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports
under cover Form 20-F or Form 40-F.
Form 20-F X Form 40-F
------------- -------------
Indicate by check mark whether the registrant by furnishing the information
contained in this Form is also thereby furnishing the information to the
Commission pursuant to Rule 12g3-2(b) under Securities Exchange Act of 1934.
Yes No X
------------- -------------
If "Yes" is marked, indicate below the file number assigned to the registrant in
connection with rule 12g3- 2(b):82 N/A
<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.
TEVECAP S.A.
By: /s/ Jose Augusto P. Moreira
---------------------------
Jose Augusto P. Moreira
Officer
By: /s/ Claudio Cesar D'Emilio
--------------------------
Claudio Cesar D'Emilio
Officer
Date: August 28, 1998
<PAGE>
EXHIBIT LIST
1. One copy of the press release, dated August 31, 1998, containing
relevant information on Tevecap S.A. for the three-month period ended
June 30, 1998, with financial information prepared in accordance with
Brazilian GAAP.
<PAGE>
Tevecap S.A.
Rua do Rocio, 313 - 11th floor
04552-904-Sao Paulo-SP-Brazil
- --------------------------------------------------------------------------------
TEVECAP ANNOUNCES SECOND
QUARTER 1998 RESULTS
Sao Paulo, August 31st, 1998, TEVECAP S.A., (TVA) one of Brazil's largest and
fastest growing pay television operators and programming distributors, today
announced results for the second quarter of 1998.
- ----------
Contact:
Tevecap - Douglas Duran Telephone: 55 (11) 821-8554
Ludgate Communications - Marina Echavarria Telephone: 1 (212) 688-5144
<PAGE>
Tevecap S.A. Page 2/36
Index
1. Overview................................................................3
Financial Highlights as of June 30, 1998................................4
Operational Overview....................................................5
TVA Market Overview.....................................................5
2. Ownership & Partnership Relations.......................................7
New Licenses............................................................7
3. Operational Performance 2Q98............................................8
TVA Distribuidora.......................................................8
a) Cable Operation Overview..........................................8
b) MMDS Operation Overview..........................................15
c) C-Band Operation Overview........................................19
d) TVA Distribuidora - 2Q98 Income Statement........................21
TVA Satelite...........................................................22
a) Ku-Band Operation Overview.......................................22
b) TVA Satelite - 2Q98 Income Statement.............................25
TVA Programadora.......................................................26
a) HBO Brasil Operation Overview....................................26
b) ESPN Brasil Operation Overview...................................27
c) TVA Channel Operation Overview...................................27
d) TVA Programadora - 2Q98 Income Statement.........................29
4. Tevecap's Consolidated 2Q98 Results....................................30
a) Consolidated Results.............................................30
b) Financial Situation..............................................32
c) Consolidated Balance Sheet.......................................34
d) Tevecap - 2Q98 Income Statement..................................35
e) Tevecap - 2Q98 Statement of Cash Flow............................36
<PAGE>
Tevecap S.A. Page 3/36
1. Overview
--------
Tevecap S.A. is one of the leading pay television operators and programming
distributors in Brazil. The Company was the first to offer Ku-Band technology in
Brazil through DirecTV(TM), which was launched in the second half of 1996.
Brazil is the largest television market in Latin America, with approximately
35.2 million television households. During the first half of 1998, Pay TV
penetration had no growth due to the difficult situation of the Country affected
by the Asian crisis. Nevertheless, it is significant that Brazil had a 93%
penetration of broadcast television and only a 7.3% Pay TV penetration as of
December 1997. Market projections estimate that overall penetration should reach
28% by 2004.
Despite the fact that the market has presented no growth during the first
half of 1998, Tevecap continues to achieve its goals and has presented a
subscriber base increase during this period.
As of June 30, 1998, Tevecap had approximately 1.3 million direct and
indirect subscribers, an increase of 5.2% over 4Q97, and a 3.6% increase over
the 1Q98 subscriber base.
The table below sets forth the number of subscribers as of June 30, 1998
and March 31, 1998.
Subscriber Base
---------------
Jun-98 Mar-98 Chg %
------ ------ -----
MMDS 201,998 223,247 -9.5%
Cable 115,528 103,651 11.5%
C Band 71,687 69,431 3.2%
Total Owned Systems 398,213 396,329 -1.8%
TV Filme (MMDS) Total 111,090 112,443
Equity Subscribers 16,326 16,525 -1.2%
Canabras (Cable) Total 43,420 37,625
Equity Subscribers 15,631 13,545 15.4%
Total Operating Ventures (a) 31,957 30,070 6.3%
TVA Distribuidora 421,170 426,399 -1.2%
TVA Satelite (b) 176,002 163,826 7.4%
TVA Programadora 711,679 672,830 5.8%
TVA Total Subscribers (c) 1,308,851 1,263,055 3.6%
HH receiving TVA 1,431,404 1,383,053 3.5%
- ----------
(a) represents equity subscriber base
(b) means Ku Band Subscribers
(c) method employed in the United States, which means that the customer must be
installed and paying on a current basis to be considered a subscriber.
Non-installed backlog and disconnected subscribers are not included in
TVA's Subscriber Base
<PAGE>
Tevecap S.A. Page 4/36
Financial Highlights as of June 30, 1998
o Consolidated Net Revenue for 2Q98 reached US$81.0 million, representing a
decrease of 1.4% versus US$82.2 million in 1Q98.
o Subscription Revenue amounted to US$64.3 million in 2Q98, a growth of 2.3%
versus US$62.9 million in 1Q98 and an increase of 21.1% versus US$53.1
million in 2Q97. Subscription revenue represented 79.4% of Net Revenue
versus 64.2% in 2Q97.
o Installation Revenue amounted to US$14.9 million in 2Q98, a decrease of
2.5% versus US$15.3 million in 1Q98. Installation revenue represented 18.4%
of net revenue for 2Q98 as compared to 29.4% in 2Q97.
o Direct Operating Expenses reached US$48.2 million in 2Q98, a 2.8% decrease
versus US$49.6 million in 1Q98. When comparing 2Q98 versus 2Q97,
Subscription revenue grew 21.1% while Direct Operating Expenses grew only
11.3%.
o Selling, General and Administrative Expenses for 2Q98 reached US$23.7
million, a decrease of 6.5% versus US$25.3 million in 1Q98. As a percentage
of Net Revenue, SG&A decreased from 30.8% in 1Q98 to 29.2% in 2Q98, showing
a stabilization during the year.
o EBITDA reached US$9.1 million in 2Q98, representing an increase of 25.3%
over the US$7.3 million reported in 1Q98, and an increase of 15.5% when
compared to US$7.9 million in 2Q97.
o Total Operating Expenses for 2Q98 amounted to US$93.2 million, a 1.2%
decrease versus US$94.4 million in 1Q98.
o Net loss for 2Q98 was US$33.1 million, an increase of 5.8% compared to a
loss of US$31.2 million in 1Q98.
o Capital Expenditures (cash basis) amounted to US$27.0 million for 2Q98, an
8.0% increase versus US$25.0 million during 1Q98. Capital Expenditures
(book basis) for 2Q98 reached US$41.4 million, an increase of 32.7% versus
US$31.2 million in 1Q98.
o Net Sales in 2Q98 were 62,213 and the Activation for the same period was
64,282, which means that the Company reduced its Backlog.
NET NEW SALES MAY JUN JUL TOT ACTIVATION 2Q98
------------- --- --- --- --- ---------- ----
Cable 4,944 7,514 6,696 19,154 Cable 19,693
MMDS 5,650 3,572 3,110 12,333 MMDS 15,082
C-Band 2,181 2,238 3,193 7,612 C-Band 6,209
Ku-Band 6,974 8,116 8,024 23,114 Ku-Band 23,297
TOTAL 19,750 21,440 21,024 62,213 TOTAL 64,282
o The Backlog as of the end of 2Q98 was 10,112 subscribers, a 20% decrease
versus the 12,681 in 1Q98.
Complete Financial Statements are included on pages 34 - 36
<PAGE>
Tevecap S.A. Page 5/36
Operational Overview
Despite the fact that Pay TV industry in Brazil is being impacted by
adverse conditions, TVA's 2Q98 results are in accordance with our expectations
mentioned during the 1Q98 Conference Call.
We had anticipated sustaining the growth of our cable subscriber base,
which did occur in 2Q98. This is impressive when compared with other Brazilian
operators. The same trend was confirmed in our Ku-Band and C-band operations. In
the case of MMDS, presented in detail on the following pages, we decided to
reduce the sales while evaluating the current situation and now we are
finalizing a plan to be implemented in the second half, to address properly the
C class and to ensure continued profitability.
