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 September 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 (I.R.S. Employer Identification Number) Incorporation or Organization) C/O ITSA-INTERCONTINENTAL TELECOMUNICACOES LTDA. SCS, QUADRA 07-BL.A ED. EXECUTIVE TOWER, SALA 601 70.300-911 BRASILIA-DF BRAZIL (Address, Including Zip Code, of Principal Executive Offices) 011-55-61-314-9904 (Registrant's Telephone Number, Including Area Code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ ] 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. [ ] Yes [|X|] 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. Since July 21, 2000, Registrant has filed a Current Report on Form 8-K12G3 and a Quarterly Report on Form 10-Q for the Period Ended June 30, 2000. On November 14, 2000, Registrant filed a Notification of Late Filing on Form 12b-25 detailing the reasons for the delayed filing of this Quarterly Report on Form 10-Q for the period ended September 30, 2000. 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 February 28, 2001 ITSA LTD. (SUCCESSOR TO TV FILME, INC.) INDEX PART I. FINANCIAL INFORMATION PAGE NO. ------------------------------ -------- ITEM 1. Financial Statements Consolidated Balance Sheets as of December 31, 1999 and September 30, 2000 (Unaudited)........................ 2 Unaudited Consolidated Statements of Operations for the Three Months Ended September 30, 1999, the Twenty Days Ended July 20, 2000, and the Two Months and Eleven Days Ended September 30, 2000.................................. 3 Unaudited Consolidated Statements of Operations for the Nine Months Ended September 30, 1999, the Six Months and Twenty Days Ended July 20, 2000, and the Two Months and Eleven Days Ended September 30, 2000................. 4 Unaudited Consolidated Statement of Changes in Stockholders' Equity for the Nine Months ended September 30, 2000....................................... 5 Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 1999, the Six Months and Twenty Days Ended July 20, 2000 and the Two Months and Eleven Days Ended September 30, 2000................. 6 Notes to Unaudited Consolidated Financial Statements...... 7 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 10 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 15 PART II. OTHER INFORMATION ITEM 1. Legal Proceedings......................................... 15 ITEM 2. Changes in Securities and Use of Proceeds................. 15 ITEM 3. Defaults Upon Senior Securities........................... 15 ITEM 4. Submission of Matters to a Vote of Security Holders....... 16 ITEM 5. Other Information......................................... 16 ITEM 6. Exhibits and Reports on Form 8-K.......................... 16 SIGNATURES........................................................ 17 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ITSA LTD. (SUCCESSOR TO TV FILME, INC.) AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS PREDECESSOR SUCCESSOR DECEMBER 31, SEPTEMBER 30, 1999 2000 -------------- ---------------- (UNAUDITED) (IN THOUSANDS OF US DOLLARS) ASSETS Current assets: Cash and cash equivalents............ $ 42,175 $ 6,379 Accounts receivable, net............. 2,474 1,546 Supplies............................. 2,750 2,745 Prepaid expenses and other current 5,700 6,271 assets............................. -------------- ---------------- Total current assets............... 53,099 16,941 Property, plant and equipment, net...... 25,005 18,275 Goodwill, net........................... -- 29,935 Other assets............................ 5,218 6,077 -------------- ---------------- Total assets....................... $ 83,322 $71,228 ============== ================ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable..................... $ 6,168 $ 5,197 Payroll and other benefits payable... 1,577 2,180 Accrued interest payable............. 18,776 3,267 Accrued liabilities and taxes payable 7,543 7,256 Senior notes subject to Chapter 11 140,000 -- proceeding......................... -------------- ---------------- Total current liabilities.......... 174,064 17,900 Senior notes, 12% interest -- 35,000 Deferred installation fees.............. 900 486 Stockholders' equity: Common stock, $.01 par value, 20,000,000 shares authorized, 10,824,594 shares (Predecessor) and 10,000,000 (Successor) issued and outstanding.................... 108 100 Additional paid-in capital........... 45,657 21,668 Accumulated deficit.................. (130,225) (2,851) Cumulative translation adjustment.... (7,182) (1,075) -------------- ---------------- Total stockholders' equity (deficiency).................... (91,642) 17,842 -------------- ---------------- Total liabilities and stockholders' $ 83,322 $71,228 equity........................... ============== ================

