SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to _____________
ITSA LTD.
(Exact name of Registrant as Specified in its Charter)
COMMISSION FILE NUMBER: 0-28670
CAYMAN ISLANDS NOT APPLICABLE
(State or Other Jurisdiction
of Incorporation or Organization) (I.R.S. Employer Identification Number)
C/O ITSA-INTERCONTINENTAL TELECOMUNICACOES LTDA.
SCS, QUADRA 07-BL.A
ED. EXECUTIVE TOWER, SALA 601
70.300-911 BRASILIA-DF
BRAZIL
(Address, Including Zip Code, of Principal Executive Offices)
011-55-61-314-9908
(Registrant's Telephone Number, Including Area Code)
TV FILME, INC.*
(Former Name, if Changed Since Last Report)
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.
[ ] Yes [ X ] 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. [ X ] Yes [ ] No*
*Registrant became subject to filing requirements pursuant to Rule 12g-3
under the Securities Exchange Act of 1934 on July 21, 2000, when it became the
successor in interest to TV Filme, Inc., a Delaware corporation.
Indicate the number of shares outstanding of each of the issuer's classes
of Common Stock, as of the latest practicable date.
CLASS OUTSTANDING
Ordinary Shares, par value $0.01 10,000,000 shares
per share. as of August 11, 2000
<PAGE>
TV FILME, INC. (PREDECESSOR TO ITSA LTD.)
INDEX
PART I. FINANCIAL INFORMATION PAGE NO.
ITEM 1.Financial Statements
Consolidated Balance Sheets as of December 31, 1999
and June 30, 2000 (Unaudited)................................. 2
Unaudited Consolidated Statements of Operations for the Six
Months Ended June 30, 1999 and the Six Months Ended
June 30, 2000................................................. 3
Unaudited Consolidated Statement of Changes in Stockholders'
Equity at June 30, 2000....................................... 4
Unaudited Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 and June 30, 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.... 12
PART II.OTHER INFORMATION
ITEM 1.Legal Proceedings............................................. 13
ITEM 2.Changes in Securities and Use of Proceeds..................... 13
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........................................................... 15
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
TV FILME, INC. (PREDECESSOR
TO ITSA LTD.) AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
1999 2000
-------------- --------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current assets:
Cash and cash equivalents............ $ 42,175 $36,533
Accounts receivable, net............. 2,474 1,448
Supplies............................. 2,750 3,016
Prepaid expenses and other current assets 5,700 6,849
-------------- --------------
Total current assets............... 53,099 47,846
Property, plant and equipment, net...... 25,005 22,320
Debt issuance costs, net................ 0 0
Other assets............................ 5,218 7,170
-------------- --------------
Total assets....................... $ 83,322 $77,336
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 6,168 $ 8,448
Payroll and other benefits payable... 1,577 1,833
Accrued interest payable............. 18,776 27,538
Accrued liabilities and taxes payable 7,543 8,819
Senior Notes in default - Note 4..... 140,000 140,000
-------------- --------------
Total current liabilities.......... 174,064 186,638
Deferred installation fees.............. 900 507
Capital deficiency:
Cumulative translation adjustment.... (7,182) (6,387)
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) (149,187)
-------------- --------------
Total capital deficiency........... (91,642) (109,809)
-------------- --------------
Total liabilities and capital
deficiency.................... $ 83,322 $ 77,336
============== ==============
See accompanying notes.
2
<PAGE>
TV FILME, INC. (PREDECESSOR
TO ITSA LTD.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- -------------------
1999 2000 1999 2000
----------- --------- -------- --------
<S> <C> <C> <C> <C>
Revenues.............................. $ 6,812 $ 5,675 $13,388 $11,585
Operating costs and expenses:
System operating - Note 2........... 3,075 2,925 6,304 5,524
Selling, general and administrative. 4,694 6,702 8,300 10,720
Depreciation and amortization....... 3,728 2,869 7,760 5,964
----------- --------- -------- --------
Total operating costs and expenses. 11,497 12,496 22,364 22,208
----------- --------- -------- --------
Operating loss..................... (4,685) (6,821) (8,976) (10,623)
Other (expense) income:
Interest and other expense - Note 5. (4,761) (4,679) (10,633) (10,473)
Interest income..................... 1,788 1,387 3,931 2,769
----------- --------- -------- --------
Interest (expense) income, net...... (2,973) (3,292) (6,702) (7,704)
Monetary loss....................... (2,414) (2,824) (29,408) (635)
----------- --------- -------- --------
Total other (expense) income....... (5,387) (6,116) (36,110) (8,339)
----------- --------- -------- --------
Net loss.............................. $ (10,072) $(12,937) $(45,086) $(18,962)
=========== ========= ======== ========
Net loss per share, basic and diluted. $ (0.93) $ (1.20) $ (4.16) $ (1.75)
=========== ========= ======== ========
Weighted average number of shares of
common stock and common stock
equivalents outstanding............. 10,825 10,825 10,825 10,825
=========== ========= ======== ========
</TABLE>
See accompanying notes.
