<PAGE>
Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 1999
.......... Paging Network do Brasil S.A. ..........
(Translation of registrant's name into English)
..........Rua Alexandre Dumas, 1,711..........
......Chacara Santo Antonio......
..........Sao Paulo, 04717-004, Brazil...........
(Address of principal executive offices)
<PAGE>
PAGING NETWORK DO BRASIL S.A.
Index
Page
----
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements
a) Balance Sheet at December 31, 1998 and June 30, 1999 (unaudited).....3
b) Statement of Operations for the
three and six months ended June 30, 1998 and 1999 (unaudited)........4
c) Statement of Cash Flows for the
six months ended June 30, 1998 and 1999 (unaudited)..................5
d) Statement of Shareholders' Equity (Deficit) for the six months ended
June 30, 1999 (unaudited)............................................6
e) Notes to Financial Statements (unaudited)............................7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...................12
PART II. OTHER INFORMATION
- --------------------------
Item 1. Legal Proceedings.................................................16
Item 2. Changes in Securities.............................................16
Item 3. Defaults Upon Senior Securities...................................16
Item 4. Submission of Matters to a Vote of Security Holders...............16
Item 5. Other Information.................................................16
Item 6. Exhibits..........................................................16
Signatures................................................................17
2
<PAGE>
Item 1 (a)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
At December 31, 1998 and June 30, 1999
(Amounts in U.S. dollars)
<CAPTION>
December 31, June 30,
1998 1999
-----------------------------------------
(Note 2) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 219,787 $ 44,867
Short-term investments 39,857,633 31,846,387
Accounts receivable, net 567,291 866,617
Recoverable taxes 1,383,380 3,349,193
Pager inventories 2,233,240 2,952,486
Prepaid expenses and other current assets 415,535 838,157
Pledged securities-current 15,764,225 7,965,713
-----------------------------------------
Total current assets 60,441,091 47,863,420
Fixed assets, net 21,869,217 14,176,451
Pledged securities 8,177,844 8,245,114
Debt issuance costs, net 6,443,007 6,151,756
Other assets 339,212 1,418,186
=========================================
Total assets $ 97,270,371 $ 77,854,927
=========================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 1,376,981 $ 492,489
Accrued expenses 5,199,318 7,217,225
Payable to related parties 1,217,914 1,217,914
-----------------------------------------
Total current liabilities 7,794,213 8,927,628
Senior notes 125,000,000 125,000,000
Redeemable preferred stock, without par value
Authorized shares - 63,000 shares
Issued and outstanding, 30,000 shares 37,945,014 40,281,921
Shareholders' equity (deficit)
Common stock, without par value
Authorized shares - 2,037,387
Issued and outstanding 1,378,401 30,760 30,760
Accumulated deficit (77,096,213) (125,795,229)
Accumulated other comprehensive
income 3,596,597 29,409,847
-----------------------------------------
Total shareholders' equity (deficit) (73,468,856) (96,354,622)
-----------------------------------------
Total liabilities and shareholders' equity (deficit) $ 97,270,371 $ 77,854,927
=========================================
See accompanying notes to financial statements.
</TABLE>
3
<PAGE>
Item 1(b)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
For the three months and six months ended June 30, 1998 and 1999
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------------------------------------------
1998 1999 1998 1999
------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues:
Services, rent and maintenance revenue $ 5,760,607 $ 5,759,223 $ 10,775,767 $ 11,489,379
Product revenue 1,477,877 246,742 2,812,833 871,546
------------------------------------------------------------------------
Gross revenues 7,238,484 6,005,965 13,588,600 12,360,925
Sales taxes (740,817) (573,888) (1,358,380) (1,178,504)
------------------------------------------------------------------------
Net revenue 6,497,667 5,432,077 12,230,220 11,182,421
Cost of products sold 1,592,885 120,340 2,997,098 1,488,311
Operating costs and expenses:
Services rent and maintenance 2,274,638 1,853,090 4,260,270 3,550,415
Selling, general and administrative 6,664,769 5,905,175 13,098,369 11,351,044
Depreciation and amortization 1,183,225 993,696 1,919,742 1,990,092
------------------------------------------------------------------------
Total operating costs and expenses 10,122,632 8,751,961 19,278,381 16,891,551
------------------------------------------------------------------------
Operating loss (5,217,850) (3,440,224) (10,045,259) (7,197,441)
Other income (expense):
Interest expense (4,499,087) (4,394,173) (9,113,359) (8,728,749)
Interest income 2,839,980 2,249,497 6,307,635 18,030,658
Other expense 34,654 (280,560) (52,892) (419,083)
Currency exchange loss (1,385,502) (2,904,241) (3,045,560) (38,619,719)
Total other (expense), net (3,009,955) (5,329,477) (5,904,176) (29,736,893)
------------------------------------------------------------------------
Net loss $ (8,227,805) $ (8,769,701) $ (15,949,435) $ (36,934,334)
========================================================================
See accompanying notes to financial statements.