See accompanying notes. 2 ITSA LTD. (SUCCESSOR TO TV FILME, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) SUCCESSOR PREDECESSOR PREDECESSOR TWO MONTHS THREE TWENTY DAYS AND ELEVEN MONTHS ENDED ENDED DAYS ENDED SEPTEMBER JULY SEPTEMBER 30, 20, 30, 1999 2000 2000 ----------------------------------------- (IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA) ----------------------------------------- Revenues $6,095 $1,459 $5,285 Operating costs and expenses: System operating 2,850 552 1,897 Selling, general and administrative 4,618 1,670 2,938 Depreciation and amortization 3,443 478 2,535 ------------- ------------- ------------- Total operating costs and expenses 10,911 2,700 7,370 ------------- ------------- ------------- Operating loss (4,816) (1,241) (2,085) Other (expense) income: Interest and other expense (6,167) (1,224) (907) Interest and other income 1,580 126 323 Foreign exchange loss (6,492) (143) (182) ------------- ------------- ------------- Total other (expense) income (11,079) (1,241) (766) ------------- ------------- ------------- Loss before reorganization items and extraordinary item (15,895) (2,482) (2,851) Reorganization items: Reorganization costs (840) - - Adjust accounts to fair value - (3,221) - ------------- ------------- ------------- Total reorganization items (840) (3,221) - ------------- ------------- ------------- Loss before extraordinary item (16,735) (5,703) (2,851) Extraordinary item: Extinguishment of debt - 87,585 - ------------- ------------- ------------- Net Income (loss) $(16,735) $81,882 $(2,851) ============= ============= ============= Basic earnings (loss) per share: Before extraordinary item $(1.55) $(0.53) $(0.29) Extraordinary item - 8.09 - ------------- ------------- ------------- Net income (loss) $(1.55) $ 7.56 $(0.29) ============= ============= ============= Weighted average shares outstanding 10,824,594 10,824,594 10,000,000

See accompanying notes. 3 ITSA LTD. (SUCCESSOR TO TV FILME, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) PREDECESSOR PREDECESSOR SUCCESSOR NINE MONTHS SIX MONTHS AND TWO MONTHS AND ENDED TWENTY DAYS ELEVEN DAYS ENDED SEPTEMBER 30, ENDED JULY 20, SEPTEMBER 30, 1999 2000 2000 ------------------------------------------------- (IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA) ------------------------------------------------- Revenues $19,483 $13,044 $5,285 Operating costs and expenses: System operating 9,154 6,076 1,897 Selling, general and administrative 12,324 9,681 2,938 Depreciation and amortization 11,202 6,442 2,535 ------------- ------------- ------------- Total operating costs and expenses 32,680 22,199 7,370 ------------- ------------- ------------- Operating loss (13,197) (9,155) (2,085) Other (expense) income: Interest and other expense (16,799) (11,697) (907) Interest and other income 5,510 2,895 323 Foreign exchange loss (35,900) (778) (182) ------------- ------------- ------------- Total other (expense) income (47,189) (9,580) (766) ------------- ------------- ------------- Loss before reorganization items and extraordinary item (60,386) (18,735) (2,851) Reorganization items: Reorganization costs (1,435) (2,709) - Adjust accounts to fair value - (3,221) - Total reorganization ------------- ------------- ------------- items (1,435) (5,930) - Loss before extraordinary item (61,821) (24,665) (2,851) Extraordinary item: Extinguishment of debt - 87,585 - Net income (loss) $(61,821) $62,920 $(2,851) ============= ============= ============= Basic earnings (loss) per share: Before extraordinary item $(5.71) $(2.28) $(0.29) Extraordinary item - 8.09 - ------------- ------------- ------------- Net income (loss) $(5.71) $ 5.81 $(0.29) ============= ============= ============= Weighted average shares outstanding 10,824,594 10,824,594 10,000,000