We also explained last quarter how we have been managing churn and bad debt
problems. Now, even though the churn rate remains high, we think that the
Company is achieving its goal of minimizing this cost throughout the recovery of
commissions in the case of subscriber cancellations occurring during the first
90 days, and also by retrieving 95% of decoders. Since our operations are almost
100% fully addressable, delinquent subscribers can be disconnected easily and
immediately by software from the head-end without incurring the extra costs
associated with sending a team to the subscriber's location.
As mentioned in prior conference calls, with the consulting services of AT
Kearney, a well-known US management consulting firm, supporting the Management
of the Company in the review of internal corporate procedures, we are now
showing a productivity gain that results in the reduction of Direct Operating
Expenses and SG&A expenses. At this moment, we are confident that we will be
able to maintain this trend in the second half of 1998. The following pages
demonstrate the significance of Tevecap's improvement in terms of quality of
service. Obviously, efficiency will result in an increase in profitability.
Even under unfavorable circumstances, Tevecap was able to sustain its
results, and even increase them, due to accurate market information and
implementation of well-defined plans in all businesses, as in the cable business
that took advantage of newly cabled areas, which are aimed at A and B class
households.
We intend to remain agile and responsive to consumer needs as the year
progresses so that we can sustain and hopefully increase our growth patterns.
TVA Market Overview
Tevecap will continue to pursue its strategy of consistent growth in
existing operations since the TVA Market represents a huge potential for
increased penetration. On the next page the Company has presented a chart
showing our current status in terms of A, B and C classes.
<PAGE>
Tevecap S.A. Page 6/36
<TABLE>
<CAPTION>
Households (1) Total
-------------- Marketable % of
City A B C Households Brazil
- ---- ----- ----- ----- ---------- ------
<S> <C> <C> <C> <C> <C>
Sao Paulo (2) 359,824 1,125,511 1,488,750 2,974,085 22%
Rio de Janeiro (3) 162,698 501,343 781,454 1,445,495 11%
Curitiba (4) 34,568 116,188 177,428 328,184 2%
Others (5) 49,985 156,193 183,822 390,000 3%
Total 607,075 1,899,235 2,631,454 5,137,764 38%
% of total ABC HH 12% 37% 51% 100%
Brazil (6) 1,081,498 4,190,804 8,246,421 13,518,723
% of total ABC HH 8% 31% 61% 100%
</TABLE>
- ----------
(1) Income strata: A = greater than US$40,500, B=US$13,500 to US$40,500,
C=US$5,400 to US$13,500
(2) Includes Sao Paulo and 31 contiguous cities
(3) Includes Rio de Janeiro and 10 continguous cities
(4) Includes Curitiba and 6 contiguous cities
(5) Includes Porto Alegre, Foz do Iguacu, Florianopolis, Camboriu and Blumenau
(6) KU-Band and C-Band market
Source: Pay-TV, August 1997
The Brazilian Pay TV market for A, B and C classes is close to 13 million
households. Combining MMDS and Cable, the Company can reach 5 million
households, representing 38% of the potential market. However, with DTH
technology, Tevecap can provide service to almost 100% of the potential market.
Based on these figures, considering our cable plant that was built with
state of the art technology and on our programming line-up that has been
considered the best in the market, our current goals are as follows:
o Increase our cable subscriber penetration very quickly
o Build additional cable infrastructure to "A" and "B" class households
o Properly target MMDS Service to "C" class households
o Deliver DTH signal throughout the Country
o Leverage infrastructure with additional services
o Continue providing high quality programming
o Provide the best service to Customers, and
o Consolidate the Brazilian Pay TV market
<PAGE>
Tevecap S.A. Page 7/36
2. Ownership & Partnership Relations
---------------------------------
Tevecap is a 62.2% owned subsidiary of The Abril Group, the largest
publishing company in Latin America and one of the five largest media
conglomerates in Latin America. Abril publishes approximately 200 magazines in
Brazil, including eight of the ten most widely circulated. Additionally, Abril
distributes nine magazines in Portugal and four in Argentina. Abril is also the
leader in the Brazilian home video market and is the largest publisher of
telephone directories in Latin America. Abril pioneered the development of
electronic media in Brazil with the launch of TVA, which was the Country's first
pay television operation. Abril, with its strong presence in all media sectors,
provides TVA with expertise in distribution and advertising. Abril also provides
TVA with access to its databases with proprietary subscriber information,
particularly through its magazine publishing interests (including Veja, the
world's fourth largest newsweekly magazine) which have a combined monthly paid
circulation of 15.8 million.
[OWNERSHIP AND ORGANIZATIONAL CHART]
New Licenses
Considering the structure of the tender invitation announced by the
Government in the last quarter of 1997, Tevecap's shareholders decided to create
new companies in association with other Telecommunication Groups in order to
participate in the bid with the best structure under the Government rules.
As of July, almost all injunctions that were preventing the Pay TV licenses
auction from moving forward were eliminated since the "Superior Tribunal de
Justica - STJ" (Brazilian Federal Court) gave a favorable ruling to Anatel
(National Communications Agency). Therefore, the Company believes that the
announcement of the list of companies qualified for the second stage of this
process will be scheduled in a few weeks.
<PAGE>
Tevecap S.A. Page 8/36
3. Operational Performance 2Q98
----------------------------
TVA Distribuidora
a) Cable Operation Overview
The following table sets forth TVA's Cable Plant as of June 30, 1998:
<TABLE>
<CAPTION>
Coaxial Optical Homes Density Penetration Subs
Cable (Km) Fiber (Km) Passed (HP/Km) (Subs/HP) Base
---------- ---------- ------ ------- --------- ----
<S> <C> <C> <C> <C> <C> <C>
TVA SISTEMA - SP 1,974 540 561,012 284 14.1% 78,642
TVA SUL - 4 cities 1,215 117 263,999 217 13.8% 36,886
TOTAL OWNED SYSTEMS 3,189 657 825,011 259 14.0% 115,528
Canbras TVA - 10 cities 989 98 289,111 292 14.9% 43,420
TOTAL 4,178 755 1,114,122 267 14.3% 158,948
</TABLE>
TVA Sistema's Cable platform was built with state of the art technology
having 79% of 750 MHz bandwidth cable. Moreover, our cable plant can easily be
upgradable for telephone service and is already capable of allowing the Company
to offer interactive services as Internet. As of June 30, 1998 TVA's cable
subscriber base, on an equity basis, amounted to 131,159 subscribers, which
represented a 12% increase when compared to 1Q98, while our major competitor's
equity subscriber base for the same period declined by 2.4%.
The addressable decoders used by TVA's cable systems permit the upgrading,
downgrading or disconnection of a subscriber service from the head-end. We have
the capability of making such adjustments or changes on short notice. Our system
is also ready to use pay-per-view technology. Addressability allows the Company
to manage its churn since we have greater control over the services offered to
our subscriber base. Addressability also enables TVA to offer four different
programming tiers. Our main competitor is only now beginning to obtain
addressability capability, and at present is able to offer only two tiers.
Even though the City of Sao Paulo has been overbuilt, we are confident that
we will be able to continue to achieve growth in the second half of 1998.
Despite Brazil's generally adverse economic conditions for general consumer
products, TVA's cable subscriber base grew by 11.9% in the 2Q98.
We believe this growth performance is the result of the cable growth
strategy we planned and have been implementing over a number of months. Our
strategy focuses, among other things, on the concentration of our cable services
in high density affluent areas. Our homes passed figure is now approximately 1.1
million. The homes passed are nearly all "A" and "B" class households. This
greatly enhances our ability to penetrate our cabled areas. By contrast, our
main cable competitor's homes passed figure, of 2.5 million, includes a
substantial number of "C" class households. At present Brazil's "C" class
households are suffering most from Brazil's economic difficulties. Bad debt
among "C" class households is at an all-time high. TVA has been able to achieve
a level of protection from these problems by concentrating on areas with "A" and
"B" class households. We have also achieved greater efficiency by concentrating
in high-density areas. Our current density statistics are approximately 267
homes per kilometer, while the similar figure for our main competitor is 167.
This allows us to more efficiently derive revenue from our cable investments.
<PAGE>
Tevecap S.A. Page 9/36
Subscriber Performance
Despite the present status of the Brazilian economy, TVA's cable subscriber
base grew by approximately 12% in 2Q98. Tevecap had approximately 131,000 direct
cable subscribers, an increase of 24% since December 31, 1997.
