<PAGE>
Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 1998
.......... Paging Network do Brasil S.A. ..........
(Translation of registrant's name into English)
..........Rua Alexandre Dumas, 1,711..........
......Chacara Santo Antonio......
..........Sao Paulo, 04717-004, Brazil...........
(Address of principal executive offices)
<PAGE>
PAGING NETWORK DO BRASIL S.A.
INDEX
Page
PART I. FINANCIAL INFORMATION ----
Item 1. Financial Statements
a) Balance Sheet at December 31, 1997 (audited) and
March 31, 1998 (unaudited).........................................1
b) Statement of Operations for the
three months ended March 31, 1997 and 1998 (unaudited).............2
c) Statement of Cash Flows for the
three months ended March 31, 1997 and 1998 (unaudited).............3
d) Statement of Shareholders' Equity at March 31, 1998 (unaudited)...4
e) Notes to Financial Statements (unaudited)..........................5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................12
Item 2. Changes in Securities.........................................12
Item 3. Defaults Upon Senior Securities...............................12
Item 4. Submission of Matters to a Vote of Security Holders...........12
Item 5. Other Information.............................................12
Item 6. Exhibits......................................................12
Signatures..............................................................14
<PAGE>
PART I
Item 1(a)
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
At December 31, 1997 and March 31, 1998
(Amounts in U.S. dollars)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
----------------- -----------------
(Audited) (Unaudited)
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents.................................. $ 377,004 $ 53,416
Short-term investments..................................... 59,039,317 53,526,398
Accounts receivable, net................................... 819,835 883,169
Refundable taxes........................................... 280,917 297,681
Pager inventories.......................................... 6,825,310 7,205,007
Prepaid expenses and other current assets.................. 173,030 319,847
Pledged securities-current................................. 14,842,004 15,056,659
----------------- -----------------
Total current assets..................................... 82,357,417 77,342,177
Fixed assets, net............................................... 18,945,448 21,194,739
Pledged securities.............................................. 23,886,559 24,251,833
Debt issuance costs, net........................................ 6,895,019 6,415,380
Other assets.................................................... 316,020 318,600
----------------- -----------------
Total assets............................................. $ 132,400,463 $ 129,522,729
================= =================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable........................................... $ 1,881,127 $ 1,618,775
Accrued expenses........................................... 4,255,335 9,410,886
Payable to related parties................................. 1,571,368 1,571,368
----------------- -----------------
Total current liabilities................................ 7,707,830 12,601,029
Senior notes.................................................... 125,000,000 125,000,000
Redeemable preferred stock, without par value...................
Authorized shares - 63,000 shares
Issued and outstanding, 30,000 shares...................... 33,661,424 34,658,407
Shareholders' equity (deficit)
Cumulative translation adjustment............................... -- 581,394
Common stock, without par value
Authorized shares - 2,073,387
Issued and outstanding 1,378,401........................... 30,760 30,760
Accumulated deficit............................................. (33,999,551) (43,348,861)
----------------- -----------------
Total shareholders' equity (deficit)..................... (33,968,791) (42,736,707)
----------------- -----------------
Total liabilities and shareholders' equity (deficit)..... $ 132,400,463 $ 129,522,729
================= =================
</TABLE>
See accompanying notes to financial statements.
<PAGE>
Item 1(b)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
For the three months ended March 31, 1997 and 1998
(Amounts in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Revenues:
Services, rent and maintenance revenues $ 41,623 $ 5,163,989
Product sales........................................ 28,881 1,338,999
------------- -------------
Gross revenues 70,504 6,502,988
Taxes................................................ (28,398) (770,435)
------------- -------------
Total revenues.......................................... 42,106 5,732,553
Cost of products sold................................ (18,128) (1,404,213)
------------- -------------
23,978 4,328,340
Operating costs and expenses:
Services rent and maintenance 833,887 1,985,632
Selling, general and administrative.................. 2,519,918 6,433,600
Depreciation and amortization........................ 152,173 736,517
------------- -------------
Total operating costs and expenses................ 3,505,978 9,155,749
------------- -------------
Operating loss.................................... (3,482,000) (4,827,409)
Other income (expense):
Interest expense..................................... -- (4,614,272)
Interest income...................................... 250,311 3,467,655
Other expense........................................ -- (87,545)
Monetary loss........................................ -- (1,660,058)
Exchange and translation loss........................ (233,634) --
------------- -------------
Total other income (expense)...................... 16,677 (2,894,220)
------------- -------------
Net loss................................................ $ (3,465,323) $ (7,721,629)
============= =============
</TABLE>
See accompanying notes to financial statements.