See accompanying notes. 4 ITSA LTD. (SUCCESSOR TO TV FILME, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 ADDITIONAL OTHER COMMON STOCK PAID-IN ACCUMULATED COMPREHENSIVE SHARES PAR VALUE CAPITAL DEFICIT LOSS TOTAL ------ --------- --------- ---------- ------------- ----- (IN THOUSANDS OF US DOLLARS, EXCEPT SHARES) PREDECESSOR BALANCE AT DECEMBER 31, 1999............ 10,824,594 $108 $45,657 $(130,225) $(7,182) $(91,642) Predecessor cumulative translation adjustment......... -- -- -- -- 1,683 1,683 Predecessor net income for the period..... -- -- -- 62,920 -- 62,920 Effect of reorganization and fresh-start accounting: Cancellation of Predecessor equity..........(10,824,594)(108) -- -- -- (108) Issuance of new shares pursuant to the Plan of Reorganization.. 10,000,000 100 17,423 -- -- 17,523 Fresh-start accounting valuation adjustment -- -- (41,412) 67,305 5,499 31,392 -------------------------------------------------------------- SUCCESSOR BALANCE AT JULY 21, 2000........... 10,000,000 100 21,668 -- -- 21,768 Successor cumulative translation adjustment....... -- -- -- -- (1,075) (1,075) Successor Net Loss for the period.... -- -- -- (2,851) -- (2,851) -------------------------------------------------------------- SUCCESSOR BALANCE AT SEPTEMBER 30, 2000............ 10,000,000 $100 $21,668 $(1,075) $(2,851) $17,842 ==============================================================

See accompanying notes. 5 ITSA LTD. (SUCCESSOR TO TV FILME, INC.) AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) PREDECESSOR PREDECESSOR SUCCESSOR NINE SIX MONTHS TWO MONTHS MONTHS AND TWENTY AND ELEVEN ENDED DAYS ENDED DAYS ENDED SEPTEMBER 30, JULY 20, SEPTEMBER 30, 1999 2000 2000 ------------ ---------- ------------ (IN THOUSANDS OF US DOLLARS) CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (61,821) $ 62,920 $ (2,851) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 10,885 6,442 2,535 Allowance for doubtful accounts 1,140 548 254 Amortization of debt issuance costs 1,405 - - Deferred installation fees (234) (392) 19 Gain on disposal of property, plant and equipment (197) (42) Foreign exchange loss 31,687 778 182 Adjust accounts to fair value - 3,221 - Extinguishment of debt - (87,585) - Changes in operating assets and liabilities: Accounts receivable (1,253) 535 (454) Supplies 370 (250) 164 Prepaid expenses and other current assets (3,098) (1,297) 540 Other assets 956 (779) (317) Accounts payable 2,448 142 (1,675) Payroll and other benefits payable (349) 738 (11) Accrued interest payable 13,713 (16,148) 886 Accrued liabilities and taxes payable 2,864 492 186 ------------ ---------- ------------ Net cash provided by (used in) operating activities (1,287) (30,832) (584) ------------ ---------- ------------ CASH FLOWS FROM INVESTING ACTIVITIES Purchase of property, plant and equipment (2,845) (4,382) (1,498) Sales of property, plant and equipment 709 187 ------------ ---------- ------------ Net cash used in investing activities (2,845) (3,673) (1,311) ------------ ---------- ------------ Effect of exchange rate changes on cash (8,954) 591 13 ------------ ---------- ------------ Net change in cash and cash equivalents (13,086) (33,914) (1,882) Cash and cash equivalents at beginning of period 57,492 42,175 8,261 ------------ ---------- ------------ Cash and cash equivalents at end of period $ 44,406 $ 8,261 $ 6,379 ============ ========== ============

See accompanying notes. 6 ITSA LTD. (SUCCESSOR TO TV FILME, INC.) AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (IN THOUSANDS OF US DOLLARS, EXCEPT SHARE DATA) (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." Since fresh-start reporting has been reflected in the accompanying consolidated financial statements as of September 30, 2000, which are those of a reorganized entity, certain material aspects of these financial statements are not comparable to such statements of any prior period. 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) 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 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. The Company offers a pre-paid subscription video service, called MAISTV, which is comprised of a self-install kit available in retail stores in most of the cities where the company has operations. 7 ITSA was also the first company in Brazil to launch a high-speed internet access system using the technology of high-speed modems. The system, called LINKEXPRESS, has been available on a commercial basis in the city of Brasilia since 1998. The Company has all its licenses covering the frequency band from 2,500 to 2,686 MHz. In the third quarter of 2000, ANATEL -- the Brazilian Telecommunications Agency -- approved and awarded additional spectrum to the Company, in the frequency band of 2,170 to 2,182 MHz. Currently, with a total of 198 MHz of spectrum available in each market, the Company is able to offer a wide range of two-way advanced communication services, including high-speed data services and high-speed Internet, both to the residential and the corporate market. The Company also owns additional specific licenses, which