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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
/_/ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
/_/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to ________________
Commission file number:
Paging Network do Brasil S.A.
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(Exact name of Registrant as specified in its charter)
Paging Network do Brasil Inc.
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(Translation of Registrant's name into English)
The Federative Republic of Brazil
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(Jurisdiction of incorporation or organization)
Rua Alexandre Dumas, 1,711
Chacara Santo Antonio
Sao Paulo, 04717-004, Brazil
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(Address of principal executive offices)
Securities registered or to be registered pursuant
to Section 12(b) of the Act.
Title of each class Name of each exchange on which registered
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None None
Securities registered or to be registered pursuant
to Section 12(g) of the Act.
None
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(Title of Class)
Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act.
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report.
1,378,401 Common Shares, no par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes /x/ No /_/
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 /_/ Item 18 /x/
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TABLE OF CONTENTS
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PAGE
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Presentation of Certain Information...............................................................................1
Forward-Looking Statements........................................................................................1
Exchange Rates....................................................................................................1
PART I
Item 1. Description of Business..............................................................................5
Item 2. Description of Property.............................................................................16
Item 3. Legal Proceedings...................................................................................16
Item 4. Control of Registrant...............................................................................16
Item 5. Nature of Trading Market............................................................................20
Item 6. Exchange Controls and Other Limitations Affecting Security Holders..................................20
Item 7. Taxation............................................................................................21
Item 8. Selected Financial Data.............................................................................25
Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations...............25
Item 10. Directors and Officers of Registrant................................................................33
Item 11. Compensation of Directors and Officers..............................................................33
Item 12. Options to Purchase Securities from Registrant or Subsidiaries......................................34
Item 13. Interest of Management in Certain Transactions......................................................34
PART II
Item 14. Description of Securities to be Registered..........................................................35
PART III
Item 15. Defaults Upon Senior Securities.....................................................................36
Item 16. Changes in Securities, Changes in Security for Registered Securities and
Use of Proceeds...................................................................................36
PART IV
Item 17. Financial Statements................................................................................36
Item 18. Financial Statements................................................................................36
Item 19. Financial Statements and Exhibits...................................................................36
Signatures.......................................................................................................39
Index to Financial Statements...................................................................................F-1
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PRESENTATION OF CERTAIN INFORMATION
As used herein, references to the Company, the Registrant and PageNet
do Brasil refer to Paging Network do Brasil S.A.
The Company publishes its financial statements in U.S. dollars. In this
Annual Report, references to "dollars" or "$" are to U.S. dollars and references
to "REAL" or "REAIS" are to Brazilian REAIS. Except as otherwise stated herein,
all monetary amounts in this Annual Report have been presented in dollars.
Unless otherwise stated, the translations of REAIS into dollars have
been made in accordance with the provisions of Statement of Financial Accounting
Standards No. 52 as it applies to entities operating in highly inflationary
economies, at a rate published daily by the Brazilian Central Bank (the "Central
Bank") through December 31, 1997.
Effective January 1, 1998 the Company began using the REAL as the
functional currency as Brazil ceased to be a high inflationary country under
SFAS 52. See notes to the financial statements for details on translation
adjustments.
FORWARD-LOOKING STATEMENTS
This Form 20-F 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 with respect to the financial condition, results of operations and
business of the Company. When used in this Form 20-F, 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 a high level
of, and restrictions imposed by, debt, the 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.
EXCHANGE RATE DATA
The Company publishes its financial statements in U.S. dollars.
However, currently the majority of the Company's revenues and expenses are
denominated in REAIS. For information regarding the effects of currency
fluctuations on the Company's results, see "Item 9. Management's Discussion and
Analysis of Financial Condition and Results of Operations."
There are two legal foreign exchange markets in Brazil: the Commercial
Market and the Floating Market. The Commercial Market is reserved primarily for
foreign trade transactions and transactions that generally require prior
approval from Brazilian monetary authorities, including the purchase and sale of
registered investments by foreign persons and related remittances of funds
abroad. Purchases of foreign exchange in the Commercial Market may be carried
out only through a financial institution in Brazil authorized to buy and sell
currency in that market. The "Commercial Market Rate" is the commercial selling
rate for Brazilian currency into U.S. dollars, as reported by the Central Bank.
The "Floating Market Rate" generally applies to transactions to which the
Commercial Market Rate does not apply. Prior to the
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implementation of the Real Plan, the Commercial Market Rate and the Floating
Market Rate differed significantly at times. Since the introduction of the REAL,
the two rates have not differed significantly, although there can be no
assurance that there will not be significant differences between the two rates
in the future. Both the Commercial Market Rate and the Floating Market Rate are
reported by the Central Bank on a daily basis.
Both the Commercial Market Rate and the Floating Market Rate are freely
negotiated but may be influenced by the Central Bank, which typically intervened
in the Commercial Market, prior to the implementation of the Real Plan, in order
to control fluctuations and to regulate disparities between the Commercial
Market Rate and the Floating Market Rate.
