<PAGE>
Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 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)
1
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<TABLE>
PAGING NETWORK DO BRASIL S.A.
INDEX
Page
PART I. FINANCIAL INFORMATION
<CAPTION>
Item 1 Financial Statements
<S> <C>
a) Balance Sheet at December 31, 1998 (audited)
and March 31, 1999 (unaudited)...............................3
b) Statement of Operations for the three months ended March
31, 1998 and 1999 (unaudited)................................4
c) Statement of Cash Flows for the three months ended
March 31, 1998 and 1999 (unaudited)..........................5
d) Statement of Shareholders' Equity (Deficit) for the three
months ended March 31, 1999 (unaudited)......................6
e) Notes to Financial Statements (unaudited)....................7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.....................................11
<CAPTION>
PART II. OTHER INFORMATION
<S> <C>
Item 1. Legal Proceedings.............................................15
Item 2. Changes in Securities.........................................15
Item 3. Defaults Upon Senior Securities...............................15
Item 4. Submission of Matters to a Vote of Security Holders...........15
Item 5. Other Information.............................................15
Item 6. Exhibits......................................................15
Signatures ..........................................................16
</TABLE>
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Item 1 (a)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
At December 31, 1998 and March 31, 1999
(Amounts in U.S.Dollars)
<CAPTION>
December 31, March 31,
1998 1999
--------------------------------
<S> <C> <C>
(Audited) (Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 219,787 $ 193,245
Short-term investments 39,857,633 34,557,137
Accounts receivable, net 567,291 874,881
Refundable taxes 1,383,380 3,100,146
Pager inventories 2,233,240 1,725,506
Prepaid expenses and other current assets 415,535 722,315
Pledged securities-current 15,764,225 16,001,182
--------------------------------
Total current assets 60,441,091 57,174,412
Fixed assets, net 21,869,217 15,786,460
Pledged securities 8,177,844 8,306,160
Debt issuance costs, net 6,443,007 6,327,181
Other assets 339,212 1,378,725
================================
Total assets $ 97,270,371 $ 88,972,938
================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 1,376,981 $ 900,688
Accrued expenses 5,199,318 10,663,016
Payable to related parties 1,217,914 1,217,914
--------------------------------
Total current liabilities 7,794,213 12,781,618
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 39,100,247
Shareholders' equity (deficit)
Cumulative translation adjustment 3,596,597 27,129,974
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) (115,069,661)
--------------------------------
Total shareholders' equity (deficit) (73,468,856) (87,908,927)
--------------------------------
================================
Total liabilities and shareholders' equity (deficit) $ 97,270,371 $ 88,972,938
================================
See accompanying notes to financial statements.
</TABLE>
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Item 1(b)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
For the three months ended March 31, 1998 and 1999
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1998 1999
----------- ------------
<S> <C> <C>
Revenues:
Services, rent and maintenance revenue......... $ 5,015,160 $ 5,730,156
Product revenue................................ 1,334,956 624,804
----------- ------------
Gross revenues................................... 6,350,116 6,354,960
Taxes.......................................... (617,563) (604,616)
----------- -------------
Total revenue.................................... 5,732,553 5,750,344
Cost of products sold............................ (1,404,213) (1,367,971)
----------- ------------
4,328,340 4,382,373
Operating costs and expenses:
Services rent and maintenance.................. 1,985,632 1,697,325
Selling, general and administrative............ 6,433,600 5,445,869
Depreciation and amortization.................. 736,517 996,396
----------- ------------
Total operating costs and expenses......... 9,155,749 8,139,590
----------- ------------
Operating loss............................. (4,827,409) (3,757,217)
Other income (expense):
Interest expense............................. (4,614,272) (4,334,576)
Interest income.............................. 3,467,655 15,781,161
Other expense................................ (87,545) (138,523)
Monetary loss................................ (1,660,058) (35,715,478)
----------- ------------
Total other income (expense)..................... (2,894,220) (24,407,416)
----------- ------------
Net loss......................................... $(7,721,629) $(28,164,633)
=========== ============
See accompanying notes to financial statements.
