<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 September 30, 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
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
a) Balance Sheet at December 31, 1997 (audited) and September 30, 1998
(unaudited)...........................................................1
b) Statement of Operations for the three and nine months ended September
30, 1997 and 1998 (unaudited).........................................2
c) Statement of Cash Flows for the nine months ended September 30, 1997
and 1998 (unaudited)..................................................3
d) Statement of Shareholders' Equity at September 30, 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..................................................................13
(i)
<PAGE>
Item 1(a)
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
At December 31, 1997 and September 30, 1998
(Amounts in U.S. dollars)
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
(Audited) (Unaudited)
------------ -------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents........................... $ 377,004 $ 55,066
Short-term investments.............................. 59,039,317 44,550,715
Accounts receivable, net............................ 819,835 431,535
Refundable taxes.................................... 280,917 1,280,445
Pager inventories................................... 6,825,310 6,715,181
Prepaid expenses and other current assets........... 173,030 380,845
Pledged securities-current.......................... 14,842,004 15,519,009
----------- ------------
Total current assets.......................... 82,357,417 68,932,796
Fixed assets, net..................................... 18,945,448 22,462,306
Pledged securities.................................... 23,886,559 16,401,329
Debt issuance costs, net.............................. 6,895,019 6,403,124
Other assets.......................................... 316,020 324,274
----------- ------------
Total assets.................................. $132,400,463 $114,523,829
============ ============
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable.................................... $ 1,881,127 $ 1,417,771
Accrued expenses.................................... 4,255,335 10,771,708
Payable to related parties.......................... 1,571,368 1,217,914
----------- ------------
Total current liabilities..................... 7,707,830 13,407,393
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 36,813,714
Shareholders' equity (deficit)
Cumulative translation adjustment..................... -- 2,491,749
Common stock, without par value..................... -- --
Authorized shares -2,037,387........................ -- --
Issued and outstanding 1,378,401.................... 30,760 30,760
Accumulated deficit................................... (33,999,551) (63,219,787)
----------- ------------
Total shareholders' equity (deficit).......... (33,968,791) (60,697,278)
----------- ------------
Total liabilities and shareholders' equity
(deficit)..................................... $132,400,463 $114,523,829
============ ============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
Item 1(b)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
For the three and nine months ended September 30, 1997 and 1998
(Amounts in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------------- ---------------------------
1997 1998 1997 1998
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Services, rent and maintenance revenue.. $ 990,933 $ 6,493,560 $ 1,248,500 $ 17,269,327
Product revenues........................ 3,710,631 882,590 4,013,411 3,695,423
------------- ------------- ------------- ------------
Gross revenues.......................... 4,701,564 7,376,150 5,261,911 20,964,750
Taxes................................. (621,854) (668,965) (800,051) (2,027,345)
------------ ------------ ------------ ------------
Total revenues.......................... 4,079,710 6,707,185 4,461,860 18,937,405
Cost of products sold................... (3,244,718) (969,179) (3,508,911) (3,966,277)
------------ ------------ ------------ ------------
834,992 5,738,006 952,949 14,971,128
Operating costs and expenses:
Services rent and maintenance ........ 1,193,167 2,139,578 2,892,404 6,399,848
Selling, general and administrative... 5,219,471 7,007,610 11,110,413 20,105,979
Depreciation and amortization......... 391,240 1,262,150 801,640 3,181,892
------------- ------------- ------------- ------------
Total operating costs and expenses.. 6,803,878 10,409,338 14,804,457 29,687,719
------------- ------------- ------------- ------------
Operating loss...................... (5,968,886) (4,671,332) (13,851,508) (14,716,591)
Other income (expense):
Interest expense ..................... (4,350,744) (4,073,152) (5,461,519) (13,186,511)
Interest income ...................... 4,362,494 2,929,546 5,728,260 9,237,181
Other expense......................... -- (237,135) -- (290,027)
Monetary loss......................... -- (2,259,021) -- (5,304,581)
Exchange and translation loss......... (1,455,050) -- (2,163,375) --
------------ ------------ ------------ ------------
Total other income (expense).......... (1,443,300) (3,639,762) (1,896,634) (9,543,938)
------------ ------------ ------------ ------------
Net loss................................ $ (7,412,186) $ (8,311,094) $ (15,748,142)$ (24,260,529)
============ ============ ============= =============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
Item 1(c)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1997 and 1998
(Amounts in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Operating activities:
Net loss..................................................... $(15,748,142) $(24,260,529)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization.............................. 801,640 3,181,892
Provision for losses on accounts receivable................ 210,476 1,649,495
Amortization of debt issuance costs........................ 117,769 505,064
Monetary loss.............................................. -- 5,304,581
Loss on sale of equipment.................................. -- 57,584
Changes in operating assets and liabilities:
Increase in accounts receivable.......................... (1,574,497) (1,287,798)
Decrease (increase) in refundable taxes.................. 407,590 (1,048,650)
Increase in pager inventories............................ (386,114) (297,530)
Decrease (increase) in prepaid expenses and other current 291,254 (226,798)
assets...................................................