The following table sets forth the subscriber performance between the
quarters ended March 31, 1998 and June 30, 1998:
Cable Subscriber Evolution (Apr-Jun/98)
TVA TVA Canbras
Sistema Sul TVA (a) Total
------- --- ------- -----
(+) Paying Subs - March 31, 1998 66,655 36,996 13,545 117,196
(+) New Connects 13,212 3,691 2,790 19,693
(+) Net Transferred from MMDS 4,760 194 4,954
(-) Disconnects 5,985 3,995 704 10,684
(=) Paying Subs - June 30, 1998 78,642 36,886 15,631 131,159
2nd Q98 Growth 18.0% -0.3% 15.4% 11.9%
Monthly Churn (b) 2.4% 3.3% 1.4% 2.5%
Annual Churn (c) 28.3% 39.1% 17.2% 30.1%
- ----------
(a) Represents subscribers in an equity basis.
(b) Disconnects / (Initial Balance + New Connects + Net Transferred) / 3
(c) Monthly Churn * 12
As mentioned in our 1Q98 Press Release, our Cable Plant was built only in
areas with high potential penetration and the only additional necessary
investment are backbones and decoders. In the case of the City of Sao Paulo, the
Company has already backboned 6,000 buildings adding almost 220,000 potential
cable subscribers. As a result of our comprehensive marketing and sales efforts,
we are achieving in Sao Paulo City, the country's most competitive area, 18.0%
growth in the second quarter of 1998, while our major competitor had a 5.3%
decline in the same period.
<PAGE>
Tevecap S.A. Page 10/36
Tevecap has always planned to transfer subscribers from MMDS to Cable
technology in recently activated cabled areas of the City of Sao Paulo. As
illustrated in the graph below, the transfer is occurring at an impressive rate.
Subscribers Transferred from MMDS
---------------------------------
[CHART]
The graph below shows sales evolution for the first half of 1998. In 2Q98
TVA made a total of 19,154 new sales, a similar level compared to our major
competitor for the same period, despite the fact that TVA has 56% fewer
homes-passed than the major competitor.
Sales Volume Per Month
----------------------
[BAR CHART]
The following highlights demonstrate our strategy in terms of the
competition, focusing on providing good service to our customers and increasing
profitability.
<PAGE>
Tevecap S.A. Page 11/36
Tevecap's Installation Performance
As shown below, the Company has significantly improved installation
performance in order to accomplish the strategy implemented a few months ago.
% of installation as of daily sales
-----------------------------------
[CHART]
Following such strategy, backlog was dramatically reduced.
Backlog (in days of installation)
---------------------------------
[CHART]
<PAGE>
Tevecap S.A. Page 12/36
The service provided to the Customer has shown that we are increasing our
efficiency reducing the need for technical assistance:
TVA has supplied improved training to all technicians using procedures
recently designed by an outside consultant, giving the technicians indicators
according to benchmarks. As a result, we are proud to show how the Company has
been decreasing Customer requests for technical assistance:
Calls for technical assistance over Subs Base
---------------------------------------------
[CHART]
Tevecap solves 40% of all calls on the same day and 60% on the following
day.
Sales and growth strategy for Sao Paulo's Cable Network:
As shown previously, TVA is ready to aggressively fight competition by
increasing penetration, through the following procedures:
o Building cable in prospected areas and activating it immediately;
o Investing in backbone in selected buildings with prior approval of the
building manager;
o Approaching potential subscribers, and
o Making instantaneous installations.
Due to the procedures above and in a constant search for accurate market
information, we noticed that there is a major competitor's backlog (68,300 as of
June 30, 1998) in A, B and C classes areas that are still waiting for Pay TV
service.
Based on our sales strategy and on our agility to backbone new buildings,
there is a great opportunity for TVA cable operation to continue to grow during
this year.
<PAGE>
Tevecap S.A. Page 13/36
Churn and bad debt level tendency:
Although present churn is already considered high by the Company, the
action plan implemented in 1Q98 is indicating a trend for churn to decline
during the second half of 1998. We experienced a 2.4% churn per month in 2Q98,
8% less than 1Q98.
Tevecap has implemented a consistent policy regarding delinquent
subscribers, who are disconnected after they become 30 days past due. After
disconnection, the company makes a 100% provision for the outstanding account
receivable. We manage subscriber receivables on a daily basis. Our policy
towards default has been the following:
o Five days after maturity date, our billing department sends a letter
to the subscriber
o Fourteen days after maturity date, a qualified employee calls the
delinquent subscriber
o From the fourteenth to the thirtieth day after maturity, the
delinquent subscriber is expected to make a decision concerning the
subscription, from three options:
a) pay the overdue value to avoid disconnection,
b) downgrade the programming package to a lower priced one, or
c) cancel the subscription.
o After thirty days past due, the subscriber is immediately disconnected
and the Company starts the process to issue a service order for
retrieval of the decoder. We have recovered 95% of total disconnected
subscriber decoders, allowing the Company to gain additional revenue.
OBS.: The same procedure is used for MMDS
<PAGE>
Tevecap S.A. Page 14/36
Price continues to be consistent with the previous quarter as a result of the
programming tiering implementation:
As mentioned in the 1Q98 Press Release, TVA Distribuidora operation has
achieved its budgeted cable subscriber goals by targeting A and B social classes
combined with the implementation of affordable programming packages.
As shown in the chart below, TVA Distribuidora's cable operation has
sustained the monthly fee throughout the first half of 1998. In Sao Paulo we
increased our hook-up fee by 57.3%. In the South, in order to face competition,
we invested in a more aggressive policy, reducing the hook-up fee by 18.3%. As a
result of this strategy we obtained a 29.4% average increase as compared with
1Q98.
US$ per new subs
----------------
Hook up fee Monthly fee
----------- -----------
1Q98 2Q98 % Chg. 1Q98 2Q98 % Chg.
---- ---- ------ ---- ---- ------
TVA Sistema $32.66 $51.39 57.3% $42.83 $44.99 5.0%
TVA Sul $60.44 $49.37 -18.3% $38.55 $36.26 -5.9%
TOTAL $39.31 $50.86 29.4% $41.80 $42.71 2.2%
As soon as Brazilian legislation approves Internet service to subscribers,
Tevecap will be able to provide such services, and this will certainly represent
a new source of revenue for the Company. We have already started a pilot project
in Sao Paulo with 100 subscribers. We estimate 25% of total PC households as
potential subscribers.
Presently, TVA offers up to 54 analog channels with capacity to offer up to
78 analog channels. The following chart shows Sao Paulo's tiering table with
prices in US$.
Package Channels Price (1)
------- -------- ---------
Essencial 35 32.50
Especial 49 36.82
Cine Show 38 46.33
Total 54 50.91
- ----------
(1) TVA Sul's packages are cheaper than Sao Paulo's
On the next page we set out our line-up for cable operation:
<PAGE>
Tevecap S.A. Page 15/36
Cable Line-up
Cable Channel Packages (1)
--------------------------
Essencial Package
-----------------
Essencial Comunitario Electronic Guide ESPN Intl.
TV Legislativa Cultura* Bravo Brasil Eurochannel
TV Senado Globo* Cartoon Fox Kids
CBS Manchete* Discovery MTV*
Bandeirantes* Record* CMT Mundo
Canal 21* Rede Mulher* CNN Espanol Sony
Canal Sao Paulo Rede Vida* E! TNT
CNT* SBT* ESPN Brasil Warner
TVE Rio* CNV TV Gospel
Cine Show Package = Essencial plus ...
--------------------------------------
HBO HBO2 Cinemax
Especial Package = Essencial plus ...
-------------------------------------
ART CNN Intl. Discovery Kids DW
Fox Nickelodeon RAI RTPi
TeleUno Travel Channel EV5 TV Espana
WorldNet NHK MGM Gold America 2
Total Package = All channels listed above
- ----------
(1) Based on Sao Paulo tiering
* Names in Bold Blue mean Broadcast TV
According to the Brazilian Cable legislation, off-air channels are a
must-carry for cable operations.
After the implementation of our tiering strategy, in Sao Paulo, 67.5% of
new subscribers elected the Total Package and 6.6% elected the Cine Show
package, totaling 74.0% of new sales of premium packages, which was the main
reason for the 5% increase on the average monthly fee during 2Q98 in Sao Paulo
City.
b) MMDS Operation Overview
TVA Distribuidora has four MMDS licenses and operates in the Cities of Sao
Paulo, Rio de Janeiro, Porto Alegre and Curitiba. These areas have a LOS of
almost 5 million A, B and C households, for a total population of close to 17.4
million. As of June 30, 1998, 218,324 MMDS subscribers were served in this area.
Through a tiered pricing system and 100% addressable decoder boxes, its MMDS
system offers up to 31 channels. Since customers may select the programming
packages they want and can afford, tiered pricing is expected to attract more
subscribers. This will also reduce future churn rates. Customers may select from
four packages varying from US$26 to US$47, for 14 to 31 channels.
