<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 June 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)
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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
June 30, 1998 (unaudited)...........................................3
b) Statement of Operations for the
three months and six months ended June 30, 1997
and 1998 (unaudited)................................................4
c) Statement of Cash Flows for the
six months ended June 30, 1997 and 1998 (unaudited).................5
d) Statement of Shareholders' Equity at June 30, 1998 (unaudited)......6
e) Notes to Financial Statements (unaudited)...........................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations..................10
PART II. OTHER INFORMATION
- -------- -----------------
Item 1. Legal Proceedings..............................................14
Item 2. Changes in Securities..........................................14
Item 3. Defaults Upon Senior Securities................................14
Item 4. Submission of Matters to a Vote of Security Holders............14
Item 5. Other Information..............................................14
Item 6. Exhibits.......................................................14
Signatures...............................................................15
2
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Item 1 (a)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
At December 31, 1997 and June 30, 1998
(Amounts in U.S. dollars)
<CAPTION>
December 31, June 30,
1997 1998
----------------- ------------------
(Audited) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 377,004 $ 933,244
Short-term investments.................................... 59,039,317 45,370,903
Accounts receivable, net.................................. 819,835 482,889
Refundable taxes.......................................... 280,917 1,006,023
Pager inventories......................................... 6,825,310 8,994,488
Prepaid expenses and other current assets................. 173,030 451,013
Pledged securities-current................................ 14,842,004 15,287,140
--------------- ---------------
Total current assets............................... 82,357,417 72,525,700
Fixed assets, net............................................. 18,945,448 22,474,329
Pledged securities............................................ 23,886,559 16,147,113
Debt issuance costs, net...................................... 6,895,019 6,257,526
Other assets.................................................. 316,020 327,797
--------------- ---------------
Total assets........................................ $ 132,400,463 $ 117,732,465
=============== ===============
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable.......................................... $ 1,881,127 $ 1,623,836
Accrued expenses.......................................... 4,255,335 6,086,599
Payable to related parties................................ 1,571,368 1,067,914
--------------- ---------------
Total current liabilities............................ 7,707,830 8,778,349
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 35,708,394
Shareholders' equity (deficit)
Cumulative translation adjustments............................ - 1,279,237
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) (53,064,275)
--------------- ---------------
Total shareholders' equity (deficit)................ (33,968,791) (51,754,278)
--------------- ---------------
Total liabilities and shareholders' equity (deficit) $132,400,463 $ 117,732,465
================ ===============
</TABLE>
See accompanying notes to financial statements.
3
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Item 1(b)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
For the three months and six months ended June 30, 1997 and 1998
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------ -------------------------------
1997 1998 1997 1998
------------ ------------- ------------ -----------------
<S> <C> <C> <C> <C>
Revenues:
Services, rent and maintenance
revenues.............................. $ 215,944 $ 5,760,607 $ 257,567 $ 10,775,767
Product revenues........................ 273,899 1,477,877 302,780 2,812,833
------------ ------------- ------------ -----------------
Gross revenues............................ 489,843 7,238,484 560,347 13,588,600
Taxes................................... (149,799) (740,817) (178,197) (1,358,380)
------------ ------------- ------------ -----------------
Total revenues............................ 340,044 6,497,667 382,150 12,230,220
Cost of products sold..................... (246,065) (1,592,885) (264,193) (2,997,098)
------------ ------------- ------------ -----------------
93,979 4,904,782 117,957 9,233,122
Operating costs and expenses:
Services rent and maintenance........... 865,350 2,274,638 1,699,237 4,260,270
Selling, general and administrative..... 3,416,192 6,664,769 5,890,942 13,098,369
Depreciation and amortization........... 258,227 1,183,225 410,400 1,919,742
------------ ------------- ------------ -----------------
Total operating costs and expenses.. 4,539,769 10,122,632 8,000,579 19,278,381
------------ ------------- ------------ -----------------
Operating loss...................... (4,445,790) (5,217,850) (7,882,622) (10,045,259)
Other income (expense):
Interest expense...................... (1,065,607) (4,499,087) (1,110,775) (9,113,359)
Interest income....................... 1,115,455 2,839,980 1,365,766 6,307,635
Other expense......................... - 34,654 - (52,891)
Monetary loss......................... - (1,385,502) - (3,045,560)
Exchange and translation loss......... (474,691) - (708,325) -
------------ ------------- ------------ -----------------
Total other income (expense).......... (424,843) (3,009,955) (453,334) (5,904,175)
------------ ------------- ------------ -----------------
Net loss.................................. $ (4,870,633) $ (8,227,805) $ (8,335,956) $ (15,949,434)
============ ============= ============ =================
</TABLE>
See accompanying notes to financial statements.
