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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
/ / REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from
______________________ to ______________________
Commission file number:
Paging Network do Brasil S.A.
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(Exact name of Registrant as specified in its charter)
Paging Network do Brasil Inc.
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(Translation of Registrant's name into English)
The Federative Republic of Brazil
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(Jurisdiction of incorporation or organization)
Rua Alexandre Dumas, 1,711
Chacara Santo Antonio
Sao Paulo, 04717-004, Brazil
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(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
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None None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
None
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(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act.
13-1/2% Senior Notes due 2005
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes
of capital or common stock as of the close of the period covered by the
annual report.
1,378,401 Common Shares, no par value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes /x/ No / /
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 / / Item 18 /x/
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Table of Contents
Page
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Presentation of Certain Information..................................... 1
Exchange Rates.......................................................... 1
PART I
Item 1. Description of Business.................................... 4
Item 2. Description of Property................................... 16
Item 3. Legal Proceedings......................................... 16
Item 4. Control of Registrant..................................... 17
Item 5. Nature of Trading Market.................................. 21
Item 6. Exchange Controls and Other Limitations Affecting
Security Holders.......................................... 21
Item 7. Taxation.................................................. 22
Item 8. Selected Financial Data................................... 26
Item 9. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 27
Item 10. Directors and Officers of Registrant...................... 30
Item 11. Compensation of Directors and Officers.................... 30
Item 12. Options to Purchase Securities from Registrant
or Subsidiaries........................................... 31
Item 13. Interest of Management in Certain Transactions............ 31
PART II
Item 14. Description of Securities to be Registered................ 33
PART III
Item 15. Defaults Upon Senior Securities........................... 33
Item 16. Changes in Securities, Changes in Security for Registered
Securities and Use of Proceeds............................ 33
PART IV
Item 17. Financial Statements...................................... 33
Item 18. Financial Statements...................................... 33
Item 19. Financial Statements and Exhibits......................... 34
Signatures............................................................. 36
Index to Financial Statements......................................... F-1
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Presentation of Certain Information
As used herein, references to the Company, the Registrant and
PageNet do Brasil refer to Paging Network do Brasil S.A.
The Company publishes its financial statements in U.S. dollars.
In this Annual Report, references to "dollars" or "$" are to U.S. dollars
and references to "real" or "reais" are to Brazilian reais. Except as
otherwise stated herein, all monetary amounts in this Annual Report have
been presented in dollars. Solely for the convenience of the reader, this
Annual Report contains translations of certain real amounts into dollars
at specified rates. These translations should not be construed as
representations that the real amounts actually represent such dollar
amounts or could be converted into dollars at the rates indicated or at
any other rate. Unless otherwise stated, the translations of reais into
dollars have been made in accordance with the provisions of Statement of
Financial Accounting Standards No 52 as it applies to entities operating
in highly inflationary economies, at a P-TAX rate published daily by the
Brazilian Central Bank (the "Central Bank").
Exchange Rate Data
The Company publishes its financial statements in dollars. However,
currently the majority portion of the Company's revenues and expenses are
denominated in reais. For information regarding the effects of currency
fluctuations on the Company's results, see "Item 9. Management's Discussion
and Analysis of Financial Condition and Results of Operations."
There are two legal foreign exchange markets in Brazil: the
Commercial Market and the Floating Market. The Commercial Market is
reserved primarily for foreign trade transactions and transactions that
generally require prior approval from Brazilian monetary authorities,
including the purchase and sale of registered investments by foreign
persons and related remittances of funds abroad. Purchases of foreign
exchange in the Commercial Market may be carried out only through a
financial institution in Brazil authorized to buy and sell currency in
that market. The "Commercial Market Rate" is the commercial selling rate
for Brazilian currency into U.S. dollars, as reported by the Central
Bank. The "Floating Market Rate" generally applies to transactions to
which the Commercial Market Rate does not apply. Prior to the
implementation of the Real Plan, the Commercial Market Rate and the
Floating Market Rate differed significantly at times. Since the
introduction of the real, the two rates have not differed significantly,
although there can be no assurance that there will not be significant
differences between the two rates in the future. Both the Commercial
Market Rate and the Floating Market Rate are reported by the Central Bank
on a daily basis.
Both the Commercial Market Rate and the Floating Market Rate are
freely negotiated but are strongly influenced by the Central Bank, which
typically intervened in the Commercial Market, prior to the
implementation of the Real Plan, in order to control fluctuations and to
regulate disparities between the Commercial Market Rate and the Floating
Market Rate. After implementation of the Real Plan, the Central Bank
allowed the real to float with minimal intervention. However, as
described below, on March 6, 1995, the Central Bank announced its
intention to intervene in the foreign exchange markets and has
subsequently intervened in the markets and taken other actions affecting
such markets.
On August 1, 1993, the cruzeiro real replaced the cruzeiro as
the unit of Brazilian currency, with each cruzeiro real being equal to
1,000 cruzeiros. Beginning in 1994, the Brazilian Government began
implementation of the Real Plan. On July 1, 1994, the real replaced the
cruzeiro real as the unit of Brazilian currency, with each real being
equal to 2,750 cruzeiros reais and having an exchange rate
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of R$1.00 to US$1.00. According to Brazilian law, the issuance of reais is
controlled by quantitative limits backed by a corresponding amount of U.S.
dollars in reserves, but the Brazilian Government subsequently expanded those
quantitative limits and allowed the real to float, with parity between
the real and the U.S. dollar (R$1.00 to US$1.00) as a ceiling.
On March 6, 1995, the Central Bank announced that it would
intervene in the market and buy or sell U.S. dollars, establishing a band
(faixa de flutuacao) in which the exchange rate between the real and the
U.S. dollar could fluctuate. The Central Bank initially set the band with
a floor of R$0.86 per US$1.00 and a ceiling of R$0.90 per US$1.00 and
provided that, from and after May 2, 1995, the band would fluctuate
between R$0.86 and R$0.98 per US$1.00. Shortly thereafter, the Central
Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per US$1.00. On June 22, 1995, the Central Bank issued
another directive providing that the band would be between R$0.91 and
R$0.99 per US$1.00 and subsequently reset the band on January 30, 1996 to
between R$0.97 and R$1.06 per US$1.00. There can be no assurance that the
band will not be altered in the future. On June 7, 1996, the Commercial
Market rate as reported by the Central Bank was R$0.99910 per US$1.00. On
February 18, 1997, the Central Bank again reset the band to between
R$1.05 and R$1.14 per US$1.00.
The following table sets forth the Commercial Market Rate for
U.S. dollars for the periods and dates indicated. Amounts are expressed
in reais and have been translated from the predecessor currencies in
effect during the relevant period at the rates of exchange at the time
the successor currency took effect.
Exchange Rates per US$1.00(1)
-----------------------------
Period Low High Average(2) Period-End
--- ---- ---------- ----------
1990...................... 0.000004 0.000062 0.000025 0.000062
1991...................... 0.000062 0.000389 0.000149 0.000389
1992...................... 0.000393 0.004505 0.001655 0.004505
1993...................... 0.004557 0.118584 0.032809 0.118584
1994...................... 0.120444 0.940000 0.645000 0.846000
1995...................... 0.834000 0.972600 0.917742 0.972500
1996...................... 0.971800 1.041400 1.004000 1.039100
1997...................... 1.039500 1.116400 1.078100 1.116400
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(1) The information set forth above is based on information published by the
Central Bank.
The Federal Reserve Bank of New York does not publish a noon-buying rate
for reais.
(2) Weighted average of the exchange rates on business days for the period.
Brazilian law provides that whenever there is a material
imbalance, or a serious risk of a material imbalance, in Brazil's balance
of payments, the Brazilian Government may, for a limited period of time,
impose restrictions on the remittance to foreign investors of the
proceeds of their investments in Brazil, as it did for approximately six
months in 1989 and early 1990, as well as on the conversion of the
Brazilian currency into foreign currencies.
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The Brazilian Government currently restricts the ability of
Brazilian or foreign persons or entities to convert Brazilian currency
into U.S. dollars or other currencies other than in connection with
certain authorized transactions. The Central Bank has issued a
certificate of registration authorizing each of the scheduled payments of
principal of, premium on, and interest on the Company's 13-1/2% Senior
Notes due 2005 (the "Notes") or for payments of principal of, premium on
and interest on the Notes upon any early redemption of the Notes at the
option of a holder of Notes. However, consent from the Central Bank is
needed for the payment of principal of, premium, if any, on and interest
on the Notes upon acceleration of the Notes following an event of default
under the Indenture (an "Event of Default") pursuant to which the Notes
were issued or for certain late payments of the Notes (i.e., payments
made 181 days or more after a scheduled payment date). In addition,
consent from the Central Bank is needed for (i) payments in respect of
the Notes upon redemption by the Company in the event of certain changes
in Brazilian law relating to tax withholding, (ii) payments in respect of
the Notes in the event of redemption of the Notes by the Company, (iii)
payments in respect of the Notes in the event of certain asset sales, and
(iv) payments in respect of the Notes in the event of a change of
control. There can be no assurance that any required consent from the
Central Bank will be obtained.
There can be no assurance that the Brazilian Government will not
in the future impose more restrictive foreign exchange regulations that
would have the effect of eliminating or restricting the Company's access
to foreign currency that would be required to meet its foreign currency
obligations, including the Notes. The likelihood of the imposition of
such restrictions by the Brazilian Government may be affected by, among
other factors, the extent of Brazil's foreign currency reserves, the
availability of sufficient foreign currency on the date a payment is due,
the size of Brazil's debt service burden relative to the economy as a
whole, Brazil's policy toward the International Monetary Fund and
political constraints to which Brazil may be subject.
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PART I
Item 1. Description of Business.
General
PageNet do Brasil's objective is to become a leading provider of
paging and wireless messaging services in Brazil. The Company has secured
licenses which enable it to broadcast paging services throughout the
country, and currently serves approximately 47,260 subscribers. The
Company has installed 72 paging transmitters in 10 cities (the "Existing
Coverage Area"), commenced offering paging services in greater Sao Paulo
in January 1997, and began marketing paging services in greater Rio de
Janeiro in September 1997 and is evaluating whether to commence the
marketing of paging services in three additional cities during 1999.
PageNet do Brasil was formed by Paging Network International N.V.
("PageNet NV"), a wholly owned subsidiary of Paging Network, Inc.
("PageNet USA"), the largest paging company in the United States,
Warburg, Pincus Ventures, L.P. ("Warburg Pincus"), a private equity fund,
TVA Sistema de Televisao S.A. ("TVA"), a leading pay television company
in Brazil, and a wholly owned subsidiary of Abril S.A., Latin America's
largest publishing enterprise, IVP Paging (Cayman) L.P. ("IVP Cayman"),
the general partner of which is IVP--International Venture Partners, Inc.
("IVP"), a private investment fund focused on Brazil, and Multiponto
Telecomunicacoes Ltda. ("Multiponto"), an equity investor focused on the
Brazilian telecommunications sector. Management believes that a number of
factors create a favorable environment for the paging industry in Brazil,
including: (i) Brazil's large population, (ii) its growing and stable
economy, (iii) the paging market's relatively low penetration rate and
high historical growth rate, and (iv) the relatively high demand for
reliable communications services. The Company believes it will be well
positioned to be a leading provider of paging services in Brazil because
of its state-of-the-art infrastructure, high quality services, low cost
structure and strategic relationships.
The Company has completed the buildout of the Sao Paulo and Rio
de Janeiro systems and has installed the infrastructure necessary to
support both operations. The Company is currently focused on Sao Paulo
and Rio de Janeiro (the "Initial Markets") and is evaluating whether to
market paging services in Brasilia, Curitiba and Belo Horizonte (the
"Expansion Markets") during 1999. The Company currently offers its Sao
Paulo subscribers extended paging service in the other cities in the
Existing Coverage Area.
Business Strategy
The Company's strategy is to become a leading provider of paging
services in Brazil. The principal elements of the Company's business
strategy are to: (i) provide high quality paging services at a low cost,
(ii) leverage the PageNet USA relationship, (iii) gain rapid market
penetration, and (iv) provide superior customer service.
Provide High Quality Paging Services at a Low Cost. The Company
has employed state-of-the-art FLEX(R) technology developed by Motorola,
Inc. and is using equipment similar to that used by PageNet USA in the
United States. Furthermore, the Company utilizes a fully redundant paging
system that is linked by satellite. Management believes that as the
number of subscribers grows, this advanced technology will allow the
Company to be a provider of high quality paging services at a low cost
per subscriber.