As presented in the item "Cable Operation Overview", TVA Distribuidora's
strategy to transfer subscribers from MMDS technology to Cable was intensified
in 2Q98 since the Company has invested heavily to deploy a significant Cable
Network in Sao Paulo.
<PAGE>
Tevecap S.A. Page 16/36
Notwithstanding TVA Distribuidora's strategy to continue to offer MMDS
Service to C class households and to areas not covered by cable, the Company has
decided to reduce efforts to sell such technology in 2Q98 while it was preparing
a plan to properly reach the subscribers that were affected by the Brazilian
economic situation. We expect that after the definition of some market issues
the Company will be ready to start to increase sales to such potential
subscribers, based on said plan and due to be fully addressable.
Since early this year, Tevecap has adopted a credit check of all new
potential subscribers, using SPC and SERASA Credit Bureaus (Brazilian companies
offering services similar to Dun & Bradstreet). Also, as mentioned in the 1Q98
Press Release, the delinquency trend is not expected to slow down. In 2Q98, we
realized that more than 30% of potential new customers - mainly C class - had
their credit refused and, accordingly, the Company decided not to accept them as
subscribers.
Tevecap firmly believes that, as soon the economy stabilizes and Pay TV
becomes a utility for this class as a whole, then churn rate will reduce to an
average of 1.5% per month. During the second half of 1998, our focus is to
manage this technology using our strong credit policy. Therefore, we expect to
be showing to the market a low-growth but better-quality MMDS subscriber base.
The Company has developed in the past years a strong expertise in MMDS
technology. At this time, we are also working on the MMDS Digitalization that
could provide an important tool to expand channel capacity up to 100 channels,
with digital signal quality. This project may be available for 1999. At this
moment, the Company is also testing internet service through MMDS in Sao Paulo,
and its subsidiary TV Filme already delivers this service to its subscriber
base.
Subscriber Performance
In the second quarter of 1998, TVA Distribuidora had approximately 218,000
MMDS direct subscribers, a decrease of 8.9% over March 31, 1998.
The following table sets forth the subscriber performance between the
quarters ended March 31, 1998 and June 30, 1998:
MMDS Subscriber Evolution (Apr-Jun/98)
--------------------------------------
TVA TVA TV
Sistema Sul Filme (a) Total
------- --- --------- -----
(+) Paying Subs - March 31, 1998 203,333 19,914 16,525 239,772
(+) New Connects 11,990 2,086 1,006 15,082
(+) Net Transferred to Cable -4,760 -194 0 -4,954
(-) Disconnects 26,295 4,076 1,205 31,576
(=) Paying Subs - June 30, 1998 184,268 17,730 16,326 218,324
2nd Q98 Growth -9.4% -11.0% -1.2% -8.9%
Monthly Churn (b) 4.2% 6.2% 2.3% 4.2%
Annual Churn (c) 50.0% 74.8% 27.5% 50.5%
- ----------
(a) Represents subscribers in an equity basis
(b) Disconnects / (Initial Balance + New Connects + Net Transferred) / 3
(c) Monthly Churn * 12
<PAGE>
Tevecap S.A. Page 17/36
The graph below shows our strategy to reduce MMDS sales during the 2Q98.
Sales Volume per Month
----------------------
[CHART]
MMDS Strategy for next quarters:
TVA Distribuidora will continue to switch its MMDS subscribers to cable,
but in areas not served by cable it intends to get more subscribers, but only
credit approved subscribers.
Despite the fact that TVA Sul's operation at Curitiba suffered a decrease
in Monthly Fee due to programming tiering, TVA Sistema (Sao Paulo and Rio de
Janeiro) maintained the same level for the new subscriber base as presented in
the first quarter, showing a stabilization, pursuant to the table below:
US$ per new subs
----------------
Hook up fee Monthly fee
----------- -----------
1Q98 2Q98 % Chg. 1Q98 2Q98 % Chg.
---- ---- ------ ---- ---- ------
TVA Sistema $103.06 $85.79 -16.8% $39.28 $39.21 -0.2%
TVA Sul $97.13 $94.32 -2.9% $30.74 $26.80 -12.8%
TOTAL $102.48 $87.37 -14.7% $38.45 $36.91 -4.0%
Opportunity at the C class:
Since MMDS operations serve a 35 Km radius from the main antenna, in past
years C class subscribers could be reached by this technology. However, those
subscribers were strongly affected by unemployment and by the economic action
taken by the Government in reaction to the Asian crisis.
The Company has no doubt that the 2.4 million C class households covered by
our existing operations represent a huge opportunity for the growth of Pay TV
business in Brazil. We feel confident that TVA is in a good position, after all
procedures that we implemented to avoid delinquency, to grow by exploiting in a
profitable way this segment that might be considered risky by other competitors.
<PAGE>
Tevecap S.A. Page 18/36
MMDS Line-up:
TVA currently offers four different programming tiers:
MMDS Channel Packages (1)
Essencial Package
-----------------
Bravo Cartoon Electronic Guide Discovery
Bandeirantes* ESPN Brasil ESPN Intl. Eurochannel
Fox Kids MTV* Mundo Sony
TNT Warner Cultura* E!
SBT* CBS CMT
Cine Show Package = Essencial plus ...
--------------------------------------
HBO HBO2 Cinemax
Especial Package = Essencial plus ...
-------------------------------------
CNN Intl. Discovery Kids Fox Nickelodeon
RAI RTPi Travel Channel MGM Gold
Total Package = All channels listed above
- ----------
(1) Based on Sao Paulo and Rio de Janeiro tiering
* Names in Bold Blue mean Broadcast TV
In accordance with the MMDS legislation, Brazilian off-air channels do not
enjoy "must carry" status, and frequencies occupied by MMDS are being reserved
to future digital distribution of services.
Presently, TVA offers up to 31 analog channels. See below our price list
based on the Sao Paulo and Rio de Janeiro Operations in US$.
Package Channels Price (1)
------- -------- ---------
Essencial 19 25.84
Especial 27 32.41
Cine Show 22 41.66
Total 30 46.42
(1) TVA Sul's packages are cheaper than Sao Paulo's
After the implementation of our tiering strategy, in Sao Paulo, 66.7% of
new subscribers elected the Total Package and 6.4% elected the Cine Show
package, totaling 73.1% of new sales of premium packages.
<PAGE>
Tevecap S.A. Page 19/36
c) C-Band Operation Overview
Today TVA is the only pay TV operator to deliver a digital C-Band signal in
Brazil. TVA has provided C-Band service since 1993. The system serves the whole
Brazilian territory (35.2 million television households) and can reach
approximately four million households that currently use C-Band dishes to
receive broadcast channels. At the end of June 1998, TVA had 71,687 C-Band
subscribers representing a growth of 3.2% as compared to 1Q98. In order to
receive TVA C-Band signal, the subscriber must pay a low US$87 hook-up fee - the
lowest hook-up fee in the Brazilian DTH Market since February 1998 - and a
monthly fee of US$44. In this manner, the C-Band user may upgrade to TVA's
C-Band service, which offers up to 24 Pay TV channels, in addition to local
off-air channels. This segment is expected to have minimal growth in the near
future by virtue of the huge variety of Pay TV technologies and the new upcoming
licenses.
We intend to continue with the subscriber base administrative policies of
disconnecting thirty-day past due subscribers, both individual and MDU, and
working on reconnections through contact with the disconnected subscribers.
These policies have shown good results, expressed by churn reduction of
29%, which can be confirmed by the average monthly churn rate of 1.7% in 2Q98
against 2.4% in 1Q98.
Subscriber Performance
During the second quarter, C-Band's subscriber base increased 3.2% as
compared to the end of the first quarter, almost reaching 72,000 subscribers as
mentioned above.
The following table shows subscriber performance between the quarters ended
March 31, 1998 and June 30, 1998:
C-Band Subsriber Evolution
(Apr-Jun/98)
TVA
Sistema
-------
(+) Paying Subs - March 31, 1998 69,431
(+) New Connects 6,209
(+) Net Transferred from/to other Operations 0
(-) Disconnects 3,953
(=) Paying Subs - June 30, 1998 71,687
2nd Q98 Growth 3.2%
Monthly Churn (a) 1.7%
Annual Churn (b) 20.9%
- ----------
(a) Disconnects / (Initial Balance + New Connects + Net Transferred) / 3
(b) Monthly Churn * 12
<PAGE>
Tevecap S.A. Page 20/36
C-Band Strategy:
TVA's main C-Band competitor abandoned the market. This offers TVA's C-Band
a good opportunity to exploit this segment, which has lower market potential,
but experienced a subscriber base growth and continues to be a profitable
business.