3
<PAGE>
TV FILME, INC. (PREDECESSOR TO
ITSA LTD.) AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
ADDITIONAL OTHER
PAID-IN COMPREHENSIVE ACCUMULATED
COMMON STOCK CAPITAL LOSS DEFICIT TOTAL
SHARES PAR VALUE
(IN THOUSANDS, EXCEPT SHARES)
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1999 10,824,594 $108 $45,657 $(7,182) $(130,225) $ (91,642)
Cumulative translation
adjustment.............. -- -- -- 795 -- 795
Net loss for the period...... -- -- -- -- (18,962) (18,962)
---------- ---- ------- ------- --------- ----------
BALANCE AT JUNE 30, 2000..... 10,824,594 $108 $45,657 $(6,387) ($149,187) $(109,809)
========== ==== ======= ======= ========== ==========
</TABLE>
See accompanying notes.
4
<PAGE>
TV FILME, INC. (PREDECESSOR TO
ITSA LTD.) AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1999 2000
---- ----
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss............................ $(45,086) $(18,962)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization.... 7,760 5,964
Provision for losses on accounts
receivable................... 631 247
Amortization of debt issuance
costs.......................... (1,535) 0
Increase (decrease) in deferred
installation fees............ (113) (420)
Monetary loss (gain)............. 25,195 (635)
Changes in operating assets and
liabilities:
Increase (decrease) in accounts
receivable................... (920) 809
Increase in supplies............. (167) (246)
Increase in prepaid expenses and
other current assets......... (1,809) (1,137)
Decrease (increase) in other
assets....................... 746 (1,920)
Increase in accounts payable..... 1,722 2,261
Decrease (increase) in payroll
and other benefits payable... (634) 248
Increase in accrued interest
payable...................... 9,207 8,762
Decrease (increase) in accrued
liabilities and taxes
payable.................... (131) 1,271
--------- --------
Net cash used for operating
activities........................ (5,134) (3,759)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions:
Property, plant and equipment... (1,731) (3,048)
-------- --------
Net cash used in investing
activities......................... (1,731) (3,048)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in payables to affiliates... 0 0
-------- --------
Net cash used for financing
activities......................... 0 0
-------- --------
Effect of exchange rate changes on
cash............................... (7,556) 1,165
-------- --------
Net change in cash and cash
equivalents........................ (14,421) (5,642)
-------- --------
Cash and cash equivalents at
beginning of period........... 57,492 42,175
-------- --------
Cash and cash equivalents at end of
period........................ $ 43,071 $ 36,533
======== ========
See accompanying notes.
5
<PAGE>
TV FILME, INC. (PREDECESSOR TO
ITSA LTD.) AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. COMPANY BACKGROUND
On July 21, 2000, ITSA Ltd., a Cayman Islands company, became the
successor to TV Filme, Inc., a Delaware corporation, following the successful
completion of a debt restructuring pursuant to a plan of reorganization of TV
Filme, Inc. under Chapter 11 of the United States Bankruptcy Code. Unless
otherwise indicated, ITSA Ltd., the successor company to TV Filme, Inc., will
hereinafter be referred to as the "Company," and TV Filme, Inc., the predecessor
company to ITSA Ltd., will hereinafter be referred to as "TV Filme."
The Company develops, owns and operates broadband wireless
telecommunications systems in markets in Brazil, offering video, high-speed
Internet and data communications services. Through it subsidiaries, the Company
has licenses in the cities of Brasilia, Goiania, Belem, Campina Grande, Caruaru,
Porto Velho, Presidente Prudente, Bauru, Franca, Uberaba, Belo Horizonte and
Vitoria, covering over 3 million households and approximately 13 million people.