On March 6, 1995, the Central Bank announced that it would intervene in
the market and buy or sell U.S. dollars, establishing a floating band in which
the exchange rate between the REAL and the U.S. dollar could fluctuate. The
Central Bank initially set the band with a floor of R$0.86 per US$1.00 and a
ceiling of R$0.90 per US$1.00 and provided that, from and after May 2, 1995, the
band would fluctuate between R$0.86 and R$0.98 per US$1.00. Shortly thereafter,
the Central Bank issued a new directive providing that the band would be between
R$0.88 and R$0.93 per US$1.00. On June 22, 1995, the Central Bank issued another
directive providing that the band would be between R$0.91 and R$0.99 per US$1.00
and subsequently reset the band on January 30, 1996 to between R$0.97 and R$1.06
per US$1.00. There can be no assurance that the band will not be altered in the
future. On June 7, 1996, the Commercial Market rate as reported by the Central
Bank was R$0.99910 per US$1.00. On February 18, 1997, the Central Bank again
reset the band to between R$1.05 and R$1.14 per US$1.00.
By means of Comunicado No. 6565, dated January 18, 1999, the Central
Bank extinguished the band. According to such regulation, the Central Bank will
no longer establish exchange rates in the foreign exchange market but instead,
the exchange rates shall be determined by the inter-bank market. There have been
occasions where the Central Bank did intervene in the foreign exchange market to
indicate it has control over the market in line with the overall economic policy
and International Monetary Fund (IMF) agreed targets.
The following table sets forth the Commercial Market Rate for U.S.
dollars for the periods and dates indicated. Amounts are expressed in REAIS and
have been translated from the predecessor currencies in effect during the
relevant period at the rates of exchange at the time the successor currency took
effect
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EXCHANGE RATES PER US$1.00(1)
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PERIOD LOW HIGH AVERAGE(2) PERIOD-END
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1990.............. 0.000004 0.000062 0.000025 0.000062
1991.............. 0.000062 0.000389 0.000149 0.000389
1992.............. 0.000393 0.004505 0.001655 0.004505
1993.............. 0.004557 0.118584 0.032809 0.118584
1994.............. 0.120444 0.940000 0.645000 0.846000
1995.............. 0.834000 0.972600 0.917742 0.972500
1996.............. 0.971800 1.041400 1.004000 1.039100
1997.............. 1.039500 1.116400 1.078100 1.116400
1998.............. 1.116500 1.208700 1.162600 1.208700
1999.............. 1.207800 2.164700 1.816900 1.789000
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(1) The information above based on bulletins published by the Central Bank.
The Federal Reserve Bank of New York does not publish a noon-buying
rate for reais.
(2) Weighted average of the exchange rates on business days for the period.
Brazilian law provides that whenever there is a material imbalance, or
a serious risk of a material imbalance, in Brazil's balance of payments, the
Brazilian Government may, for a limited period of time, impose restrictions on
the remittance to foreign investors of the proceeds of their investments in
Brazil, as it did for approximately six months in 1989 and early 1990, as well
as on the conversion of the Brazilian currency into foreign currencies.
The Brazilian Government currently restricts the ability of Brazilian
or foreign persons or entities to convert Brazilian currency into U.S. dollars
or other currencies other than in connection with certain authorized
transactions. The Central Bank has issued a certificate of registration
authorizing each of the scheduled payments of principal of, premium on, and
interest on the Company's 13-1/2% Senior Notes due 2005 (the "Notes") or for
payments of principal of, premium on and interest on the Notes upon any early
redemption of the Notes at the option of a holder of Notes. However, consent
from the Central Bank is needed for the payment of principal of, premium, if
any, on and interest on the Notes upon acceleration of the Notes following an
event of default under the Indenture (an "Event of Default") pursuant to which
the Notes were issued or for certain late payments of the Notes (I.E., payments
made 181 days or more after a scheduled payment date). In addition, consent from
the Central Bank is needed for (i) payments in respect of the Notes upon
redemption by the Company in the event of certain changes in Brazilian law
relating to tax withholding, (ii) payments in respect of the Notes in the event
of redemption of the Notes by the Company, (iii) payments in respect of the
Notes in the event of certain asset sales, and (iv) payments in respect of the
Notes in the event of a change of control. There can be no assurance that any
required consent from the Central Bank will be obtained.
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There can be no assurance that the Brazilian Government will not in the
future impose more restrictive foreign exchange regulations that would have the
effect of eliminating or restricting the Company's access to foreign currency
that would be required to meet its foreign currency obligations, including the
Notes. The likelihood of the imposition of such restrictions by the Brazilian
Government may be affected by, among other factors, the extent of Brazil's
foreign currency reserves, the availability of sufficient foreign currency on
the date a payment is due, the size of Brazil's debt service burden relative to
the economy as a whole, Brazil's economic policy and agreed targets with IMF and
political constraints to which Brazil may be subject.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
PageNet do Brasil is a provider of paging and wireless messaging
services in Brazil. The Company has secured licenses which enables it to
broadcast paging services throughout the country, and had at year-end
approximately 90,189 subscribers down from approximately 96,767 subscribers at
year-end 1998. The Company has 82 paging transmitters installed in 10 cities
(the "EXISTING COVERAGE AREA"). PageNet do Brasil was formed by Paging Network
International N.V. ("PageNet NV"), a wholly owned subsidiary of Paging Network,
Inc. ("PageNet USA"), the largest paging company in the United States, Warburg,
Pincus Ventures, L.P. ("Warburg Pincus"), a private equity fund, TVA Sistema de
Televisao S.A. ("TVA"), a leading pay television company in Brazil, and a wholly
owned subsidiary of Abril S.A., Latin America's largest publishing enterprise,
IVP Paging (Cayman) L.P. ("IVP Cayman"), the general partner of which is
International Venture Partners, Inc. ("IVP"), a private investment fund focused
on Brazil, and Multiponto Telecomunicacoes Ltda. ("Multiponto"), an equity
investor focused on the Brazilian telecommunications sector.