2
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Item 1(c)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
For the three months ended March 31, 1997 and 1998
(Amounts in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------------------------
1997 1998
------------- -------------
<S> <C> <C>
Operating activities:
Net loss...................................................... $ (3,465,323) $ (7,721,629)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization............................... 152,173 736,517
Provision for losses on accounts receivable................. -- 700,000
Amortization of debt issuance costs......................... -- 385,290
Monetary loss............................................... -- 1,660,058
Loss of sale of equipment................................... -- 87,545
Changes in operating assets and liabilities:................ --
Increase in accounts receivable........................... (20,221) (763,335)
Increase in refundable taxes.............................. (50,163) (77,287)
Increase in pager inventories............................. (318,984) (560,320)
Decrease (increase) in prepaid expenses
and other current assets................................ 172,788 (156,935)
Increase in other assets.................................. -- (8,754)
Increase in pledged securities............................ -- (637,680)
Decrease in accounts payable.............................. (2,092,931) (346,020)
(Decrease) increase in accrued expenses.................... (129,162) 5,428,478
Decrease in payable to related parties.................... (1,854,492) --
------------- -------------
Net cash used in operating activities.................. (7,606,315) (1,274,072)
Investing activities
Purchase of fixed assets...................................... (2,386,631) (3,494,934)
Decrease in short term investment............................. -- 4,464,458
------------- -------------
Net cash (used in) provided by investing activities.... (2,386,631) 969,524
Financing activities
Proceeds from the sale of common
and redeemable preferred stock............................. 850,756 --
------------- -------------
Net cash provided by financing activities.............. 850,756 --
Effect of exchange rate changes on cash........................... -- (19,040)
------------- -------------
Net decrease in cash and cash equivalents (9,142,190) (323,588)
Cash and cash equivalents at beginning of period.................. 12,444,689 377,004
------------- -------------
Cash and cash equivalents at end of period........................ $ 3,302,499 $ 53,416
============= =============
</TABLE>
See accompanying notes to financial statements.
3
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Item 1(d)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF SHAREHOLDERS' EQUITY
For the three months ended March 31, 1998
(Amounts in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Cumulative
Common Accumulated Translation
Stock Deficit Adjustment Total
---------------- ----------------- -------------- -----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997..................... $ 30,760 $(33,999,551) $ -- $(33,968,791)
Accrued dividends on redeemable
preferred stock............................... (996,983) (996,983)
Cumulative translation adjustment................ 581,394 581,394
Monetary adjustment on redeemable
preferred stock............................... (630,698) (630,698)
Net loss for the period.......................... (7,721,629) (7,721,629)
---------------- ----------------- -------------- -----------------
Balance at March 31, 1998........................ $ 30,760 $(43,348,861) $581,394 $(42,736,707)
================ ================= ============== =================
</TABLE>
See accompanying notes to financial statements.
4
<PAGE>
Item 1(e)
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
March 31, 1998
(Amounts in U.S. dollars)
1. Organization
Paging Network do Brasil S.A. (formerly Warburg Paging do Brasil Ltda.,
the "Company") was formed on April 7, 1996 through an investment by Warburg,
Pincus Ventures, L.P. During 1997, the Company started to provide paging
services in Sao Paulo and Rio de Janeiro and offers extended paging services
to eight other cities in Brazil.
In October 1996, the Company increased its capital to approximately
$5,500,000 and in December 1996, through the incorporation of three new
shareholders, received approximately $15,000,000 of additional capital. In
December 1996, the Company changed its name from Warburg Paging do Brasil
Ltda. to Paging Network do Brasil Ltda. and then to Paging Network do Brasil
S.A. following a change in its legal formation from a limited liability
company (Ltda.) to a closed corporation (S.A.), at which time common stock in
the limited liability company was exchanged for common and redeemable
preferred stock in the Company. In June 1997, the Company issued $125,000,000
principal amount of 13-1/2% Senior Notes due June 6, 2005 (the "Senior
Notes"). Prior to consummation of the Senior Note offering, the Company
received from shareholders approximately $9,500,000 in exchange for additional
shares of redeemable preferred stock, and effected a stock split of 40.74774
for each issued and outstanding share of common stock.