As a result of the economic slowdown in Brazil in years 1998 and 1999, and
the devaluation of the Brazilian currency (the REAL) in 1999, among other
factors, TV Filme selected a financial advisor, BT Alex. Brown (now Deutsche
Bank), to assist in evaluating strategic alternatives for the restructuring of
its long term debt, represented by the 12-7/8% Senior Notes due 2004 (the
"12-7/8% Senior Notes"). On August 13, 1999, TV Filme reached an agreement in
principle with a committee representing holders of TV Filme's outstanding
12-7/8% Senior Notes. This agreement was effected on July 21, 2000 pursuant to a
pre-arranged plan of reorganization which received court approval under Chapter
11 of the U.S. Bankruptcy Code on April 10, 2000. In accordance with the terms
of the plan of reorganization, the 12-7/8% Senior Noteholders received a $25
million cash payment and their existing notes were converted into (i) Senior
Secured Notes in the aggregate principal amount of $35 million, due 2004, at an
interest rate of 12% per annum (interest payable-in-kind at the Company's option
through its first four interest payments), and (ii) 80% of the new common equity
of the reorganized Company. Current management received 15% of the new common
equity, and the existing common stockholders of TV Filme received 5% of the new
common equity of the reorganized Company. All outstanding stock options were
cancelled. ITSA Ltd., (the reorganized Company) is a newly-formed Cayman Islands
holding company and is the successor issuer to TV Filme, Inc. pursuant to Rule
12g-3 under the Securities Exchange Act. The 12% Senior Secured Notes were
issued by ITSA-Intercontinental Telecommunicacoes Ltda., a wholly-owned
subsidiary of the Company.
On January 26, 2000, as part of the restructuring process, TV Filme 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 TV Filme's
12-7/8% Senior Notes and holders of TV Filme's common stock voted in favor of
the restructuring set forth in the Plan. Effectuation of the Plan was completed
on July 21, 2000, following support from ANATEL (the Brazilian
Telecommunications Agency) and the Central Bank of Brazil. 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
reorganization.
B. METHOD OF PRESENTATION
The consolidated financial statements of TV Filme were prepared in
accordance with generally accepted accounting principles in the United States in
6
<PAGE>
U.S. dollars. Effective January 1, 1998, TV Filme determined that Brazil ceased
to be a highly inflationary economy under Statement of Financial Accounting
Standards No. 52. Accordingly, as of January 1, 1998, TV Filme 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.
C. ALLOWANCE FOR DOUBTFUL ACCOUNTS
TV Filme had an allowance for doubtful accounts of $651,000 at December
31, 1999 and $645,000 at June 30, 2000. Charges to the allowance during the six
months ended June 30, 2000 were $490,000.
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 six months ended June 30, 1999 and
2000 were approximately $3,999,000 and $1,615,000, respectively.
3. STOCK OPTIONS
All outstanding stock options of TV Filme have been cancelled in
conjunction with TV Filme's restructuring process under Chapter 11 of the U.S.
Bankruptcy Code (see Note 1). The Company currently has no stock option plan in
place.
4. LONG-TERM DEBT
On December 20, 1996, TV Filme issued $140 million principal amount of
12-7/8% Senior Notes due December 15, 2004. The proceeds of the 12-7/8% Senior
Notes were loaned to ITSA-Intercontinental Telecomunicacoes S.A. and its
subsidiaries ("ITSA") and evidenced by an intercompany note. Interest was
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. Cash received
from scheduled interest and principal payments on such government securities was
in an amount sufficient to provide for payment in full when due of the first
four scheduled interest payments on the 12-7/8% 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).
Under the provisions of the 12-7/8% Senior Note indenture, TV Filme was
required to make semi-annual interest payments on June 15 and December 15 of
each year to the noteholders. On June 15, 1999, TV Filme did not 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. As a result of this event of default, TV Filme
classified the 12-7/8% Senior Notes as a current liability as of June 30, 2000,
in the accompanying balance sheet
As discussed in Note 1, all outstanding 12-7/8% Senior Notes were
exchanged in conjunction with TV Filme's reorganization for a combination of
cash, 12% Senior Secured Notes of ITSA-Intercontinental Telecomunicacoes, Inc.
(the Company's Brazilian subsidiary) and new common equity of the Company. The
12-7/8% Senior Notes were cancelled upon surrender.
5. FOREIGN EXCHANGE CONTRACTS
At December 31, 1999 and June 30, 2000, TV Filme had $28.0 million and
$25.0 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 June 30, 2000 expired in July 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."