</TABLE>
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Item 1(c)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
For the three months ended March 31, 1998 and 1999
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Three Months Ended
March 31,
-------------------------------
1998 1999
------------ -------------
<S> <C> <C>
Operating activities:
Net loss $ (7,721,629) $ (28,164,634)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 736,517 996,396
Provision for losses on accounts receivable 700,000 726,894
Amortization of debt issuance costs 385,290 122,665
Monetary loss 1,660,058 35,715,478
Loss on sale of equipment 87,545 43,277
Changes in operating assets and liabilities:
Increase in accounts receivable (763,335) (1,034,484)
Increase in refundable taxes (77,287) (3,149,802)
Increase in pager inventories (560,320) (154,077)
Increase in prepaid expenses and other current assets (156,935) (415,506)
Increase in other assets (8,754) (14,299)
Increase in pledged securities (637,680) (393,741)
(Decrease) in accounts payable (346,020) (282,684)
Increase in accrued expenses 1,209,728 2,239,787
Increase in Senior Notes Interest 4,218,750 4,559,743
------------ -------------
Net cash (used in) provided by operating activities (1,274,072) 10.795,013
Investing activities:
Purchase of fixed assets (3,494,934) (1,464,563)
Proceeds from sale of equipment 11,930
(Increase) decrease in short term investment 4,464,458 (6,367,783)
------------ -------------
Net cash (used in) provided by investing activities 969,524 (7,820,416)
Effect of exchange rate changes on cash (19,040) (3,001,139)
------------ -------------
Net decrease in cash and cash equivalents (323,588) (26,542)
Cash and cash equivalents at beginning of period 377,004 219,787
============ =============
Cash and cash equivalents at end of period $ 53,416 $ 193,245
============ =============
See accompanying notes to financial statements.
</TABLE>
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Item 1(d)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the three months ended March 31, 1999
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Other
Common Accumulated 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 (28,164,633) (28,164,633)
Cumulative translation adjustment 23,533,377 23,533,377
Monetary adjustment on redeemable
preferred stock (8,653,582) (8,653,582)
Accrued dividends on redeemable
preferred stock (1,155,233) (1,155,233)
------------------------------------------------------------------
Balance at March 31, 1999 $ 30,760 $ (115,069,661) $ 27,129,974 $ (87,908,927)
==================================================================
See accompanying notes to financial statements
</TABLE>
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Item 1(e)
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, 1999
(Amounts in U.S. dollars)
1. Organization
Paging Network do Brasil S.A. (formerly Warburg Paging do Brasil Ltda., the
"Company") was formed on April 7, 1996 through an investment by Warburg, Pincus
Ventures, L.P. During 1997, the Company started to provide paging services in
Sao Paulo and Rio de Janeiro and offers extended paging services to eight other
cities in Brazil.
In October 1996, the Company increased its capital to approximately $5.5
million and in December 1996, as a result of capital contributions of three new
shareholders, received approximately $15 million of additional capital. In
December 1996, the Company changed its name from Warburg Paging do Brasil ltda.
to Paging Network do Brasil ltda. and then to Paging Network do Brasil S.A.
following a change in its legal formation from a limited liability company
(Ltda.) to a closed corporation (S.A). In June 1997, the Company issued $125
million principal amount of 13-1/2% Senior Notes due June 6, 2005 ( the "Senior
Notes"). Prior to consummation of the Senior Note offering, the Company received
from shareholders approximately $9.5 million in connection with the issuance of
additional shares of redeemable preferred stock, and effected a stock split of
40.74774 for each issued and outstanding share of common stock.
2. Summary of Significant Accounting Policies
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ("U.S. GAAP") in U.S.
dollars.