Although the Brazilian paging industry has been adversely affected by
the rapid growth in the use of cellular telephones, the Company believes that a
number of factors continue to provide a market for paging services in Brazil,
including: (i) Brazil's large population, (ii) the paging market's relatively
low penetration rate, (iii) the relatively high demand for reliable and low cost
communications services and (iv) the development and implementation of new
two-way services that provide access to the Internet. The Company is in the
process of considering the development of a two-way network in Brazil but there
can be no assurance that the Company will implement such a network.
The Company believes it will be well positioned to maintain a good
position as a provider of paging services in Brazil because of its
state-of-the-art infrastructure, high quality services, low cost structure and
strategic relationships. In 1999, the Company won an award naming it the best
paging service provider in Brazil by Exame and Info-Exame, two widely-circulated
and well-known business magazines in Brazil, which have been conducting quality
surveys for the information systems and telecommunications industries since the
early 1990s.
BUSINESS STRATEGY
The Company's strategy is to continue to be a leading provider of
one-way paging services in Brazil by: (i) providing high quality paging services
at a low cost, (ii) developing new wireless internet application services, (iii)
increasing market penetration, and (iv) providing superior customer service.
PROVIDE HIGH QUALITY PAGING SERVICES AT A LOW COST. The Company has
employed state-of-the-art FLEX(R) technology developed by Motorola, Inc. and is
using equipment similar to that used by PageNet USA in the United States.
Furthermore, the Company utilizes a fully redundant paging system that is linked
by satellite. Management believes that as the Company adjusts itself to a
smaller one way paging market, this advanced technology will allow the Company
to continue to be a provider of high quality paging services at a low cost per
subscriber.
DEVELOP NEW WIRELESS INTERNET APPLICATION SERVICES. By developing
application services like e-mail notification and the capability to deploy
internet information into the one-way device, the Company believes it can
capture part of the internet market growth in Brazil.
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GAIN MARKET PENETRATION. As of December 31, 1999, the Company had
captured an estimated 10% of the paging market. Unlike competitors whose
primary focus has been the consumer market, the Company now focuses primarily
on business customers through a commissioned direct sales force and through
telemarketing. The Company has reduced significantly its retail distribution
channels. The Company has two "retail showrooms" strategically located in Sao
Paulo.
PROVIDE SUPERIOR CUSTOMER SERVICE. By focusing on key elements of
customer satisfaction during the sales process and over the life of the customer
, the Company provides high levels of customer service. Moreover, the Company
has introduced customer service account representatives to the paging industry
in Brazil, as a complement to sales representatives. The primary function of
customer service account representatives is to serve existing accounts. In
addition, customer service account representatives act as a secondary sales
force, targeting existing customers for additional services and paging units.
The Company believes this strategy allows it to ensure superior customer
satisfaction.
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THE COMPANY'S MARKETS
The Company has secured three national licenses, which enable it to
broadcast paging services on specified frequencies throughout Brazil. In
addition, the Company has secured another three local licenses which serve to
enhance the Company's capacity in certain cities in the Existing Coverage Area.
The Company is actively marketing paging services in Sao Paulo, Rio de Janeiro
and Brasilia and currently offers extended paging coverage in the remainder of
the Existing Coverage Area.
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ESTIMATED
POPULATION
EXISTING COVERAGE AREA(1) (IN MILLIONS)
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CURRENT MARKETS:
Sao Paulo.......................................... 22.7
Rio de Janeiro..................................... 10.9
Brasilia........................................... 1.7
EXTENDED COVERAGE AREA:
Curitiba........................................... 2.0
Belo Horizonte..................................... 3.4
Porto Alegre....................................... 2.7
Salvador........................................... 2.6
Recife............................................. 2.8
Belem.............................................. 1.7
Goiania............................................ 1.3
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Total..................................... 51.8
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(1) Includes, in each case, the city identified as well as the regions
surrounding such city in which the Company expects to provide its
services.