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Item 1(c)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
For the six months ended June 30, 1997 and 1998
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
-----------------------------------
1997 1998
--------------- ------------------
<S> <C> <C>
Operating activities:
Net loss...................................................................... $ (8,335,956) $ (15,949,435)
Adjustments to reconcile net loss to net cash used by
operating activities:
Depreciation and amortization.............................................. 410,400 1,919,742
Provision for losses on accounts receivable................................ 25,000 1,253,398
Amortization of debt issuance costs........................................ (14,225) 610,023
Monetary loss.............................................................. - 3,045,560
Loss on sale of equipment.................................................. - 87,545
Changes in operating assets and liabilities:
Increase in accounts receivable....................................... (323,349) (939,841)
Decrease (increase) in refundable taxes............................... 103,869 (738,926)
Increase in pager inventories......................................... (1,062,755) (2,525,996)
Increase in prepaid expenses and other current assets................. (231,949) (290,819)
Increase in other assets.............................................. (288,694) (23,233)
(Increase) decrease in pledged securities............................. (171,232) 7,407,095
Increase (decrease) in accounts payable............................... 812,446 (181,284)
Increase in accrued expenses.......................................... 2,883,387 1,860,423
Decrease in payable to related parties................................ (561,352) (503,454)
-------------- -----------------
Net cash used in operating activities............................ (6,754,410) (4,969,202)
Investing activities:
Purchase of fixed assets.............................................. (4,464,765) (6,165,410)
(Increase) decrease in short term investment.......................... (69,486,408) 11,801,544
-------------- ----------------
Net cash (used in) provided by investing activities.............. (73,951,173) 5,636,134
Financing activities:
Proceeds from the sale of common and redeemable preferred stock....... 9,550,660 -
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 ......................................... - (110,692)
-----------------
Net increase in cash and cash equivalents........................................ 241,735 556,240
Cash and cash equivalents at beginning of period................................. 12,444,689 377,004
-------------- ----------------
Cash and cash equivalents at end of period....................................... $ 12,686,424 $ 933,244
============== ================
</TABLE>
See accompanying notes to financial statements.
5
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Item 1(d)
<TABLE>
PAGING NETWORK DO BRASIL
STATEMENT OF SHAREHOLDERS' EQUITY
For the six months ended June 30, 1998
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Cumulative
Accumulated Translation
Common Stock Deficit Adjustments 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................................... - (2,046,970) - (2,046,970)
Cumulative translation adjustement.......... - - 1,279,237 1,279,237
Monetary adjustment on redeemable preferred
stock................................... - (1,068,319) - (1,068,319)
Net loss for the period..................... - (15,949,435) - (15,949,435)
--------------- --------------- --------------- ---------------
Balance at June 30, 1998.................... $ 30,760 $ (53,064,275) $ 1,279,237 $ (51,754,278)
=============== =============== =============== ===============
</TABLE>
See accompanying notes to financial statements.
6
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Item 1(e)
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
June 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 now 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).
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Revenues Recognition
The Company recognizes revenues under service, rental and maintenance
agreements with customers as the related services are performed. Advance
billings for services are deferred and recognized as revenues 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.
Allowance for Doubtful Accounts
The Company had an allowance for doubtful accounts of $977,000 at
December 31, 1997, and $1,215,000 at June 30, 1998. Charges to the allowance
during the six months ended June 30, 1997 and 1998 were $0 and $1,015,000.
Inventories
Inventories are recorded at the lower of average cost or market.
Reclassifications
Certain amounts for the three months ended March 31, 1998 have been
reclassified to conform with the presentation of the financial statements as of
June 30, 1998.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect 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 June 30, 1998,
the Company had a payable of approximately $968,000 to Warburg, Pincus and
approximately $100,000 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 of each year, commencing on December 6, 1997.
Of the $125 million proceeds approximately $45.6 million were 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 June 30, 1998, the
8
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Company is unable to make any dividend payments.
At June 30, 1998, the Senior Notes were traded at 80.85% of principal
amount.
5. Accrued Expenses
Accrued expenses at December 31, 1997 and June 30, 1998 are comprised
of the following:
1997 1998
---- ----
Excise taxes payable $ 141,013 $ 148,135
Withholding taxes payable 392,177 286,854
Payroll and other benefits payable 1,419,651 1,775,577
Accrued interest payable 1,125,000 1,125,000
Other 1,177,494 2,751,033
---------- ----------
$4,255,335 $6,086,599
========== ==========
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 Senior Note 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 in the Company's by-laws.
The amount of accrued and unpaid dividends on the redeemable preferred
stock at December 31, 1997 and at June 30, 1998 was $3,661,000 and $5,708,000,
respectively.