2. Summary of Significant Accounting Policies
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ("U.S. GAAP") in U.S.
dollars.
The Company's significant accounting policies are as follows:
Foreign Currency Translation
Until December 31, 1997, the financial statements were translated from
Brazilian reais to U.S. dollars in accordance with the provisions of Statement
of Financial Accounting Standards No. 52 as it applies to entities operating
in highly inflationary economies. Pager inventories, fixed assets and
intangibles and related income statement accounts were remeasured at exchange
rates in effect when the assets were acquired or the liabilities were
incurred. All other assets and liabilities were remeasured at period end
exchange rates, and all other income and expense items were remeasured at
average exchange rates prevailing during the period. Remeasurement adjustments
were included in exchange and translation gains (losses).
Effective January 1, 1998, the Company determined that Brazil ceased to
be a high inflationary economy under SFAS 52. Accordingly, as of January 1,
1998, the Company began using the real as the functional currency. 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. Translation
adjustments are not included in determining net income but reported in a
separate component of equity. Transaction (losses) associated with the
Company's net U.S. dollar liability position is included in monetary (losses).
Revenue Recognition
The Company recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Advance
billings for services are deferred and recognized as revenue when earned.
Sales of pagers are recognized upon delivery. Sales commissions are included
in selling, general and administrative expenses. The Company will lease
certain pagers under month-to-month arrangements.
5
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Allowance for Doubtful Accounts
The Company had an allowance for doubtful accounts of $977,000 at
December 31, 1997, and $1,254,000 at March 31, 1998. Charges to the allowance
during the three months ended March 31, 1997 and 1998 were $0 and $423,000.
Inventories
Inventories are recorded at the lower of average cost or market.
3. Related Party Transactions
The Company has agreed to reimburse its shareholders for certain
transaction costs associated with the formation of the Company and the
$125,000,000 senior note offering consummated on June 6, 1997. As of March 31,
1998, the Company had a payable of approximately $1,000,000 to Warburg, Pincus
and approximately $571,000 to Paging Network, Inc.
4. Long Term Debt
On June 6, 1997, the Company issued $125,000,000 principal amount of
13-1/2% Senior Notes due June 6, 2005. Interest is payable semi-annually in
arrears on June 6 and December 6 and each year, commencing on December 6,
1997. Of the $125,000,000 proceeds approximately $45,600,000 was used to
purchase U.S. government securities, scheduled interest and principal payments
on which are in amounts sufficient to provide for payment in full when due of
the first six scheduled interest payments on the Senior Notes. Debt issuance
costs are capitalized and amortized over the term of the debt under the
effective yield method.
The Senior Notes are redeemable on or after June 6, 2001 at the option of
the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after June 6,
2004, plus accrued interest. The Senior Notes contain certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness or issue preferred stock, pay dividends or make certain other
restricted payments. Upon a change of control, the Company is required to make
an offer to purchase the Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any.
In accordance with the covenants of the Senior Notes and the Company's current
level of leverage, at March 31, 1998, the Company is unable to make any
dividend payments.
At March 31, 1998, the Senior Notes were traded at 102% of principal
amount.
5. Accrued Expenses
Accrued expenses at December 31, 1997 and March 31, 1998 are comprised of
the following:
<TABLE>
<CAPTION>
1997 1998
---- ----
<S> <C> <C>
Excise taxes payable $141,013 $106,926
Withholding taxes payable 392,177 378,826
Payroll and other benefits payable 1,419,651 1,682,137
Accrued interest payable 1,125,000 5,343,750
Other 1,177,494 1,899,247
---------- ----------
$4,255,335 $9,410,886
========== ==========
</TABLE>
6. Redeemable Preferred Stock
The redeemable preferred stock has an accruing dividend with an
effective annual rate of 12% compounding quarterly for the first five years
from its issuance on December 11, 1996. On the fifth anniversary of its
issuance, the dividend increases to an effective rate of 14% compounding
quarterly. On the sixth anniversary all previously accrued dividends will be
paid in kind. The annual dividend rate will increase to 16% in the seventh
year,
6
<PAGE>
18% in the eighth year, and 20% in the ninth and tenth years. After the
sixth anniversary, subject to the terms of the Indenture, all dividends will
be payable in cash. The Company is required to redeem, in U.S. dollars, the
redeemable preferred stock at $1,000 per share plus accrued and unpaid
dividends on the tenth anniversary of its issuance.