(SOURCE: INSTITUTO BRASILEIRO DE GEOGRAFIA E ESTATISTICA--IBGE (BRAZILIAN
INSTITUTE FOR GEOGRAPHICS AND STATISTICS) (1995) )
CURRENT MARKETS. The Company commenced offering paging services in
greater Sao Paulo in January 1997 and in Rio de Janeiro in September 1997, the
two largest metropolitan areas in the country. In the third quarter of 1999, the
Company commenced offering paging services in Brasilia. Sao Paulo, Rio de
Janeiro and Brasilia have a combined population of approximately 35.3 million
people. The Company occupies 43,000 square feet of office space in Sao Paulo and
19,460 square feet of office space in Rio de Janeiro and Brasilia's sales office
and had approximately 90,189 subscribers as of December 31, 1999.
EXTENDED COVERAGE AREA. Extended coverage allows a paging customer to
receive pages in cities other than the customer's base city. Through the
satellite-linked transmission system, customers can choose to receive pages only
in their base city or to extend their paging service to include additional
cities. For example, a customer in Sao Paulo can still receive pages when
traveling to a city in the Extended Coverage
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Area. The Company has installed transmitters in seven cities in addition to Sao
Paulo, Rio de Janeiro and Brasilia and is currently offering its customers
extended paging coverage in all of these cities. The Company has delayed plans
to open local offices in these cities due to the significant slow down in the
paging industry. Any decision in the future to open local offices in these, or
any other, cities will depend upon business demand, general economic conditions,
the presence of competing businesses and telephone infrastructure. The Company,
however, will continue to consider attractive opportunities to enter other
markets on an ongoing basis.
OPERATIONS AND SYSTEMS
OVERVIEW. The Company's day-to-day operations to provide paging
services to its subscribers are substantially similar to those of PageNet USA in
the United States. Pagers and other paging equipment are received by the Company
and placed in inventory, where they are appropriately labeled and coded for
proper tracking after sale, and programmed to respond only to a particular code.
These pagers are then supplied to the Company's direct sales representatives,
the Company's stores or to other sellers of the Company's service, who are
responsible for the initial sales process including payment collection, the
completion of an application for service, and the delivery of a functioning
pager. The Company's billing department enters the appropriate customer
information to begin the billing process, and the collections department begins
tracking the customer's payment history to ensure timely payment. Customer
service representatives address calls from customers regarding the functions of
the pager, service details and payment policies. The dispatch center, which
receives the calls from individuals sending alphanumeric pages to subscribers
and enters the message into the paging terminal, dispatches messages 24 hours
per day, seven days per week. The systems department monitors daily all of the
Company's equipment including transmitters, paging terminals and supporting
software and hardware.
DISPATCH CENTER. The Company operates state-of-the-art dispatch center
in Sao Paulo, utilizing customized dispatch software and analytic staffing
software designed to enhance productivity. The Company currently has sufficient
telephone capacity to conduct its business for the foreseeable future and
expects that it will be able to obtain additional telephone capacity as the
demands of its business require. The Company emphasizes both productivity and
quality performance to its dispatch center staff through training, monthly
monitoring and incentive based performance measures.
ADVANCED INFORMATION SYSTEMS. The Company uses an advanced proprietary
management information system, customized to accommodate the Brazilian market.
This system is used primarily to support three principal areas of the Company's
business: (i) customer service, including billing systems; (ii) network
management and operational support systems; and (iii) general business support
systems including financial management. The Company's information systems have
been designed to accommodate efficiently the planned data the Company expects to
process .
CUSTOMER SERVICE. The Company's customer information and billing system
incorporates all aspects of billing and customer preferences, which are intended
to produce a high level of customer satisfaction and to minimize customer
turnover levels. The Company's customer information and billing system provides
management with readily accessible information regarding subscribers' pager
usage, coordinates customer account information among the various departments
and ensures that customers receive all requested products and, technical and
support services. This access to information facilitates the provision of
attentive customer service. The Company's account representatives, who are
responsible for customer service, respond to a customer's telephonic inquiry
within 24 hours. The Company believes that customer service is an important
factor in developing customer loyalty and differentiates its service from that
of its competitors.
BILLING AND COLLECTIONS. The Company utilizes the Brazilian practice of
invoicing customers through the banking system. Billing information is
electronically transmitted to the Company's bank which
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then mail the invoices and collects the Company's receivables at its branches or
affiliates. The Company has implemented a collections policy to contact
delinquent customers, charge a late fee and finally suspend service until the
account is made current. The Company monitors customer payment patterns and has
developed a subscriber credit criteria policy.
NETWORK MAINTENANCE. The Company has two separate but coordinated
network maintenance systems. The first is dedicated to the proper maintenance of
the paging system which includes daily dial-in to each of the Company's paging
transmitters, monthly preventative maintenance reviews of each site, periodic
review of the satellite up-link and constant monitoring of the paging terminals
that reside in the Company's local offices. This department is also responsible
for updating and upgrading the hardware and software so that the system is
operating at the highest possible level. The second system is responsible for
the maintenance and interconnectivity of all other computer systems, including
the dispatch department's systems, the Company's LAN and related productivity
software and the telephone system. In addition, this department is responsible
for the Company's relationship with local and long distance telephone companies
including the acquisition of additional telephone lines if needed.