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND
This Form 10-Q contains forward-looking statements, including pro forma
information, which involve risks and uncertainties. The Company's actual results
may differ significantly from the results discussed in these 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 TV Filme's financial statements are presented pursuant to United
States generally accepted accounting principles in U.S. dollars, the Company's
transactions are consummated in both REAIS and U.S. dollars. Inflation and
devaluation in Brazil have had, and are currently having, substantial effects on
the Company's results of operations and financial condition. See "-- Inflation
and Exchange Rates."
As a result of the changes in exchange rates during the periods presented,
the period-to-period comparisons of TV Filme's results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance of the Company.
<TABLE>
Three Months Ended June 30
----------------------------------------------
1999 % OF REVENUE 2000 % OF REVENUE
------ ------------ ---- ------------
(In thousands, except subscriber, per share and share data)
<S> <C> <C> <C> <C>
Revenue.............................. $ 6,812 100% $ 5,675 100%
Operating costs and expenses:
System operating................ 3,075 45% 2,925 52%
Selling, general and administrative 4,694 69% 6,702 118%
Depreciation and amortization...... 3,728 55% 2,869 51%
------ ------ ------ ----
Total operating costs and expenses 11,497 169% 12,496 220%
------ ------ ------ ----
Operating loss................... (4,685) (69%) (6,821) (120%)
Other income (expense):
Interest and other expense........ (4,761) (70%) (4,679) (82%)
Interest income.................. 1,788 26% 1,387 24%
------ ------ ------ ----
Interest income (expense), net.... (2,973) (44%) (3,292) (58%)
Monetary loss..................... (2,414) (35%) (2,824) (50%)
------- ------ -------- -----
Total other income (expense).... (5,387) (79%) (6,116) (108%)
------- ------ -------- ------
Net loss............................ $(10,072) (148%) $(12,937) (228%)
========= ======== ======== =======
Net loss per share.................. $ (0.93) (1.20)
========= ========
Weighted average number of shares of
Common stock and common stock
Equivalents....................... 10,825 10,825
========= ========
Other Data:
EBITDA (a)........................ $ (957) $(3,952)
========= ========
Number of subscribers at end of
period ........................... 74,271 73,637
========= ========
Number of operating systems at end
of period......................... 4 4
========= ========
Exchange rate (R $: US $) at end
of period......................... 1.7695:1 1.800:1
========= ========
</TABLE>
8
<PAGE>
<TABLE>
Six Months Ended June 30
-------------------------------------------
1999 % OF REVENUE 2000 % OF REVENUE
-------- ------------ ---- ------------
(In thousands, except subscriber, per share and share data)
<S> <C> <C> <C> <C>
Revenue................................. $ 13,388 100% $ 11,585 100%
Operating costs and expenses:
System operating..................... 6,304 47% 5,524 48%
Selling, general and administrative.. 8,300 62% 10,720 93%
Depreciation and amortization........ 7,760 58% 5,964 51%
------- ------ ------- -----
Total operating costs and expenses.. 22,364 167% 22,208 192%
------- ------ ------- -----
Operating loss...................... (8,976) (68%) (10,623) (9%)
Other income (expense):
Interest and other expense............ (10,633) (79%) (10,473) (90%)
Interest and other income............. 3,931 29% 2,769 24%
------- ------ ------- -----
Interest income (expense), net........ (6,702) (50%) (7,704) (66%)
Monetary loss......................... (29,408) (220%) (635) (5%)
-------- ------- ------- -----
Total other income (expense), net (36,110) (270%) (8,339) (72%)
------- ------- ------- -----
Net loss................................ $(45,086) (337%) $(18,962) (164%)
======== ====== ======== ======
Net loss per share...................... $ (4.16) $ (1.75)
======== ========
Weighted average number of shares of
common stock and common stock
equivalents.......................... 10,825 10,825
======== ========
Other Data:
EBITDA (a)........................... $ (1,216) $ (4,659)
========= ========
Number of subscribers at end of
period.............................. 74,271 73,637
========= ========
Number of operating systems at
end of period....................... 4 4
========= ========
Exchange rate (R $: US $) at end
of period........................... 1.7695:1 1.8000:1
========= ========
</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. For the three months ended June 30, 2000 compared to the three
months ended June 30, 1999, net loss increased to $(12.9) million versus $(10.1)
million, or 28%, primarily due to the restructuring costs associated with TV
Filme's restructuring. Net loss for the six months ended June 30, 2000 decreased
from $(45.1) million for the six months ended June 30, 1999 to $(19.0) million,
or 58%, primarily due to recovery from a monetary loss associated with TV
Filme's net dollar-denominated liability position caused by a 51% devaluation of
the REAL against the U.S. dollar in 1999, offset by the restructuring costs
associated with TV Filme's restructuring.