The Company's significant accounting policies are as follows:
Foreign Currency Translation
Until December 31, 1997, the financial statements were translated from
Brazilian reais to U.S. dollars in accordance with the provisions of Statement
of Financial Accounting Standards No. 52 as it applies to entities operating in
highly inflationary economies. Pager inventories, fixed assets and intangibles
and related income statement accounts were remeasured at exchange rates in
effect when the assets were acquired or the liabilities were incurred. All other
assets and liabilities were remeasured at period end exchange rates, and all
other income and expense items were remeasured at average exchange rates
prevailing during the period. Remeasurement adjustments were included in
exchange and translation gains (losses).
Effective January 1, 1998, the Company determined that Brazil ceased to be
a high inflationary economy under SFAS 52. Accordingly, as of January 1, 1998,
the Company began using the real as the functional currency. As a result, all
assets and liabilities are translated into dollars at period end exchange rates
and all income and expense items are translated into U.S. dollars at the average
exchange rate prevailing during the period. Translation adjustments are not
included in determining net income but reported in a separate component of
equity. Transaction (losses) associated with the Company's net U.S. dollar
liability position is included in monetary (losses).
7
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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 Costs
The Company expenses the costs of advertising as incurred. Advertising
expenses during the three months ended March 31, 1998 and 1999 were $1,125,000
and $557,240 respectively
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 $1,400,000 at
December 31, 1998, and $1,081,500 at March 31, 1999. Charges to the allowance
during the three months ended March 31, 1998 and 1999 were $423,000 and
$1,045,000.
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.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
3. Related Party Transactions
The Company has agreed to reimburse its shareholders for certain
transaction costs associated with the formation of the Company and the $125
million senior note offering consummated on June 6, 1997. As of December 31,
1998 and March 31, 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, scheduled interest and principal payments on which
are in amounts sufficient to provide for payment in full when due of the first
six scheduled interest payments on the Senior Notes. Debt issuance costs are
capitalized and amortized over the term of the debt under the effective yield
method.
The Senior Notes are redeemable on or after June 6, 2001 at the option of
the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after June 6,
2004, plus accrued interest. The Senior Notes contain certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness or issue preferred stock, pay dividends or make certain other
restricted payments. Upon a change of control, the Company is required to make
an offer to
8
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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
<TABLE>
Accrued expenses at December 31, 1998 and March 31, 1999 are comprised of
the following:
<CAPTION>
1998 1999
---------- ----------
<S> <C> <C>
Excise taxes payable $ 334,174 $ 219,738
Withholding taxes payable 247,733 247,733
Payroll and other benefits payable 1,439,289 1,086,571
Accrued interest payable 1,125,000 5,343,750
Other 2,053,122 3,765,224
---------- ----------
$5,199,318 $10,663,016
========== ===========
</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. 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 March 31, 1999 was $7,945,014 and $9,100,247,
respectively.
7. Fixed Assets
<TABLE>
Fixed assets at December 31, 1998 and March 31, 1999 are comprised of the
following:
<CAPTION>
Period
1998 1999 of Depreciation
---------- ---------- ---------------
<S> <C> <C> <C>
Furniture and Fixtures $ 1,915,206 $ 1,369,026 10 years
Equipment 13,643,133 9,849,008 5-10 years
Pagers 7,888,885 6,663,228 2.5 years
Leasehold improvements 4,104,869 2,907,517 5 years
---------- ----------
$27,552,093 $20,788,779
Less - Accumulated
depreciation (5,682,876) (5,002,319)
</TABLE>
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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 March 31, 1999 are as follows.
1999 $ 2,195,500
2000 $ 2,867,000
2001 $ 2,984,000
2002 $ 3,107,500
2003 $ 3,236,700
Total rental expense for the periods ended December 31, 1998 and March 31,
1999 was $3,020,600 and $560,252 respectively.
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 $26.4 million, $48.3
million and $20 million at December 31, 1997, 1998 and March 31, 1999
respectively.