</TABLE>
4
<PAGE>
Item 1(c)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
For the six months ended June 30, 1998 and 1999
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Operating activities:
Net loss $ (15,949,435) $ (36,934,334)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 1,919,742 1,990,092
Provision for losses on accounts receivable 1,253,398 1,783,691
Amortization of debt issuance costs 610,023 295,909
Currency exchange loss 3,045,560 38,619,719
Loss on sale of equipment 87,545 227,497
Changes in operating assets and liabilities:
Increase in accounts receivable (939,841) (2,083,017)
Increase in refundable taxes (738,926) (3,610,939)
Increase in pager inventories (2,525,996) (1,444,982)
Increase in prepaid expenses and other current assets (290,819) (561,295)
Increase in other assets (23,233) (24,986)
Decrease pledged securities 7,407,095 7,807,994
Decrease in accounts payable (181,284) (692,595)
Increase in accrued expenses 1,860,423 3,441,450
Increase in payable to related parties (503,454)
---------------- ---------------
Net cash (used in) provided by operating activities (4,969,202) 8,814,204
Investing activities:
Purchase of fixed assets (6,165,410) (1,601,605)
Proceeds from sale of equipment 130,453
(Increase) decrease in short term investment 11,801,544 (4,678,834)
---------------- ---------------
Net cash (used in) provided by investing activities 5,636,134 (6,149,986)
Effect of exchange rate changes on cash (110,692) (2,839,138)
---------------- ---------------
Net Increase (Decrease) in cash and cash equivalents 556,240 (174,920)
Cash and cash equivalents at beginning of period 377,004 219,787
----------------------------------
Cash and cash equivalents at end of period $ 933,244 $ 44,867
==================================
Supplemental disclosures of cash flow information:
Cash paid during the period for Interest on Senior Notes $ 8,437,500 $ 8,437,500
See accompanying notes to financial statements
</TABLE>
5
<PAGE>
Item 1(d)
<TABLE>
PAGING NETWORK DO BRASIL
STATEMENT OF SHAREHOLDERS' EQUITY
For the six months ended June 30, 1999
(Amounts in U.S. dollars)
(Unaudited)
Accumulated Other
Common Retained Comprehensive
Stock Deficit Income Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1998 30,760 $ (77,096,213) $ 3,596,597 $ (73,468,856)
Net loss for the period (36,934,334) (36,934,334)
Translation adjustment 25,813,250 25,813,250
----------------
Comprehensive loss for the period (11,121,084)
Monetary adjustment on redeemable
preferred stock (9,427,776) (9,427,776)
Accrued dividends on redeemable
Preferred stock (2,336,906) (2,336,906)
-----------------------------------------------------------------------
Balance at June 30, 1999 30,760 $ (125,795,229) $ 29,409,847 $ (96,354,622)
=======================================================================
See accompanying notes to financial statements.
</TABLE>
6
<PAGE>
Item 1(e)
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
June 30, 1999
(Unaudited)
(Amounts in U.S. dollars)
1. Organization
Paging Network do Brasil S.A. (formerly Warburg Paging do Brasil Ltda., the
"Company") was formed on April 7, 1996 through an investment by Warburg, Pincus
Ventures, L.P. During 1997, the Company started to provide paging services in
Sao Paulo and Rio de Janeiro and offers extended paging services to eight other
cities in Brazil.