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Leverage the PageNet USA Relationship. The Company has
implemented a marketing strategy and operating procedures similar to
those of PageNet USA in the United States adapted to the Brazilian needs,
and several members of the Company's senior management have had
significant experience managing PageNet USA operations in the United
States. Moreover, pursuant to the Technical Services Agreement, PageNet
USA provides the Company with access to PageNet USA's products, paging
expertise, intellectual property (including the exclusive use of PageNet
USA's tradename in Brazil), volume supplier discounts and other
capabilities. The Company has also benefited from the favorable
relationships that PageNet USA has established with suppliers of paging
equipment and from its use of the PageNet brand name, which is well
established among multinational corporations. PageNet do Brasil is
PageNet USA's first venture in the Latin American paging market, and
PageNet USA's only enterprise in Brazil.
Gain Rapid Market Penetration. The Company has gained, and
continues to seek to gain, subscribers in its markets rapidly through
extensive marketing and advertising and competitive pricing. As of
December 31, 1997 the Company has captured an estimated 6% of the Sao
Paulo paging market. Unlike competitors whose primary focus has been the
consumer market, the Company focuses on both business and consumer paging
customers. The Company targets business customers through a commissioned
direct sales force and through telemarketing, and individual customers
through advertising and through retail distribution channels including
the use of two "retail showrooms" strategically located in Sao Paulo.
Provide Superior Customer Service. Management believes that its
competitors have not made customer service a primary focus of their
business strategy and do not provide the customer with service standards
that are prevalent in the United States. By focusing on key elements of
customer satisfaction during the sales process and over the life of the
subscriber, the Company provides high levels of customer service similar
to those provided by PageNet USA in the United States. Moreover, similar
to PageNet USA's practice in the United States, the Company has
introduced customer service account representatives to the paging
industry in Brazil, as a complement to sales representatives. The primary
function of customer service account representatives is to serve existing
accounts. In addition, customer service account representatives act as a
secondary sales force, targeting existing customers for additional
services and paging units. The Company believes this innovation allows it
to ensure superior customer satisfaction, thereby minimizing customer
turnover and increasing subscriber base growth.
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The Company's Markets
The Company has secured two national licenses which enable it to
broadcast paging services on specified frequencies throughout Brazil. In
addition, the Company has secured another local license which serves to
enhance the Company's capacity in certain cities in the Existing Coverage
Area. The Company is actively marketing paging services in Sao Paulo and
Rio de Janeiro and currently offers extended paging coverage in the
remainder of the Existing Coverage Area.
Estimated
Existing Coverage Area(1) Population
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Initial Markets:
Sao Paulo................................................. 22.7
Rio de Janeiro............................................ 10.9
Expansion Markets:
Brasilia.................................................. 1.7
Curitiba.................................................. 2.0
Belo Horizonte............................................ 3.4
Extended Coverage:
Porto Alegre.............................................. 2.7
Salvador.................................................. 2.6
Recife.................................................... 2.8
Belem..................................................... 1.7
Goiania................................................... 1.3
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Total.................................................. 51.8
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(1) Includes, in each case, the city identified as well as the regions
surrounding such city in which the Company expects to provide its
services.
(Source: Instituto Brasileiro de Geografia e Estatistica--IBGE (Brazilian
Institute for Geographics and Statistics) (1995) )
Initial Markets. The Company commenced offering paging services
in greater Sao Paulo in January 1997 and in Rio de Janeiro in September
1997, the two largest metropolitan areas in the country with a combined
population of approximately 33.6 million. The Company occupies 43,000
square feet of office space in Sao Paulo and 36,000 square feet of office
space in Rio de Janeiro and had approximately 47,260 subscribers as of
December 31, 1998. To support its business objectives, the Company has
hired (i) hired the personnel, leased facilities and acquired telephone
lines and other infrastructure to support the Company's operations
(including its dispatch center and sales force); (ii) customized and
installed its proprietary billing/collection/inventory/customer service
information system; (iii) linked all of its paging transmitters via
satellite; (iv) has opened one retail location at the Company's Sao Paulo
headquarters and another one in the center of Sao Paulo; and (v)
installed paging transmitters in each of the eight additional cities
where it has secured licenses to Broadcast Paging Services.
Expansion Markets. The Company has installed transmitters in
eight cities in addition to Sao Paulo and Rio de Janeiro, including
Brasilia, Curitiba and Belo Horizonte, where the Company is evaluating
whether to open local offices. The extent to which the Company will
develop local offices in
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these, or any other, cities will depend upon a number of factors, including
business and consumer demand, general economic conditions, the presence of
competing businesses and telephone infrastructure. Moreover, the Company will
consider attractive opportunities to enter other markets on an ongoing basis.
Subscriber Capacity. The Company currently has sufficient
license capacity in its Initial and Expansion Markets to provide paging
services to approximately 600,000 subscribers, of which the Company can
currently serve 250,000 based on its existing infrastructure. The Company
expects to expand its infrastructure based on the demand for paging
services in each market.
Extended Coverage. Extended coverage allows a paging customer to
receive pages in cities other than the customer's base city. Through the
satellite-linked transmission system, customers can choose to receive
pages only in their base city or to extend their paging service to
include additional cities. For example, a customer in Sao Paulo can still
receive pages when traveling to a city in the Extended Coverage Area. The
Company has installed transmitters in Porto Alegre, Salvador, Recife,
Belem and Goiania and is currently offering its customers in the Initial
Markets extended paging coverage in all of these cities.
Management expects that the ability to offer nationwide coverage
increases the Company's marketability and potential subscriber base.
While there is no immediate additional capital expenditure required for
the provision of nationwide service, should the Company decide to offer
extended coverage in additional cities, the Company would incur
additional capital expenses in the future for the installation of
transmitters in other cities in Brazil in order to develop a nationwide
paging network. The Company expects that the incremental cost to build a
nationwide network would quickly be offset by the revenue generated from
sales of nationwide paging service in Brazil.
Operations and Systems
Overview. The Company's day-to-day operations for the provision
of paging service to its subscribers are substantially similar to those
of PageNet USA in the United States. Pagers and other paging equipment
are received by the Company and placed in inventory, where they are
appropriately labeled and coded for proper tracking after sale, and
programmed to respond only to a particular code. These pagers are then
supplied to the Company's direct sales representatives, the Company's
stores or to other sellers of the Company's service, who are responsible
for the initial sales process including payment collection, the
completion of an application for service, and the delivery of a
functioning pager. The Company's billing department enters the
appropriate customer information to begin the billing process, and the
collections department begins tracking the customer's payment history to
ensure timely payment. Customer service representatives address calls
from customers regarding the functions of the pager, service details and
payment policies. The dispatch center, which receives the calls from
individuals sending pages to subscribers and enters the message into the
paging terminal, dispatches messages 24 hours per day, seven days per
week. The systems department monitors daily all of the Company's
equipment including transmitters, paging terminals and supporting
software and hardware.
Dispatch Center. The Company operates state-of-the-art dispatch
centers in Sao Paulo and Rio de Janeiro, utilizing customized dispatch
software and analytic staffing software designed to enhance productivity.
The Company currently has sufficient telephone capacity in both cities to
conduct its business for the foreseeable future and expects that it will
be able to obtain additional telephone capacity as the demands of its
business require. The Company emphasizes both productivity and
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quality performance to its dispatch center staff through training, monthly
monitoring and incentive based performance measures.
Advanced Information Systems. The Company uses an advanced
proprietary management information system, customized to accommodate the
Brazilian market. This system is used primarily to support three
principal areas of the Company's business: (i) customer service,
including billing systems; (ii) network management and operational
support systems; and (iii) general business support systems including
financial management. The Company's information systems have been
designed to accommodate efficiently the increased volumes of data that
the Company expects to process in the future as the Company's subscriber
base continues to grow.
Customer Service. The Company's customer information and billing
system incorporates all aspects of billing and customer preferences,
which are intended to produce a high level of customer satisfaction and
to minimize customer turnover levels. The Company's customer information
and billing system provides management with readily accessible
information regarding subscribers' pager usage, coordinates customer
account information among the various departments and ensures that
customers receive all requested products and technical and support
services. This access to information facilitates the provision of
attentive customer service. The Company's account representatives, who
are responsible for customer service, respond to a customer's telephonic
inquiry within 24 hours. The Company believes that customer service is an
important factor in developing customer loyalty and differentiating its
service from that of its competitors.
Billing and Collections. The Company utilizes the Brazilian
custom of invoicing customers through the banking system. Billing
information is electronically transmitted to the Company's bank which
then sends the invoices and collects the Company's receivables at its
branches or affiliates. The Company has implemented a collections policy
to contact delinquent customers, charge a late fee and finally suspend
service until the account is made current. The Company will monitor
customer payment patterns and has developed a subscriber credit criteria
policy.
Network Maintenance. The Company has two separate but
coordinated network maintenance systems. The first is dedicated to the
proper maintenance of the paging system which includes daily dial-in to
each of the Company's paging transmitters, monthly preventative
maintenance reviews of each site, periodic review of the satellite uplink
and constant monitoring of the paging terminals that reside in the
Company's local offices. This department is also responsible for updating
and upgrading the hardware and software so that the system is operating
at the highest possible level. The second system is responsible for the
maintenance and interconnectivity of all other computer systems,
including the dispatch department's systems, the Company's LAN and
related productivity software and the telephone system. In addition, this
department is responsible for the Company's relationship with local and
long distance telephone companies including the acquisition of additional
telephone lines.
Sales and Marketing
The Company's current marketing strategy is to differentiate its
service from that which is available in the Brazilian market today. The
Company believes that it provides service at a lower cost and with higher
quality than its competitors through the use of its advanced FLEX(R)
technology and satellite-linked network, customized information systems,
and focus on customer service. In its marketing and advertising, the
Company highlights the PageNet brand name which is associated with
worldwide leadership and quality in the paging business. The Company also
prices its high quality
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service competitively and utilizes various sales channels to distribute its
product. The Company focuses on both the business market and the consumer
market.
Business Market
Customer Segmentation. The Company targets businesses whose
employees are highly mobile or work at several locations. Such customers
include companies in service industries, hospitals and medical
professionals, construction and manufacturing companies, governmental
agencies and retail and financial institutions. In addition, the
Company's use of the PageNet name, which is recognized by U.S.-based
multinational companies, gives the Company a competitive advantage over
other paging companies in acquiring multinational accounts. The Company
believes that the business market segment will offer stronger recurring
revenues and will experience a higher subscriber retention rate than the
consumer market segment. As of December 31, 1997, businesses accounted
for approximately 25% of the Company's pagers in service in Brazil.
Subject to appropriate credit policies, the Company leases
pagers to businesses, thereby reducing the business customer's capital
outlay and increasing the Company's revenue per unit. The Company has
identified more than 20,000 business targets for sales in its early
months and generally expects that businesses will account for
approximately 20% to 25% of the total units in service in Brazil.
Distribution. The Company employs a direct sales force to target
specific businesses. Sales representatives receive leads through a number
of sources, including the Company's telemarketing department, referrals
and advertising. In addition, unlike its competitors, the Company employs
a separate team of account representatives, whose primary function is to
serve existing accounts. In addition, the account representatives act as
a secondary sales force, targeting existing customers for additional
services and paging units. The Company believes that by shifting the
customer service function from the sales representative to an account
representative, the sales representative is more productive and the
customer is better served.
Consumer Market
Customer Segmentation. The Company estimates that, as of
December 31, 1997, individuals accounted for approximately 75% of total
pagers in service in Brazil. Management believes that consumer demand for
paging service arises from four factors: (i) the increased consumer
purchasing power due to Brazil's stable and growing economy; (ii) the
need for reliable, portable communications services; (iii) delayed access
to telephone service or the prohibitive cost of immediate access; and
(iv) the higher cost and lower reliability of cellular telephone service.
Advertising is a key component of the Company's consumer
marketing strategy. To that end, management has hired Standard Ogilvy &
Matter, a multinational advertising firm with extensive experience in
consumer products to target high quality customers. The Company's
advertising campaign and maintenance program includes the use of
newspapers, magazines, billboards and radio.
Distribution. In Sao Paulo, the Company's advertising campaign
directs consumers to the Company's strategically located retail
showrooms. Additionally, the Company has developed a retail outlet
distribution channel through which the Company may provide pagers to the
retailer at wholesale prices. Once purchased by a subscriber, the pager
is activated on the Company's standard retail contract as a
subscriber-owned pager.
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Products
Existing Products. The Company offers PIN-based alphanumeric
paging with dispatch service included, at a competitive price. Additional
product enhancements are available to subscribers, including extended
coverage in Existing Coverage Area, pager protection against loss or
theft and pager maintenance.
Subsequent Products. The Company expects to offer additional
products, many of which will be new products to the Brazilian paging
market. These products are expected to include: (i) page-by-name, which
allows the caller to eliminate the use of a PIN and send a page using
only the subscriber's name; (ii) direct dial paging, which allows the
caller to dispense with the use of a PIN and send a page using a
subscriber's direct telephone number; (iii) customized greeting, which
allows a subscriber to customize service and have a dispatch center
operator answer using the subscriber's name and other information as
designated by the subscriber; (iv) numeric paging; (v) PageMail, which
adds voice mail service to an existing subscriber account; (vi) click
detection, which enables Brazil's prevalent pulse telephones to send
pages where tone telephones would otherwise be required; (vii) self
dispatch, which allows subscribers to send pages directly from their
personal computers, without accessing the dispatch center; and (viii)
Internet dispatch and e-mail capabilities. Although the Company's current
principal focus is offering its initial products at competitive prices
and achieving rapid market penetration, the Company anticipates that
these additional products may enhance revenues and attract more
technologically demanding customers when and if such subscriber products
are implemented and offered.