SALES AND MARKETING
The Company's current marketing strategy is to differentiate its
service from that which is available in the Brazilian market today. The Company
believes that it provides a lower cost and higher quality service than its
competitors through its advanced FLEX(R) technology and satellite-linked
network, customized informatioN systems, and focus on customer service. The
Company also prices its high quality service competitively and uses appropriate
sales channels to distribute its product, now focused on the business market
segment.
BUSINESS MARKET
CUSTOMER SEGMENTATION. The Company targets businesses whose employees
are highly mobile or work at several locations. Such customers include companies
in service industries, hospitals and medical professionals, construction and
manufacturing companies, governmental agencies and retail and financial
institutions. The Company believes that the business market segment will offer
stronger recurring revenues and will experience a higher subscriber retention
rate than the consumer market segment. As of December 31, 1999, business
customers accounted for approximately 38% of the Company's pagers in service in
Brazil, up from 25% in December 1998.
Subject to appropriate credit policies, the Company leases pagers to
businesses, thereby reducing the business customer's capital outlay.
DISTRIBUTION. The Company employs a direct sales force to target
specific businesses. Sales representatives receive leads through a number of
sources, including the Company's telemarketing department, referrals and
advertising. In addition, the Company employs a separate team of account
representatives, whose primary function is to serve existing accounts. The
account representatives act as a secondary sales force, targeting existing
customers for additional services and paging units. The Company believes that by
shifting the customer service function from the sales representative to an
account representative, the sales representative is more productive and the
customer is better served.
CONSUMER MARKET
CUSTOMER SEGMENTATION. The Company estimates that, as of December 31,
1999, individuals accounted for 62% approximately, down from 75% of total pagers
in service in Brazil in December 1998. Management believes that consumer demand
for paging service used to come from the need for a reliable,
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portable communications service and that it has been severely affected by low
pre-paid cellular telephone service.
Due to the prevailing market conditions, advertising has not been a key
component of the Company's consumer marketing strategy. The Company's few
advertising campaigns and maintenance programs conducted in early 1999 included
advertisements in newspapers, television, magazines, billboards and radio.
DISTRIBUTION. In Sao Paulo, the Company's advertising campaign directed
consumers to the Company's strategically located retail showrooms. Even though
this is no longer emphasized, the Company had also developed a retail outlet
distribution channel through which the Company provided pagers to the consumer
at discounted prices. Once purchased by a subscriber, the pager would be
activated on the Company's standard retail contract as a subscriber-owned pager.
PRODUCTS
EXISTING PRODUCTS. The Company offers PIN-based alphanumeric paging
with dispatch service included, at a competitive price. Additional product
enhancements are available to subscribers, including extended coverage in the
Existing Coverage Area, pager protection against loss or theft, pager
maintenance and wireless internet related services.
SUBSEQUENT PRODUCTS. The Company has offered some and expects to offer
some other additional products, many of which will be new products to the
Brazilian paging market. These products may include: (i) page-by-name, which
allows the caller to eliminate the use of a PIN and send a page using only the
subscriber's name; (ii) direct dial paging, which allows the caller to dispense
with the use of a PIN and send a page using a subscriber's direct telephone
number; (iii) customized greeting, which allows a subscriber to customize
service and have a dispatch center operator answer using the subscriber's name
and other information as designated by the subscriber; (iv) numeric paging; (v)
Page-Mail, which adds voice mail service to an existing subscriber account; (vi)
click detection, which enables Brazil's prevalent pulse telephones to send pages
where tone telephones would otherwise be required; (vii) self dispatch, which
allows subscribers to send pages directly from their personal computers, without
accessing the dispatch center; and (viii) internet dispatch and e-mail
capabilities. Although the Company does not plan on offering these subsequent
products due to current market conditions, the Company remains positioned to
offer these additional products in the future should market conditions improve.
FUTURE PRODUCTS. The Company may deploy new paging and paging-related
products with both one-way and two-way spectrums and has already secured a
two-way experimental license. Although the Company has access to additional
technologies through its relationship with PageNet USA it has also hired a
U.S.-based consulting firm to help it understand new technologies and
applications. There can be no assurance that the Company will offer any of these
products or services in the future.
PAGING SYSTEMS EQUIPMENT
The Company's paging system equipment consists of call distribution
telephone connectors, dispatch systems, paging terminals, satellite up-links,
satellite receivers, paging transmitters and pagers. Additional supporting
equipment includes fully redundant telephone switches, dispatch systems and
paging terminals, uninterrupted power supplies, backup generators, dedicated
land lines redundant to the microwave and satellite-linked systems and land
lines to each transmitter for daily diagnostic review and maintenance. The
Company, has supervised the entire paging infrastructure build-out from
transmitter site selection to transmitter installation alignment to programming
of the paging terminal.
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The Company has secured satellite access from Embratel, a Brazilian
satellite and long distance telephone company, to access BrasilSat One, a
Brazilian satellite, and link its paging transmitters. The Company leases its
satellite access under a five-year contract. A "backbone" network of satellite
paths with microwave and conventional radio links will connect the operators,
telephone lines, terminals and control equipment to various cities to be served.