The holders of the redeemable preferred stock are entitled to voting
rights limited to specific matters included on the Company's by-laws.
The amount of accrued and unpaid dividends on the redeemable
preferred stock at December 31, 1997 and at March 31, 1998 was $3,661,000 and
$4,658,000, respectively.
7
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 6-K contains forward-looking statements, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. The following discussion
should be read in conjunction with the financial statements, including the
notes thereto, included in this report.
Results of Operations
Three months ended March 31, 1998 compared with three months ended
March 31, 1997
Although the Company's financial statements are presented pursuant to
U.S. GAAP in U.S. dollars, the Company's transactions are consummated in both
Brazilian reais and U.S. dollars. Inflation and devaluation in Brazil have
had, and may continue to have, substantial effects on the Company's results of
operations and financial condition. See "Inflation and Exchange Rates".
For the purpose of management's discussion and analysis, net revenues
are defined as total revenues less cost of products sold.
As a result of the development of the Company's business in Sao Paulo
and Rio de Janeiro (the "Initial Markets") during the periods presented, the
period-to-period comparisons of the Company's results of operations are not
necessarily meaningful and should not be relied upon as an indication of
future performance.
<TABLE>
<CAPTION>
Three months ended
March 31,
--------------------------------------
1997 1998
---- ----
<S> <C> <C>
Net revenues $ 23,978 $ 4,328,340
Operating costs and expenses:
Services rent and maintenance 833,887 1,985,632
Selling, general and administrative 2,519,918 6,433,600
Depreciation and amortization 152,173 736,517
----------- -----------
Total operating costs and expenses 3,505,978 9,155,749
----------- -----------
Operating loss (3,482,000) (4,827,409)
Other income (expense) 16,677 (2,894,220)
----------- -----------
Net loss $(3,465,323) $ 7,721,629
=========== ===========
Other data:
EBITDA(1) $(3,329,827) $(4,090,892)
Number of subscribers at end of period 1,674 62,328
</TABLE>
- --------------------
(1) EBITDA is defined as operating income (loss) plus depreciation,
amortization and non-cash charges. EBITDA is a commonly used measure
of performance in the paging industry. While EBITDA should not be
construed as a substitute for operating income (loss) or a better
measure of liquidity than cash flow from operating activities, each of
which is 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 and any future debt service.
EBITDA, however, is not necessarily a measure of the Company's ability
to fund its cash needs because it does not include capital
expenditures, which the Company expects to continue to be significant.
8
<PAGE>
Net Revenues. The Company's total revenues primarily consist of
monthly fees paid by subscribers for the paging service, as well as product
sales to both individuals and retailers, net of sales taxes. During the three
months ended March 31, 1998, the Company was offering service to customers in
Sao Paulo and Rio de Janeiro. Service in Rio de Janeiro began in September
1997.
For the three-month period ended March 31, 1998, the Company generated
net revenues of $4,328,340 consisting of $5,163,989 in service revenues,
$1,338,999 in product sales to customers, cost of sales of $1,404,213 and sales
taxes of $770,435. During the three month period ended March 31, 1997, the
Company's net revenues were $23,978. Average monthly revenue for the three month
period ended March 31, 1998 was approximately $33.90; average monthly revenue
for the three month period ended March 31, 1997 was not meaningful due to the
limited number of subscribers.
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses include a portion of costs of compensation and benefits for the
Company's dispatch and technical employees, transmitter site rentals,
telephone line costs, transmission costs, vehicle rental costs and repair and
maintenance expenditures and service call costs. During the three month period
ended March 31, 1998, the Company incurred $1,985,632 of expenses in
connection with the operations in Sao Paulo and Rio de Janeiro. During the
three month period ended March 31, 1997, the Company incurred service, rent
and maintenance expenses of $833,887 which did not include expenses from the
Rio de Janeiro operation.