allow the offering of voice and VPN (Virtual Private Network) corporate services. Currently, the Company owns and operates its own NOC -- Network Operating Control Center -- which is located in its headquarters in Brasilia. Additionally, the Company owns and maintains its proprietary SMS -- Services Management System -- called Mythos, which was developed in-house and customized to the Brazilian needs and standards. This advanced software package allows the Company to have full control of every aspect of its businesses, from marketing to sales, customer service, technical support, inventory control and billing. The Company believes that the ability to control and customize the SMS is a key point in quickly offering reliable services to the market. Recently, the Company has licensed its software to some third party operations in Brazil. B. METHOD OF PRESENTATION The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three- and nine-months periods ended September 30, 2000 are not necessarily indicative of the results that may be expected for the year ended December 31, 2000. The balance sheet at December 31, 1999 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by the accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and footnotes thereto included in the TV Filme, Inc.'s annual report on Form 10-K for the year ended December 31, 1999. C. COMPREHENSIVE INCOME Total comprehensive loss of the Company was $3,926,000 for the two months and eleven days ended September 30, 2000. Total comprehensive income (loss) of TV Filme was $(15,170,000) and $(64,429,000) for the three months and nine months ended September 30, 1999 and $82,770,000 and $64,603,000 for the twenty days and the six months and twenty days ended July 20, 2000. 2. 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 8 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). 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. As of September 30th 2000, the Company had $35.0 million of 12% Senior secured Notes. 3. FRESH START ACCOUNTING AND REORGANIZATION The Company's unaudited consolidated financial statements as of September 30, 2000 have been presented in conformity with the American Institute of Certified Public Accountants' Statement of Position 90-7 "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." While it was in Chapter 11, TV Filme adopted fresh-start reporting and gave effect to its emergence as of July 21, 2000. Under fresh-start accounting, all assets and liabilities are restated to reflect their reorganized value, which approximates fair value and equity based upon the appraised reorganization value of TV Filme. The Predecessor's reorganization value of $76,184 was based on a valuation performed by an independent firm using discounted cash flows and other economic measures. The value resulted in a greater value than the carrying value of the net assets. As such, the difference of $31,413 was recorded as goodwill. The following journal entries record the provisions of the Plan and the adoption of fresh-start accounting: EXCHANGE DEBT OF FRESH PRECONFIRMATION DISCHARGE STOCK START REORGANIZE --------------- --------- ------- ------ ---------- (IN THOUSANDS) ASSETS ------ CURRENT ASSETS Cash and cash equivalents $ 36,163 $(27,902) $ $ $ 8,261 Accounts receivable, net 1,380 1,380 Supplies 2,976 2,976 Prepaid expense and other current assets 6,964 6,964 ------------- -------- -------- ------- ---------- Total Current Assets 47,483 (27,902) - - 19,581 Property, plant and equipment, net 28,260 - - (3,221) 25,039 Goodwill - 31,413 31,413 Other assets 151 151 ------------- -------- -------- ------- ---------- TOTAL ASSETS $ 75,894 $(27,902) $ - $ 28,192 $ 76,184 ============= ======== ======== ======= ==========

9 EXCHANGE DEBT OF FRESH PRECONFIRMATION DISCHARGE STOCK START REORGANIZE --------------- --------- -------- ------- ---------- (IN THOUSANDS) LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 7,739 $(2,902) $ $ $4,837 Payroll and other benefits payable 2,243 2,243 Accrued interest payable 27,450 (25,000) 2,450 Accrued liabilities and taxes payable 9,407 9,407 Senior notes in default 140,000 (140,000) ------------- -------- -------- ------- ---------- Total Current 186,839 (167,902) - - 18,937 Liabilities SENIOR NOTES, 12% INTEREST 35,000 35,000 DEFERRED INSTALLATION FEES 479 479 MINORITY INTERESTS (21) 21 STOCKHOLDER'S EQUITY Common stock 108 86 (94) 100 Additional paid-in capital 45,657 17,329 94 (41,412) 21,668 Accumulated deficit (130,225) 130,225 Net income (loss) (21,444 87,585 (66,141) Cumulative Translation Adjustment (5,499) 5,499 ------------- -------- -------- ------- ---------- Total Stockholders' Equity (111,403) 105,000 - 28,171 21,768 ------------- -------- -------- ------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 75,894 $(27,902) $ - $28,192 $ 76,184 ============= ======== ======== ======= ==========