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Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 6-K contains certain forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
and Section 21E of the Securities Exchange Act of 1934, as amended. When used in
this Form 6-K, words such as "anticipate," "believe," "estimate," "expect,"
"intend," "predict," "project," and similar expressions, as they relate to
Company or its management, identify forward-looking statements. Such
forward-looking statements are based on the beliefs of the Company's management
as well as assumptions made by and information currently available to the
Company's management. Such statements are subject to certain risks,
uncertainties and assumptions, including high level of and restrictions imposed
by debt, ability to implement management initiatives, dependence on the wireless
communications industry, fluctuations in quarterly results, and competition.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, expected or projected. Such forward-looking statements
reflect the current views of the Company's management with respect to future
events and are subject to these and other risks, uncertainties and assumptions
relating to the operations, results of operations, growth strategy and liquidity
of the Company. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by this paragraph.
Results of Operations Results of Operations
Three months ended March 31, 1999 compared with three months ended March
31, 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 taxes and cost of products sold.
As a result of the development of the Company's business in Sao Paulo and
Rio de Janeiro (the "Initial Markets") during the periods presented, the
period-to-period comparisons of the Company's results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1998 1999
---------------- ---------------
<S> <C> <C> <C> <C>
Net Revenue $ 4,328,340 100% $ 4,382,373 100%
Operating costs and expenses:
Services rent and maintenance 1,985,632 46% 1,697,325 39%
Selling and marketing 2,632,143 61% 2,352,728 54%
General and administrative 3,801,457 88% 3,093,141 71%
Depreciation and amortization 736,517 17% 996,396 23%
----------- ----- ------------ ---
Total operating costs and expenses 9,155,749 212% 8,139,590 186%
----------- ----- ------------ ---
Operating loss (4,827,409) (112)% (3,757,217) (86)%
Other income (expenses) (2,894,220) (67)% (24,407,416) N/A
----------- ----- ------------ ---
Net loss $(7,721,629) (178)% $(28,164,633) N/A
----------- ----- ------------ ---
Other data:
EBITDA1 (4,090,892) (95)% $(2,760,821) (63)%
Number of subscribers at end of
period 62,328 102,194
</TABLE>
- -----------------------------
1 EBITDA is defined as operating income (loss) plus depreciation, amortization
and non-cash charges. EBITDA is a commonly used measure of performance in the
paging industry. While EBITDA should not be construed as a substitute for
operating income (loss) or a better measure of liquidity than cash flow from
operating activities, each of which is determined in accordance with U.S.GAAP,
it is included herein to provide additional information regarding the ability of
the Company to meet 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
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Net Revenues. The Company's total revenues primarily consist of monthly
fees paid by subscribers for the paging service, as well as product sales to
both individuals and retailers, net of sales taxes. During the three months
ended March 31, 1999, the Company was offering service to customers in Sao Paulo
and Rio de Janeiro.
For the three months ended March 31, 1999, the Company generated net
revenues of $4,382,373 consisting of $5,730,156 in service revenues, $624,804 in
product sales to customers, cost of sales of $1,367,971 and sales taxes of
$604,616. During the three months ended March 31, 1998, the Company's net
revenues were $4,328,340. Average monthly revenue per unit for the three months
ended March 31, 1999 was approximately $31.87; average monthly revenue per unit
for the three months ended March 31, 1998 was approximately $33.90.
Service, Rent and Maintenance Expenses. Service, rent and maintenance
expenses include a portion of costs of compensation and benefits for the
Company's dispatch and technical employees, transmitter site rentals, telephone
line costs, transmission costs, and repair and maintenance expenditures. During
the three months ended March 31, 1999, the Company incurred $1,697,325 of
expenses in connection with the operations in Sao Paulo and Rio de Janeiro.
During the three months ended March 31, 1998, the Company incurred service, rent
and maintenance expenses of $1,985,632.
Selling and Marketing Expenses. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
three months ended March, 1999 and 1998 the Company incurred $2,352,728 and
$2,632,143, respectively, of selling and marketing expenses.
