<PAGE>
Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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 September 30, 1999
(unaudited).......................................................3
b) Statement of Operations for the three and nine months ended
September 30, 1998 and 1999 (unaudited)...........................4
c) Statement of Cash Flows for the nine months ended September 30,
1998 and 1999 (unaudited).........................................5
d) Statement of Shareholders' Equity (Deficit) for the nine months
ended September 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
September 30, 1999 (Amounts in U.S. dollars)
<CAPTION>
December 31, September 30,
1998 1999
-----------------------------------------
(Note 2) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 219,787 $ 37,009
Trading securities 39,857,633 31,521,677
Accounts receivable, net 567,291 220,148
Recoverable taxes 1,383,380 879,759
Pager inventories 2,233,240 2,687,061
Prepaid expenses and other current assets 415,535 491,212
Pledged securities held-to-maturity - current 15,764,225 16,465,042
-----------------------------------------
Total current assets 60,441,091 52,301,908
Fixed assets, net 21,869,217 15,598,032
Pledged securities held-to-maturity 8,177,844 -
Debt issuance costs, net 6,443,007 6,025,907
Other assets 339,212 1,360,837
-----------------------------------------
Total assets $ 97,270,371 $ 75,286,684
=========================================
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 1,376,981 $ 2,985,030
Accrued expenses 5,199,318 11,448,422
Payable to related parties 1,217,914 1,217,914
-----------------------------------------
Total current liabilities 7,794,213 15,651,366
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 41,526,062
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) (143,546,985)
-----------------------------------------
Accumulated other comprehensive income 3,596,597 36,625,481
-----------------------------------------
Total shareholders' equity (deficit) (73,468,856) (106,890,744)
-----------------------------------------
Total liabilities and shareholders' equity (deficit) $ 97,270,371 $ 75,286,684
=========================================
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 and nine months ended September 30, 1998 and 1999
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------
1998 1999 1998 1999
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C>
Revenues:
Services, rent and maintenance revenue $ 6,493,560 $ 5,570,709 $ 17,269,327 $ 17,060,087
Product revenue 882,590 202,510 3,695,423 1,074,056
----------------------------------------------------------------------
Gross revenues 7,376,150 5,773,219 20,964,750 18,134,143
Sales taxes (668,965) (604,288) (2,027,345) (1,782,792)
----------------------------------------------------------------------
Net revenue 6,707,185 5,168,931 18,937,405 16,351,351
Cost of products sold (969,179) (395,330) (3,966,277) (1,883,641)
Operating costs and expenses:
Services rent and maintenance 2,139,578 1,681,273 6,399,848 5,231,688
Selling, general and administrative 7,007,610 5,856,190 20,105,979 17,207,234
Depreciation and amortization 1,262,150 1,001,465 3,181,892 2,991,557
----------------------------------------------------------------------
Total operating costs and expenses 10,409,338 8,538,928 29,687,719 25,430,479
----------------------------------------------------------------------
Operating loss (4,671,332) (3,765,327) (14,716,591) (10,962,769)
Other income (expense):
Interest expense (4,073,152) (4,345,120) (13,186,511) (13,073,869)
Interest income 2,929,546 3,162,789 9,237,181 21,193,447
Other expense (237,135) (404,662) (290,027) (823,745)
Currency exchange loss (2,259,021) (8,741,066) (5,304,581) (47,360,785)
Total other (expense); net (3,639,762) (10,328,059) (9,543,938) (40,064,952)
----------------------------------------------------------------------
Net loss $ (8,311,094) $ (14,093,386) $ (24,260,529) $ (51,027,721)
======================================================================
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 nine months ended September 30, 1998 and 1999
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
Operating activities:
Net loss $ (24,260,529) $ (51,027,721)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization 3,181,892 2,991,557
Provision for losses on accounts receivable 1,649,495 3,203,733
Amortization of debt issuance costs 505,064 417,099
Currency exchange loss 5,304,581 47,360,785
Loss on sale of equipment 57,584 342,881
Impairment loss on long-lived assets 0 175,311
Changes in operating assets and liabilities:
Increase (decrease) in trading securities 11,398,369 (6,957,364)
Increase in accounts receivable (1,287,798) (2,856,590)
(Increase) decrease in recoverable taxes (1,048,650) 51,920
Increase in pager inventories (297,530) (848,779)
Increase in prepaid expenses and other current assets (226,798) (247,633)
Increase in other assets (1,235,885)
(27,559)
(Decrease) in accounts payable (706,658) (824,449)
Increase in accrued expenses 6,603,792 8,168,898
Increase in payable to related parties 150,000 0
---------------- ---------------
Net cash (used in) provided by operating activities 995,255 (1,286,237)
Investing activities:
Decrease pledged securities held-to-maturity 6,836,856 7,377,266