The Company uses one of the most sophisticated paging message
transmission protocols available, developed with FLEX(R)-based technology. The
FLEX(R) transmission protocol, developed by Motorola, Inc., improVed upon the
prior paging message transmission system, POCSAG, by increasing the accuracy of
the data coding format and refining the error correction process. These
improvements made FLEX(R) the more reliable method of transmittinG paging
messages. Additionally, the technological improvements of FLEX(R) allow a paging
service provider to utilizE less of its transmission system capacity for each
message. The improved efficiency of the FLEX(R)-based paginG transmission system
results in the transmission of up to three times the amount of data using a
single paging frequency than previously possible under the POCSAG system.
An additional benefit of a FLEX(R)-based paging message transmission
system is the improved battery lifE of FLEX(R)-based pagers. Because FLEX(R)
technology has improved the timing of message delivery, the batteries of
FLEX(R)-based pagers tend to last longer than those of pagers using POCSAG
technology.
The Company's paging transmission system is fully redundant, thereby
allowing the system to automatically readjust and continue operating through an
identical paging terminal upon the failure of any of the system's key
components. This system is driven by the Company's fully-featured diagnostics
software and alarm-monitoring hardware.
The Company does not and will not manufacture any of the pagers or
related transmitting and computerized paging terminal equipment used in the
Company's paging operations.
COMPETITION
The Company has experienced and will continue to experience direct
competition in all the locations in which it operates. Competition for
subscribers to the Company's paging services in most geographic markets will be
based primarily on the price of the device and the monthly service charge, the
quality and variety of services offered and the geographic area covered. The
Company believes that its price of device and service, the quality of its
services and its geographic coverage areas generally compares favorably with
those of its competitors.
Although most of the Company's competitors are small privately owned
companies serving only one market area, others are subsidiaries or divisions of
larger companies that provide paging services in multiple market areas being
Teletrim, Mobitel, and Conectel our largest and primary competitors.
In the Sao Paulo and Rio de Janeiro metropolitan areas, which
together are estimated to represent approximately 80% of the current paging
market in Brazil, more than eight competitors share a market of approximately
700,000 pagers in December 1999. While there is healthy competition in the
paging market, no single competitor dominates the market. The current
industry leaders, Teletrim and Conectel together share more or less evenly
approximately 50% of the market. Teletrim is the largest player in Rio de
Janeiro and shares with Conectel the lead in Sao Paulo. With respect to the
share of monthly new subscriber sales, 80% of all sales are approximately
divided evenly among PageNet, Teletrim, and Conectel, each capturing
approximately one-third of sales.
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The primary focus of the Company's competitors in the Brazilian paging
market has been the consumer market, rather than the business market. The
Company always focused on both and now focus on the business markets and expects
to take advantage of the fact that the corporate customer in the business
markets is more likely to maintain service, pay on time, purchase enhanced
services and have a better appreciation for the paging service.
EMPLOYEES
As of December 31, 1999, the Company had a total of 517 employees, down
from 750 employees in 1998. The Company's employees are not currently subject to
collective bargaining agreements, although under the Brazilian Constitution the
employees have a right to organize a union. The Company considers its employee
relations to be good.
GOVERNMENT REGULATION
TELECOMMUNICATIONS. Under Brazilian law, the provision of public
services requires a concession, license or authorization granted by the relevant
governmental authority. Under the Brazilian Constitution, the Federal Government
is required to provide, directly or through concession, license or
authorization, telecommunication services in accordance with the applicable
regulations. According to this Constitutional provision, the Federal Government
may freely grant concessions to private sector companies to provide telephone
and telecommunications services and data transmission services. On July 19,
1996, Law 9,295 was enacted to regulate telecommunication services, which
establishes that the Federal Government may impose restrictions in the
composition of the capital stock of the companies holding concessions for the
provision of mobile cellular telephone services and satellite signal
transportation services for the period of three years following the enactment of
such law. Such restriction will be imposed when required by national interest
and shall require that at least 51% of the voting capital of such companies is
held by Brazilian citizens. It is also provided by such law that the concessions
can only be granted to companies organized under Brazilian law and having their
head offices in Brazil. Decree 2,056 of November 4, 1996, which approved the
regulations applicable to cellular telephone services, delegated to the Ministry
of Communications the authority to establish limits to foreign participation
with respect to such services. The Ministry of Communication has issued the call
for a public bid (Concorrencia 001/96-SFO/MC) for the purchase of concessions to
provide cellular telephone services, with the requirement that at least 51% of
the voting capital of the proposed owners of the concessions be held by
Brazilian citizens. Brazil was divided into 10 concession areas and the
interested companies presented their bids on April 7, 1997. The awarding of the
concessions has been successfully completed, except for the region encompassing
the State of Amazonas, which had no bidders.
On July 16, 1997, Law 9,472, the General Telecommunications Law, was
enacted. The law created the National Telecommunication Agency (ANATEL) to
regulate the telecommunication services in the country. The law also provides
for (i) the organization of the telecommunications system, including the
granting of licenses, which has replaced the Telecommunications Code enacted in
1962 and (ii) the restructuring and privatization of the Telebras System that
was successfully completed in 1998. Article 18, Sole Paragraph of the law
authorizes the Federal Government, under certain conditions, to impose foreign
ownership restrictions relating to the capital stock of companies providing
telecommunications services.