Sales performance is presented in the chart below:
Sales Volume per Month
----------------------
[CHART]
Brazil has certain areas that cannot receive Ku-Band signals due to
limitations of satellite footprints. TVA can serve those areas without
competition and without additional investment. TVA expects to concentrate its
efforts in those areas using its existing decoder inventory. Our C-band
subscriber base is fully addressable.
During the second quarter, C-Band Operations focused on MDU sales (bulk
installation in multiple dwelling units) and reduced hook-up and monthly fees.
MDU sales increased from 10% of total sales in 1Q98 to 32% in 2Q98. The table
below shows the price performance for this Operation:
US$ per new subs
----------------
Hook up fee Monthly fee
----------- -----------
1Q98 2Q98 % Chg. 1Q98 2Q98 % Chg.
---- ---- ------ ---- ---- ------
TVA Sistema $108.22 $60.38 -44.2% $41.87 $35.90 -14.3%
In making any comparison with our major competitor in Brazil, market
analysts should add this subscribers base to DirecTV(TM)'s subscriber base,
since the competitor merged its C-Band and Ku-Band technologies in the same
legal entity.
<PAGE>
Tevecap S.A. Page 21/36
d) TVA Distribuidora - 2Q98 Income Statement
TVA DISTRIBUIDORA S.A
Income Statement
For the Three-Month Periods Ended June 30, 1998;
March 31, 1998 and June 30, 1997
<TABLE>
<CAPTION>
2Q98 1Q98 2Q97
---- ---- ----
2Q98/ 2Q98/
% Net % Net 1Q98 % Net 2Q97
$000 Revenue $000 Revenue % Change $000 Revenue % Change
---- ------- ---- ------- -------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly subscriptions 38,713 104.7% 40,255 99.9% -3.8% 42,243 89.1% -8.4%
Installation (Hook-up fee) 1,104 3.0% 2,654 6.6% -58.4% 8,014 16.9% -86.2%
Advertising
Indirect programming
Other 55 0.1% 390 1.0% -85.9% 670 1.4% -91.8%
Gross revenue 39,872 107.8% 43,299 107.4% -7.9% 50,927 107.4% -21.7%
Revenue taxes (2,889) -7.8% (2,997) -7.4% -3.6% (3,529) -7.4% -18.1%
Net revenue 36,983 100.0% 40,302 100.0% -8.2% 47,398 100.0% -22.0%
Direct operating expenses 19,061 51.5% 20,536 51.0% -7.2% 23,077 48.7% -17.4%
S, G&A expenses 6,729 18.2% 7,788 19.3% -13.6% 13,560 28.6% -50.4%
EBITDA 11,193 30.3% 11,978 29.7% -6.6% 10,761 22.7% 4.0%
</TABLE>
Highlights as of June 30, 1998
o EBITDA reached US$11.2 million in 2Q98, a growth of 4.0% when compared
to the same period of the previous year, and the EBITDA Margin
increased from 29.7% in 1Q98 to 30.3% in 2Q98.
o As mentioned in the table below, Installation Revenue decreased 58.4%
as compared to 1Q98. The main reasons were low volume of MMDS new
subscriptions and reimbursements to C-Band subscribers who paid
approximately US$351 a few months before the Company decided to drop
the price to approximately US$87.
US$ million
-----------
2Q98 1Q98 % Chg.
---- ---- ------
Cable 678 380 78.4%
MMDS 780 1,717 -54.6%
C-Band -354 557 -163.6%
TOTAL 1,104 2,654 -58.4%
o According to its strict disconnection policy, TVA makes a 100%
provision for potential bad debt. However, as soon the Company
realizes that any account receivable becomes non-collectable, TVA
accounts the write-off in the Income Statement. As a consequence of
this policy, the Company has cancelled non-receivable accounts, which
allows TVA to recover taxes payable.
<PAGE>
Tevecap S.A. Page 22/36
US$ million
-----------
2Q98 1Q98 % Chg.
---- ---- ------
Cable 10,419 8,776 18.7%
MMDS 22,627 25,006 -9.5%
C-Band 5,667 6,473 -12.5%
TOTAL 1 38,713 40,255 -3.8%
Write-off 5,134 2,858 79.6%
TOTAL 2 43,847 43,113 1.7%
As shown above, the Company always presents Accounts Receivable (TOTAL 1)
clean-up of any non-collectable bill. Otherwise, the Monthly subscription in the
Income Statement would be inflated, as line TOTAL 2 shows. The 3.8% decrease in
Monthly Subscription during 2Q98 was due to the decision to disconnect
delinquent subscribers.
o Significant reduction of 7.2% in Direct Operating Expenses and 13.6%
in SG&A during 2Q98 was due to the process review implemented with the
support of AT Kearney.
TVA Satelite
a) Ku-Band Operation Overview
DirecTV(TM) was the first digital Ku-Band service offered in Brazil. We
launched this service in 1996 and ended that year with 23,322 subscribers. As of
the end of fiscal year 1997, Ku-Band subscribers increased by 513% to 142,900
and on June 30, 1998, with approximately 176,000 subscribers, the Company
continues to present significant growth. As compared to the 4Q97, the Company
grew 23.2%.
Our major competitor in this technology - Sky - announced that it had
approximately 230 thousand subscribers (188 thousand Ku-Band Subscribers and 42
thousand C-Band subscribers) as of June 30, 1998, after the merger of C-band and
Ku-band technologies. That performance shows that our Company continues to be,
by far, the leader in the DTH segment, with 248,000 subscribers (including
C-Band and Ku-Band technologies).
We expect this segment to continue experiencing consistent growth. With the
launch of Galaxy's VIII-i satellite in the fourth quarter of 1997, we obtained a
significant improvement in the total signal availability, even under the most
adverse weather conditions. The Galaxy VIII-i satellite is providing us with the
capability of offering more than 150 channels in Brazil, with the best
technology and quality available in the country. New channels have been
introduced into the line-up as well as new pay-per-view programming options such
as daily Pay-Per-View. The footprint of GVIII-i allows the use of a
sixty-centimeter dish antenna in almost all of Brazil.
<PAGE>
Tevecap S.A. Page 23/36
The new satellite was launched on December 8, 1997 from the Cape Canaveral
Air Station in Florida. It has replaced the transmission services on Galaxy
III-R, the first satellite launched to offer DirecTV(TM), digital direct-to-home
television service in Latin America. Galaxy VIII-i, with 32 transponders, is the
most powerful satellite built to date by Hughes Space and Communications and is
operated by PanAmSat Corporation. Its payload has been expanded and the expected
operational life of the spacecraft extended. Additionally, as DirecTV's
satellite covers almost all of Brazil, it can also be marketed to those
households in areas where cable or MMDS are not fully developed or not
economically viable alternatives.
Galaxy Brazil, due to the new satellite, increased its line-up and
currently offers 94 video channels (35 pay-per-view) and 48 audio channels, by
far the most complete line-up in the DTH market. The entrance cost for a new
subscriber is US$351 as a hook-up fee plus a monthly fee of US$12 as a decoder
rental to the customer. The US$12 is built-in to the total monthly subscription
fee of US$58.This operation has been funded with a long-term lease finance
facility.
Competition
DirecTV(TM) is one of the leading operators in the Brazilian DTH Ku-Band
market. It has the best quality product and the largest programming offer. SKY
is the other player in the market, which had migrated its C-Band subscribers to
its Ku-Band operation with no charge for equipment and antenna. SKY has been
reducing its hook-up fee in order to match DirecTV(TM) prices, and has
introduced many channels throughout the year. TECSAT is a new player that
launched the service in March 1998. It started the servicse with a limited
number of channels and a promotional programming package.
Subscriber Performance
In the first quarter of 1998, DirecTV(TM) had approximately 176,000 direct
Ku-Band subscribers, an increase of 7.4% over March 1998.
The following table shows subscriber performance between the month ended
March 31, 1998 and June 30, 1998 and previous months:
Ku-Band Subscriber Evolution
(Jan-Jun/98)
<TABLE>
<CAPTION>
2Q98 Apr May Jun Jan-Jun
---- --- --- --- -------
<S> <C> <C> <C> <C> <C>
(+) Paying Subs - Initial Balance 163,826 163,826 163,411 168,930 142,900
(+) New Connects 23,297 6,759 7,814 8,724 46,154
(+) Net Transferred from/to other Operations
(-) Disconnects 11,121 7,174 2,295 1,652 13,052
(=) Paying Subs - Closing Balance 176,002 163,411 168,930 176,002 176,002
2nd Q98 Growth 7.4% -0.3% 3.4% 4.2% 23.2%
Monthly Churn (a) 2.0% 4.2% 1.3% 0.9% 1.2%
Annual Churn (b) 23.8% 50.5% 16.1% 11.2% 13.8%
</TABLE>
- ----------
(a) Disconnects / (Initial Balance + New Connects + Net Transferred) / 3
(b) Monthly Churn * 12
<PAGE>
Tevecap S.A. Page 24/36
Although DirecTV(TM)had an overall disconnection rate of 2% for 2Q98, the
monthly churn rate since May has stabilized at 1.1%, as shown in the table
above. We expect this rate to remain stable for the remainder of 1998.