Purchase of fixed assets (8,397,683) (3,269,465)
Proceeds from sale of equipment 375,589 141,431
---------------- ---------------
Net cash (used in) provided by investing activities (1,185,238) 4,249,232
Effect of exchange rate changes on cash (131,955) (3,145,773)
---------------- ---------------
Net Increase (Decrease) in cash and cash equivalents (321,938) (182,778)
Cash and cash equivalents at beginning of period 377,004 219,787
----------------------------------
Cash and cash equivalents at end of period $ 55,066 $ 37,009
==================================
Supplemental disclosures of cash flow information:
Cash paid during the period for Interest on Senior Notes $ 8,437,500 $ 8,437,500
Payable to Powernet $ 2,860,000
See accompanying notes to financial statements
</TABLE>
5
<PAGE>
Item 1(d)
<TABLE>
PAGING NETWORK DO BRASIL
STATEMENT OF SHAREHOLDERS' EQUITY (DEFICIT)
For the nine months ended September 30, 1999
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
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 (51,027,721) (51,027,721)
Translation adjustment 33,028,884 33,028,884
---------------
Comprehensive loss for the period (17,998,837)
Monetary adjustment on redeemable
preferred stock (11,842,002) (11,842,002)
Accrued dividends on redeemable
Preferred stock (3,581,049) (3,581,049)
----------------------------------------------------------------------
Balance at September 30, 1999 30,760 $ (143,546,985) $ 36,625,481 $(106,890,744)
======================================================================
See accompanying notes to financial statements.
</TABLE>
6
<PAGE>
Item 1(e)
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
September 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 addition 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's
reporting currency is the U.S. dollar. 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. 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, 1999 set forth
in the Company's Annual Report on Form 20-F filed with the Securities and
Exchange Commission. The results of operations for the interim periods presented
herein are not necessarily indicative of the results to be expected for the full
year.
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 currency exchange
loss.
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 $909,784 and $3,159,784 and during the three and nine months ended
September 30, 1998 and $659,198 and $1,856,992 during the three and nine months
ended September 30, 1999.
Cash Equivalents and trading securities
The Company considers all investments with a maturity of three months or
less when purchased to be cash equivalents. Trading securities are liquid
investments with a maturity of greater than three months which are recorded at
fair value.
Allowance for Doubtful Accounts
The Company had an allowance for doubtful accounts of $1,400,000 at
December 31, 1998, and $1,508,765 at September 30, 1999. Charges to the
allowance were $117,180 and $1,132,180 during the three and nine months ended
September 30, 1998 and $1,157,968 and $3,094,968 during the three and nine
months ended September 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>
Pledged securities held-to-maturity
Pledged securities held-to-maturity current and non-current consist of U.S.
government securities, recorded at amortized cost which approximates market. All
securities in the non-current portion mature within five years.
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. Senior Notes
On June 6, 1997, the Company issued $125 million principal amount of
13-1/2% Senior Notes due June 6, 2005. Interest is payable semi-annually in
arrears on June 6 and December 6 of each year. 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 through June 6, 2000. Debt issuance costs are
capitalized and amortized over the term of the debt under the effective yield
method.
The Senior Notes are redeemable on or after June 6, 2001 at the option of
the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after June 6,
2004, plus accrued interest. The Senior Notes contain certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness or issue preferred stock, pay dividends or make certain other
restricted payments. Upon a change of control, the Company is required to make
an offer to purchase the Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any. In
accordance with the covenants of the Senior Notes and the Company's current
level of leverage, at September 30, 1999, the Company is unable to make any
dividend payments
5. Accrued Expenses
Accrued expenses at December 31, 1998 and September 30, 1999 are comprised
of the following:
1998 1999
---- ----
Excise taxes payable $334,174 $241,281
Withholding taxes payable 247,733 231,853
Payroll and other benefits payable 1,439,289 1,443,592
Accrued interest payable 1,125,000 5,343,750
Other 2,053,122 4,187,946
---------- -----------
$5,199,318 $11,448,422
========== ===========
9
<PAGE>
The $4,187,946 of other accrued amounts includes $2,554,047 that represent
a tax contingency accrual for certain taxes relating to interest income and
exchange gains that are being disputed in good faith by the Company
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 September 30, 1999 was $7,945,014 and
$11,526,062, respectively.