Selling and Marketing Expenses. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
three month periods ended March 31, 1998 and 1997 the Company incurred
$2,632,143 and $368,005, respectively, of selling and marketing expenses; such
amount increased in 1998 from the same period in 1997 as the Company began full
operations in March of 1997.
General and Administrative Expenses. General and administrative
expenses include compensation benefits, rent, bank fees, outside services and
the provision for losses on accounts receivable. During the three month
periods ended March 31, 1998 and 1997, the Company incurred $3,801,457 and
$2,151,913, respectively, of general and administrative expenses. Included in
such amounts is approximately $700,000 of costs associated with the provision
for doubtful accounts.
Depreciation and Amortization. Depreciation and amortization expenses
consist primarily of depreciation of leased pagers, transmitters, paging
terminals, leasehold improvements, telephone lines and cost of network
installation. Depreciation and amortization expenses increased from
approximately $152,173 for the three month period ended March 31, 1997 to
$736,517 for the three month period ended March 31, 1998, primarily due the
purchase and installation of equipment necessary to buildout its paging
network and the buildout of the Rio de Janeiro office.
Operating Loss. For the three month periods ended March 31, 1998 and
1997 the Company generated operating losses of $4,827,409 and $3,482,000,
respectively, primarily due to expenses in connection with the development of
the Company's business as explained above.
Interest Expense. Interest expense was $4,614,272 and $0 for the
three month period ended March 31, 1998, primarily as a result of interest
associated with the Senior Notes.
Interest Income. Interest Income increased to $3,467,655 for the
three month period ended March 31, 1998 primarily as a result of investing the
net proceeds from the Senior Note offering and issuance by the Company of its
redeemable preferred stock.
Exchange and Translation (Losses). Exchange and translation (losses)
were $233,634 for the three-month period ended March 31, 1997, primarily as a
result of its short-term investments in Brazil. Effective January 1, 1998, the
Company began using the real as its functional currency. Unless Brazil returns
to a highly inflationary status, the Company does not expect to incur future
exchange and translation gains and losses.
Monetary Loss. Beginning January 1, 1998, in accordance with SFAS52,
monetary losses from the depreciation of the real against the U.S. dollar
resulted in a net transaction loss of $1,660,058 for the three-month period
ended March 31, 1998.
9
<PAGE>
Income Taxes. The Company did not have taxable income during the
periods presented and expects to generate losses for the foreseeable future.
Net Loss. As explained above, net loss in the period presented is
primarily attributable to the significant expenses incurred during the period in
connection with the development of the Company's business and the net interest
expense associated with the Senior Notes.
Liquidity and Capital Resources. The Company's operations and
expansion into new markets and products lines will require substantial capital
investment for the development and installation of paging systems and for the
procurement of pagers and paging equipment. The Company made capital
expenditures of $3,494,934 and $2,386,631, respectively, for the three months
ended March 31, 1998 and 1997.
The Company commenced the buildout of systems for its paging services
in May 1996 and completed the buildout of the Initial Markets during the first
quarter of 1998 and is evaluating whether to commence the marketing of paging
services into other markets during 1999. As of March 31, 1998, the Company has
(1) completed the buildout of its Sao Paulo and Rio de Janeiro systems, which
served 62,328 subscribers, (2) installed transmitters in each of the
additional eight cities where it has secured licenses, and (3) hired personnel
and infrastructure necessary to support the Company's Sao Paulo and Rio de
Janeiro operations. The Company expects that the proceeds of the Senior Notes
and the issuance of redeemable preferred stock will be sufficient to complete
the buildout of Initial Markets and may need to secure additional financing to
complete the full commercial development of expansion markets.
The principal capital expenditure requirements to construct a paging
system involve the acquisition of pagers for leasing and the acquisition and
installation of transmission facilities, both of which are directly related to
the demand of paging service. Additional capital is required to fund operating
losses incurred during the initial stages of construction and the commencement
of paging services. The Company currently anticipates that its cash requirements
(comprised of capital expenditures, working capital requirements, debt service
requirements and anticipated operating losses) for the remaining nine months
will be approximately $25,000,000.