The Company's pre-petition liabilities open at September 30, 2000, amounted to $694 and were all related to professional fees. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- 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 the Company's financial statements are presented in U.S. dollars and pursuant to accounting principles generally accepted in the United States, the Company's transactions are consummated in both REAIS and U.S. dollars. Inflation and devaluation in Brazil have had substantial effects on the Company's results of operations and financial condition. See "-- Inflation and Exchange Rates." 10 As a result of the changes in exchange rates during the periods presented, the period-to-period comparisons of the Company's results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance of the Company. Effective January 26, 2000, the Company emerged from Chapter 11 bankruptcy proceedings and implemented "fresh start accounting". Accordingly, all assets and liabilities were restated to reflect their respective fair values. The consolidated financial statements after that date are those of a new reporting entity and are not comparable to the Pre-Confirmation periods. However, for purposes of this discussion, the two months and eleven days ended September 30, 2000 have been combined to the twenty days ended July 20, 2000 and to the six months and twenty days ended July 20, 2000 and then compared to the nine and three months period ended September 30, 1999, respectively. Differences between periods due to fresh start accounting are explained when necessary. The following table is included solely for use in comparative analysis of results of operations, and to complement management's discussions and analysis: THREE MONTHS ENDED SEPTEMBER 30 ------------------------------------------- 1999 % OF 2000 % OF REVENUE REVENUE (IN THOUSANDS, EXCEPT SUBSCRIBER DATA) Revenue........................... $6,095 100% $6,744 100% Operating costs and expenses: System operating................ 2,850 47% 2,449 36% Selling, general and administrative 4,618 76% 4,608 68% Depreciation and amortization... 3,443 56% 3,013 45% ------ ------ ------ ---- Total operating costs and expenses...................... 10,911 179% 10,070 149% Operating loss................ (4,816) (79%) (3,326) (49%) Other income (expense): Interest and other expense...... (6,167) (101%) (2,131) (32%) Interest and other income....... 1,580 26% 449 7% ------ ------ ------ ---- Interest and other income (expense), net.................. (4,587) (75%) (1,682) (25%) Foreign exchange loss........... (6,492) (107%) (325) (5%) ------- ---------------- ----- Total other (expense) income.. (11,079) (182%) (2,007) 30% -------- ---------------- ---- Loss before reorganization items and extraordinary item.......... (15,895) (261%) (5,333) (79%) Reorganization items: Reorganization costs Adjust accounts to fair value (840) (14%) (3,221) (48%) --------- -------- ------- ----- Total reorganization items (840) (14%) (3,221) (48%) --------- -------- ------- ----- Loss before extraordinary item (16,735) (275%) (8,554) (127%) Extraordinary item: Extinguishment of debt 87,585 1,299% --------- -------- ------- ------ NET INCOME (LOSS) $(16,735) (275%) $79,031 1,172% ======== ====== ====== ====== Other Data: EBITDA (a)...................... $(1,373) $ (313) ======== ======= Number of subscribers at end of period ......................... 73,162 77,725 ======== ======== Number of operating systems at end of period....................... 4 4 ======== ======== Exchange rate (R $: US $) at end of period....................... 1.9223:1 1.8437:1 ======== ========