Increase in other assets................................. (300,325) (27,559)
(Increase) decrease pledged securities................... (846,029) 6,836,856
Increase (decrease) in accounts payable.................. 1,082,106 (706,658)
Increase in accrued expenses............................. 7,608,853 6,603,792
Increase (decrease) in payable to related parties ....... (561,352) 150,000
------------ ------------
Net cash used in operating activities.................. (8,896,771) (3,566,258)
Investing activities:
Purchase of fixed assets................................. (7,635,164) (8,397,683)
Proceeds from sale of equipment.......................... -- 375,589
Increase (decrease) in short term investments............ (71,293,835) 11,398,369
------------ ------------
Net cash (used in) provided by investing activities.... (78,928,999) 3,376,275
Financing activities:
Proceeds from the sale of common and redeemable preferred 9,550,660 --
stock....................................................
Proceeds of senior notes, net of debt issuance cost...... 117,000,000 --
Pledged securities....................................... (45,603,342) --
------------ ------------
Net cash provided by financing activities.............. 80,947,318 --
Effect of exchange rate changes on cash........................ -- (131,955)
------------ ------------
Net decrease in cash and cash equivalents...................... (6,878,452) (321,938)
Cash and cash equivalents at beginning of period............... 12,444,689 377,004
------------ ------------
Cash and cash equivalents at end of period..................... $ 5,566,237 $ 55,066
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on senior notes............................... $ -- $ 8,437,500
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
Item 1(d)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF SHAREHOLDERS' EQUITY
For the nine months ended September 30, 1998
(Amounts in U.S. dollars)
(Unaudited)
<TABLE>
<CAPTION>
Other
Common Accumulated Comprehensive
Stock Deficit Income Total
------------ -------------- -------------- -------------
<S> <C> <C> <C> <C>
Balance at December 31, 1997..... $ 30,760 $ (33,999,551) $ -- $ (33,968,791)
Net loss for the period.......... -- (24,260,529) -- (24,260,529)
Foreign currency translation
adjustment..................... -- -- 2,491,749 2,491,749
Monetary adjustment on redeemable
preferred stock................ -- (1,807,418) -- (1,807,418)
Accrued dividends on redeemable
preferred stock.................. -- (3,152,289) -- (3,152,289)
------------ --------------- ------------- -------------
Balance at September 30, 1998.... $ 30,760 $ (63,219,787) $ 2,491,749 $ (60,697,278)
============ ============== ============= =============
</TABLE>
See accompanying notes to financial statements.
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<PAGE>
Item 1(e)
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
September 30, 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 $5.5
million and in December 1996, as a result of capital contributions of three new
shareholders, received approximately $15 million 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). In June 1997, the Company issued $125
million 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 $9.5 million in connection with the issuance of
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.
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<PAGE>
Allowance for Doubtful Accounts
The Company had an allowance for doubtful accounts of $977,000 at December
31, 1997, and $1,494,000 at September 30, 1998. Charges to the allowance during
the three months ended September 30, 1997 and 1998 were $0 and $1,132,000.
Inventories
Inventories are recorded at the lower of average cost or market.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
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 million senior
note offering consummated on June 6, 1997. As of September 30, 1998, the Company
had a payable of approximately $968,000 to Warburg, Pincus and approximately
$250,000 to Paging Network, Inc.
4. Long Term Debt
On June 6, 1997, the Company issued $125 million 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
million proceeds approximately $45,6 million 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 September 30, 1998, the Company is unable to make any
dividend payments.
At September 30, 1998, the Senior Notes were traded at 43% of principal
amount.