REVENUES. For the three months ended June 30, 2000 compared to the three
months ended June 30, 1999, revenues decreased by 17%, primarily due to
converting from a post-paid to a pre-paid subscription model in two of the
Company's markets, Brasilia and Belem. Revenues for the six months ended June
30, 2000 decreased by 13% compared to the six months ended June 30, 1999, due
primarily to converting from a post-paid to a pre-paid subscription model in two
of the Company's markets, Brasilia and Belem.
SYSTEM OPERATING EXPENSES. For the three months ended June 30, 2000
compared to the three months ended June 30, 1999, system operating expenses
decreased by 5%, primarily due to a decrease in programming costs related to
lower priced packages now offered by the Company. System operating expenses for
the six months ended June 30, 2000 decreased by 12%, compared to the six months
ended June 30, 1999, primarily due to a decrease in programming costs (14%) and
a decrease in compensation and benefits expenses (9%).
SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. For the three
months ended June 30, 2000 compared to the three months ended June 30, 1999,
SG&A expenses increased by 43% primarily due to the restructuring costs
associated with TV Filme's restructuring as well as due to expenses related
to the transition to the new pre-paid subscription model in the Belem system.
SG&A expenses for the six month period ended June 30, 2000 increased by 29%
compared to the six months ended June 30, 1999, primarily due to the
restructuring costs associated with TV Filme's restructuring as well as due
to expenses related to the transition to the new pre-paid subscription model in
the Brasilia and Belem systems.
9
<PAGE>
DEPRECIATION AND AMORTIZATION. For the three months ended June 30, 2000
compared to the three months ended June 30, 1999, depreciation and amortization
decreased by 23%, primarily due to assets becoming fully depreciated.
Depreciation and amortization for the six month period ended June 30, 2000
decreased by 23% compared to the six months ended June 30, 1999, primarily due
to the reduction in asset values on a dollar basis, and assets becoming fully
depreciated.
INTEREST AND OTHER EXPENSE. For the three months ended June 30, 2000
compared to the three months ended June 30, 1999, interest expense decreased by
2%. Interest expense for the six month period ended June 30, 2000 decreased by
2% compared to the six months ended June 30, 1999.
INTEREST INCOME. For the three months ended June 30, 2000 compared to the
three months ended June 30, 1999, interest income decreased by 22%, primarily
due to a decrease in the average cash balance between the two periods. Interest
income for the six month period ended June 30, 2000 decreased by 30% compared to
the six months ended June 30, 1999, primarily due to a decrease in the average
cash balance between the two periods.
MONETARY LOSS. Due to its net dollar-denominated liability position, the
Company generates monetary losses in any reporting period in which the value of
the REAL depreciates in relation to the value of the U.S. dollar. In the three
months ended June 30, 2000, TV Filme generated a monetary loss of $2.8 million,
compared to a monetary loss of $2.4 million in the three months ended June 30,
1999. In the six months ended June 30, 2000, TV Filme generated a monetary loss
of $0.6 million, compared to a monetary loss of $29.4 million in the six months
ended June 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The telecommunications business is capital intensive. From 1993 through
the first part of 1996, TV Filme 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 TV Filme of $24.4 million and in December 1996 TV
Filme completed the sale of the 12-7/8% 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 June 30, 2000, TV
Filme 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.
In previous years, TV Filme made a substantial amount of import purchases
of equipment with the use of letters of credit provided by banks in Brazil. As
of June 30, 2000, TV Filme had no amounts outstanding under letters of credit.
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 12-7/8% Senior Notes as a current
liability, TV Filme had negative working capital at June 30, 2000 of $138.8
million. Net cash used in operating activities for the three months ended June
30, 2000 was $2.8 million.