Inflation and Exchange Rates. Inflation and exchange rate variations
have had, and may continue to have, 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 in its
expenses and may set its prices without government regulation. However, under
Brazilian law designed to reduce inflation, the rates that the Company may
charge to a particular subscriber may not be increased until the next
anniversary of the subscriber's initial subscription date. 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. Devaluation of the real
may also have an adverse effect on the Company. The Company collects
substantially all of its revenues in reais, but pays certain of its expenses,
(including pagers, a significant portion of its transmission equipment costs
and substantially all interest expense) 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) will be adversely affected. This effect on the Company's revenues may
negatively impact the Company's ability to fund U.S. dollar-based
expenditures. Accordingly, devaluation of the real may have a material adverse
effect on the Company's results of operations and financial condition.
Further, as of January 1, 1998, the Company's financial statements will
reflect foreign exchange gains and losses associated with monetary assets and
liabilities denominated in currencies other than the real. See footnote
"Foreign Currency Translation" contained in the Notes to Consolidated
Financial Statements. As a result, the devaluation of the real against the
U.S. dollar will cause 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 transaction losses in the Company's financial
statements.
10
<PAGE>
Recent Economic Events. The economic and financial turmoil in
Southeast Asia during 1997 has had an impact on many emerging markets,
including Brazil. As a result of these events, the Brazilian government has
taken significant measures to protect the real, as well as the gains achieved
over the last several years by the Real Plan. Among other actions, on October
27, 1997, Brazil's Central Bank significantly raised short-term interest
rates, and, on November 10, 1997, the Brazilian government announced a series
of austerity measures, generally including budget cuts, restrictions on public
indebtedness, tax increases, export incentives and restrictions on imports.
These measures, which are having a negative impact on Brazil's economic
growth, are designed to improve the country's fiscal and current account
deficits and relieve pressure on the real. During the first quarter of 1998,
short-term interest rates declined but remained higher than the rates in
effect prior to the Brazilian government's October and November initiatives.
The Brazilian government continues to attempt to protect its currency through
various mechanisms. These include maintaining high short-term interest rates
and maintaining high levels of import duties on various products. The
short-term effect of these policies has been a tightening of consumer credit
and increased rates of unemployment. Soon after the austerity measures were
initiated, the Company began to experience an increase in customer delinquency
rates which, among other things, resulted in the Company increasing its
provision for doubtful accounts and increasing customer cancellations. In the
first quarter of 1998, the monthly churn rate associated with customer
cancellations was approximately 4.5% versus a historical monthly churn rate of
between approximately 2.0% and 2.5%. Of this amount, approximately 90% of
cancellations resulted from the termination of service of non-paying customers.
In April 1998, the Company implemented a more restrictive credit qualification
policy for its retail customers. The impact of such policy will not be
measurable until early in the third quarter, but sales made in the first
quarter, before implementation of the new policy, are expected to result in an
increase in monthly churn rate of 1.0% to 2.0% in the second quarter as compared
to the prior quarter. While it is anticipated that the new qualification policy
will reduce sales from the retail distribution channel during the second
quarter, the Company remains hopeful that the new policy will improve the credit
quality of the customer base over time. The Company believes these difficulties
are short-term in nature but there can be no assurance that the measures taken
by the government and the Company will be successful, or that the increase in
delinquent payments and service cancellations will abate.
11
<PAGE>
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
3.1* -- Bylaws of Paging Network do Brasil S.A. (English
Translation).
4.1* -- Indenture dated as of June 1, 1997 between
Paging Network do Brasil S.A. and The Chase
Manhattan Bank, as Trustee (including exhibits).
4.2* -- Form of Senior Note (included in Exhibit 4.1).
- ------------
* Incorporated herein by reference to the Exhibit to the
Company's Registration Statement on Form F-4, Registration
No. 333-29865.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PAGING NETWORK DO BRASIL S.A.
(Registrant)
By: /s/ Thomas C. Trynin
--------------------------
Thomas C. Trynin
President and
Chief Executive Officer
Date: June 1, 1998