Pursuant to Decree 2,534 of April 2, 1998, which approved the General
Granting Plan ("Plano Geral de Outorgas") for fixed telephone communication
services, the Federal Government has started a bid call to grant authorizations
to explore these services in the four regions in which the country has been
divided for such purposes.
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Pursuant to Decree 2,617 of June 5, 1998, the concessions, permissions
and authorizations to explore telecommunication services to the public in
general shall only be granted or issued to companies organized under Brazilian
law, with head offices and administration in the country, in which the majority
of the quotas or shares with voting rights are held by companies organized under
the laws of Brazil and with head offices and administration in the country or by
individuals residents in Brazil.
DEVELOPMENT OF PAGING REGULATIONS. The National Telecommunications
Agency (ANATEL) is the governmental body responsible to grant paging licenses in
Brazil and is also the body in charge to regulate the exploitation of such
services in Brazil. Currently, paging services in Brazil ("Servico Especial de
Radiochamada") are regulated by Rule No. 15/97, approved by Ordinance 558, of
November 3, 1997, of the Ministry of Communications using its residual
competence prior to the effective installation of ANATEL. Ordinance 558/97
expressly revoked Ministry of Communications Ordinances 232/91, 257/91 and
579/94, as well as Ordinance Minfra-SNC 32/91.
Pursuant to paging regulations, a paging operator must first obtain a
paging license from ANATEL in order to provide paging services in Brazil. All
licenses are non-exclusive licenses to provide paging services in a service
area.
The paging regulations distinguish between nationwide, regional,
mid-regional, micro-regional and local licenses. The nationwide license allows
the license holder to provide paging services in the Federal District and the 26
States of the Federation. The regional licenses allow the license holder to
provide paging services in one of nine regional areas encompassing one or more
Brazilian States. The State of Sao Paulo constitutes Regional Area One, the
States of Rio de Janeiro and Espirito Santo constitute Regional Area Two, and so
forth. The mid and micro regional areas are defined by the Brazilian Institute
of Geography and Statistics - IBGE. Finally, the local license allows the
license holder to provide separate services in one locality of the national
territory. The paging regulations also provide that the license holder may,
eventually, provide paging services on an international basis, as long as it has
transmission capacity through other providers abroad.
The recently enacted Paging Authorizations Plan, approved by ANATEL's
Resolution 108 of March 5, 1999, has allocated the frequencies to the areas
provided for in the paging regulations and has defined the number and localities
of each of the national, regional, mid regional, micro regional and local
licenses.
Regarding the granting of new licenses, the paging regulations provide
that a license holder or its controlled or affiliated companies may only have
one permission to exploit paging services in the same area of coverage. The
regulations also provide for the consolidation of previously existing licenses
in one sole permission under certain circumstances. The transfer of paging
licenses or the transfer of control of the license holder is subject to the
prior approval of the Ministry of Communications. The transfer of licenses or
the transfer of control of the license holder can only be made after the
effective commercial operation of the services begins.
On April 8, 1997, the President enacted Decree No. 2196, approving the
Regulation for Special Telecommunication Services, within which paging services
are included. Such Decree provides the guidelines for the granting of licenses
with respect to such services by the Ministry of Communications. Such Decree
confirmed the competence of the Ministry of Communications to establish specific
complementary rules, to grant licenses, to allocate frequencies and to supervise
the exploitation of such special services. Since the enactment of the General
Telecommunications Law, the Ministry of Communications has been replaced by
ANATEL for such functions.
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Decree No. 2196/7 regulates the procedure for the granting of new
licenses for exploitation of special services, which include the possibility of
a prior public consultation by the Ministry of Communications with respect to
the granting of such licenses, as well as the applicable terms and conditions of
such grants. The Decree also regulates the requirements of the call for public
bid, the rules for pre qualification of the interested parties, the criteria for
judgment of the proposals and for the granting of the licenses. The granting of
new licenses shall be formalized by means of the execution of a contract between
the Ministry of Communications and the awarded party.
Regarding the exploitation of the services the Decree expressly assures
the licensees the right to use equipment not owned by the licensee and to
contract with third parties the development of activities inherent, accessory or
complementary to the licensed services, provided that: (a) the licensee shall
remain responsible before the Ministry of Communications and the users for the
execution and exploitation of the services; and (b) the licensee shall be
contractually bound to the users.
Decree No. 2196/97 assures the transfer of the licenses, provided the
transferee complies with the qualification requirements imposed by the Ministry
of Communications and undertakes to comply with all of the conditions of the
contract, assuming all rights and obligations of the transferor. As mentioned
above, there is no minimum term for the transfer of paging licenses, the only
requirement being the commencement of the commercial operation of such services.
The number of requests for paging licenses presented to the Ministry of
Communications increased in 1994 and 1995 and, as of March 14, 1997,
approximately 855 local operating licenses had been issued. The Ministry of
Communications has estimated that another 1,000 local operating licenses will be
issued in the near future. In April 1997, two of the License holders (TVA and
Multiponto) were granted nationwide licenses by the Ministry of Communications.