General and Administrative Expenses. General and administrative expenses
include compensation benefits, office rent, bank fees, outside services and the
provision for losses on accounts receivable. During the three months ended March
31, 1999 and 1998 the Company incurred $3,093,141 and $3,801,457, respectively
of general and administrative expenses. For the three months ended March 31,
1999 and 1998, included in such amounts is approximately $726,894 and $700,000,
respectively, of costs associated with the provision for losses on accounts
receivable.
Depreciation and Amortization. Depreciation and amortization expenses
consist primarily of depreciation of leased pagers, transmitters, paging
terminals, leasehold improvements, telephone lines and cost of network
installation. Depreciation and amortization expenses increased from
approximately $736,517 for the three months ended March 31, 1998 to $996,396 for
the three months ended March 31, 1999, primarily due the purchase and
installation of equipment necessary to buildout its paging network and the
buildout of the Rio de Janeiro office.
Operating Loss. For the three months ended March 31, 1999 the Company
generated operating losses of $3,757,217 and for the three months ended March
31, 1998 $4,827,409 primarily due to expenses in connection with the development
of the Company's business as explained above.
Interest Expense. Interest expense was $4,334,576 for the three months
ended March 31, 1999 and $4,614,272 for the three months March 31, 1998 ,
primarily as a result of interest associated with the Senior Notes.
Interest Income. Interest Income increased from $3,467,655 for the three
months ended March, 31 1998 to $15,781,161 for the three months ended March 31,
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 and the
gain on dollar hedging contracts amounting $14,600,000
Exchange and Translation (Losses). Effective January 1, 1998, the Company
began using the real as its functional currency. Unless Brazil returns to a
highly inflationary status, the Company does not expect to incur future exchange
and translation gains and losses.
- --------------------------------------------------------------------------------
include capital expenditures, which the Company expects to continue to be
significant.
12
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Monetary Loss. Beginning January 1, 1998, in accordance with SFAS52,
monetary losses from the depreciation of the real against the U.S. dollar
resulted in a net transaction loss of $35,715,478 and $1,660,058 respectively,
for the three months ended March 31, 1999 and 1998. This was generated by the
exposed accounts on the balance sheet, mainly $ 24 million of escrow in U.S
territory completely compensated by $125 million of senior notes debt.
Income Taxes. The Company did not have taxable income during the periods
presented and expects to generate losses for the foreseeable future.
Net Loss. As explained above, net loss in the period presented is primarily
attributable to significant expenses incurred during the period in connection
with the development of the Company's business and the net interest expense
associated with the Senior Notes and from 30% devaluation of the real against
the U.S dollar.
Liquidity and Capital Resources. The Company's operations and expansion
into new markets and products lines will require substantial capital investment
for the development and installation of paging systems and for the procurement
of pagers and paging equipment. For the three months ended March 31, 1999 and
1998 the Company made capital expenditures of $1,464,563 and $3,494,934
respectively.
The Company commenced the buildout of systems for its paging services in
May 1996 and completed the buildout of the Initial Markets during the first
quarter of 1998 and is evaluating whether to commence the marketing of paging
services into other markets during 1999. As of March 31, 1999, the Company has
(1) completed the buildout of its Sao Paulo and Rio de Janeiro systems, which
served 102,194 subscribers, (2) installed transmitters in each of the additional
eight cities where it has secured licenses, and (3) hired personnel and
infrastructure necessary to support the Company's Sao Paulo and Rio de Janeiro
operations. The Company expects that the proceeds of the Senior Notes and the
issuance of redeemable preferred stock will be sufficient to complete the
buildout of Initial Markets and may need to secure additional financing to
complete the full commercial development of expansion markets.
The principal capital expenditure requirements to construct a paging system
involve the acquisition of pagers for leasing and the acquisition and
installation of transmission facilities, both of which are directly related to
the demand of paging service. Additional capital is required to fund operating
losses incurred during the initial stages of construction and the commencement
of paging services. The Company currently anticipates that its cash requirements
(comprised of capital expenditures, working capital requirements, debt service
requirements and anticipated operating losses) for the remaining nine months
will be approximately $5 million.