In October 1996, the Company increased its capital to approximately
$5,500,000 and in December 1996, through the incorporation of three new
shareholders, received approximately $15,000,000 of additional capital. In
December 1996, the Company changed its name from Warburg Paging do Brasil Ltda.
to Paging Network do Brasil Ltda. and then to Paging Network do Brasil S.A.
following a change in its legal formation from a limited liability company
(Ltda.) to a closed corporation (S.A.), at which time common stock in the
limited liability company was exchanged for common and redeemable preferred
stock in the Company. In June 1997, the Company issued $125,000,000 principal
amount of 13-1/2% Senior Notes due June 6, 2005 (the "Senior Notes"). Prior to
consummation of the Senior Note offering, the Company received from shareholders
approximately $9,500,000 in exchange for additional shares of redeemable
preferred stock, and effected a stock split of 40.74774 for each issued and
outstanding share of common stock.
2. Basis of Presentation and Summary of Significant Accounting Policies
Basis for Presentation
The unaudited consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles in the
United States ("U.S. GAAP") for interim financial information. The Company has
adopted the U.S. dollar as its reporting currency. In the opinion of management,
all adjustments considered necessary for a fair presentation of the unaudited
interim consolidated financial statements have been included and are of a normal
recurring nature. The results of operations for the interim periods presented
herein are not necessarily indicative of the results to be expected for the full
year. These statements, however, do not include all information and footnotes
necessary for a complete presentation of financial position, results of
operations and cash flows in conformity with generally accepted accounting
principles. These statements should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 1998 set forth
in the Company's Annual Report on Form 20-F filed with the Securities and
Exchange Commission.
The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by U.S. GAAP for complete financial statements.
The Company's significant accounting policies are as follows:
7
<PAGE>
Foreign Currency Translation
Until December 31, 1997, the financial statements were translated from
Brazilian reais to U.S. dollars in accordance with the provisions of Statement
of Financial Accounting Standards No. 52 as it applies to entities operating in
highly inflationary economies. Pager inventories, fixed assets and intangibles
and related income statement accounts were remeasured at exchange rates in
effect when the assets were acquired or the liabilities were incurred. All other
assets and liabilities were remeasured at period end exchange rates, and all
other income and expense items were remeasured at average exchange rates
prevailing during the period. Remeasurement adjustments were included in
exchange and translation gains (losses).
Effective January 1, 1998, the Company determined that Brazil ceased to be
a high inflationary economy under SFAS 52. Accordingly, as of January 1, 1998,
the Company began using the real as the functional currency. As a result, all
assets and liabilities are translated into dollars at period end exchange rates
and all income and expense items are translated into U.S. dollars at the average
exchange rate prevailing during the period. Translation adjustments are not
included in determining net income but reported as the only component of
accumulated other comprehensive income. Transaction (losses) associated with the
Company's net U.S. dollar liability position is included in monetary (losses).
Revenue Recognition
The Company recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Advance
billings for services are deferred and recognized as revenue when earned. Sales
of pagers are recognized upon delivery. Sales commissions are included in
selling, general and administrative expenses. The Company will lease certain
pagers under month-to-month arrangements.
Advertising Cost
The Company expenses the costs of advertising as incurred. Advertising
expenses were $1,125,000 and $2,250,000 during the three and six months ended
June 30, 1998 and $557,240 and $1,197,793 during the three and six months ended
June 30, 1999.
Cash Equivalents
The Company considers all 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 values
approximate market values.
Allowance for Doubtful Accounts
The Company had an allowance for doubtful accounts of $1,400,000 at
December 31, 1998, and $1,247,586 at June 30, 1999. Charges to the allowance
were $592,000 and $1,015,000 during the three and six months ended June 30, 1998
and $891,105 and $1,936,105 during the three and six months ended June 30, 1999.
Inventories
Inventories consist of certain types and brands of pagers (the subscriber
devices) which are held primarily for resale. Inventories are recorded at the
lower of average cost or market.