7 . Fixed Assets
Fixed assets at December 31, 1998 and September 30, 1999 are comprised of
the following:
Period
1998 1999 of Depreciation
---- ---- ---------------
Furniture and Fixtures $ 1,915,206 $ 1,231,176 10 years
Equipment 13,643,133 9,549,434 5-10 years
Pagers 7,888,885 6,266,298 2.5 years
Leasehold improvements 4,104,869 2,612,275 5 years
Powernet Based 2,103,244 9 months
-----------------------------
27,552,093 21,762,427
Less - Accumulated (5,682,876) (6,164,395)
------------ ------------
depreciation $ 21,869,217 $ 15,598,032
============ ============
8. Comprehensive Loss
The calculation of comprehensive loss for the three months and nine months
ended September 30, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ -----------------------------------
1998 1999 1998 1999
---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net loss $8,311,094 $14,093,386 $24,260,529 $51,027,721
Foreign currency
translation adjustments (1,212,512) (7,215,634) (2,491,749) (33,028,884)
---------------- ----------------- ----------------- -----------------
Comprehensive loss $7,098,582 $6,877,752 $21,768,780 $17,998,837
================ ================= ================= =================
</TABLE>
10
<PAGE>
Accumulated comprehensive income, consisting entirely of foreign currency
translation adjustment is $36,625,481 at September 30, 1999 and $3,596,597 at
December 31, 1998.
9. 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 September 30, 1999 calculated in reais and translated into U.S.
dollars and the September 30, 1999 closing note are as follows.
1999 $ 568,722
2000 $1,980,000
2001 $1,932,000
2002 $ 545,000
2003 $ 198,000
Total rental expense was $795,176 and $2,489,961 for the three and nine months
ended September 30, 1998 and $446,278 and $1,487,574 for the three and nine
months ended September 30, 1999.
10. 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
more likely than not that it will not 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 $43.3 million at December 31, 1997, 1998 and
September 30, 1999 respectively. Under Brazilian law, net operating losses may
be carried forward for an unlimited period of time.
11. Recent Events
The Company has entered into an agreement to acquire paging subscribers
from Powernet Ltda., a Brazilian paging company wholly owned subsidiary of
Motorola for approximately $5,100,000, based on the 46,000 paging subscribers
Powernet had in the first quarter of 1999.
Approximately 26,000 paging subscribers are expected to be confirmed, at a
cost of approximately US$ 2,860,000. These 26,000 subscribers already have
generated US$ 650,000 of net services revenue in the quarter. The cost of this
acquisition will be amortized in nine months starting in the fourth quarter of
1999. The final acquisition cost is subject to the actual number of subscribers
that are acquired by the Company. This transaction is expected to be completed
during the fourth quarter of 1999.
No other events or transactions have occurred since September 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 nine months ended September 30, 1999 compared with three
months and nine months ended September 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".
As a result of the development of the Company's business in Sao Paulo and
Rio de Janeiro (the "Initial Markets") during the periods presented, the
period-to-period comparisons of the Company's results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance.
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
------------------ -----------------
September 30, 1998 and 1999 September 30, 1998 and 1999
--------------------------- ---------------------------
1998 1999 1998 1999
---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues $ 6,707,185 $ 5,168,931 $ 18,937,405 $16,351,351
Cost of products sold (969,179) (395,330) (3,966,277) (1,883,641)
----------- ------------ ------------ -----------
Gross profit 5,738,006 100% 4,773,601 100% 14,971,128 100% 14,467,710 100%
Operating costs and expenses:
Services rent and maintenance 2,139,578 37% 1,681,273 34% 6,399,848 43% 5,231,688 36%
Selling, general and 7,007,610 122% 5,856,190 122% 20,105,979 134% 17,207,234 119%
administrative
Depreciation and amortization 1,262,150 22% 1,001,465 20% 3,181,892 21% 2,991,557 20%
----------- ------------ ------------ -----------
Total operating costs and expenses 10,409,338 181% 8,538,928 175% 29,687,719 198% 25,430,479 175%
----------- ------------ ------------ -----------
Operating loss - (3,765,327) - (14,716,591) - (10,962,769) -
(4,671,332)
Other income (expense) (3,639,762) - (10,328,059) - (9,543,938) - (40,064,952) -
----------- ------------ ------------ -----------
Net loss (8,311,094) - (14,093,386) - (24,260,529) - (51,027,721) -
=========== ============ ============ ===========
Other data:
EBITDA(1) $(3,409,182) - $ (2,763,862) - $(11,534,699) - $(7,971,212) -
Number of subscribers at end of 82,705 114,881 82,705 114,881
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>
Gross Profit . The Company's total revenues primarily consist of monthly
fees paid by subscribers for the paging service, as well as product sales to
both individuals and retailers, net of sales taxes. During the three months and
nine months ended September 30, 1999, the Company was offering service to
customers in Sao Paulo and Rio de Janeiro.
For the three month and nine month periods ended September 30, 1999, the
Company generated gross profit of $4,773,601 and $14,467,710 consisting of
$5,570,709 and $17,060,087 in service revenues, $202,510 and $1,074,056 in
product sales to customers, cost of sales of $395,330 and $1,883,641 and sales
taxes of $604,288 and $1,782,792. During the three month and nine month periods
ended September 30, 1998, the Company's net revenues were $5,738,006 and
$14,971,128. Average monthly revenue per unit for the three month period ended
September 30, 1999 was approximately R$30.00 (US$ 16.81) for a base of 114,881
subscribers; average monthly revenue per unit for the three month period ended
September 30, 1998 was approximately R$33.42 (US$29.10) for a base of 82,705
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, repair and maintenance
expenditures and service call costs. During the three month and nine month
periods ended September 30, 1999, the Company incurred $1,681,273 and $5,231,688
of expenses in connection with the operations in Sao Paulo and Rio de Janeiro.