Increase in MDU sales and Regional Sales Teams increase the 2Q98 performance:
Sales increased 7.3%, from 21,543 new net sales during 1Q98 to 23,114 for
2Q98. The MDU project was implemented in 125 new cities and, due to that, we
hired new direct sales teams in major cities.
Sales management was in-house and a new regional sales structure was
implemented to manage retailers, dealers and a direct sales force. The retail
sales channel is being reinforced by the increase in number of sales points in
shopping centers and hypermarkets.
Sales Volume Per Month
----------------------
[CHART]
During the second quarter, as a result of MDU Project and some short-time
discounts for the first monthly fee for new subscribers, the average monthly fee
decreased.
US$ per new subs
----------------
Hook up fee Monthly fee
----------- -----------
1Q98 2Q98 % Chg. 1Q98 2Q98 % Chg.
---- ---- ------ ---- ---- ------
Galaxy Brasil $325.96 $324.47 -0.5% $50.74 $48.52 -4.4%
<PAGE>
Tevecap S.A. Page 25/36
b) TVA Satelite - 2Q98 Income Statement
TVA SATELITE LTDA.
Income Statement
For the Three-Month Periods Ended June 30, 1998;
March 31, 1998 and June 30, 1997
<TABLE>
<CAPTION>
2Q98 1Q98 2Q97
---- ---- ----
2Q98/ 2Q98/
% Net % Net 1Q98 % Net 2Q97
$000 Revenue $000 Revenue % Change $000 Revenue % Change
---- ------- ---- ------- -------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly subscriptions 25,615 70.0% 22,623 68.9% 13.2% 10,888 43.8% 135.3%
Installation (Hook-up fee) 13,821 37.8% 12,646 38.5% 9.3% 16,265 65.4% -15.0%
Advertising
Indirect programming
Other
Gross revenue 39,436 107.8% 35,269 107.5% 11.8% 27,153 109.2% 45.2%
Revenue taxes (2,852) -7.8% (2,448) -7.5% 16.5% (2,290) -9.2% 24.5%
Net revenue 36,584 100.0% 32,821 100.0% 11.5% 24,863 100.0% 47.1%
Direct operating expenses 22,591 61.8% 22,051 67.2% 2.4% 11,671 46.9% 93.6%
S, G&A expenses 9,552 26.1% 9,062 27.6% 5.4% 12,007 48.3% -20.4%
EBITDA 4,441 12.1% 1,708 5.2% 160.0% 1,185 4.8% 274.8%
</TABLE>
Highlights as of June 30, 1998
o EBITDA increased 160% as compared to 1Q98. As a percentage of Net
Revenue (EBITDA Margin), we moved from 5.2% in 1Q98 to 12.1% in 2Q98.
o Monthly Subscriptions amounted to US$25.6 million in 2Q98, an increase
of 13.2% versus US$22.6 million in 1Q98, as a result of the subscriber
increase and additional Pay-Per-View revenue.
o Installation Revenue also increased 9.3%, from US$12.6 million in 1Q98
to US$13.8 million as a result of sales.
o SG&A, as a percentage of Net Revenue, declined from 27.6% in 1Q98 to
26.1% in 2Q98, and Direct Operating Expenses, also as a percentage,
declined from 67.2% in 1Q98 to 61.8% in 2Q98.
<PAGE>
Tevecap S.A. Page 26/36
TVA Programadora
TVA's programming is distributed by TVA to its owned and operated Multiple
System Operator (MSOs), its affiliated MSOs and to independent operators. By the
end of 2Q98, programming was distributed to almost 1.4 million households. Among
its proprietary channels, TVA Programadora includes ESPN Brasil, HBO Brasil
channels - HBO 1, HBO 2 (multiplexed) and Cinemax - Bravo Brasil and
Eurochannel.
a) HBO Brasil Operation Overview
On June 30, 1998, HBO Brasil had 820,574 subscribers, being distributed by
73 Pay TV operators throughout the Country. This subscriber count is 11.6%
higher than 1Q98, despite HBO's recent move to premium tier in its main
operations. These figures convey the increasing market acceptance of its
superior product.
Thus far, 1998 has been a terrific year for HBO in terms of programming
content. The partner studio providers (Disney, Warner, Sony) have supplied a
better than ever stream of blockbuster movies, including "Jerry Maguire", "The
Scarlet Letter", "Scream", "The Rock", "Ransom", "A Time to Kill" and many
others. The second semester is also promising, featuring the most expensive TV
original production to date, HBO's original "From Earth to the Moon", and
blockbuster movies such as "Men in Black", among others. With this programming
offering, HBO is gradually reinforcing its popularity with subscribers. Recent
marketing surveys indicate that HBO has been increasing its position as the
strongest preference among subscribers and the highest levels of satisfaction
when compared to any other Pay TV service. Over 80% of HBO subscribers mention
the channel as their favorite among all pay TV channels. Its satisfaction levels
are superior than any other channels, including all broadcast networks. This
fact is unique in the Brazilian Pay TV market.
Most Frequently Watched Channels
--------------------------------
[CHART]
Source : DataFolha Market Research, June 1998 results with 2,128 interviews
<PAGE>
Tevecap S.A. Page 27/36
Cinemax continues to show rampant growth of its subscriber base. The
channel is growing in popularity among movie lovers, its target segment, and has
shown a perfect complement to HBO's portfolio of products. The channel is
developing its movie assets through new acquisitions and by the establishment of
output deals.
b) ESPN Brasil Operation Overview
At June 30, 1998, ESPN Brasil had 899,013 subscribers, being distributed by
71 Pay TV operators. The channel continues to reinforce its programming content,
including rights to the most important Brazilian, European and South American
soccer leagues, and other relevant Brazilian sports, such as volleyball and
basketball, plus an exclusive license agreement with ESPN2 for Brazil.
Last June, ESPN Brasil offered its subscribers a 24 hour complete coverage
of the soccer World Cup, which is by far the most relevant sports event of the
year in Brazil. The coverage was followed by extensive promotional support, and
the end results were very encouraging. The round tables promoted by the channel
were subscribers' favorite with a 36.6% rate of preference, ahead of Globo, the
major Brazilian broadcast station, which had a rate of 32.84% under the same
research (Analise & Sintese Marketing Research Institute, June 1998). Extensive
media space was granted to the unique and highly qualified coverage of the
channel, which was surpassed by none in its first World Cup. The successful
formats developed are now being utilized for other important soccer tournaments.
c) TVA Channel Operation Overview
During 2Q98, the recently launched channels CBS Telenoticias, Nickelodeon
and Discovery Kids completed their process of delivering 24 hours a day of
programming, entirely in the Portuguese language. This upgrade is of paramount
importance to Brazilian viewers, especially for children.
Tiering packages introduced on November 1st, 1997, have proven to be a
powerful sales tool as well as a churn controlling aid. Only 10% of the existing
base as of the launch date converted to less expensive packages. With the
financial distress caused by unfavorable economic conditions, the great majority
of this group would otherwise drop the service. Continuing to be customers in a
lower level platform, they can upgrade once their financial conditions improve.
Tiering has also helped with the gaining of new subscribers: 35% of the new
sales from November 1, 1997 have been to newly developed packages, which are an
opportunity for future upgrades, especially for C social classes, which had
little or no experience with the product to date.
<PAGE>
Tevecap S.A. Page 28/36
Subscriber Performance
In 2Q98, TVA Programadora had approximately 712,000 indirect subscribers,
an increase of 5.8% over March 31, 1998, as described in the following table:
TVA Programadora Subscriber Evolution
(Apr-Jun/98)
Indirects
---------
(+) Paying Subs - March 31, 1998 672,830
(+) New Connects 68,843
(+) Net Transferred from/to other Operations
(-) Disconnects 29,994
(=) Paying Subs - June 30, 1998 711,679
2nd Q98 Growth 5.8%
Monthly Churn (a) 1.3%
Annual Churn (b) 16.2%
- ----------
(a) Disconnects / (Initial Balance + New Connects + Net Transferred) / 3
(b) Monthly Churn * 12
Aggressive campaign helps indirect operators:
Independent operators enjoyed growth of 5.8% during 2Q98 (against 0.5% in
the first quarter) as a result of our aggressive campaign targeting independent
operators.