8
<PAGE>
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Related Party Transactions
The Company has agreed to reimburse its shareholders for certain
transaction costs associated with the formation of the Company and the
$125,000,000 senior notes offering consummated on June 6, 1997. As of June 30,
1999, the Company had a payable of approximately $968,000 to Warburg, Pincus and
approximately $250,000 to Paging Network, Inc.
4. Long Term Debt
On June 6, 1997, the Company issued $125 million principal amount of 13-1/2%
Senior Notes due June 6, 2005. Interest is payable semi-annually in arrears on
June 6 and December 6 and each year, commencing on December 6, 1997. Of the $125
million proceeds approximately $45.6 million was used to purchase U.S.
government securities on which scheduled interest and principal payments are in
amounts sufficient to provide for payment in full when due of the first six
scheduled interest payments on the Senior Notes. Debt issuance costs are
capitalized and amortized over the term of the debt under the effective yield
method.
The Senior Notes are redeemable on or after June 6, 2001 at the option of
the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after June 6,
2004, plus accrued interest. The Senior Notes contain certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness or issue preferred stock, pay dividends or make certain other
restricted payments. Upon a change of control, the Company is required to make
an offer to purchase the Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any. In
accordance with the covenants of the Senior Notes and the Company's current
level of leverage, at March 31, 1999, the Company is unable to make any dividend
payments
5. Accrued Expenses
Accrued expenses at December 31, 1998 and June 30, 1999 are comprised of
the following:
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Excise taxes payable $ 334,174 $ 145,426
Withholding taxes payable 247,733 247,733
Payroll and other benefits payable 1,439,289 1,321,667
Accrued interest payable 1,125,000 1,125,000
Other 2,053,122 4,377,399
---------- ----------
$5,199,318 $7,217,225
========== ==========
The $4,377,399 of other accrued amounts includes $2,476,355 that represent a tax
contingency accrual for certain taxes relating to interest income and exchange
gains that are being disputed good faith by the Company.
</TABLE>
6. Redeemable Preferred Stock
The redeemable preferred stock has an accruing dividend with an effective
annual rate of 12% compounding quarterly for the first five years from its
issuance on December 11, 1996. On the fifth anniversary of its issuance, the
dividend increases to an effective rate of 14% compounding quarterly. On the
sixth anniversary all previously accrued dividends will be paid in kind. The
annual dividend rate will increase to 16% in the seventh year, 18% in the eighth
year, and 20% in the ninth and tenth years.
9
<PAGE>
After the sixth anniversary, subject to the terms of the Indenture, all
dividends will be payable in cash. The Company is required to redeem, in U.S.
dollars, the redeemable preferred stock at $1,000 per share plus accrued and
unpaid dividends on the tenth anniversary of its issuance.
The holders of the redeemable preferred stock are entitled to voting rights
limited to specific matters included in the Company's by-laws.
The amount of accrued and unpaid dividends on the redeemable preferred
stock at December 31, 1998 and at June 30, 1999 was $7,945,014 and $10,281,921,
respectively.
7 . Fixed Assets
Fixed assets at December 31, 1998 and June 30, 1999 are comprised of the
following:
<TABLE>
<CAPTION>
Period
1998 1999 of Depreciation
---- ---- ---------------
<S> <C> <C> <C>
Furniture and Fixtures $ 1,915,206 $ 1,333,412 10 years
Equipment 13,643,133 9,669,349 5-10 years
Pagers 7,888,885 5,994,205 2.5 years
Leasehold improvements 4,104,869 2,834,931 5 years
----------- -----------
27,552,093 19,831,897
Less - Accumulated
depreciation (5,682,876) (5,655,446)
$21,869,217 $14,176,451
</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 June 30, 1999 calculated in reais and translated into U.S.
dollars at the June 30, 1999 closing rate are as follows.
1999 $1,015,000
2000 $1,980,000
2001 $1,932,000
2002 $ 545,000
2003 $ 198,000
Total rental expense was $834,815 and $1,694,785 for the three and six
months ended June 30, 1998 and $481,016 and $1,041,269 for the three and six
months ended June 30, 1999.