Inflation and Exchange Rates. Inflation and exchange rate variations have
had, and may continue to have, substantial effects on the Company's results of
operations and financial condition. In periods of inflation, many of the
Company's expenses will tend to increase. Generally, in periods of inflation, a
company is able to raise its prices to offset the rise in its expenses and may
set its prices without government regulation. However, under Brazilian law
designed to reduce inflation, the rates that the Company may charge to a
particular subscriber may not be increased until the next anniversary of the
subscriber's initial subscription date. Thus, the Company is less able to offset
expense increases with revenue increases. Accordingly, inflation may have a
material adverse effect on the Company's results of operations and financial
condition.
Generally, inflation in Brazil has been accompanied by devaluation of the
Brazilian currency relative to the U.S. dollar. Devaluation of the real has an
adverse effect on the Company. The Company collects substantially all of its
revenues in reais, but pays certain of its expenses, (including pagers, a
significant portion of its transmission equipment costs and substantially all
interest expense) in U.S. dollars. To the extent the real depreciates at a rate
greater than the rate at which the Company is able to raise prices, the value of
the Company's revenues (as expressed in U.S. dollars) will be adversely
affected. This effect on the Company's revenues will negatively impact the
Company's ability to fund U.S. dollar-based expenditures. Accordingly,
devaluation of the real will have a material adverse effect on the Company's
results of operations and financial condition. Further, as of January 1, 1998,
the Company's financial statements reflect foreign exchange gains and losses
associated with monetary assets and liabilities denominated in
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currencies other than the real. See footnote "Foreign Currency Translation"
contained in the Notes to Financial Statements. As a result, the devaluation of
the real against the U.S. dollar has caused the Company to record a loss
associated with its U.S. dollar monetary liabilities and a gain associated with
its U.S. dollar monetary assets. Given that the Company has a net U.S. dollar
monetary liability position, the net effect of the devaluation of the real
against the U.S. dollar is to generate transaction losses in the Company's
financial statements.
Recent Economic Events. As expected, the actions taken by the government
last October in terms of fiscal stabilization, along with the austerity program
to reduce government spending affected customer delinquency rates already during
last quarter of 1998.
This coupled with the devaluation of the local currency that happened
during the first quarter 1999, worsened even further this situation. These
economic events have contributed to increase significantly the uncertainty of
the Brazilian market generating overall fear with investors reevaluating
carefully intention of investments in the country and Brazilian people afraid of
the return of old inflationary times.
The Company believes that such market uncertainty has increased capital
outflow, that although partially compensated by the effect of the devaluation on
the trade balance, have impacted the trading price of its senior notes, which,
to the Company's knowledge were traded at approximately 45% of principal
amount on March 30, 1999. The exchange rate during first quarter 1999 reached a
peak of R$ 2,15 per US$ 1,00, quickly reducing to R$1,72 at the end of March
1999.
While the Company continues to believe that Brazil economic downturn and
market uncertainty are short-term in nature, there can be no assurance that the
measures taken by the Company to execute its business plan under the current
economic conditions will be successful.
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PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
3.1* -- Bylaws of Paging Network do Brasil S.A. (English
Translation).
4.1* -- Indenture dated as of June 1, 1997 between Paging
Network do Brasil S.A. and The Chase Manhattan Bank,
as Trustee (including exhibits).
4.2* -- Form of Senior Note (included in Exhibit 4.1).
---------
* Incorporated herein by reference to the Exhibit to the
Company's Registration Statement on Form F-4, Registration No.
333-29865.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PAGING NETWORK DO BRASIL S.A.
(Registrant)
By: /s/ Thomas C. Trynin
--------------------------
Thomas C. Trynin
President and
Chief Executive Officer
Date: May 26, 1999
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