<PAGE>
Tevecap S.A. Page 29/36
d) TVA Programadora - 2Q98 Income Statement
TVA PROGRAMADORA LTDA.
Income Statement
For the Three-Month Periods Ended June 30, 1998;
March 31, 1998 and June 30, 1997
<TABLE>
<CAPTION>
2Q98 1Q98 2Q97
---- ---- ----
2Q98/ 2Q98/
% Net % Net 1Q98 % Net 2Q97
$000 Revenue $000 Revenue % Change $000 Revenue % Change
---- ------- ---- ------- -------- ---- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly subscriptions
Installation (Hook-up fee)
Advertising 1,265 17.6% 1,203 14.0% 5.2% 1,136 11.0% 11.4%
Indirect programming 4,527 62.9% 5,729 66.5% -21.0% 6,459 62.3% -29.9%
Other 1,776 24.7% 2,196 25.5% -19.1% 3,169 30.6% -44.0%
Gross revenue 7,568 105.2% 9,128 106.0% -17.1% 10,764 103.8% -29.7%
Revenue taxes (376) -5.2% (514) -6.0% -26.8% (398) -3.8% -5.5%
Net revenue 7,192 100.0% 8,614 100.0% -16.5% 10,366 100.0% -30.6%
Direct operating expenses 6,512 90.5% 6,963 80.8% -6.5% 8,539 82.4% -23.7%
S, G&A expenses 1,794 24.9% 2,009 23.3% -10.7% 2,244 21.6% -20.1%
EBITDA (1,114) -15.5% (358) -4.2% 211.2% (417) -4.0% 167.1%
</TABLE>
Highlights as of June 30, 1998
o Two major factors influenced the EBITDA, as follows:
i) Indirect programming - We negotiated with our programming
suppliers the ability to directly bill our affiliates (Canbras
TVA and TV Filme), to avoid double taxation and reduce
programming costs for our affiliates. This lowered by US$1.2
million the Indirect programming revenue.
ii) Direct Operating Expenses - During 2Q98, decreased by US$1.2
million for the reason mentioned above, but this decrease was
partially offset by (among other factors) additional costs
related to improvement in our operated and owned channels.
<PAGE>
Tevecap S.A. Page 30/36
4. Tevecap's Consolidated 2Q98 Results
-----------------------------------
a) Consolidated Results
Monthly Subscription Revenue
----------------------------
2Q98 1Q98 2Q98
---- ---- ----
US$ million 64,328 62,878 53,131
% of Gross Revenue 73.9% 71.4% 59.7%
As shown above, the Monthly Subscription Revenue continues to be the most
important portion of revenue in light of our solid and consistent subscriber
base. For 2Q98 we experienced a 2.3% growth rate despite the adverse Brazilian
economic situation as already mentioned in the previous pages.
The Company has a provision for bad debt equivalent to 100% of the
potential subscriber cancellation based on historical data.
Installation Revenue
--------------------
2Q98 1Q98 2Q98
---- ---- ----
US$ million 14,925 15,300 24,279
% of Gross Revenue 17.1% 17.4% 27.3%
During 2Q98, Installation Revenue decreased 2.5% as compared to 1Q98. The
decrease in TVA Distribuidora, due to low sales level in MMDS and C-Band price
reduction, was partially off set by the 9.3% increase of TVA Satelite's
installation revenue.
The chart below shows the performance of sales in 2Q98:
2Q98 1Q98 % Chg.
---- ---- ------
MMDS 11,281 24,382 -53.7%
Cable 14,946 15,452 -3.3%
C Band 7,612 5,685 33.9%
Ku Band 23,114 21,543 7.3%
------ ------ ---
TOTAL O&O 56,953 67,062 -15.1%
Ventures 5,260 4,344 21.1%
----- ----- ----
Total 62,212 71,406 -12.9%
<PAGE>
Tevecap S.A. Page 31/36
Indirect Programming Revenue
- ----------------------------
2Q98 1Q98 2Q97
---- ---- ----
US$ million 4,527 5,729 6,459
% of Gross Revenue 5.2% 6.5% 7.3%
The decrease of Indirect Programming Revenue is due to a change in the
billing process between the programming suppliers and our affiliates.
Direct Operating Expenses
- -------------------------
2Q98 1Q98 2Q97
---- ---- ----
(+) Direct Operating Expenses 21,205 23,134 24,241
(excluding programming)
% of Net Revenue 26.2% 28.2% 29.3%
(+) Programming 26,959 26,416 19,046
% of Net Revenue 33.3% 32.2% 23.0%
(=) Direct Operating Expenses 48,164 49,550 43,287
% of Net Revenue 59.5% 60.3% 52.3%
Overall, the Direct Operating Expenses, as a percentage of Net Revenue
continue under control and declining, due to the intensive search for cost
reductions as previously mentioned when we made reference to AT Kearney process
review.
Selling, General and Administrative expenses
- --------------------------------------------
2Q98 1Q98 2Q97
---- ---- ----
Selling Expenses 5,117 8,038 8,196
% of Net Revenue 6.3% 9.8% 9.9%
Allowance for doubtful accounts 2,062 2,691 2,170
% of Net Revenue 2.5% 3.3% 2.6%
G&A 16,491 14,591 21,152
% of Net Revenue 20.4% 17.8% 25.6%
SG&A 23,670 25,321 31,518
% of Net Revenue 29.2% 30.8% 38.1%
During 2Q98, SG&A decreased by 6.5% over 1Q98. Due to the sales force
in-housing process during 2Q98, some costs that used to be considered selling
expenses were accounted as G&A. This explains why, as a percentage of sales,
selling expenses decreased and G&A increased when compared between 1Q98 and
2Q98. Tevecap maintained its policy to make provisions for 100% of bad debt and
for potential subscriber cancellation and on June 30, 1998, the Company had a
provision of US$15.7 million for doubtful accounts.
<PAGE>
Tevecap S.A. Page 32/36
EBITDA
- ------
2Q98 1Q98 2Q97
---- ---- ----
US$ million 9,138 7,290 7,914
% of Net Revenue 11.3% 8.9% 9.6%
EBITDA Margin in 2Q98 as a percentage of Net Revenue increased from 8.9% in
1Q98 to 11.3% in 2Q98 as a consequence of the performance mentioned previously
in this report. On an operation-per-operation basis, TVA Distribuidora
experienced a growing and consistent EBITDA Margin as shown below:
2Q98 1Q98 2Q97
---- ---- ----
TVA Distribuidora 30.3% 29.7% 22.7%
TVA Programadora -15.5% -4.2% -4.0%
TVA Satelite 12.1% 5.2% 4.8%
Operating Loss
--------------
During 2Q98 Operating Loss was US$12.3 million, the same as the US$12.3
million loss reported for the 1Q98.
Interest Income/Expense
-----------------------
Net Interest Income/Expense was US$17.1 million for 2Q98, a 17% increase
when compared with US$14.5 million reported for 1Q98. The main reason for this
is an increase in debt, resulting from investments partially financed.
Equity losses of affiliates
---------------------------
This item amounted to a loss of US$3.3 million in 2Q98 versus US$4.8
million in 1Q98. This loss came from ESPN Brasil (US$2.3 million), HBO Brasil
(US$0.8 million) and Canbras TVA (US$0.3).
b) Financial Situation
The following table sets forth Tevecap's Debt breakdown and Capitalization
for 2Q98, 1Q98 and 2Q97:
2Q98 1Q98 2Q97
---- ---- ----
Short Term Debt 69,317 71,552 36,594
Long Term Debt 385,174 349,022 327,171
Total Debt 454,491 420,574 363,765
Shareholders' Equity 37,518 70,578 47,027
Capitalization 492,009 491,152 410,792
<PAGE>
Tevecap S.A. Page 33/36
During 2Q98, Total Debt increased US$33.9 million, which means that Tevecap
accrued US$17.1 million of interest expense and increased net new debt by
US$16.9 million used to finance our expansion.
The following table shows the debt breakdown for the end of 2Q98, and the
subsequent graph shows the debt cash flow for next years.
Debt balance as of June 30, 1998 (US$000)
-----------------------------------------
<TABLE>
<CAPTION>
High Yield Trade Box Loans from
12 5/8 % py Eximbank Financing Finame Leasing Abril Total
------------- -------- --------- ------ ------- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Short Term 3,008 6,093 49,938 298 9,980 69,317
Long Term 250,000 14,976 2,836 28,493 88,869 385,174
TOTAL 253,008 21,069 52,774 298 38,473 88,869 454,491
Remaining Term (years) 6.5 3.9 1.1 2.8 4.0 4.6
</TABLE>
Debt Cash Flow (US$MM)
----------------------
[CHART]
<PAGE>
Tevecap S.A. Page 34/36
c) Consolidated Balance Sheet
TEVECAP S.A.