Future Products. In the future, the Company may deploy new
paging or paging-related products. One such product in an advanced
development stage is VoiceNow. Developed jointly by PageNet USA and
Motorola, Inc., VoiceNow subscribers would carry a portable receiver,
approximately the same size as an alphanumeric pager, that is capable of
receiving, storing and playing brief voice messages. Although the Company
has access to this and additional technologies through its relationship
with PageNet USA, there can be no assurance that the Company will offer
any of these products or services in the future.
Paging Systems Equipment
The Company's paging system equipment consists of call
distribution telephone connectors, dispatch systems, paging terminals,
satellite uplinks, satellite receivers, paging transmitters and pagers.
Additional supporting equipment includes fully redundant telephone
switches, dispatch systems and paging terminals, uninterrupted power
supplies, backup generators, dedicated land lines redundant to the
microwave and satellite-linked systems and land lines to each transmitter
for daily diagnostic review and maintenance. The Company, with the
technical support of PageNet USA, has supervised the entire paging
infrastructure buildout from transmitter site selection to transmitter
installation alignment to programming of the paging terminal.
The Company has secured satellite access from Embratel Sistema
Telebras, the Brazilian state-owned satellite and long distance telephone
company, to access BrasilSat One, a Brazilian satellite, and link its
paging transmitters. The Company leases its satellite access under a
five-year contract. A "backbone" network of satellite paths with
microwave and conventional radio links will connect the operators,
telephone lines, terminals and control equipment to various cities to be
served.
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The Company uses one of the most sophisticated paging message
transmission protocols available, developed with FLEX(R)-based
technology. The FLEX(R) transmission protocol, developed by Motorola,
Inc., improved upon the prior paging message transmission system, POCSAG,
by increasing the accuracy of the data coding format and refining the
error correction process. These improvements made FLEX(R) the more
reliable method of transmitting paging messages. Additionally, the
technological improvements of FLEX(R) allow a paging service provider to
utilize less of its transmission system capacity for each message. The
improved efficiency of the FLEX(R)-based paging transmission system
results in the transmission of up to three times the amount of data using
a single paging frequency than previously possible under the POCSAG
system.
An additional benefit of a FLEX(R)-based paging message
transmission system is the improved battery life of FLEX(R)-based pagers.
Because FLEX(R) technology has improved the timing of message delivery,
the batteries of FLEX(R)-based pagers tend to last longer than those of
pagers using POCSAG technology.
The Company's paging transmission system is fully redundant
which allows the system to automatically readjust and continue operating
through an identical paging terminal, upon the failure of any of the
system's key components. This system is driven by the Company's fully
featured diagnostics software and alarm-monitoring hardware.
The equipment used in the Company's paging operations is
available for purchase from more than one source and the Company
anticipates that equipment and pagers will continue to be available to
the Company in the foreseeable future, consistent with normal
manufacturing and delivery lead times. Because of the high degree of
compatibility among different models of transmitters, computers and other
paging equipment manufactured by suppliers, the Company has designed its
systems without being dependent upon any single source of such equipment.
The Company does not and will not manufacture any of the pagers
or related transmitting and computerized paging terminal equipment used
in the Company's paging operations. The Company's relationship with
PageNet USA provides it with access to volume discounts on all of its
supplies. PageNet USA has arranged with its U.S. suppliers to ensure that
the Company will receive favorable prices on all supplies, including
pagers. There can be no assurance that PageNet USA's arrangement with its
suppliers will continue or that the Company will be able to receive all
of its supplies at prices comparable to those obtained by PageNet USA.
Competition
The Company does experience and will continue to experience
direct competition from one or more competitors in all the locations in
which it plans to operate. Competition for subscribers to the Company's
paging services in most geographic markets will be based primarily on the
price of hardware, the price of monthly service, quality of services
offered and the geographic area covered. The Company believes that its
price of hardware and service, the quality of its services and its
geographic coverage areas will generally compare favorably with those of
its competitors.
Although some of the Company's competitors are small privately
owned companies serving only one market area, others are subsidiaries or
divisions of larger companies that provide paging services in multiple
market areas. Among the Company's competitors are Teletrim, Mobitel,
Conectel, Powernet and Acess.
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In the Sao Paulo and Rio de Janeiro metropolitan areas, which
together are estimated to represent approximately 67% of the current
paging market in Brazil, more than eight competitors share a market of
approximately 800,000 pagers. While there is healthy competition in the
paging market, no single competitor dominates the market. The current
industry leaders, Teletrim and Mobitel, each service fewer than 300,000
subscribers. In Sao Paulo, the Company's main competitors will be
Teletrim, which holds approximately 25% of the market, and Mobitel,
which holds approximately 20% of the market. In Rio de Janeiro,
Teletrim holds approximately 44% of the market while Mobitel and
Powernet hold approximately 18% and 14%, respectively. In the regions
of Brazil outside of Sao Paulo and Rio de Janeiro, which account for
approximately 33% of the existing paging market in Brazil, Mobitel leads
the major operators, primarily due to its strong presence in Brasilia.
Approximately 65% of the market outside of Sao Paulo and Rio de Janeiro
is held by smaller paging operators.
The primary focus of the Company's competitors in the Brazilian
paging market has been the consumer market, rather than the business
market. The Company focuses on both the consumer and business market and
thereby takes advantage of the fact that the corporate customer in the
business markets is more likely to maintain service, remit payments on a
timely basis, purchase enhanced services and have a better appreciation
for the paging service.
Employees
As of December 31, 1997, the Company had a total of 463
employees. The Company's employees are not currently subject to
collective bargaining agreements, although under the Brazilian
Constitution the employees have a right to organize a union. The Company
considers its employee relations to be good.
Government Regulation
Telecommunications. Under Brazilian law, the provision of public
services requires a concession, license or authorization granted by the
relevant governmental authority. Under the Brazilian Constitution, the
Federal Government is required to provide, directly or through
concession, license or authorization, telecommunication services in
accordance with the applicable regulations. According to this
Constitutional provision, the Federal Government may freely grant
concessions to private sector companies to provide telephone and
telecommunications services and data transmission services. On July 19,
1996, Law 9,295 was enacted to regulate telecommunication services, which
includes a provision establishing that the Federal Government may impose
restrictions in the composition of the capital stock of the companies
holding concessions for the provision of mobile cellular telephone
services and satellite signal transportation services for the period of
three years following the enactment of such law. Such restriction will be
imposed when required by national interest and shall require that at
least 51% of the voting capital of such companies is held by Brazilian
citizens. It is also provided by such law that the concessions can only
be granted to companies organized under Brazilian law and having their
head offices in Brazil. Decree 2,056 of November 4, 1996, which approved
the regulations applicable to cellular telephone services, delegated to
the Ministry of Communications the authority to establish limits to
foreign participation with respect to such services. The Ministry of
Communication has issued the call for a public bid (Concorrencia
001/96-SFO/MC) for the purchase of concessions to provide cellular
telephone services, with the requirement that at least 51% of the voting
capital of the proposed owners of the concessions be held by Brazilian
citizens. Brazil was divided into 10 concession areas and the interested
companies presented their bids on April 7, 1997. The awarding of the
concessions has been recently completed.
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On July 16, 1997, Law 9,742, the General Telecommunications Law,
was enacted. The law created the National Telecommunication Agency
(ANATEL) with the function of regulating telecommunication in the
country. The law also provides for (i) the organization of the
telecommunications system, including the granting of licenses, which has
replaced the Telecommunications Code enacted in 1962 and (ii) the
restructuring and privatization of the Telebras System that was recently
begun. Article 18, Sole Paragraph of the law authorizes the Federal
Government, under certain conditions, to impose foreign ownership
restrictions relating to the capital stock of companies providing
telecommunications services.
Development of Paging Regulations. The National
Telecommunications Agency (ANATEL) is the governmental body responsible
for the granting of paging licenses in Brazil and is also the body in
charge of regulating the exploitation of such services in Brazil.
Currently, paging services in Brazil ("Servico Especial de Radiochamada")
are regulated by Rule No. 15/97, approved by Ordinance 558, of November
3, 1997, of the Ministry of Communications, making use of its residual
competence prior to the effective installation of ANATEL. Ordinance
558/97 expressly revoked Ministry of Communications Ordinances 232/91 and
579/94, as well as Ordinance Minfra-SNC 32/91.
Pursuant to paging regulations, a paging operator must first
obtain a paging license from ANATEL in order to provide paging services
in Brazil. All licenses are non-exclusive licenses to provide paging
services in a service area.
The paging regulations distinguish between nationwide, regional,
mid-regional, micro-regional and local licenses. The nationwide license
allows the license holder to provide paging services in the Federal
District and the 26 States of the Federation. The regional licenses allow
the license holder to provide paging services in one of nine regional
areas encompassing one or more Brazilian States. The State of Sao Paulo
constitutes Regional Area One, the States of Rio de Janeiro e Espirito
Santo constitute Regional Area Two, and so forth. The mid and micro
regional areas are defined by the Brazilian Institute of Geography and
Statistics - IBGE. Finally, the local license allows the license holder
to provide separate services in one locality of the national territory.
The paging regulations also provide that the license holder may,
eventually, provide paging services on an international basis, as long as
it has transmission capacity through other providers abroad.
Regarding the granting of new licenses, the paging regulations
provide that a license holder or its controlled or affiliated companies
may only have one permission to exploit paging services in the same area
of coverage. The regulations also provide for the consolidation of
previously existing licenses in one sole permission under certain
circumstances. The transfer of paging licenses or the transfer of control
of the license holder is subject to the prior approval of the Ministry of
Communications. The transfer of licenses or the transfer of control of
the license holder can only be made after the effective commercial
operation of the services begins.
On April 8, 1997, the President enacted Decree No. 2196,
approving the Regulation for Special Telecommunication Services, within
which paging services are included. Such Decree provides the guidelines
for the granting of licenses with respect to such services by the
Ministry of Communications. Such Decree confirmed the competence of the
Ministry of Communications to establish specific complementary rules, to
grant licenses, to allocate frequencies and to supervise the exploitation
of such special services. Since the enactment of the General
Telecommunications Law, the Ministry of Communications has been replaced
by ANATEL regarding such functions.
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<PAGE>
Decree No. 2196/7 regulates the procedure for the granting of
new licenses for exploitation of special services, which include the
possibility of a prior public consultation by the Ministry of
Communications with respect to the granting of such licenses, as well as
the applicable terms and conditions of such grants. The Decree also
regulates the requirements of the call for public bid, the rules for pre
qualification of the interested parties, the criteria for judgment of the
proposals and for the granting of the licenses. The granting of new
licenses shall be formalized by means of the execution of a contract
between the Ministry of Communications and the awarded party.
Regarding the exploitation of the services the Decree expressly
assures the licensees the right to use equipment not owned by the
licensee and to contract with third parties the development of activities
inherent, accessory or complementary to the licensed services, provided
that: (a) the licensee shall remain responsible before the Ministry of
Communications and the users for the execution and exploitation of the
services; and (b) the licensee shall be contractually bound to the users.
Decree No. 2196/97 assures the transfer of the licenses,
provided the transferee complies with the qualification requirements
imposed by the Ministry of Communications and undertakes to comply with
all of the conditions of the contract, assuming all rights and
obligations of the transferor. As mentioned above, there is no minimum
term for the transfer of paging licenses, the only requirement being the
commencement of the commercial operation of such services.
The number of requests for paging licenses presented to the
Ministry of Communications increased in 1994 and 1995 and, as of March
14, 1997, approximately 855 local licenses had been issued. The Ministry
of Communications has estimated that another 1,000 local licenses will be
issued in the near future. In April 1997, two of the Licenseholders (TVA
and Multiponto) were granted nationwide licenses by the Ministry of
Communications. As of April 1998, only twelve national licenses were
issued by the Ministry of Communications.
Paging Licenses. Under the General Ttelecommunications Law,
Decree 2196/97 and Rule 15/97, paging licenses are granted by ANATEL for
a period of 15 years and are renewable for successive 15 year periods.
Renewal of licenses is expected provided the paging operator has complied
with the terms of the operating license and has requested the renewal at
least 18 months prior to the expiration date of the license. Under the
Decree a fee may be charged for the renewal of the license in an amount
to be agreed between the Ministry of Communications and the licensee, at
least 12 months prior to the expiration of original term. The license
establishes the terms and conditions under which the paging service
should be provided. Those conditions include, among others: (i) lack of
exclusivity of the service, (ii) a prohibition on the transfer of the
license prior to the commencement of commercial operation of the service,
(iii) prior authorization from the Ministry of Communications for any
transfer of the license, (iv) the licensee's compliance with certain
terms and conditions specified by the Ministry of Communications such as
price schedules, and (v) the licensee's performance under the license.