9
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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 and six months ended June 30, 1998 compared with three
months and six months ended June 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 Six Months ended
June 30, June 30,
---------------------------- ----------------------------
1997 1998 1997 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues .................... $ 93,979 $ 4,904,782 $ 117,957 $ 9,233,122
Operating costs and expenses:
Services rent and maintenance . 865,350 2,274,638 1,699,237 4,260,270
Selling, general and
administrative ................ 3,416,192 6,664,769 5,890,942 13,098,369
Depreciation and amortization . 258,227 1,183,225 410,400 1,919,742
------------ ------------ ------------ ------------
Total operating costs and
expenses ........................ 4,539,769 10,122,632 8,000,579 19,278,381
------------ ------------ ------------ ------------
Operating loss .................. (4,445,790) (5,217,850) (7,882,622) (10,045,259)
Other income (expense) .......... (424,843) (3,009,955) (453,334) (5,904,175)
------------ ------------ ------------ ------------
Net loss ........................ $ (4,870,633) $ (8,227,805) $ (8,335,956) $(15,949,434)
============ ============ ============ ============
Other data:
EBITDA1 ......................... $ (4,187,563) $ (4,034,625) (7,472,222) (8,125,517)
Number of subscribers at end of
period .......................... 5,163 70,272 5,163 70,272
</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.
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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 six months ended June 30, 1998, the Company was offering service to
customers in Sao Paulo and Rio de Janeiro.
For the three months and six months ended June 30, 1998, the Company
generated net revenues of $4,904,782 and $9,233,122 consisting of $5,760,607 and
$10,775,767 in service revenues, $1,477,877 and $2,812,833 in product sales to
customers, cost of sales of $1,592,885 and $2,997,098 and sales taxes of
$740,817 and $1,358,380, respectively. During the three months and six months
ended June 30, 1997, the Company's net revenues were $93,979 and $117,957,
respectively. Average monthly revenues for the three months ended June 30, 1998
was approximately $33,000. Average monthly revenues for the three months ended
June 30, 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 months and six months
ended June 30, 1998, the Company incurred $2,274,638 and $4,260,270,
respectively, of expenses in connection with the operations in Sao Paulo and Rio
de Janeiro. During the three months and six months ended June 30, 1997, the
Company incurred service, rent and maintenance expenses of $865,350 and
$1,699,237, respectively, 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 months and six months ended June 30, 1998 the Company incurred $2,807,208
and $5,439,351, respectively, of selling and marketing expenses. During the
three months and six months ended June 30, 1997, the Company incurred $1,009,738
and $1,377,743, respectively, of selling and marketing expenses.
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 months and six
months ended June 30, 1998 and 1997 the Company incurred $3,857,561 and
$7,659,018 and $2,406,454 and 4,513,199, respectively, of general and
administrative expenses. For the six months ended June 30, 1998 and 1997,
included in such amounts is approximately $1,253,398 and $25,000, 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 $258,227 and $410,400, respectively, for the three months and six
months ended June 30, 1997 to $1,183,225 and $1,919,742, respectively, for the
three months and six months ended June 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 six months ended June 30,
1998 the Company generated operating losses of $5,217,850 and $10,045,259,
respectively, and for the three months and six months ended June 30, 1997,
$4,445,790 and $7,882,622, respectively, primarily due to expenses in connection
with the development of the Company's business as explained above.
Interest Expense. Interest expense was $4,499,087 and $9,113,359,
respectively, for the three months and six months ended June 30, 1998, and
$1,065,607 and $1,110,775, respectively, for the three months and six months
ended June 30, 1997, primarily as a result of interest associated with the
Senior Notes.
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Interest Income. Interest Income increased to $2,839,980 and
$6,307,635, respectively, for the three months and six months ended June 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.
Exchange and Translation Loss. Exchange and translation loss was
$474,691 and $708,325, respectively, for the three months and six months ended
June 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 $1,385,502 and $3,045,560, respectively,
for the three months and six months ended June 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 six months
ended June 30, 1998 and 1997 the Company made capital expenditures of $2,670,476
and $6,165,410 and $2,078,134 and $4,464,765 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 June 30, 1998, the Company has
(1) completed the buildout of its Sao Paulo and Rio de Janeiro systems, which
served 70,272 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 six months will
be approximately $[15 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 revenues increases. Accordingly, inflation may have a
material adverse effect on the Company's results
12
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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.
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. 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.
As a result of the recent devaluation of the Russian currency, Brazil
has suffered from market uncertainty and an increase in capital outflows. The
Company believes that such market uncertainty and increased capital outflows
have impacted the trading price of its Senior Notes, which, to the Company's
knowledge, were traded at approximately [60]% of principal amount on August 25,
1998, down from 80.85% of principal amount on June 30, 1998.
Recent Developments. The Company has implemented certain management
changes in the second and third quarters of 1998. Wilson Olivieri assumed the
position of Vice President of Operations, formerly held by Marco A. Fregenal,
and relinquished his position as Chief Financial Officer. Mr. Fregenal has
assumed the position of Vice President of Sales and Neil R. Milano was appointed
the new Chief Financial Officer of the Company. Prior to his appointment as
Chief Financial Officer, Mr. Milano, a principal of Financial Consultants, Inc.,
a management consultant, advised the Company on strategic planning matters since
the Company's inception. Mr. Milano has also served as Assistant Treasurer of
Grand Metropolitan, Inc and Journal Register Company. Mr. Milano is 42 years
old. In addition to his responsibilities as Chief Financial Officer, Mr. Milano
will continue to oversee
13
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strategic planning.
14
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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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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: August 28, 1998
16