Consolidated Balance Sheet
For the Periods Ended June 30, 1998;
March 31, 1998 and June 30, 1997 (in
thousands of US dollars)
<TABLE>
<CAPTION>
Jun 30, Mar 31, June 31,
1998 1998 % Chg. 1997 % Chg.
---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents 1,270 16,378 -92% 32,381 -96%
Accounts receivable, net 46,999 43,103 9% 47,759 -2%
Inventories 19,106 23,639 -19% 15,582 23%
Film exhibition rights 1,551 1,559 -1% 606 156%
Prepaid and other assets 15,228 11,139 37% 10,457 46%
Other accounts receivable 13,967 14,254 -2% 7,288 92%
------ ------ - ----- --
Total current assets 98,121 110,071 -11% 114,073 -14%
------ ------- -- ------- --
Property, plant and equipment 454,502 434,038 5% 337,845 35%
Investments
- - Equity affiliates 2,992 5,229 -43% 7,682 -61%
- - Cost basis investees 44,905 43,705 3% 27,734 62%
- - Concessions, net 12,922 13,349 -3% 16,276 -21%
Loans to related companies 29,387 19,311 52% 20,277 45%
Prepaid expenses 6,985 7,351 -5% 8,576 -19%
Other 2,253 2,683 -16% 2,193 3%
----- ----- -- ----- -
Total assets 652,067 635,737 3% 534,656 22%
======= ======= = ======= ==
Short-term bank loans 69,317 71,552 -3% 36,594 89%
Film suppliers 30,167 26,017 16% 15,536 94%
Other suppliers 74,806 64,940 15% 47,271 58%
Taxes payable other than income taxes 14,679 13,761 7% 9,369 57%
Accrued payroll and related liabilities 7,057 6,282 12% 7,891 -11%
Advance payments received from subscribers 3,110 3,045 2% 5,850 -47%
Other accounts payable 8,638 8,126 6% 13,340 -35%
----- ----- - ------ --
Total current liabilities 207,774 193,723 7% 135,851 53%
------- ------- - ------- --
Long term bank loans 296,305 303,198 -2% 300,718 -1%
Loans from related companies 88,869 45,824 94% 26,453 236%
Loans from shareholders 3,802 -100%
Provision for claims 7,285 6,643 10% 5,089 43%
Liability to fund joint
venture and equity investee 51 561 -91%
Deferred hook up fee revenue 10,281 11,190 -8% 13,754 -25%
------ ------ - ------ --
Total long-term liabilities 402,791 366,855 10% 350,377 15%
------- ------- -- ------- --
Minority interest 3,984 4,581 -13% 1,401 184%
Paid-in-capital 387,803 387,803 0% 287,962 35%
Accumulated deficit (350,285) (317,225) 10% (240,935) 45%
-------- -------- -- -------- --
Total shareholders' equity 37,518 70,578 -47% 47,027 -20%
------ ------ -- ------ --
Total liabilities and shareholders' equity 652,067 635,737 3% 534,656 22%
======= ======= = ======= ==
</TABLE>
<PAGE>
Tevecap S.A. Page 35/36
d) Tevecap - 2Q98 Income Statement
TEVECAP S.A.
Income Statement
For the Three-Month Periods Ended June 30, 1998;
March 31, 1998 and June 30, 1997
<TABLE>
<CAPTION>
2Q98 1Q98 2Q97
---- ---- ----
2Q98/ 2Q98/
1Q98 2Q97
% Net % Net % % Net %
$000 Revenue $000 Revenue Change $000 Revenue Change
---- ------- ---- ------- ------ ---- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Monthly subscriptions 64,328 79.4% 62,878 76.5% 2.3% 53,131 64.2% 21.1%
Installation (Hook-up fee) 14,925 18.4% 15,300 18.6% -2.5% 24,279 29.4% -38.5%
Advertising 1,265 1.6% 1,203 1.5% 5.2% 1,136 1.4% 11.4%
Indirect programming 4,527 5.6% 5,729 7.0% -21.0% 6,459 7.8% -29.9%
Other 2,048 2.5% 3,015 3.7% -32.1% 3,936 4.8% -48.0%
Gross revenue 87,093 107.6% 88,125 107.3% -1.2% 88,941 107.5% -2.1%
Revenue taxes (6,121) -7.6% (5,964) -7.3% 2.6% (6,222) -7.5% -1.6%
Net revenue 80,972 100.0% 82,161 100.0% -1.4% 82,719 100.0% -2.1%
Direct operating expenses 48,164 59.5% 49,550 60.3% -2.8% 43,287 52.3% 11.3%
S, G&A expenses 23,670 29.2% 25,321 30.8% -6.5% 31,518 38.1% -24.9%
EBITDA 9,138 11.3% 7,290 8.9% 25.3% 7,914 9.6% 15.5%
Allowance for
obsolescence of material 49 0.1% 999 1.2% -95.1%
Depreciation and
amortization 21,365 26.4% 19,551 23.8% 9.3% 12,547 15.2% 70.3%
Operating loss (12,276) -15.2% (12,261) -14.9% 0.1% (5,632) -6.8% 118.0%
Interest Income 771 1.0% 2,767 3.4% -72.1% 1,357 1.6% -43.2%
Interest expenses (17,830) -22.0% (17,297) -21.1% 3.1% (13,644) -16.5% 30.7%
Translation (loss) gain 229 0.3% (636) -0.8% -136.0% (469) -0.6% -148.8%
Equity in losses of affiliates (3,322) -4.1% (4,761) -5.8% -30.2% (3,239) -3.9% 2.6%
Other nonoperating
(expenses) income, net (1,230) -1.5% 731 0.9% -268.3% 528 0.6% -333.0%
Loss before income taxes
and minority interest (33,658) -41.6% (31,457) -38.3% 7.0% (21,099) -25.5% 59.5%
Income taxes
Minority interest 598 0.7% 222 0.3% 169.4% 200 0.2% 199.0%
Net income (loss) (33,060) -40.8% (31,235) -38.0% 5.8% (20,899) -25.3% 58.2%
</TABLE>
<PAGE>
Tevecap S.A. Page 36/36
e) Tevecap - 2Q98 Statement of Cash Flow
TEVECAP S.A.
Statement of Cash Flow
For the Three-Month Periods Ended June 30, 1998;
March 31, 1998 and June 30, 1997 (in thousands of U.S. dollars)
<TABLE>
<CAPTION>
2Q 1Q 2Q
Cash flows from operating activities: 1998 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net loss (33,060) (31,235) (20,899)
Adjustment to reconcile net loss to net cash
(used in) provided by operating activities:
Depreciation 20,938 19,125 12,068
Amortization 427 426 479
Allowance for doubtful accounts 2,062 2,691 2,170
Allowance for obsolescence 49 998
Provision for claims 642 736 542
Minority interest (597) (221) (201)
Equity in losses (earnings) of affiliates 3,321 4,761 3,236
Changes in operating assets and liabilities:
Film exhibition rights 8 (268) 250
Accounts receivable (5,958) 1,208 (14,001)
Prepaid and other assets (3,723) 9,586 1,910
Other accounts receivable 286 (7,573) (11,421)
Accrued interest 11,523 3,266 8,924
Inventories 4,484 (49) 326
Legal deposits 430
Suppliers 14,016 (1,976) (133)
Taxes payable other than income taxes 918 924 526
Accrued payroll and related liabilities 775 (307) 729
Advances received from subscribers 65 (1,341) (453)
Deferred hook up fee Revenue (909) (908) 4,530
Other accounts payable 512 3,283 3,787
Net Cash (used in) provided
by operating activities 16,209 2,128 (6,633)
Cash flows from investing activities:
Business acquisition
Purchase of fixed assets (41,402) (31,191) (89,628)
Loans to affiliated companies (10,232) (189) (3,634)
Cash received on loans to affiliated companies 344 439
Investments in equity and cost investments (2,234) (11,625) (4,851)
Net cash used in investing activities: (53,524) (42,566) (98,113)
Cash flows from financing activities:
Loans from Banks 4,530 15,081 67,262
Capital contributions 99,847
Loans from shareholders 574
Loans from affiliated companies 45,019 38,651 23,378
Repayments of loans from affiliated companies (4,615) (90,073)
Repayments of loans from banks (22,727) (7,714) (19,153)
Net cash provided by financing activities 22,207 55,792 72,061
Net (decrease) increase in cash and cash equivalents (15,108) 15,354 (32,685)
Cash and cash equivalents at beginning of the period 16,378 1,024 65,066
Cash and cash equivalents at end of the period 1,270 16,378 32,381
</TABLE>