Any transfer of a paging license is subject to the prior approval of the
Ministry of Communications. A license may not be directly transferred by
a license holder to a third party until after the commencement of
commercial operation of the service. Transfers of shares which cause a
change in the control of the licensee or entity which controls the
licensee must also receive prior approval of the Ministry of
Communications. Licenses may be revoked prior to their expiration by the
Ministry of Communications for a number of reasons, including: (i) the
public interest as determined by the Ministry of Communications, (ii) the
failure of the licensee to meet the terms and conditions of the license,
(iii) the transfer of the license without the consent of the Ministry of
Communications, or (iv) the failure of the licensee to pay the required
license fees. To initiate paging services, the paging operator must be
granted three different permits or approvals by the Ministry of
Communications:
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<PAGE>
(i) the initial license, which entitles the license holder to develop paging
services under a certain frequency and in certain localities formalized by an
adhesion contract signed by the license holder and the Ministry of
Communications; (ii) the Project Approval Certificate which permits
installation of equipment necessary for the development of the paging service
in accordance with the installation project of the license holder and, once the
installation period is complete, (iii) the paging operating license. Under
applicable regulations, the Licenseholders received paging licenses from the
Ministry of Communications and pursuant to the Operating Agreements and other
covenants (the "Operating Agreements"), the Company is required to construct and
start the operation of its service within 12 months of the issuance of the
paging license. To meet the requirements of operating within the meaning of the
paging license, a licensee is required to construct a single site from which a
radio signal can be directed. The Company has complied with this condition in
each of the cities for which a local paging license and a Project Approval
Certificate have been obtained and, as a result, the corresponding paging
operating permit for each of such cities has been issued by the Ministry of
Communications. Under nationwide licenses, it will be necessary for the Company
to present and obtain approval from the Ministry of Communications of the
installation project, as well as, the subsequent issuance of the paging
operating license for the relevant station. The fee for an operating license
totals one-half of one percent of the fixed assets of the licensee (deemed to be
the transmitters, paging terminal and initial supply of pagers). In addition,
licensees must pay a fee of approximately US$1,206 per transmitter installed.
Subject to certain exceptions, generally any paging licenses not
already issued are to be granted pursuant to a public auction
administered by the Ministry of Communications. The rules of the auction
are expected to be open to public comment before the actual process is
initiated. The Company is planning to participate in this auction
although there can be no assurance that the Company will acquire any
licenses at the auction.
Additional frequencies have been awarded to Mobitel in Sao Paulo
and Rio de Janeiro, and to Teletrim in Rio de Janeiro. The current
regulations allow the Company to request additional frequency allocations
if needed; such additional frequency allocations will be granted pursuant
to a public auction administered by the Ministry of Communications. The
Company anticipates needing additional licenses in the Initial Markets
only. There can be no assurance that the Company will receive the
additional licenses, which may materially alter the Company's market
projections.
Paging License Ownership; Operating Agreements; Agreements to
Transfer Licenses. The licenses presently operated by the Company were
granted to and are owned by TVA, Multiponto and San Francisco
Comunicacoes Ltda., an affiliate of IVP (the "Licenseholders") and are
valid through July 28, 2009. The Company has entered into Operating
Agreements with each of the Licenseholders pursuant to which the Company
has the right to operate the paging licenses held by the Licenseholders.
The Company has also entered into Agreements of Promise of Assignment and
Transfer of Permissions (the "Transfer Agreement") with each
Licenseholder pursuant to which the Licenseholders have agreed, subject
to the necessary approvals, to transfer their paging licenses to the
Company. The Company is in negotiations with the Ministry of
Communications and ANATEL regarding the transfer of the licenses, in view
of the fact that the three year minimum term limitation no longer
applies. Under the applicable paging legislation, operating agreements
are permitted and do not amount to a transfer of the license.
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Trademarks
The Company markets its paging and related services under
various names and marks, including PageNet and PageMail. The Company's
use of each of these marks is granted by the terms of the Technical
Services Agreement with PageNet USA. Under the Technical Services
Agreement, the Company has use of the PageNet USA trademarks and service
marks in Brazil for so long as PageNet USA holds such properties absent
breach by the Company of its obligations thereunder or Brazilian
governmental action requiring its termination. PageNet USA has applied to
register the mark PageNet in Brazil. PageNet USA has advised the Company
that certain third parties also have applied to register the PageNet name
in Brazil. PageNet USA is pursuing vigorously its registration of the
PageNet mark. However, there can be no assurance that PageNet USA will be
successful in which case the Company may not have the right to use the
PageNet mark.
Item 2. Description of Property.
The Company currently leases 43,000 square feet of office space
in Sao Paulo and 36,000 square feet in Rio de Janeiro under a five-year
lease. These spaces house the Company's corporate headquarters, as well
as its Sao Paulo and Rio de Janeiro operations, including dispatch
centers, systems rooms and a retail showroom. In addition, the Company
leases an additional retail showroom in downtown Sao Paulo.
In each of the cities in which the Company has secured paging
licenses, the Company has entered into and will continue to enter into
agreements for the placement, construction and maintenance of paging
transmitter antennas.
Item 3. Legal Proceedings.
The Company is not a party to any legal proceedings that would
have a material adverse effect on its results of operations and financial
condition.
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Item 4. Control of Registrant.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock, no par value (the
"Common Stock") and Preferred Stock, no par value (the "Preferred Stock")
as of April 29, 1998 as determined in accordance with Rule 13d-3 under
the Exchange Act, unless otherwise stated with respect to (i) each person
known by the Company to be the beneficial owner of more than five percent
of any class of the Company's voting securities and (ii) all directors
and executive officers of the Company, as a group.
<TABLE>
<CAPTION>
Common Stock Preferred Stock
------------ ---------------
Name and Address of Number Number
Beneficial Owner of Shares Percentage(1) of Shares Percentage
- ---------------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Paging Brazil Holding Co., LLC
c/o Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017(2)................................. 939,955 68.2% _ _
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017(2)(3).............................. 939,955 68.2% 20,000 66.7%
Paging Network International N.V.
4965 Preston Park Blvd.
Plano, Texas 75093(4)....................................... 325,982 19.1% _ _
IVP Paging (Cayman) L.P.
c/o Maples and Calder
P.O. Box 309
George Town, Grand Cayman
Cayman Islands, B.W.I....................................... 325,982 23.7% 8,000 26.7%
Multiponto Telecomunicacoes Ltda.
Avenida Presidente Wilson No. 231
Rio de Janeiro, Brazil(5)................................... 122,243 8.6% 2,000 6.7%
Douglas M. Karp(6)
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017.................................... 939,955 68.2% 20,000 66.7%
David E. Libowitz(6)
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017.................................... 939,955 68.2% 20,000 66.7%
All directors and executive officers as a group
(7 persons)(7).............................................. 30,805 2.2% _ _
- -----------
</TABLE>
(1) Calculated in accordance with Rule 13d-3 under the Exchange Act.
(2) Warburg Pincus owns 100% of the voting interests in Holding LLC.
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(3) The sole general partner of Warburg Pincus is Warburg, Pincus & Co.,
a New York general partnership ("WP"). E.M. Warburg, Pincus & Co.,
LLC, a New York limited liability company ("EMW LLC"), manages
Warburg Pincus. The members of EMW LLC are substantially the same as
the partners of WP. Lionel I. Pincus is the managing partner of WP
and the managing member of EMW LLC. WP has a 15% interest in the
profits of Warburg Pincus as the general partner, and also owns
approximately 1.2% of the limited partnership interest in Warburg
Pincus.
(4) PageNet NV holds a subscription bond that is currently exercisable into
325,982 shares of Common Stock.
(5) Multiponto holds a subscription bond that is currently exercisable into
40,748 shares of Common Stock.
(6) All shares indicated as owned by Messrs. Karp and Libowitz are owned by
Warburg Pincus and are included because of the affiliation of Messrs.
Karp and Libowitz with Warburg Pincus. Messrs. Karp and Libowitz,
Managers of Holding LLC, are Managing Directors and members of EMW LLC and
general partners of WP.
(7) Excludes directors qualifying shares.
Shareholders Agreement
The relations among the Company's shareholders, Warburg Pincus,
PageNet NV, IVP Cayman, Multiponto, TVA (together, the "Shareholders")
and Messrs. Trynin and Fregenal (together with other stockholding members
of the Company's management "Management Investors"), are governed by a
Shareholders Agreement, dated as of December 11, 1996, as amended as of
March 10, 1997 (the "Shareholders Agreement"). The following describes
certain terms of the Shareholders Agreement:
Board of Directors. The Company is managed by a Board of
Directors that is currently comprised of five members. For so long as IVP
Cayman beneficially owns at least 10% of the Common Stock outstanding on
a fully diluted basis, IVP Cayman will have the right to designate one
director to the Board of Directors. For so long as (i) PageNet NV
beneficially owns at least 10% of the Common Stock outstanding on a fully
diluted basis or (ii) the Technical Services Agreement is in full force
and effect, PageNet NV shall have the right to designate one director to
the Board of Directors. For so long as Warburg Pincus beneficially owns
more shares of Common Stock outstanding on a fully diluted basis than any
other shareholder of the Company, Warburg Pincus will have the right if
it so chooses to designate a majority of the directors of the Board of
Directors. In the event Warburg Pincus is not entitled to designate a
majority of the Board of Directors, but Warburg Pincus beneficially owns
at least 10% of the Common Stock outstanding on a fully diluted basis,
Warburg Pincus will have the right to designate one director to the Board
of Directors.
Restrictions on Transfer of Stock. Neither IVP Cayman nor
PageNet NV will sell, assign, transfer or otherwise dispose of
("Transfer") any capital stock of the Company ("Capital Stock") held by
it without the prior written approval of Warburg Pincus, which approval
will not be unreasonably withheld. Such restriction applies to IVP Cayman
only for a period of five years following the issuance of any such stock.
The Management Investors may not Transfer stock held by them for a period
of five years following the issuance of such stock, subject to certain
exceptions.
PageNet NV Right of First Offer. PageNet NV has a right of first
offer with respect to either the Transfer by any Shareholder or the
Transfer by the Company of any of its assets.
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Tag-Along Rights; Drag-Along Rights. The Shareholders Agreement
provides tag-along rights for (i) the Management Investors in the event
that the Shareholders Transfer all their shares of Common Stock and (ii)
each Investor in the event that another Shareholder Transfers any of its
Capital Stock. In the event that Warburg Pincus chooses to Transfer all
its shares of Common Stock or Preferred Stock to a proposed transferee,
the Shareholders Agreement provides that Warburg Pincus may require each
other Shareholder to Transfer all its shares of Common Stock or Preferred
Stock, as the case may be, to such transferee.
Preemptive Rights. Except in connection with an underwritten
public offering or a merger of the Company, the Shareholders Agreement
provides each Shareholder with preemptive rights in connection with any
issuance of equity securities by the Company. Each Shareholder has agreed
to waive its preemptive rights in connection with the issuance of shares
of Common Stock to Holding LLC.
Consent Rights of Preferred Stock. The consent of the holders of
a majority in interest of the outstanding Preferred Stock is required for
any of the following actions to be taken by the Company: (i) the
acquisition or disposition of significant assets outside the ordinary
course of business, (ii) the incurrence of any indebtedness or other
commitment in excess of US$250,000, (iii) the amendment of the by-laws
(estatutos sociais) of the Company (the "By-laws"), (iv) the guarantee of
any third party indebtedness or the incurrence of any lien outside the
ordinary course of business, (v) transactions with affiliates, (vi) the
entry by the Company into a new business, (vii) the issuance of any
equity securities, and (viii) the winding up, liquidation or dissolution
of the Company. The consent rights of the holders of the Preferred Stock
with respect to the matters described in clauses (i) through (vi) above
will not be required in the event that Warburg Pincus ceases to
beneficially own any shares of Preferred Stock.