11 NINE MONTHS ENDED SEPTEMBER 30 ------------------------------------------- 1999 % OF 2000 % OF REVENUE REVENUE (IN THOUSANDS, EXCEPT SUBSCRIBER DATA) Revenue........................... $19,483 100% $ 18,329 100% Operating costs and expenses: System operating............... 9,154 47% 7,973 43% Selling, general and administrative................ 12,324 63% 12,619 69% Depreciation and amortization.. 11,202 57% 8,977 49% Total operating costs and ------- ------ ------ ---- expenses..................... 32,680 168% 29,569 161% ------- ------ ------ ---- Operating loss................ (13,197) (68%) (11,240) (61%) Other income (expense): Interest and other expense...... (16,799) (86%) (12,604) (69%) Interest and other income....... 5,510 28% 3,218 (18%) ------ ------ ------ ----- Interest income (expense), net.. (11,289) (58%) (9,386) (51%) Foreign exchange loss........... (35,900) (184%) (960) (5%) -------- ------ -------- ----- Total other expense, net.... (47,189) (242%) (10,346) (56%) -------- ------ -------- ----- Loss before reorganization items and extraordinary item........... (60,386) (310%) (21,586) (118%) Reorganization items: Reorganization costs (1,435) (7%) (2,709) (15%) Adjust accounts to fair value (3,221) (18%) --------- -------- ------- ----- Total reorganization items (1,435) (7%) (5,930) (32%) --------- -------- ------- ----- Loss before extraordinary item (61,821) (317%) (27,516) (150%) Extraordinary items: Extinguishment of debt 87,585 478% --------- -------- ------- ----- NET INCOME (LOSS) (61,821) (317%) $60,069 328% ======== ====== ====== ==== Other Data: EBITDA (a)..................... $(1,995) $(2,263) ======== ======== Number of subscribers at end of period ....................... 73,162 77,725 ======== ======== Number of operating systems at end of period................. 4 4 ======== ======== Exchange rate (R $: US $) at end of period..................... 1.9223:1 1.8437:1 ========= =========

----------------------------- (a) EBITDA is defined as operating loss plus depreciation and amortization. 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 INCOME (LOSS). For the three months ended September 30, 2000 compared to the three months ended September 30, 1999, net income (loss) was $79.0 million versus $(16.7) million, primarily due to reduced interest expenses, a decrease in recorded currency exchange loss, a decrease in operating loss and the reorganization and the extraordinary item associated with TV Filme's restructuring. Net income (loss) for the nine months ended September 30, 2000 was $60.1 million as compared to $(61.8) million for the nine months ended September 30, 1999, primarily due to recovery from a monetary loss associated with the Company's net dollar-denominated liability position caused by a 51% devaluation of the REAL against the U.S. dollar in 1999 and the reorganization and the extraordinary item associated with TV Filme's restructuring. REVENUES. For the three months ended September 30, 2000 compared to the three months ended September 30, 1999, revenues increased by 11%, primarily due to an increase of 2,000 in the average number of subscribers and an increase of 7% in the average monthly fee. Revenues for the nine months ended September 30, 2000 decreased by 6% compared to the nine months ended September 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. 12 SYSTEM OPERATING EXPENSES. For the three months ended September 30, 2000 compared to the three months ended September 30, 1999, system operating expenses decreased by 14%, primarily due to a reduction of programming costs related to lower priced packages now offered by the Company. System operating expenses for the nine months ended September 30, 2000 decreased by 13%, compared to the nine months ended September 30, 1999, primarily due to a reduction of programming costs related to lower priced packages now offered by the Company. SELLING, GENERAL AND ADMINISTRATIVE ("SG&A") EXPENSES. For the three months ended September 30, 2000 compared to the three months ended September 30, 1999, SG&A expenses did not vary significantly. SG&A expenses for the nine month period ended September 30, 2000 increased by 2% compared to the nine months ended September 30, 1999, primarily due to expenses related to the transition to the new pre-paid subscription model in the Brasilia and Belem systems. DEPRECIATION AND AMORTIZATION. For the three months ended September 30, 2000 compared to the three months ended September 30, 1999, depreciation and amortization decreased by 12%, primarily due to assets becoming fully depreciated. Depreciation and amortization for the nine month period ended September 30, 2000 decreased by 20% compared to the nine months ended September 30, 1999, primarily due to assets becoming fully depreciated. INTEREST AND OTHER EXPENSE. For the three months ended September 30, 2000 compared to the three months ended September 30, 1999, interest and other expense decreased by 65%, primarily due to a decrease in liability position associated with TV Filme's restructuring process. Interest and other expense for the nine month period ended September 30, 2000 decreased by 