5. Accrued Expenses
Accrued expenses at December 31, 1997 and September 30, 1998 are comprised
of the following:
1997 1998
--------- -----------
Excise taxes payable $ 141,013 $ 148,016
Withholding taxes payable 392,177 286,854
Payroll and other benefits payable 1,419,651 2,143,910
Accrued interest payable 1,125,000 5,343,750
Other 1,177,494 2,849,178
--------- -----------
$4,255,335 $10,771,708
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<PAGE>
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, 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 September 30, 1998 was $3,661,000 and $6,814,000,
respectively.
7. Subsequent Event
The Company initiated an operational change in November 1998 that
consolidated its dispatch centers, which were formerly in Rio de Janeiro and Sao
Paulo, in Sao Paulo. The financial impact of such consolidation is expected to
be approximately $1 million and will be recorded as an operating expense in the
fourth quarter of 1998.
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<PAGE>
Item 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 6-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 6-K, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," "project," and similar expressions, as they relate to
Company or its management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. Such statements are subject to certain risks,
uncertainties and assumptions, including high level of and restrictions imposed
by debt, ability to implement management initiatives, dependence on the wireless
communications industry, fluctuations in quarterly results, and competition.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect the current views of the Company's management with respect to future
events and are subject to these and other risks, uncertainties and assumptions
relating to the operations, results of operations, growth strategy and liquidity
of the Company. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this paragraph.
Results of Operations
Three months and nine months ended September 30, 1998 compared with three
months and nine months ended September 30, 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 Nine Months Ended
September 30, September 30,
------------------------------------------------ ---------------------------------------------
1997 % 1998 % 1997 % 1998 %
------------ ------- ----------- -------- ------------ -------- ------------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues..................... $ 834,992 100% $ 5,738,006 100% $ 952,949 100% $ 14,971,128 100%
Operating costs and expenses:
Services rent and maintenance. 1,193,167 143% 2,139,578 37% 2,892,404 304% 6,399,848 43%
Selling and marketing......... 2,916,063 349% 3,027,944 53% 4,293,806 451% 8,467,293 57%
General and administrative.... 2,303,408 276% 3,979,666 69% 6,816,607 715% 11,638,686 77%
Depreciation and amortization. 391,240 47% 1,262,150 22% 801,640 84% 3,181,892 21%
------------ ------- ----------- -------- ------------ -------- ----------- ----
Total operating costs and expenses 6,803,878 815% 10,409,338 181% 14,804,457 1,553% 29,687,719 198%
------------ ------- ----------- -------- ------------ -------- ----------- ----
Operating loss................... (5,968,886) 715% (4,671,332) 81% (13,851,508) 1,453% (14,716,591) 98%
Other income (expenses).......... (1,443,300) 173% (3,639,762) 63% (1,896,634) 199% (9,543,938) 64%
------------- ------- ----------- -------- ------------ -------- ------------- ----
Net loss......................... $ (7,412,186) 888% $(8,311,094) 144% $(15,748,142) 1,652% $ (24,260,529) 162%
------------ ------- ------------ -------- ----------- -------- ------------ -----
Other data:
EBITDA(1)..................... $ (5,577,646) (668%) $(3,409,182) (59%) (13,049,868) (1,369%) 11,534,699) (77%)
Number of subscribers at end
of period..................... 25,418 82,705 25,418 82,705
- ---------
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.
</TABLE>
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<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 and
nine months ended September 30, 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 months and nine months ended September 30, 1998, the Company
generated net revenues of $5,738,006 and $14,971,128 consisting of $6,493,560
and $17,269,327 in service revenues, $882,590 and $3,695,423 in product sales to
customers, cost of sales of $969,179 and $3,966,277 and sales taxes of $668,965
and $2,027,345, respectively. During the three months and nine months ended
September 30, 1997, the Company's net revenues were $834,992 and $952,949,
respectively. Average monthly revenue for the three months ended September 30,
1998 was approximately $29.10, down from approximately $32 for the three months
ended September 30, 1997, which decrease is primarily due to the fluctuation in
the real/dollar exchange rate for the relative periods.
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, and repair and maintenance expenditures. During
the three months and nine months ended September 30, 1998, the Company incurred
$2,139,578 and $6,399,848, respectively, of expenses in connection with the
operations in Sao Paulo and Rio de Janeiro. During the three months and nine
months ended September 30, 1997, the Company incurred service, rent and
maintenance expenses of $1,193,167 and $2,892,404, respectively.
Selling and Marketing Expenses. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
three months and nine months ended September 30, 1998 the Company incurred
$3,027,944 and $8,467,293, respectively, of selling and marketing expenses.
During the three months and nine months ended September 30, 1997, the Company
incurred $2,916,063 and $4,293,806, respectively of selling and marketing
expenses.