9. Income Taxes
The Company has not recognized any future income tax benefit for its net
operation 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 $14.9 million, $27.3
million and $18.6 million at December 31, 1997, 1998 and June 30, 1999
respectively. Under Brazilian law, net operating losses may be carried forward
for an unlimited period of time.
10
<PAGE>
10. Subsequent Event
The Company has entered into an agreement to acquire approximately 46,000
paging subscribers from Powernet Ltda., a Brazilian paging company that is a
wholly owned subsidiary of Motorola. The cost of such acquisition is expected to
be approximately $5,100,000. The final acquisition cost is subject to adjustment
based upon the actual number of subscribers that are acquired by the Company.
This transaction is expected to be consummated by the end of 1999.
No other events or transactions have occurred since June 30, 1999 or are
pending that would have a material effect on the financial statements at that
date or for the three months then ended, or that are of such significance in
relation to the Company's affairs to require mention in a note to the financial
statements in order to make them not misleading regarding the financial
position, results of operations, or cash flows of the Company.
11
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 6-K contains forward-looking statements, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. The following discussion
should be read in conjunction with the financial statements, including the notes
thereto, included in this report.
Results of Operations
Three months and six months ended June 30, 1999 compared with three months
and six months ended June 30, 1998.
Although the Company's financial statements are presented pursuant to U.S.
GAAP in U.S. dollars, the Company's transactions are consummated in both
Brazilian reais and U.S. dollars. Inflation and devaluation in Brazil have had,
and may continue to have, substantial effects on the Company's results of
operations and financial condition. See "Inflation and Exchange Rates".
For the purpose of management's discussion and analysis, net revenues are
defined as total revenues less cost of products sold.
As a result of the development of the Company's business in Sao Paulo and
Rio de Janeiro (the "Initial Markets") during the periods presented, the
period-to-period comparisons of the Company's results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
Three Months ended Six Months ended
------------------ ----------------
June 30, 1998 and 1999 June 30, 1998 and 1999
---------------------- ----------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 4,904,782 100% $ 5,311,737 100% $ 9,233,122 100% $9,694,110 100%
Operating costs and expenses:
Services rent and maintenance 2,274,638 46% 1,853,090 35% 4,260,270 46% 3,550,415 37%
Selling, general and 6,664,769 136% 5,905,175 111% 13,098,369 142% 11,351,044 117%
administrative
Depreciation and amortization 1,183,225 24% 993,696 19% 1,919,742 21% 1,990,092 21%
--------- ----------- ----------- ------------
Total operating costs and 10,122,632 206% 8,751,961 165% 19,278,381 209% 16,891,551 174%
expenses ---------- ----------- ----------- ------------
Operating loss (5,217,850) - (3,440,224) - (10,045,259) - (7,197,441) -
Other income (expense) (3,009,955) - (5,329,477) - (5,904,176) - (29,736,893) -
----------- ----------- ----------- ------------
Net loss (8,227,805) - (8,769,701) - (15,949,435) - (36,934,334) -
=========== =========== ============ ============
Other data:
EBITDA(1) $(4,034,625) - $(2,446,528) - $ (8,125,517) - $(5,207,349) -
Number of subscribers at end of 70,272 106,219 70,272 106,219
period
- ----------
1 EBITDA is defined as operating income (loss) plus depreciation, amortization and non-cash charges. EBITDA is a
commonly used measure of performance in the paging industry. While EBITDA should not be construed as a substitute
for operating income (loss) or a better measure of liquidity than cash flow from operating activities, each of
which is determined in accordance with U.S. GAAP, it is included herein to provide additional information
regarding the ability of the Company to meet its capital expenditures and any future debt service. EBITDA,
however, is not necessarily a measure of the Company's ability to fund its cash needs because it does not include
capital expenditures, which the Company expects to continue to be significant.
</TABLE>
12
<PAGE>
Net Revenues. The Company's total revenues primarily consist of monthly
fees paid by subscribers for the paging service, as well as product sales to
both individuals and retailers, net of sales taxes. During the three months and
six months ended June 30, 1999, the Company was offering service to customers in
Sao Paulo and Rio de Janeiro.