25% compared to the nine months ended September 30, 1999, primarily due to a decrease in liability position associated with TV Filme's restructuring process. INTEREST AND OTHER INCOME. For the three months ended September 30, 2000 compared to the three months ended September 30, 1999, interest and other income decreased by 72%, primarily due to a decrease in the average cash balance between the two periods. Interest and other income for the nine month period ended September 30, 2000 decreased by 42% compared to the nine months ended September 30, 1999, primarily due to a decrease in the average cash balance between the two periods. FOREIGN EXCHANGE 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 September 30, 2000, the Company generated a monetary loss of $0.3 million, compared to a monetary loss of $6.5 million in the three months ended September 30, 1999. In the nine months ended September 30, 2000, the Company generated a monetary loss of $1.0 million, compared to a monetary loss of $35.9 million in the nine months ended September 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 September 30, 2000, TV Filme had no amounts outstanding under letters of credit. Pursuant to the terms of a commitment letter executed by various proposed lenders (including certain shareholders of the Company) on July 20, 2000, the Company is able to borrow, on a secured basis, $10,000,000 of 13 additional capital for use in its operations. 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 September 30, 2000 of $1.0 million. Net cash used in operating activities for the nine months ended September 30, 2000 was $31.4 million. Common shares of the Company are currently tradable in the over-the-counter market and are listed on the OTC Bulletin Board. 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 limit the liquidity of the common shares. 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 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. The Company made capital expenditures of approximatley $2.2 million during the three months ended September 30, 2000. Such capital expenditures were financed with the proceeds from the 12% Senior Notes offering and from cash generated from the Company's operations. As of September 30, 2000, of the Company's approximately $6.4 million in cash and cash equivalents, approximately $1.2 million (19%) 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. Generally, inflation in Brazil has been accompanied by devaluation of the Brazilian currency relative to the U.S. dollar. The Company collects 14 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. RECENT ECONOMIC EVENTS In August of 2000, the Brazilian Congress passed and approved a new law #9998 - August 17th, which establishes a new tax to be paid monthly by every telecommunications operator in the country. This tax, called FUST -- Fundo de Universalizacao dos Servicos de Telecommunicacoes (Fund for the Universalization of Telecommunications Services) -- will be calculated based on 1% (one percent) of the total gross income of every operation, and will become effective on January 2001. This tax will adversely affect the Company's results of operations. 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. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. No material legal proceedings in which the Company or any of its subsidiaries is a party, or of which any of their property is subject, are currently pending, nor have any such proceedings been terminated during the third quarter of 2000. See Item 1 of Part II of the Company's Quarterly Report on Form 10-Q for the period ended June 30, 2000, for a description of legal proceedings which took place during the first and second quarters of 2000. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. ----------------------------------------- None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. ----------------------------------------- None. 15 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 third quarter of 2000, the Company filed a Current Report on Form 8-K12G3 on August 4, 2000, pursuant to Item 5 thereof, announcing that, following the successful reorganization of TV Filme, the Company had become the successor in interest to TV Filme pursuant to Rule 12g-3 of the Securities Exchange Act of 1934, as amended. 16 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: March 15, 2001 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) 17 EXHIBIT INDEX NO. DESCRIPTION 27 Financial Data Schedule 18

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