TV Filme's common stock outstanding before the reorganization was quoted
on the OTC Bulletin Board. The ordinary shares of ITSA Ltd. issued in exchange
for the outstanding shares of TV Filme common stock pursuant to the
reorganization are currently tradeable in the non-bulletin board
over-the-counter market. The Company expects the new shares to be listed on the
OTC Bulletin Board following successful application by an OTC market maker and
SEC approval of the Company's Current Report on Form 8-K filed on August 5,
2000, announcing that ITSA Ltd. is the successor company to TV Filme, pursuant
to Rule 12g-3 under the Securities Exchange Act of 1934. The effects of shares
trading in the over-the-counter market, as opposed to being listed on a National
Exchange, include, without limitation, the limited release of market prices of
the ordinary shares, 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 ordinary shares, thereby affecting the
Company's ability to issue additional securities or secure additional financing.
In addition, because the ordinary shares are deemed penny stock under the
Securities Enforcement Penny Stock Reform Act of 1990, additional disclosure is
required in connection with trading in the ordinary shares, 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 ordinary
shares.
10
<PAGE>
As a result of the economic slowdown in Brazil in years 1998 and 1999, and
the devaluation of the Brazilian currency (the REAL) in 1999, among other
factors, TV Filme selected a financial advisor, BT Alex. Brown (now Deutsche
Bank), to assist in evaluating strategic alternatives for the restructuring of
its long term debt, represented by the 12-7/8% Senior Notes. On August 13, 1999,
TV Filme Company reached an agreement in principle with a committee representing
holders of TV Filme's outstanding 12-7/8% Senior Notes. This agreement was
effected on July 21, 2000 pursuant to a pre-arranged plan of reorganization
which received court approval under Chapter 11 of the U.S. Bankruptcy Code on
April 10, 2000. In accordance with the terms of the plan of reorganization, the
12-7/8% Senior Noteholders received a $25 million cash payment and their
existing notes were converted into (i) Senior Secured Notes in the aggregate
principal amount of $35 million, due 2004, at an interest rate of 12% per annum
(interest payable-in-kind at the Company's option through its first four
interest payments), and (ii) 80% of the new common equity of the reorganized
Company. Current management received 15% of the new common equity, and the
existing common stockholders of TV Filme received 5% of the new common equity of
the reorganized Company. All outstanding stock options were cancelled. ITSA Ltd.
(the reorganized Company) is a newly-formed Cayman Islands holding company and
is the successor issuer to TV Filme, Inc. pursuant to Rule 12g-3 under the
Securities Exchange Act. The 12% Senior Secured Notes were issued by
ITSA-Intercontinental Telecommunicacoes Ltda., a wholly-owned subsidiary of the
Company.
TV Filme made capital expenditures of approximately $1.4 million during
the three months ended June 30, 2000. Such capital expenditures were financed
with the proceeds from the 12-7/8% 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 licenses for wireless services 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. In July 1998, the license
process for the smaller markets was reinstated and in the fourth quarter of
1998, TV Filme was awarded licenses to operate wireless services in the
following seven additional cities: Campina Grande, Caruaru, Presidente Prudente,
Bauru, Franca, Porto Velho and Uberaba. TV Filme paid an aggregate of $5.0
million for these seven licenses. In October 1999, TV Filme participated in
another bidding process and won additional licenses for the cities of Belo
Horizonte and Vitoria, for which it offered a total of $2.3 million.
The Company, from time to time, may selectively pursue joint ventures or
acquisitions in the broadband telecommunications industry, although it currently
has no understanding, commitment or agreement with respect to any such joint
venture or acquisition. As of June 30, 2000, of TV Filme's approximately $36.5
million in cash and cash equivalents, approximately $29.4 million (80%) was
invested in U.S. dollar denominated securities. In the long term, the Company's
funding needs are subject to a variety of factors, including, the number and
size of new system launches or acquisitions, the implementation of alternative
transmission technologies and the offering of additional telecommunications
services. Accordingly, there can be no assurance that the Company will be able
to meet its future funding needs.
INFLATION AND EXCHANGE RATES
Inflation and exchange rate variations have had, and are expected to
continue to have for the foreseeable future, substantial effects on the
Company's results of operations and financial condition. In periods of
inflation, many of the Company's expenses will tend to increase. Generally, in
periods of inflation, a company is able to raise its prices to offset the rise
of its expenses and may set its prices without governmental regulation. However,
under a Brazilian law designed to reduce inflation, the prices which the Company
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.
11
<PAGE>
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, TV Filme'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,
Brazil's Central Bank significantly raised short-term interest rates during
certain periods of time, and 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 have
declined over the past few months, the Brazilian government and the Central Bank
of Brazil may take additional measures which could impact Company's financial
results.