Registration Rights Agreement
In connection with the formation of the Company, the Company
entered into a Registration Rights Agreement with the Shareholders (the
"Registration Rights Agreement"), pursuant to which the Company granted
registration rights with respect to all shares of Common Stock and
Preferred Stock owned by the Shareholders. Such registration rights also
extend to any capital stock of the Company issued as a dividend in
respect of such shares. Subject to certain customary exceptions and
limitations, the Company has agreed to provide two demand registrations
to the holders of Registrable Securities (as defined in the Registration
Rights Agreement), which may be exercised by the holders of more than 50%
of the Registrable Securities. The Registration Rights Agreement also
provides for piggyback registration rights in the event the Company files
a registration statement for the sale of its securities, subject to
certain customary exceptions and limitations. In addition, once the
Company is qualified to use Form F-3 or S-3 under the Securities Act, the
holders of Registrable Securities shall have the right to request four
registrations on Form F-3 or S-3 to register all or a portion of such
shares under the Securities Act, subject to certain conditions. In
general, all fees, costs and expenses of such registration (other than
underwriting discounts and selling commissions applicable to sales of the
Registrable Securities) will be borne by the Company. The Company has
agreed to indemnify the holders of Registrable Securities from any
liability arising out of or relating to any untrue statement of a
material fact or any omission of a material fact in any registration
statement or prospectus filed by the Company pursuant to the Registration
Rights Agreement, subject to certain exceptions.
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Equity Registration Rights
In connection with the issuance of non-voting member interests
of Holding LLC (together with shares of Common Stock of the Company
distributed in respect thereof, the "Registrable Securities") to the
Initial Purchasers, the Company and Holding LLC (together, the "Issuers")
and Warburg Pincus, IVP Cayman, Multiponto, TVA, and PageNet NV
(together, the "Shareholders") and the Initial Purchasers have entered
into the Equity Registration Rights Agreement, which provides that the
holders of Registrable Securities have the following registration rights
and other rights and obligations with respect to the Registrable
Securities.
Registration Rights. Subject to certain customary exceptions and
limitations, the holders of Registrable Securities will be entitled to
require the Company to effect up to two registrations, which may be
exercised by holders of at least 35% of Registrable Securities. The
Equity Registration Rights Agreement also provides for piggyback
registration rights in the event that either of the Issuers files a
registration statement for the sale of its securities, subject to certain
customary limitations.
Tag-Along Rights. Subject to certain customary exceptions and
limitations, in the event of a proposed direct or indirect sale or other
disposition (collectively, a "Transfer") of beneficial ownership of
Common Stock or any other common equity of the Company or any equity
interests in Holding LLC (whether now or hereafter issued), in any such
case, by any Shareholder in any transaction or a series of related
transactions to any person or persons (such other person or persons being
hereinafter referred to as the "proposed purchaser") at any time prior to
the date of the consummation of one or more bona fide underwritten public
offerings of Common Stock of the Company, as a result of which 20% of the
outstanding shares of Common Stock are listed on a United States national
securities exchange or the Nasdaq National Market System (the "Triggering
Date"), each of the holders of Shares or Registrable Securities
(collectively, the "Subject Equity") shall have the right to require the
proposed purchaser to purchase from each of them up to a percentage of
the number of shares of Subject Equity owned by such holder equaling the
percentage derived by dividing the total number of shares of Common Stock
which the Shareholders and their Affiliates propose to transfer by the
total number of shares of Common Stock beneficially owned by the
Shareholders and their Affiliates; provided that, in the event of a
proposed Transfer, either at a time or as a result of which would result
in a Change of Control (as defined in the Indenture), the holders of
Registrable Securities will have the right to sell all of their Subject
Equity.
Obligation to Sell. Subject to certain customary exceptions and
limitations, in the event of any direct or indirect sale or other
disposition of beneficial ownership of all Common Stock of the Company
then held by the Shareholders prior to the Triggering Date in a
transaction resulting in the acquisition of beneficial ownership of all
voting interests in the Company for cash or freely marketable Securities
(the "Subject Sale"), all holders of Registrable Securities will be
required to sell all Registrable Securities beneficially owned by them on
equivalent terms as applicable to the Subject Sale; provided that (a) the
consideration to be received by the holders of Registrable Securities
shall be the same type of consideration received by the Shareholders and
their respective Affiliates and, in any event, shall be cash or freely
transferable marketable securities, and (b) after giving effect to such
transaction, the Shareholders and their respective Affiliates shall not
own, directly or indirectly, any capital stock or rights to purchase
capital stock of the Company or Holding LLC.
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Item 5. Nature of Trading Market.
The Company's outstanding registered securities consist solely
of the Company's 13-1/2% Senior Notes due 2005 that were registered under
the Securities Act pursuant to an Exchange Offer which expired on October
31, 1997. There is no formal trading market for such securities.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.
Brazilian law provides that whenever there is a material
imbalance, or a serious risk of a material imbalance, in Brazil's balance
of payments, the Brazilian Government may, for a limited period of time,
impose restrictions on the remittance to foreign investors of the
proceeds of their investments in Brazil, as it did for approximately six
months in 1989 and early 1990. The Brazilian Government may also impose
restrictions on the conversion of the Brazilian currency into foreign
currencies. Such restrictions may hinder or prevent the Company from
purchasing equipment required to be paid for in any currency other than
reais, paying scheduled interest and principal payments under the Notes
in U.S. dollars and making payment on judgments obtained in a court in
Brazil. Such restrictions could adversely affect the Company. The Company
could also be adversely affected by delays in, or a refusal to grant, any
required Brazilian governmental approval for conversion of real payments
and remittances abroad in respect of such dividends, distributions,
interest and principal payments.
The Brazilian Government currently restricts the ability of
Brazilian or foreign persons or entities to convert Brazilian currency
into U.S. dollars or other currencies other than in connection with
certain authorized transactions. The Central Bank has authorized the
issuance of the Notes and, although there can be no assurance, is
expected, in due course to issue a certificate of registration
authorizing each of the scheduled payments of principal of, premium on,
and interest on the Notes or for payments of principal of, premium on and
interest on the Notes upon any early redemption of the Notes at the
option of a holder of Notes. However, consent from the Central Bank is
needed for the payment of principal of, premium, if any, on and interest
on the Notes upon acceleration of the Notes following an Event of
Default. In addition, consent from the Central Bank is needed for (i)
payments in respect of the Notes upon redemption by the Company in the
event of certain changes in Brazilian law relating to tax withholding,
(ii) payments in respect of the Notes in the event of redemption of the
Notes by the Company, (iii) payments in respect of the Notes in the event
of certain asset sales, and (iv) payments in respect of the Notes in the
event of a change of control. There can be no assurance that any required
consent from the Central Bank will be obtained.
There can be no assurance that the Brazilian Government will not
in the future impose more restrictive foreign exchange regulations that
would have the effect of eliminating or restricting the Company's access
to foreign currency that would be required to meet its foreign currency
obligations, including the Notes. The likelihood of the imposition of
such restrictions by the Brazilian Government may be affected by, among
other factors, the extent of Brazil's foreign currency reserves, the
availability of sufficient foreign currency on the date a payment is due,
the size of Brazil's debt service burden relative to the economy as a
whole, Brazil's policy toward the International Monetary Fund and
political constraints to which Brazil may be subject.
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Item 7. Taxation.
Brazil
Based upon the advice of Xavier, Bernardes, Braganca, Sociedade
de Advogados, Brazilian counsel to the Company, the following is a
summary of the material Brazilian income tax consequences to the Company
in connection with the sale and repayment of the Notes (including any
interest thereon) and to beneficial owners of the Notes that are
non-residents of Brazil in connection with the purchase, ownership and
disposition of such Notes. This summary is limited to the Company and to
non-residents of Brazil which acquire the Notes at the issue price from
the Initial Purchasers, and does not address investors who purchase Notes
at a premium or market discount. In addition, this summary is based on
the Brazilian tax regulations as presently in effect and does not take
into account possible future changes in such tax laws. Prospective
purchasers of the Notes are advised to consult their tax advisers as to
the consequences of a purchase and sale of the Notes.
Individuals domiciled in Brazil and Brazilian companies are
taxed in Brazil on the basis of their worldwide income (which includes
earnings of Brazilian companies' foreign subsidiaries, branches and
affiliates). The income of non-Brazilian residents in general are taxed
in Brazil only when derived from Brazilian sources. Interest, fees,
commissions and any other income (which for the purposes of this
paragraph includes any deemed income on the difference between the issue
price of the Notes and the price at which the Notes are redeemed
("original discount")) payable by a Brazilian obligor to an individual,
company, entity, trust or organization domiciled outside Brazil is
subject to income tax withheld at source. The rate of withholding with
respect to debt obligations is 15% or such other lower rate as provided
for in an applicable tax treaty between Brazil and such other country
where the recipient of the payment has its domicile. Notwithstanding the
foregoing, the applicable withholding income tax rate for interest,
commissions, expenses and discounts, payable to persons or entities
domiciled abroad, arising from negotiable instruments such as the Notes,
was reduced to zero, pursuant to Law No. 9.481 of August 13, 1997, as
modified by Article 20 of Law No. 9.532 of December 10, 1997, which
restricts such income tax reduction to negotiable instruments that (i)
are placed abroad with the previous approval of the Central Bank and (ii)
have a minimum average amortization term of at least 96 months. As a
result, since the Notes have an original maturity in excess of 96 months,
such reduction will apply to payments of interest and other income with
respect to the Notes paid during 1998. Such reduction should continue to
apply after 1998 unless the provisions of the above-mentioned law are
modified by new tax legislation. In any event, if any Notes are redeemed
prior to the maturity date, such reduction will not apply and upon any
such redemption the Brazilian withholding tax will be applied on the
amount of interest (including original discount), fees and commissions
paid on such Notes from the date of issue through the date of redemption.
Under the terms of the Notes, the Company is required to
gross-up Noteholders for Brazilian withholding tax, subject to certain
exceptions. The Company has the right to redeem the Notes at par in the
event of certain increases in Brazilian withholding tax to a rate in
excess of 15%.
Any earnings or capital gains made abroad as a result of a
transaction between two non-residents of Brazil are not subject to tax in
Brazil. However, gains realized by a non-resident on the disposition of
the Notes inside Brazil, or to a Brazilian resident outside of Brazil,
will be subject to Brazilian tax.
Pursuant to Decree 1,815 of February 8, 1996, reais resulting
from the conversion of the proceeds received by a Brazilian borrower from
a foreign currency loan (including those in connection
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with the issue of bonds or notes) are subject to a tax on exchange
transactions. Under Article 4 of Decree 1,815/96, the Minister of Finance is
empowered to establish the applicable tax rate, which was set by means of
Portaria 241 of October 31, 1996. Portaria 241 was revoked by Portaria 85,
enacted on April 24, 1997, which reduced to zero the IOF rate applicable on the
reais. The IOF tax is currently regulated by Decree No. 2,219 dated May 2, 1997.
Under Law 8,894 of June 21, 1994, such tax rate may be increased up to 25%. In
any event, the tax burden falls upon the Brazilian borrower, not upon foreign
creditors such as the holders of the Notes and will be deducted from the
proceeds of the issue of the Notes.
On August 15, 1996, the Brazilian Congress approved
Constitutional Amendment No. 12 creating a new temporary tax, the
Contribuicao Provisoria sobre Movimentacao Financeira ("CPMF"). Based on
such Amendment, Law No. 9,311 of October 24, 1996 was enacted,
determining the creation of the CPMF tax. Under Law No. 9,311/96, as
modified by Law No. 9.539 of December 12, 1997, all financial debt and
money transfers effected on or within 24 months after January 23, 1997
will be subject to the assessment of the CPMF tax at the rate of 0.20%.
Funds arising from the collection of the CPMF tax will be applied only in
the public health system.
There is no stamp, transfer or other similar tax in Brazil with
respect to the transfer, assignment or sale or any debt instrument
outside Brazil (including the Notes).
United States
Federal Income Taxation
Based upon the advice of Willkie Farr & Gallagher, the following
is a summary of the material U.S. federal income tax consequences
associated with the purchase, ownership and disposition of a Note. This
summary does not discuss all of the tax consequences that may be relevant
to certain types of investors subject to special treatment under the U.S.
federal income tax laws (such as individual retirement accounts and other
tax-deferred accounts, securities broker-dealers, life insurance
companies, tax-exempt organizations and foreign persons, or to persons
whose "functional currency" is other than the U.S. dollar or to persons
which hold Notes as part of a "straddle" or "conversion transaction" or
otherwise as part of a "synthetic asset") and is limited to investors
which hold Notes as capital assets. In addition, this summary is limited
to initial holders that acquire the Notes at the issue price from the
Initial Purchasers. This summary is based on the Internal Revenue Code of
1986, as amended (the "Code"), final, temporary and proposed Treasury
regulations thereunder, revenue rulings, court cases, and other legal
authorities as now in effect (or proposed) and as currently interpreted,
and does not take into account possible changes in such tax laws or other
legal authorities or such interpretations. No rulings on any of the
issues discussed below will be sought from the U.S. Internal Revenue
Service (the "IRS").
For purposes of this discussion, a "U.S. Holder" is an
individual who is a citizen or resident of the United States, a
corporation, partnership or other entity created under the laws of the
United States or any political subdivision thereof, an estate that is
subject to United States federal income taxation without regard to the
source of income, or a trust if a United States court is able to exercise
primary supervision over the administration of that trust and one or more
United States fiduciaries have the authority to control all substantial
decisions of such trust.