During the three month and nine month periods ended September 30, 1998, the
Company incurred service, rent and maintenance expenses of $2,139,578 and
$6,399,848.
Selling and Marketing Expenses. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
three month and nine month periods ended September 30, 1999 the Company incurred
$1,650,273 and $6,208,247, respectively, of selling and marketing expenses.
During the three month and nine month periods ended September 30, 1998, the
Company incurred $3,027,944 and $8,467,295, 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 nine month
periods ended September 30, 1999 and 1998 the Company incurred $4,205,917 and
$10,998,987 and $3,979,666 and $11,638,684 respectively, of general and
administrative expenses. During the three and nine months ended September 30,
1999 and 1998, the Company incurred approximately $1,420,042 and $3,203,733 and
$396,097 and $1,649,495, 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 $1,262,150 and $3,181,892 for the three month and nine month
periods ended September 30, 1998 to $1,001,465 and $2,991,557 for the three
month and nine month periods ended September 30, 1999, primarily due the
purchase and installation of equipment necessary to build out the Rio de Janeiro
paging network and office.
Operating Loss. For the three month and nine month periods ended September
30, 1999 the Company generated operating losses of $3,765,327 and $10,962,769
and for 1998 $4,671,332 and $14,716,591, respectively, primarily due to expenses
in connection with the development of the Company's business as explained above.
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Interest Expense. Interest expense was $4,345,120 and $13,073,869 for the
three month and nine month periods ended September 30, 1999, and for 1998 was
$4,073,152 and $13,186,511 for the three month and nine month period ended
September 30, primarily as a result of interest associated with the Senior
Notes.
Interest Income. Interest Income increased to $3,162,789 and $21,193,447
for the three month and six month periods ended September 30, 1999 primarily as
a result of investing the net proceeds from the Senior Note offering and the
proceeds from the issuance by the Company of its redeemable preferred stock.
Exchange and Translation (Losses). The Company's reporting currency is the
U.S. dollar. Effective January 1, 1998, the Company determined that Brazil
closed to be a highly inflationary economy under SFAS number 52 and began using
the real as its functional currency. Prior to January 1, 1998, the Company used
the U.S. dollars as its functional currency as required by SFAS number 52 for
U.S. dollar reporting entities doing business in highly inflationary economies.
Currency Exchange Loss. Currency exchange losses from the depreciation of
the real against the U.S. dollar resulted in losses of $8,741,066 and
$47,360,785 for the three month and nine month periods ended September 30, 1999,
and $2,259,021 and $5,304,581 for the three month and nine month periods ended
September 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 and the currency exchange loss.
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 nine months ended
September 30, 1999 and 1998 the Company made capital expenditures of $3,132,423
and $2,232,273 and $3,269,465 and $8,397,683 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 three months
will be approximately $ 6 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.
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Generally, inflation in Brazil has been accompanied by devaluation of the
Brazilian currency relative to the U.S. dollar. Devaluation of the real may also
have an adverse effect on the Company. The Company collects substantially all of
its revenues in reais, but pays certain of its expenses, (including pagers, a
significant portion of its transmission equipment costs and substantially all
interest expense) in U.S. dollars. To the extent the real depreciates at a rate
greater than the rate at which the Company is able to raise prices, the value of
the Company's revenues (as expressed in U.S. dollars) will be adversely
affected. This effect on the Company's revenues may negatively impact the
Company's ability to fund U.S. dollar-based expenditures. Accordingly,
devaluation of the real may have a material adverse effect on the Company's
results of operations and financial condition. Further, 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.
Recent Events. The Company has entered into an agreement to acquire paging
subscribers from Powernet Ltda., a Brazilian paging company that is a wholly
owned subsidiary of Motorola. The cost of such acquisition was expected to be
approximately $5,100,000, based on the 46,000 paging subscribers Powernet had in
the first quarter of 1999.
Approximately 26,000 paging subscribers are expected to be confirmed, at a
cost of approximately US$ 2,860,000. These 26,000 subscribers already have
generated US$ 650,000 of net services revenue in the quarter. The cost of this
acquisition will be amortized in nine months and starting in the fourth quarter
of 1999. The final acquisition cost is subject to the actual number of
subscribers that are acquired by the Company. This transaction is expected to be
completed during the forth quarter of 1999.
No otherevents or transactions have occurred since September 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: November 29, 1999
17