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. This is due to the
fact that the Company has all of its operations based in Brazil, and most of its
revenues and some of its expenses are 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.
12
<PAGE>
In an effort to protect against a possible devaluation of the REAL, TV
Filme entered into the following foreign currency hedge contract, which was
outstanding as of June 30, 2000 (this contract was entered into for purposes
other than trading purposes):
-------------------------------------------------------------------------------
CONTRACT VALUE EXCHANGE RATE PREMIUM % %CDI CONTRACT DATE EXPIRATION DATE
US$25,000,000 R$1.804:US$1 +2.5% 99.5% JUNE 12, 2000 JULY 11, 2000
-------------------------------------------------------------------------------
The above contract required TV Filme to pay, on the expiration date, an amount
equal to the calculated interest (CDI--see below) on the contract value. On the
expiration date TV Filme paid R$495,380.84, which amount, in REAIS, was
calculated as follows: the "Contract Value R$" 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$."
"CDI" is the CERTIFICADO DE DEPOSITO INTERBANCARIO, or the interbank
lending rate within Brazil.
The Company is currently not party to any outstanding foreign currency hedge
contracts.
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, as part of its restructuring process, TV Filme 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 12-7/8% Senior Notes and holders of TV
Filme's common stock voted in favor of the restructuring set forth in the Plan.
The Brazilian Telecommunications Agency ("ANATEL") issued a response on April
28th, 2000, indicating full support for the restructuring and indicating that no
further approval was necessary from the Agency. Effectuation of the Plan was
completed on July 21, 2000, after receiving approval of the restructuring
contemplated by the Plan from the Central Bank of Brazil.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
As discussed in Note 1, the Company recently underwent a debt
restructuring and reorganization, pursuant to which holders of the Company's
outstanding 12-7/8% Senior Notes received a $25 million cash payment and their
existing notes were converted into (i) Senior Secured Notes in the aggregate
principal amount of $35 million, due 2004, at an interest rate of 12% per annum
(interest payable-in-kind at the Company's option through the first four
interest payments), and (ii) 80% of the new common equity of the reorganized
Company. Current management received 15% of the new common equity, and the
existing common stockholders of TV Filme received 5% of the new common equity of
the reorganized Company. All outstanding stock options were cancelled.
The 12% Senior Secured Notes were issued pursuant to an Indenture, dated
as of July 20, 2000, among ITSA-Intercontinental Telecomunicacoes Ltda., as
issuer, the several Guarantors named therein, and The Bank of New York, as
trustee. The new common equity securities of the Company were issued pursuant to
an exemption from securities law registration requirements provided by Section
1145(a) of the United States Bankruptcy Code and consist of one class of
ordinary shares, $0.01 par value per share.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
No defaults upon senior securities occurred during the quarter ended June
30, 2000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
27. Financial Data Schedule.
(b) REPORTS ON FORM 8-K
During the second quarter of 2000, the Company filed a Current Report on
Form 8-K on April 25, 2000, pursuant to Item 3 thereof, announcing that, on
April 10, 2000, the United States Bankruptcy Court for the District of Delaware
confirmed the Company's First Amended Plan of Reorganization under chapter 11 of
the United States Bankruptcy Code.
14
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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: August 14, 2000
ITSA LTD.
--------------------------------------------
(Registrant)
/s/ Hermano Studart Lins de Albuquerque
--------------------------------------------
Hermano Studart Lins de Albuquerque
Chief Executive Officer (Principal
Executive Officer)
/s/ Carlos Andre Studart Lins de Albuquerque
--------------------------------------------
Carlos Andre Studart Lins de Albuquerque
Acting Chief Financial Officer (Principal
Financial and Accounting Officer)
15
<PAGE>
EXHIBIT INDEX
NO. DESCRIPTION
2.1 Reorganization and Transfer Agreement, dated as of July 20,
2000, by and between TV Filme, Inc., a Delaware corporation,
ITSA Ltd., a Cayman Islands corporation (incorporated herein by
reference to Exhibit 2.1 of the Company's Current Report on
Form 8-K, filed on August 5, 2000).
4.1 Indenture, dated as of July 20, 2000, among
ITSA-Intercontinental Telecomunicacoes Ltda., as issuer, the
several Guarantors named therein, and The Bank of New York, as
trustee.
27 Financial Data Schedule
16