PROSPECTIVE PURCHASERS OF THE NOTES ARE ADVISED TO CONSULT THEIR
TAX ADVISERS AS TO THE CONSEQUENCES OF A PURCHASE AND SALE OF NOTES,
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INCLUDING, WITHOUT LIMITATION, (I) THE APPLICABILITY AND EFFECT OF ANY
STATE, LOCAL OR NON-U.S. TAX LAWS TO WHICH THEY MAY BE SUBJECT, AND OF
ANY LEGISLATIVE OR ADMINISTRATIVE CHANGES IN LAW, (II) THE U.S. FEDERAL
INCOME TAX CONSEQUENCES OF THE ISSUER'S DEDUCTION OF BRAZILIAN TAXES AND
OTHER AMOUNTS (AND OF THE PAYMENT BY THE ISSUER OF ADDITIONAL AMOUNTS
WITH RESPECT THERETO) WITH RESPECT TO PAYMENTS ON THE NOTES, (III) THE
AVAILABILITY FOR U.S. FEDERAL INCOME TAX PURPOSES OF A CREDIT OR
DEDUCTION FOR BRAZILIAN TAXES OR OTHER AMOUNTS AND (IV) THE CONSEQUENCES
OF PURCHASING THE NOTES AT A PRICE OTHER THAN THE ISSUE PRICE.
Tax Considerations Applicable to Holding Notes
Taxation of Interest and Additional Amounts on Notes. Interest
on the Notes and additional amounts relating thereto ("Additional
Amounts") (i.e., without reduction for any Brazilian withholding taxes)
will be taxable to a U.S. Holder as ordinary income at the time it
accrues or is received in accordance with the U.S.
Holder's method of accounting for tax purposes.
A U.S. Holder will treat the gross amount of interest and
Additional Amounts relating thereto (i.e., without reduction for any
Brazilian withholding taxes, if any) as ordinary interest income in
respect of the Notes. If the IRS were to successfully contend that a
sufficiently large portion of the purchase price should not be allocated
to the Notes, the Notes would bear OID for U.S. federal income tax
purposes. U.S. Holders of Notes would be required to accrue in income as
additional interest (whether such holder was a cash or accrual taxpayer)
in each taxable year during which such U.S. holder held such Note, a
portion of the OID. The amount of OID on a Note would be the excess of
its "stated redemption price at maturity" over the Note's "issue price."
In the event of a reallocation of purchase price, a Note's "issue price"
would be the portion of the purchase price allocated to such Note and its
"stated redemption price at maturity" would generally be its stated
principal amount. The amount of OID taken into account in a particular
year would be calculated under the constant yield to maturity method. The
effect of the OID rules, generally, would be that U.S. Holders would
recognize interest income in each year equal to the excess of the product
of (i) the yield to maturity on the Notes and (ii) the adjusted issue
price over the interest payments on the Notes. Generally, the adjusted
issue price of the Notes will be its issue price increased by previously
accrued OID. Under this method, the amount of OID included in the income
of a U.S. Holder in early years would be less than the includible amount
in later years.
Pursuant to applicable OID rules, the possibility that
Additional Amounts may be payable in respect of Brazilian withholding
taxes on interest payments could subject the Notes to the rules
applicable to contingent payment debt instruments, regardless of whether
or not Brazil actually imposes such a withholding tax. The Notes will be
excepted from the application of those rules if two conditions are
satisfied. First, the amounts and timing of the Additional Amounts are
known and second, it is significantly more likely than not that interest
payments on the Notes will continue to be subject to a Brazilian
withholding rate of zero, both as determined based on the facts and
circumstances existing at the date of issue of the Notes. Xavier,
Bernardes, Braganca, Sociedade de Advogados, Brazilian counsel to the
Company, has advised the Company that an income tax withholding rate of
15% would apply with respect to interest payments on the Notes if Brazil
were to discontinue the current zero withholding on interest payments and
that it is substantially more likely than not that the current zero
withholding rate will be continued indefinitely.
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<PAGE>
Based upon the advice of its counsel, the Company intends to
take the position that the Notes are not subject to the rules applicable
to contingent debt instruments. However, because the determinations that
form the basis of the legal opinion are inherently factual, the IRS could
challenge that position, and if it were to successfully do so, gain
realized by U.S. Holders with respect to the Notes could be
recharacterized as ordinary income rather than capital gain and,
therefore, at present U.S. federal income tax rates, subject to higher
tax rates for U.S. Holders who are individuals. The application of those
rules could also result in an unfavorable mismatch of income and
deduction/foreign tax credit for U.S. Holders. Prospective U.S. Holders
should contact their own tax advisors regarding the application of the
OID rules to the Notes.
The calculation of foreign tax credits and, in the case of a
U.S. Holder that elects to deduct foreign taxes, the availability of
deductions, involves the application of rules that depend on a U.S.
Holder's particular circumstances. U.S. Holders should consult their own
tax advisers regarding the availability of foreign tax credits and the
treatment of additional amounts.
Sale, Exchange or Other Disposition of Notes. A U.S. Holder will
generally recognize gain or loss upon the sale, exchange, retirement or
other disposition of Notes equal to the difference between the amount
realized on the sale, exchange or other disposition of such Note and the
U.S. Holder's adjusted tax basis in the Notes. Such gain or loss
generally would be capital gain or loss, and would be long-term if the
Notes were held more than one year.
Effect of Brazilian Withholding Taxes. It is believed that
payments with respect to a Note will not be subject to Brazilian
withholding tax during the fiscal year of 1998 unless the Note is
redeemed prior to June 6, 2005. After 1998 such payments may be subject
to Brazilian withholding tax at a rate of 15%. In the case of any Note
which is so redeemed, withholding taxes in respect of interest previously
paid may be imposed by Brazil at the time of redemption. Any Brazilian
tax withheld generally will be treated as a foreign income tax that U.S.
Holders may elect to deduct in computing their taxable income or, subject
to the limitations on foreign tax credits generally, credit against their
U.S. federal income tax liability. No such deduction or credit will be
available to the extent Brazil pays a subsidy to a U.S. Holder, a related
person or the Company, the amount of which is determined (directly or
indirectly) by reference to the amount of the withholding tax. While
Brazil does not have a program or policy of paying such subsidies at
present, it has had programs of that nature in the past and could
implement such programs again in the future. For purposes of determining
a U.S. Holder's United States foreign tax credit, gain or loss on the
sale, redemption or other taxable disposition of a Note will generally
constitute United States source income. Interest (including Brazilian
withholding taxes imposed on payments on a Note and Brazilian withholding
taxes imposed with respect to any Additional Amounts payable by the
issuer) will generally constitute non-United States source income. Such
interest will generally constitute passive income. However, if a Note is
redeemed prior to June 6, 2005, and payments with respect to the Note are
subject to Brazilian withholding tax of five percent or more, the IRS
might retroactively treat interest paid with respect to the Note as high
withholding tax interest. In any event, a U.S. Holder may have
insufficient foreign source income to utilize fully any foreign tax
credit attributable to such withholding taxes that could otherwise be
utilized (but such withholding taxes may instead be deductible by the
U.S. Holder). A U.S. Holder may be required to provide the IRS with a
certified copy of the receipt evidencing payment of withholding tax
imposed in respect of payments on the Notes (a "Certified Copy") in order
to claim a foreign tax credit in respect of such withholding tax. A U.S.
Holder (or its agent) may obtain a Certified Copy by providing written
demand therefor to the Principal Paying Agent. The Principal Paying Agent
will contact the issuer, which will provide such Certified Copy to the
Principal Paying Agent for prompt forwarding to the relevant U.S. Holder.
The issuer will attach to each Certified Copy a certificate stating (x)
that the
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amount of withholding tax evidenced by the Certified Copy was paid in connection
with payments in respect of the principal amount of notes then outstanding and
(y) the amount of such withholding tax paid per US$1,000 of principal amount of
the Notes.
Item 8. Selected Financial Data.
The selected financial information for the Company set forth
below for the period ended December 31, 1996 and 1997 have been derived
from the Financial Statements of the Company, which have been audited by
Ernst & Young, Auditors Independentes S.C. The information set forth
below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Financial Statements of the Company included elsewhere in this document.
The Financial Statements have been prepared in accordance with U.S. GAAP.
The Company was a development stage company in 1996. The Company began
earning revenue from operations in March 1997 and, therefore, is no
longer a development stage company.
Inception to Twelve Months Ended
December 31, 1996 December 31, 1997
----------------- -------------------
Statement of Operations Data (U.S. Dollars)
Total revenue........................ $ -- $10,203,867
Cost of product sold................. -- (6,952,092)
Operating costs and expenses:
Services, rent and maintenance..... -- 4,450,359
Selling, general, administrative
and depreciation............... 4,961,639 20,344,581
----------- ------------
Operating loss....................... (4,961,639) (21,543,165)
Other income (expense)............... 57,031 (3,890,357)
------------ -------------
Net loss............................. $(4,904,608) $(25,433,522)
============ ============
December 31,
------------
1996 1997
---- ----
Balance Sheet Data (U.S. Dollars)
Cash and cash equivalents.............. $12,444,689 $59,416,321
Pledged securities..................... -- 38,728,563
Working capital........................ 11,062,070 74,649,587
Fixed assets, net...................... 4,513,421 18,945,448
Total assets........................... 20,539,033 132,400,463
Total debt............................. -- 125,000,000
Redeemable preferred stock............. 20,451,427 33,661,424)
Shareholders' equity (deficit)......... (4,875,936) (33,968,791)
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Item 9. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following discussion should be read in conjunction with the
financial statements, including the notes thereto, included elsewhere in
this report.
Results of Operations
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
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.
For the purpose of management's discussion and analysis, net
revenue is defined as total revenue less sales tax and cost of product
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. The period ended December 31,
1996 reflects operations from April 7, 1996, the date of the Company's
inception.
Year Ended
December 31,
------------
1996 1997
---- ----
Net revenue...................................... $ -- $ 3,251,775
Operating costs and expenses:
Services rent and maintenance.................... -- 4,450,359
Selling, general and administrative.............. 4,906,057 18,964,553
Depreciation and amortization.................... 55,582 1,380,028
---------- ------------
Total operating costs and expenses............. 4,961,639 24,794,940
---------- ------------
Operating loss................................... (4,961,639) (21,543,165)
Other income (expense)........................... 57,031 (3,890,357)
---------- -------------
Net loss......................................... $(4,904,608) $(25,433,522)
=========== =============
Other data:
EBITDA1.......................................... $(4,906,057) $(20,163,137)
Number of subscribers at end of period........... -- 47,260
- --------
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 Revenue. 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 twelve months ended December 31, 1997, the Company was
offering service to customers in Sao Paulo and in September 1997 began
offering services in Rio de Janeiro. During such twelve month period, the
Company generated $4,217,273 in service revenue and $7,564,045 in product
sales to customers, had cost of sales of $6,952,092, and had sales tax of
$1,577,451. During the twelve month period ended December 31, 1997, the
Company's net revenue was $3,251,775. The Company had no revenue for the
twelve months ended December 31, 1996.
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 twelve month period ended December 31, 1997, the Company
incurred $4,450,359 of expenses in connection with the continued buildout
of its paging network and the operations of the Sao Paulo and Rio de
Janeiro systems. During the twelve month period ended December 31, 1996,
the Company did not incur any service, rent and maintenance expenses.
Selling and Marketing. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During
the twelve month period ended December 31, 1997, the Company incurred
$8,088,531 of selling and marketing expenses. Such amounts increased from
the prior year as the Company did not have significant operations in
1996.
General and Administrative. General and administrative expenses
include compensation benefits, rent, bank fees, outside services and the
provision for losses on accounts receivable. During the twelve month
period ended December 31, 1997, the Company incurred $10,876,022 of
general and administrative expenses. Included in such amount is
approximately $2,500,000 of costs associated with the formation of the
Company.
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 $55,582 for the twelve month period ended
December 31, 1996 to $1,380,028 for the twelve month period ended
December 31, 1997, 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 twelve month period ended December 31,
1997 the Company generated an operating losses of $21,543,165 primarily
due to low volume from a low subscriber base and full year expenses in
connection with the development of the Company's business as explained
above.
Interest Expense. Interest expense was $9,892,031 for the twelve
month period ended December 31, 1997, primarily as a result of interest
associated with the Senior Notes.
Interest Income. Interest income increased to $9,419,572 for the
twelve month period ended December 31, 1997 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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Exchange and Translation (Losses). Exchange and translation
losses increased to $3,417,898 for the twelve month period ended December
31, 1997 primarily as a result of its short-term investments in Brazil.
During 1997, the Company entered into foreign currency swap
agreements to hedge its foreign currency exposure. At December 31, 1997,
the Company had an investment which was the equivalent of a U.S. dollar
denominated investment with a fixed interest rate in the amount of
$53,361,000. The Company expects to continue to enter into such contracts
as its debt and a significant amount of its payables are dollar
denominated.