General and Administrative Expenses. General and administrative expenses
include compensation benefits, office rent, bank fees, outside services and the
provision for losses on accounts receivable. During the three months and nine
months ended September 30, 1998 and 1997 the Company incurred $3,979,666 and
$11,638,686, and $2,303,408 and $6,816,607, respectively, of general and
administrative expenses. For the three months and nine months ended September
30, 1998 and 1997, included in such amounts is approximately $396,097 and
$1,649,495 and $185,476 and $210,476, respectively, of costs associated with the
provision for losses on accounts receivable.
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 $391,240 and $801,640 for the three months and nine months ended
September 30, 1997 to $1,262,150 and $3,181,892 for the three months and nine
months ended September 30, 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 months and nine months ended September 30,
1998 the Company generated operating losses of $4,671,332 and $14,716,591,
respectively, and for the three months and nine months ended September 30, 1997
$5,968,886 and $13,851,508, respectively, primarily due to expenses in
connection with the development of the Company's business as explained above.
Interest Expense. Interest expense was $4,073,152 and $13,186,511,
respectively, for the three months and nine months ended September 30, 1998, and
$4,350,744 and $5,461,519, respectively, for the three months and nine months
ended September 30, 1997, primarily as a result of interest associated with the
Senior Notes.
Interest Income. Interest Income increased to $2,929,546 and $9,237,181,
respectively, for the three months and nine months ended September 30, 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.
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<PAGE>
Exchange and Translation (Losses). Exchange and translation loss was
$1,455,050 and $2,163,375 respectively, for the three months and nine months
ended September 30, 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 $2,259,021 and $5,304,581, respectively,
for the three months and nine months ended September 30, 1998.
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 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. For the three months and nine months ended
September 30, 1998 and 1997 the Company made capital expenditures of $2,232,273
and $8,397,683 and $3,170,399 and $7,635,164 respectively.
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 September 30, 1998, the Company has (1)
completed the buildout of its Sao Paulo and Rio de Janeiro systems, which served
82,705 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 three months
will be approximately $5 million.
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,
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<PAGE>
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 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.
Impact of the Year 2000. The Year 2000 issue is the result of many computer
programs and imbedded chips being written using two digits rather than four to
define the applicable year. Many of the Company's computer programs that have
date-sensitive software may recognize a date using "00"as the year 1900 rather
than the year 2000.
If not addressed and completed on a timely basis, failure of the Company's
computer systems to process Year 2000 related data correctly could have a
material adverse effect. Failures of this kind could, for example, lead to
incomplete or inaccurate accounting, order processing or recording errors in
inventory or other assets. If not addressed, the potential risks to the Company
include financial loss, legal liability, interruption to business.
The Company presently believes that with modifications to existing software
and conversions to new software, the Year 2000 issue will be resolved for all
the Company's own systems on a timely basis.
However, even if these changes are successful, the Company remains at risk
from Year 2000 failures caused by third parties. The Company has therefore
initiated efforts to survey key utilities and suppliers, among others, to assess
and wherever possible remediate Year 2000 issues. The Company expects to
complete its survey assessment of Year 2000 awareness by the first quarter of
1999.
Recent Economic Events. The economic and financial turmoil in Southeast Asia
and Russia during 1997 and 1998 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, Brazils's
Central Bank significantly raised short-term interest rates, 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, 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. 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.
In October, 1998, the Brazilian government proposed its Fiscal Stablization
Program ("PEF"), an austerity plan comprised of a three-year tax increase
program and a structural reform to reduce government spending, which subject to
approval by the Brazilian legislature. In announcing the PEF, the Brazilian
government acknowledged the possibility of a recession in 1999. While it is too
soon to measure the impact of such a program, management believes that the
Company will experience an increase in customer delinquency rates, which in turn
will result in increased customer cancellations in the fourth quarter of 1998 as
compared to the third quarter of 1998.
Additionally, as a result of the devaluation of the Russian currency in
August 1998, securities which are traded in the United States high yield debt
markets have experienced decreases in market value. Based on information
available to the Company, the Company's Senior Notes were traded at
approximately 43% of principal amount at September 30, 1998, down from
approximately 80% of principal amount at June 30, 1998.
While the Company continues to believe that Brazil's economic downturn and
market uncertainty are short-term in nature, there can be no assurance that the
measures taken by the Company to execute its business plan under the current
economic conditions will be successful.
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<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.
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<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: November 16, 1998
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