For the three month and six month periods ended June 30, 1999, the Company
generated net revenues of $5,311,737 and $9,694,110 consisting of $5,759,223 and
$11,489,379 in service revenues, $246,742 and $871,546 in product sales to
customers, cost of sales of $120,340 and $1,488,311 and sales taxes of $573,888
and $1,178,504. During the three months and six months period ended June 30,
1998, the Company's net revenues were $4,904,782 and $9,233,122. Average monthly
revenue per unit for the three month period ended June 30, 1999 was
approximately R$34.00 for a base of 98,407 subscribers; average monthly revenue
per unit for the three month period ended June 30, 1998 was approximately
R$35.00 for a base of 70,272 subscribers.
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses include a portion of costs of compensation and benefits for the
Company's dispatch and technical employees, transmitter site rentals, telephone
line costs, transmission costs, vehicle rental costs and repair and maintenance
expenditures and service call costs. During the three month and six month period
ended June 30, 1999, the Company incurred $1,853,090 and $3,550,415 of expenses
in connection with the operations in Sao Paulo and Rio de Janeiro. During the
three month and six month periods ended June 30, 1998, the Company incurred
service, rent and maintenance expenses of $2,274,638 and $4,260,270.
Selling and Marketing Expenses. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
three month and six month periods ended June 30, 1999 the Company incurred
$2,205,247 and $4,557,974, respectively, of selling and marketing expenses; such
amount increased in 1998. During the three month and six month periods ended
June 30, 1998, the Company incurred $2,807,208 and $5,439,351, respectively.
General and Administrative Expenses. General and administrative expenses
include compensation benefits, rent, bank fees, outside services and the
provision for losses on accounts receivable. During the three and six month
periods ended June 30, 1999 and 1998 the Company incurred $3,699,928 and
$6,793,070 and $3,857,561 and $7,659,018 respectively, of general and
administrative expenses. During the three and six months ended June 30, 1999,
the Company incurred approximately $1,056,797 and $1,783,691, respectively of
costs associated with the provision for doubtful accounts.
Depreciation and Amortization. Depreciation and amortization expenses
consist primarily of depreciation of leased pagers, transmitters, paging
terminals, leasehold improvements, telephone lines and cost of network
installation. Depreciation and amortization expenses increased from
approximately $1,183,225 and $1,919,742 for the three month and six month
periods ended June 30, 1998 to $993,696 and $1,990,092 for the three month and
six month periods ended June 30, 1999, primarily due the purchase and
installation of equipment necessary to build out its paging network and the
buildout of the Rio de Janeiro office.
Operating Loss. For the three month and six month periods ended June 30,
1999 the Company generated operating losses of $3,440,224 and $7,197,441 and for
1998 $5,217,850 and $10,045,259, respectively, primarily due to expenses in
connection with the development of the Company's business as explained above.
Interest Expense. Interest expense was $4,394,173 and $8,728,749 for the
three month and six month periods ended June 30, 1999, and for 1998 was
$4,499,087 and $9,113,359 for the three month and six month period ended June
30, primarily as a result of interest associated with the Senior Notes.
Interest Income. Interest Income increased to $2,249,497 and $18,030,658
for the three month and six month periods ended June 30, 1999 primarily as a
result of investing the net proceeds from the Senior Note offering and issuance
by the Company of its redeemable preferred stock.
13
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Exchange and Translation (Losses). The Company adopted the U.S. dollar as
its reporting currency. Effective January 1, 1998, the Company began using the
real as its functional currency.
Currency Exchange Loss. Foreign exchange losses from the depreciation of
the real against the U.S. dollar resulted in losses of $2,904,241 and
$38,619,719 for the three month and six month periods ended June 30, 1999, and
$1,385,502 and $3,045,560 for the three month and six month periods ended June
30,1998 relating to U.S. dollars based transactions.
Income Taxes. The Company did not have taxable income during the periods
presented and does not expect to have taxable income for the foreseeable future.