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 still small subscriber base and expenses
incurred during the period in connection with the development of the
Company's business.
Liquidity and Capital Resources. The Company's operations and
expansion into new markets and product 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 $15,812,055 for the twelve months ended December
31, 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
December 31, 1997, the Company has (1) completed the buildout of its Sao
Paulo and Rio de Janeiro systems, which served 47,260 subscribers, (2)
installed transmitters in Sao Paulo, Rio de Janeiro and 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, together with cash on hand, will be sufficient to
complete the buildout of Initial Markets and that it will need to secure
additional financing to complete the planned buildout of other 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 rolling out services. The Company currently
anticipates that its cash requirements (comprised of capital
expenditures, working capital requirements, debt service requirements and
anticipated operating losses) for its 1998 fiscal year will be
$30,000,000.
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Item 10. Directors and Officers of Registrant.
The following section sets forth certain information as of April
29, 1998 with respect to each person who is an executive officer or
director of the Company:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Thomas C. Trynin..................................... President, Chief Executive Officer and Director
Marco A. Fregenal.................................... Vice President of Operations
Wilson Olivieri...................................... Treasurer and Chief Financial Officer
Maria Regina Mangabeira Albernaz Lynch............... Director
Horacio Bernardes Neto............................... Director
Renato Abucham....................................... Director
Helena de Araujo Lopes Xavier........................ Director
</TABLE>
Each of the above-named persons has served in the indicated
position(s) since the formation of the Company in December 1996.
Management Committee of Holding LLC
Holding LLC is managed by a Management Committee appointed
solely by holders of a majority of the voting member interests. As of
April 29, 1998, the following persons are members of the Management
Committee:
<TABLE>
<CAPTION>
Name Position
- ---- --------
<S> <C>
Douglas M. Karp...................................... Manager, Chairman of Management Committee
David E. Libowitz.................................... Manager, Member of Management Committee
Barry A. Fromberg.................................... Member of Management Committee
H. Brian Thompson.................................... Member of Management Committee
Thomas C. Trynin..................................... Member of Management Committee
</TABLE>
Each of the above-named persons has served in the indicated
position(s) since the formation of Holding LLC in March 1997.
Item 11. Compensation of Directors and Officers.
For the year ended December 31, 1997, the aggregate
compensation, including bonuses, of all executive officers of the Company
was approximately US$400,000. Neither members of the Board of Directors
of the Company, nor Members of the Management Committee of Holding LLC
(the "Members") receive a salary from the Company.
Due to the recent commencement of operations of the Company,
neither the Company nor Holding LLC has set aside funds to provide
pension, retirement or similar benefits to the Directors and Executive
Officers of the Company or Members of the Management Committee of Holding
LLC.
-30-
<PAGE>
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.
Not applicable.
Item 13. Interest of Management in Certain Transactions.
Formation Transactions
In connection with its formation, the Company has been a party
to the following transactions with its executive officers, directors and
five percent shareholders:
In December 1996, the Company entered into a Securities
Subscription Agreement with PageNet NV, Warburg Pincus, IVP Cayman,
Multiponto and TVA pursuant to which, among other things, the Company
issued shares of Common Stock, Preferred Stock and subscription bonds to
purchase Common Stock. The Company believes that the terms of the
Securities Subscription Agreement were negotiated at arm's-length by the
initial investors in the Company. In connection with the formation of the
Company, the Company granted registration rights to Warburg Pincus, IVP
Cayman, PageNet NV, Multiponto and TVA with respect to all shares of
Common Stock and Preferred Stock owned by them.
In December 1996, the Company and PageNet USA entered into a
Technical Services Agreement pursuant to which PageNet USA will provide
technical services and support, including (i) assistance with the
conversion and construction of the Company's paging infrastructure; (ii)
access to the PageNet USA personnel and management supervision to assist
the Company in providing paging services; (iii) training of key members
of the Company's management; (iv) making available on an exclusive basis
in Brazil, technology, software, new product development, and system
design; and (v) interfacing with vendors to seek favorable prices and
services, comparable to those obtained by PageNet USA. In addition,
pursuant to the terms of the Technical Services Agreement, PageNet USA
granted to the Company, among other things, an exclusive, royalty-free
license (the "Intellectual Property License") to use the trademarks
PageNet and VoiceNow and the tradename Paging Network in connection with
the Company's advertisement, promotion, marketing, sale, development, and
provision of telecommunications services in Brazil. Subject to certain
rights to sublicense, the Intellectual Property License is
non-transferable. In consideration of the performance of PageNet USA's
obligations under the Technical Services Agreement, the Company has
granted PageNet NV the right (in the form of subscription bonds) to
purchase 325,982 shares of the Common Stock at an exercise price of
approximately US$.025 per share (after giving effect to the Common Stock
split of approximately 40.75 for 1, the "Common Stock Split"). The
initial term of the Technical Services Agreement is five years. The
initial term will be extended for successive three-year terms unless
either party gives notice of its intent not to so extend at least one
year prior to the end of the then current term. PageNet USA may, however,
terminate the agreement (i) six months after it ceases to beneficially
own at least five percent of the Common Stock outstanding on a fully
diluted basis including the subscription bonds to purchase such Common
Stock or (ii) if any entity other than Warburg Pincus owns 50% or more of
the Common Stock outstanding on a fully diluted basis including the
subscription bonds to purchase such Common Stock. The Intellectual
Property License will survive the termination of the Technical Services
Agreement absent breach by the Company of its obligations thereunder or
if Brazilian governmental action requires a termination of the
Intellectual Property License. In the event the Intellectual Property
License is terminated, PageNet USA will not, for a period of two years
from such termination, use the trademarks PageNet or VoiceNow in Brazil
for Licensed Services (as defined in the Intellectual Property License).
In addition, the Company is
-31-
<PAGE>
subject to certain performance standards and other obligations, the non-
compliance with which permit PageNet USA to terminate the Technical Services
Agreement (including the Intellectual Property License). The Company believes
that the Technical Services Agreement was negotiated at arm's-length by the
initial investors in the Company.
In December 1996, the Company entered into Operating Agreements
with each of the Licenseholders pursuant to which the Licenseholders have
granted the Company the exclusive right to resell paging services
utilizing the paging licenses held by the Licenseholders (the
"Licenses"). The Company and each Licenseholder have also entered into
Transfer Agreements, pursuant to which the Licenseholders have agreed to
transfer the Licenses to the Company following the three year waiting
period mandated by Brazilian law or on such earlier date as may be
permitted by Brazilian law. In consideration of the performance by each
Licenseholder of its obligations under such agreements and after giving
effect to the Common Stock Split, the Company has (i) issued and sold to
IVP Cayman 325,982 shares of the Common Stock for a purchase price of
approximately US$.025 per share, (ii) issued and sold to Multiponto
81,495 shares of the Common Stock for a purchase price of approximately
US$.025 per share and has granted Multiponto the right (in the form of
subscription bonds) to purchase up to 40,748 shares of Common Stock at a
price of approximately US$.025 per share and (iii) has granted TVA the
right (in the form of subscription bonds) to purchase up to 40,748 shares
of Common Stock at a price of US$.025 per share. The Company believes
that the Operating Agreements and the Transfer Agreements were negotiated
at arm's-length by the initial investors in the Company. Given that
certain acts or omissions by a Licenseholder could result in the
revocation of its paging licenses or unavailability of such licenses to
the Company, the Licenseholders have agreed to several covenants in the
Operating Agreements designed to limit such risk to the Company.
Restructuring Transactions
In connection with the sale of the Old Notes, Warburg Pincus
contributed all shares of Common Stock directly owned by it to Holding
LLC in exchange for 100% of the voting member interests in Holding LLC.
In addition, pursuant to a subscription agreement (the "Subscription
Agreement") with the Company, Holding LLC purchased shares of Common
Stock equivalent to 7.0% of the Common Stock on a fully diluted basis for
the capital accounts of the holders of non-voting member interests in
Holding LCC (such transactions collectively referred to as the
"Restructuring").
The Subscription Agreement imposes a number of covenants on the
Company for the benefit of Holding LLC, including (i) providing certain
financial information concerning the Company and its subsidiaries that
Holding LLC is required to provide to its Members, (ii) subject to debt
instruments to which the Company is a party, distributing cash to Holding
LLC in an amount that is intended to approximate the Members' U.S.
federal income tax liability on the net income allocated to the Members
for U.S. federal income tax purposes by Holding LLC (but there can be no
assurance that such amount will be sufficient in all cases to discharge
such tax liabilities), (iii) creating a sponsored American Depositary
Receipt program for the Common Stock that will be in effect on or prior
to the occurrence of a Liquidation Event (as defined in the Subscription
Agreement) and (iv) notifying Holding LLC at the appropriate time that
there is no material likelihood that PageNet do Brasil should be
considered a "passive foreign investment company" for U.S. federal income
tax purposes for its current or any future taxable year. The Company
believes that the Restructuring was negotiated at arm's-length with
Holding LLC.
-32-
<PAGE>
All future transactions between the Company and its officers,
directors, principal shareholders or their respective affiliates, will be
on terms no less favorable to the Company than can be obtained from
unaffiliated third parties.
PART II
Item 14. Description of Securities to be Registered.
Not applicable.
PART III
Item 15. Defaults Upon Senior Securities.
There has not been any default with respect to any senior
indebtedness of the Company.
Item 16. Changes in Securities, Changes in Security for Registered Securities
and Use of Proceeds.
There have not been any changes in the Notes or in use of
proceeds from the offering of Notes. The Notes are unsecured obligations
of the Company.
PART IV
Item 17. Financial Statements.
Not applicable. See "Item 18. Financial Statements."
Item 18. Financial Statements.
See pages F-1 through F-10.
-33-
<PAGE>
Item 19. Financial Statements and Exhibits.
(a) Financial Statements
The following financial statements, together with the
report of Ernst & Young Auditores Independentes S.C.
thereon, are filed as part of this Annual Report.
Report of Independent Auditors.
Balance Sheets at December 31, 1996 and 1997.
Statement of Operations for the Years Ended December 31, 1996
and 1997.
Statements of Shareholders' Equity (Deficit) for the Years
Ended December 31, 1996 and 1997.
Statements of Cash Flows for the Years Ended December 31,
1996 and 1997.
Notes to Financial Statements.
(b) 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).
10.1* -- Purchase Agreement dated as of May 30, 1997 among Paging
Network do Brasil S.A., Paging Brazil Holding Co., LLC and the
Initial Purchasers.
10.2* -- Notes Registration Rights Agreement dated as of June 6, 1997
among Paging Network do Brasil S.A. and the Initial Purchasers.
10.3* -- Equity Registration Rights Agreement, dated as of June 6, 1997
among Paging Network do Brasil S.A., Paging Brazil Holding
Co., LLC, Warburg, Pincus Ventures, L.P., Paging Network
International N.V., IVP Paging (Cayman) L.P., Multiponto
Telecomunicacoes Ltda., TVA Sistema Televisao S.A., the
Initial Purchasers and Chase Mellon Shareholder Services.
10.4* -- Escrow and Pledge Agreement, dated as of June 6, 1997 between
Paging Network do Brasil S.A. and The Chase Manhattan Bank.
10.5* -- Shareholder Agreement, dated as of December 11, 1996 among
Paging Network do Brasil S.A., Warburg, Pincus Ventures, L.P.,
Paging Network International N.V., IVP Paging (Cayman) L.P.,
Multiponto Telecomunicacoes Ltda. and TVA Sistema Televisao
S.A.
-34-
<PAGE>
10.6* -- Shareholders Agreement Amendment No. 1 and Waiver, dated as of
March 10, 1997 among Paging Network do Brasil S.A., Warburg,
Pincus Ventures, L.P., Paging Network International N.V. IVP
Paging (Cayman) L.P., Multiponto Telecomunicacoes Ltda. and
TVA Sistema Televisao S.A.
10.7* -- Securities Subscription Agreement dated as of December 11,
1996 among Paging Network do Brasil S.A., Warburg, Pincus
Ventures, L.P., Paging Network International N.V., IVP Paging
(Cayman) L.P., Multiponto Telecomunicacoes Ltda. and TVA
Sistema Televisao S.A.
10.8* -- Registration Rights Agreement dated as of December 11, 1996
among Paging Network do Brasil S.A., Warburg, Pincus Ventures,
L.P., Paging Network International N.V., IVP Paging (Cayman)
L.P., Multiponto Telecomunicacoes Ltda., TVA Sistema Televisao
S.A., Thomas C. Trynin and Marco A. Fregenal.
10.9* -- Technical Services Agreement dated as of December 11, 1996
between Paging Network do Brasil S.A. and Paging Network, Inc.
10.10*-- Operating Agreement and Other Covenants dated December 11,1996
between Paging Network do Brasil S.A. and Multiponto
Telecomunicacoes Ltda.
10.11*-- Agreement of Promise of Assignment and Transfer of Permissions
dated December 11, 1996 between Paging Network International
N.V. and Multiponto Telecomunicacoes Ltda.
10.12*-- Operating Agreement and Other Covenants dated December 11,1996
between Paging Network do Brasil S.A. and TVA Sistema
Televisao S.A.
10.13*-- Agreement of Promise of Assignment and Transfer of Permissions
dated December 11, 1996 between Paging Network do Brasil S.A.
and TVA Sistema Televisao S.A.
10.14*-- Operating Agreement and Other Covenants dated December 11,1996
between Paging Network do Brasil S.A. and San Francisco
Comunicacoes Ltda.
10.15*-- Agreement of Promise of Assignment and Transfer of Permissions
dated December 11, 1996 between Paging Network do Brasil S.A.
and San Francisco Comunicacoes Ltda.
---------
* Incorporated herein by reference to the Exhibit to the Company's
Registration Statement on Form F-4, Registration No. 333-29865.
-35-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the Registrant certifies that it meets all of the
requirements for filing on Form 20-F and has duly caused this annual
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: April 30, 1998
<PAGE>
PAGING NETWORK DO BRASIL S.A.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors............................................F-2
Balance Sheet at December 31, 1996 and 1997...............................F-3
Statement of Operations for the Period from April 17, 1996 (inception)
through December 31, 1996 and for the Year Ended December 31, 1997......F-4
Statement of Shareholders' Equity (Deficit) for the Period from
April 1996 (inception) through December 31, 1996 and for the Year Ended
December 31, 1997.......................................................F-5
Statement of Cash Flows for the Period from April 1996 (inception)
through December 31, 1996 and for the Year Ended December 31, 1997......F-6
Notes to Financial Statements.............................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Paging Network do Brasil S.A.
Sao Paulo, Brazil
We have audited the accompanying balance sheet of Paging Network
do Brasil S.A. as of December 31, 1997 and 1996, and related statements
of operations, shareholders' equity (deficit) and cash flows for the
period April 17, 1996 (inception) through December 31, 1996 and for the
year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards in the United States. Those standards require that we
plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosure in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position of
Paging Network do Brasil S.A. as of December 31, 1997 and 1996 and the
results of operations and its cash flow for the period April 17, 1996
(inception) through December 31, 1996 and for the year ended December 31,
1997, in conformity with generally accepted accounting principles in the
United States.
ERNST & YOUNG
Auditores Independentes S.C.
Sao Paulo, Brazil
April 9, 1998
F-2
<PAGE>
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
(Amounts in U.S. dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
------------ ------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents................................. $ 12,444,689 $ 377,004
Short-term investments.................................... -- 59,039,317
Accounts receivable, net.................................. -- 819,835
Refundable taxes.......................................... 839,859 280,917
Pager inventories......................................... 2,105,955 6,825,310
Prepaid expenses and other current assets................. 635,109 173,030
Pledged securities-current................................ -- 14,842,004
----------- ----------
Total current assets.................................... 16,025,612 82,357,417
Fixed assets, net.............................................. 4,513,421 18,945,448
Pledged securities............................................. -- 23,886,559
Debt issuance costs, net....................................... -- 6,895,019
Other assets................................................... -- 316,020
----------- -----------
Total assets............................................ $ 20,539,033 $ 132,400,463
=========== ===========
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable.......................................... $ 2,532,676 $ 1,881,127
Accrued expenses.......................................... 576,374 4,255,335
Payable to related parties................................ 1,854,492 1,571,368
--------- ---------
Total current liabilities............................... 4,963,542 7,707,830
Senior notes................................................... -- 125,000,000
Redeemable preferred stock, without par value
Authorized shares - 63,000 shares
Issued and outstanding 21,300 and 30,000 shares........... 20,451,427 33,661,424
Shareholders' equity (deficit)
Common stock, without par value
Authorized - 2.037,387 shares
Issued and outstanding 1,253,401
and 1,378,401 shares.................................... 28,672 30,760
Accumulated deficit............................................ (4,904,608) (33,999,551)
----------- -----------
Total shareholder's equity (deficit).................... (4,875,936) (33,968,791)
----------- ------------
Total liabilities and stockholder's equity (deficit).... $ 20,539,033 $ 132,400,463
========== ============
</TABLE>
See the accompanying notes to financial statements.
F-3
<PAGE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
(Amounts in U.S. dollars)
<TABLE>
<CAPTION>
From April 17,
1996 (inception)
Through Year Ended
December 31 December 31,
1996 1997
---------------- ------------
<S> <C> <C>
Revenues:
Services, rent and maintenance revenue.......... - $4,217,273
Product revenue................................. - 7,564,045
---------------- -----------
Gross revenues....................................... - 11,781,318
Taxes........................................... - (1,577,451)
---------------- -----------
Total revenue................................... - 10,203,867
Cost of products sold................................ - (6,952,092)
---------------- -----------
- 3,251,775
Operating costs and expenses:
Services rent and maintenance................... - 4,450,359
Selling, general and administrative............. 4,906,057 18,964,553
Depreciation and amortization................... 55,582 1,380,028
--------- ----------
Total operating costs and expenses........... 4,961,639 24,794,940
--------- ----------
Operating loss............................... (4,961,639) (21,543,165)
Other income (expense):
Interest expense................................ - (9,892,031)
Interest income................................. 117,210 9,419,572
Exchange and translation loss................... (60,179) (3,417,898)
-------- -----------
Total other income (expense).................... 57,031 (3,890,357)
---------- -----------
Net loss............................................. $ (4,904,608) $ (25,433,522)
========== ===========
</TABLE>
See the accompanying notes to financial statements.
F-4
<PAGE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF SHAREHOLDERS' EQUITY
(Amounts in U.S. dollars)
<TABLE>
<CAPTION>
Common Accumulated
Stock Deficit Total
---------------- --------------------- ---------------------
<S> <C> <C> <C>
Issuance of Common Stock of predecessor...................... $5,950,100 -- $5,950,100
Exchange of common stock of predecessor
for redeemable preferred stock............................. (5,940,000) -- (5,940,000)
Issuance of common stock..................................... 18,572 -- 18,572
Net loss for the period...................................... -- (4,904,608) (4,904,608)
---------- ----------- ----------
Balance at December 31, 1996................................. 28,672 (4,904,608) (4,875,936)
Proceeds from the sale of common stock....................... 2,088 -- 2,088
Accrued dividends on redeemable preferred stock.............. -- (3,661,424) (3,661,424)
Net loss for the period...................................... -- (25,433,519) (25,433,519)
----------- ----------- -----------
Balance as of December 31, 1997.............................. $ 30,760 $(33,999,551) $(33,968,791)
=========== =========== ===========
</TABLE>
See the accompanying notes to financial statements.
F-5
<PAGE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
(Amounts in U.S. dollars)
<TABLE>
<CAPTION>
From April 17,
1996 (inception)
Through Year Ended
December 31, December 31,
1996, 1997
---------------- ------------
<S> <C> <C>
Operating activities:
Net loss........................................................ $ (4,904,608) $(25,433,522)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization................................. 55,582 1,380,028
Provision for losses on accounts receivable................... -- 977,010
Interest income on pledged securities......................... -- (1,532,717)
Amortization of debt issuance costs........................... -- 329,530
Changes in operating assets and liabilities:
(Increase) in accounts receivable......................... -- (1,796,845)
(Increase) decrease in refundable taxes................... (839,859) 558,942
(Increase) in pager inventories........................... (2,105,955) (4,719,355)
(Increase) decrease in prepaid expenses
and other current assets................................ (635,109) 462,079
(Increase) in other assets................................ -- (316,020)
Decrease in pledged securities............................ -- 8,407,500
Increase (decrease) in accounts payable................... 2,532,676 (651,549)
Increase in accrued expenses.............................. 576,374 3,678,961
Increase (decrease) in payable to related parties......... 1,854,492 (283,124)
--------- ----------
Net cash used by operating activities.............................. (3,466,407) (18,939,082)
Investing activities
Purchase of fixed assets...................................... (4,569,003) (15,812,055)
Short-term investment......................................... -- (59,039,317)
--------- -----------
Net cash used by investing activities......................... (4,569,003) (74,851,372)
Financing activities
Proceeds from the sale of common and
redeemable preferred stock.................................... 20,461,527 9,550,660
Proceeds of senior notes, net of debt issuance cost........... 18,572 117,745,451
Pledged securities............................................ -- (45,573,342)
---------- -----------
Net cash provided by financing activities..................... 20,480,099 81,722,769
---------- -----------
Net increase (decrease) in cash and cash equivalents............... 12,444,689 (12,067,685)
Cash and cash equivalents at beginning of period................... -- 12,444,689
---------- -----------
Cash and cash equivalents at end of period......................... $12,444,689 $ 377,004
========== ===========
</TABLE>
See the accompanying notes to financial statements.
F-6
<PAGE>
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
December 31, 1997
(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. The period ended December 31, 1996
reflects operations from the date of inception. During 1997, the Company
has started to provide paging services in Sao Paulo and Rio de Janeiro
and simultaneously is evaluating whether to commence the marketing of
paging services into additional Brazilian markets.
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
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.
During 1997, the Company entered into foreign currency swap
agreements to hedge its foreign currency exposure. At December 31, 1997,
the Company had an investment which was the equivalent of a U.S. dollar
denominated investment with a fixed interest rate in the amount of
$53,361,000. Gains and losses from the foreign exchange portion of these
contracts are included in exchange and translation loss.
Pager inventories, fixed assets and intangibles and related
income statement accounts are remeasured at exchange rates in effect when
the assets were acquired or the liabilities were incurred. All other
assets and liabilities are remeasured at period end exchange rates, and
all other income and
F-7
<PAGE>
expense items are remeasured at average exchange rates prevailing during the
period. Remeasurement adjustments are included in exchange and translation gains
(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 adminsitrative expenses.
The Company will lease certain pagers under month-to-month arrangements.
Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash equivalents.
Short-term investments are liquid investments with a maturity of greater
than three months for which carrying values approximate market values.
Allowance for Doubtful Accounts
The Company had an allowance for doubtful accounts of $977,010
at December 31, 1997. There were no charges to the allowance during 1997.
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 result could differ
from those estimates.
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
December 31, 1997, the Company had a payable of approximately $900,000 to
Warburg, Pincus and approximately $500,000 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 of 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
F-8
<PAGE>
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 December 31, 1997 it is unable to make any dividend
payments.
At December 31, 1997, the Senior Notes were traded at 93.5% of
principal amount.
5. Accrued Expenses
Accrued expenses at December 31, 1996 and 1997 are comprised of
the following:
1996 1997
---- ----
Excise taxes payable $ -- $141,013
Withholding taxes payable............... 263,634 392,177
Payroll and other benefits payable...... 259,586 1,419,651
Accrued interest payable................ -- 1,125,000
Other................................... 53,154 1,177,494
--------- ----------
$576,374 $4,255,335
6. Redeemable Preferred Stock
The redeemable preferred stock has an accruing dividend with an
effective annual rate of 12% compounding preferably for the first five
years from its issuance. 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 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 is $3,661,424. There was no such
accrual as of December 31, 1996.
F-9
<PAGE>
7. Fixed Assets
Fixed assets at December 31, 1996 and 1997 are comprised of the
following:
<TABLE>
<CAPTION>
Period of
1996 1997 Depreciation
---- ---- ------------
<S> <C> <C> <C>
Furniture and fixtures.................. $ 138,470 $ 1,384,612 10 years
Equipment............................... 4,280,449 13,123,646 5-10 years
Pagers.................................. -- 2,563,325 2.5 years
Leasehold improvements.................. 150,084 3,309,475 5 years
---------- ----------
4,569,003 20,381,058
Less - Accumulated depreciation......... (55,582) (1,435,610)
---------- ----------
$4,513,421 $18,945,448
========== ==========
</TABLE>
8. Commitments
The Company has entered into various office space and
transmission antenna rental agreements. These agreements are readjusted
periodically for inflation. Rental expense commitments at December 31,
1997 are as follows:
1998 $3,400,000
1999 $3,650,000
2000 $4,315,000
2001 $4,180,000
2002 $4,475,000
Total rental expense for the periods ended December 31, 1996 and
1997 were $124,000 and $2,011,000, respectively.
9. Income Taxes
The Company has not recognized any future income tax benefit for
its net operati ng loss carryforwards in excess of net deferred tax
liabilities as it is not assured that it will be able to realize a
benefit for such losses in the future. The net operating loss
carryforwards amounted to $26.4 million at December 31, 1997. Under
Brazilian law, net operating losses may be carried forward for an
unlimited period of time. Use of these losses, however, is restricted to
30% of taxable income in a tax period. For reporting purposes, a
valuation allowance of 100% has been recognized.
Effective January 1, 1997, the effective Brazilian income tax
rate increased from 30.5% to 33%.
F-10