Net Loss. As explained above, net loss in the period presented is primarily
attributable to significant expenses incurred during the period in connection
with the development of the Company's business, the net interest expense
associated with the Senior Notes.
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. For the three months and six months ended June
30, 1999 and 1998 the Company made capital expenditures of $137,042 and
$2,670,476 and $1,601,605 and $6,165,410 respectively.
The principal capital expenditure requirements to construct a paging system
involve the acquisition of pagers for leasing and the acquisition and
installation of transmission facilities, both of which are directly related to
the demand of paging service. Additional capital is required to fund operating
losses incurred during the initial stages of construction and the commencement
of paging services. The Company currently anticipates that its cash requirements
(comprised of capital expenditures, working capital requirements, debt service
requirements and anticipated operating losses) for the remaining six months will
be approximately $12 million.
Inflation and Exchange Rates. Inflation and exchange rate variations have
had, and may continue to have, substantial effects on the Company's results of
operations and financial condition. In periods of inflation, many of the
Company's expenses will tend to increase. Generally, in periods of inflation, a
Company is able to raise its prices to offset the rise in its expenses and may
set its prices without government regulation. However, under Brazilian law
designed to reduce inflation, the rates that the Company may charge to a
particular subscriber may not be increased until the next anniversary of the
subscriber's initial subscription date. Thus, the Company is less able to offset
expense increases with revenue increases. Accordingly, inflation may have a
material adverse effect on the Company's results of operations and financial
condition.
Generally, inflation in Brazil has been accompanied by devaluation of the
Brazilian currency relative to the U.S. dollar. Devaluation of the real may also
have an adverse effect on the Company. The Company collects substantially all of
its revenues in reais, but pays certain of its expenses,
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(including pagers, a significant portion of its transmission equipment costs and
substantially all interest expense) in U.S. dollars. To the extent the real
depreciates at a rate greater than the rate at which the Company is able to
raise prices, the value of the Company's revenues (as expressed in U.S. dollars)
will be adversely affected. This effect on the Company's revenues may negatively
impact the Company's ability to fund U.S. dollar-based expenditures.
Accordingly, devaluation of the real may have a material adverse effect on the
Company's results of operations and financial condition. Further, beginning
January 1, 1998, the Company's financial statements reflect foreign currency
gains and losses associated with monetary assets and liabilities denominated in
currencies other than the real. See footnote "Foreign Currency Translation"
contained in the Notes to Consolidated Financial Statements. As a result, the
devaluation of the real against the U.S. dollar will cause the Company to record
a loss associated with its U.S. dollar monetary liabilities and a gain
associated with its U.S. dollar monetary assets. Given that the Company has a
net U.S. dollar monetary liability position, the net effect of the devaluation
of the real against the U.S. dollar is to generate transaction losses in the
Company's financial statements.
Subsequent Events. The Company has entered into an agreement to acquire
approximately 46,000 paging subscribers from Powernet Ltda, a Brazilian paging
company that is a wholly owned subsidiary of Motorola. The cost of such
acquisition is expected to be approximately $5,100,000. The final acquisition
cost is subject to adjustment based upon the actual number of subscribers that
are acquired by the Company. This transaction is expected to be consummated by
the end of 1999.
No other events or transactions have occurred since June 30, 1999 or are
pending that would have a material effect on the financial statements at that
date or for the three months then ended, or that are of such significance in
relation to the Company's affairs to require mention in a note to the financial
statements in order to make them not misleading regarding the financial
position, results of operations, or cash flows of the Company.
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PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
3.1* -- By laws of Paging Network do Brasil S.A. (English Translation).
4.1* -- Indenture dated as of June 1, 1997 between Paging Network do
Brasil S.A. and The Chase Manhattan Bank, as Trustee (including
exhibits).
4.2* -- Form of Senior Note (included in Exhibit 4.1).
---------
* Incorporated herein by reference to the Exhibit to the Company's
Registration Statement on Form F-4, Registration No. 333-29865.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PAGING NETWORK DO BRASIL S.A.
(Registrant)
By: /s/ Thomas C. Trynin
------------------------------
Thomas C. Trynin
President and
Chief Executive Officer
Date: August 27, 1999
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