As of December 1999, only twelve national licenses were issued by the Ministry
of Communication and pursuant to ANATEL's Resolution 171/99, 30 such licenses
shall be issued in total.
PAGING LICENSES. Under the General Telecommunications Law, Decree
2196/97 and Rule 15/97, paging licenses are granted by ANATEL for a period of 10
or 15 years and are renewable for successive 10 or 15 year periods. Renewal of
licenses is expected provided the paging operator has complied with the terms of
the operating license and has requested the renewal at least 18 months prior to
the expiration date of the license. Under the Decree a fee may be charged for
the renewal of the license in an amount to be agreed between ANATEL and the
licensee, based on the magnitude of the service, at least 12 months prior to the
expiration of original term. The license establishes the terms and conditions
under which the paging service should be provided. Those conditions include,
among others: (i) lack of exclusivity of the service, (ii) a prohibition on the
transfer of the license prior to the commencement of commercial operation of the
service, (iii) prior authorization from the Ministry of Communications for any
transfer of the license, (iv) the licensee's compliance with certain terms and
conditions specified by ANATEL such as price schedules, and (v) the licensee's
performance under the license. Any transfer of a paging license is subject to
the prior approval of ANATEL. A license may not be directly transferred by a
license holder to a third party until after the commencement of commercial
operation of the service. Transfers of shares which cause a change in the
control of the licensee or entity which controls the licensee must also receive
prior approval of the ANATEL. Licenses may be revoked prior to their expiration
by ANATEL for a number of reasons, including: (i) the public interest as
determined by the Ministry of Communications, (ii) the failure of the licensee
to meet the terms and conditions of the license, (iii) the transfer of the
license without the consent of ANATEL, or (iv) the failure of the licensee to
pay the required license fees. To initiate paging services, the paging operator
must be granted three different permits or approvals by ANATEL: (i) the initial
license, which entitles the license holder to develop paging services under a
certain frequency and in certain localities formalized by an adhesion contract
signed by the license holder and the Ministry of Communications, prior to the
installation of ANATEL, and with such agency thereafter; (ii) the Project
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Approval Certificate which permits installation of equipment necessary for the
development of the paging service in accordance with the installation project of
the license holder and, once the installation period is complete, (iii) the
paging operating license. Under applicable regulations, the Licenseholders
received paging licenses from the Ministry of Communications and pursuant to the
Operating Agreements and other covenants (the "Operating Agreements"), the
Company was required to construct and start the operation of its service within
12 months of the issuance of the paging license, which the Company has duly
complied with. To meet the requirements of operating within the meaning of the
paging license, a licensee is required to construct a single site from which a
radio signal can be directed. The Company has complied with this condition in
each of the cities for which a local paging license and a Project Approval
Certificate have been obtained and, as a result, the corresponding paging
operating permit for each of such cities has been issued by the Ministry of
Communications. Under nationwide licenses, it will be necessary for the Company
to present and obtain approval from the Ministry of Communications of the
installation project, as well as, the subsequent issuance of the paging
operating license for the relevant station. The fee for an operating license
totals one-half of one percent of the fixed assets of the licensee (deemed to be
the transmitters, paging terminal and initial supply of pagers). In addition,
licensees must pay a fee of approximately R$1,206 per transmitter installed, per
frequency, per year.
According to Rule No. 5/99, approved by ANATEL's Resolution 109, of
March 5, 1999, the license for the exploitation of paging services implies the
commitment of making it available and in regular operation within the terms and
minimum percentages of localities defined in accordance with the population and
coverage area of the service as determined therein. With respect to national
licenses, Rule No. 5/99 requires that at least 30% of the counties with
population higher than 300,000 inhabitants, of at least five Brazilian States,
within the term of two years, and at least 60% of the counties with population
higher than 300,000 inhabitants, of at least 12 Brazilian States, within the
term of four years.
The Company already complies with the first requirement, and needs only
to add coverage of two Brazilian States in order to comply with the second
requirement.
Subject to certain exceptions, generally any paging licenses not
already issued are to be granted pursuant to a public auction administered by
ANATEL. The rules of the auction are expected to be open to public comment
before the actual process is initiated. The Company is planning to participate
in this auction although there can be no assurance that the Company will acquire
any licenses at the auction.
Additional frequencies have been awarded to Mobitel in Sao Paulo and
Rio de Janeiro, and to Teletrim in Rio de Janeiro. The current regulations allow
the Company to request additional frequency allocations if needed; such
additional frequency allocations will be granted pursuant to a public auction
administered by ANATEL.
The Company anticipates no need for additional one-way frequencies in
the existing coverage area and has already secured a two-way experimental
license in accordance with ANATEL's Rule No. 4976 of October 08, 1999.
There can be no assurance that the Company will receive additional licenses.
PAGING LICENSE OWNERSHIP; OPERATING AGREEMENTS; AGREEMENTS TO TRANSFER
LICENSES. The licenses presently operated by the Company were granted to and are
owned by TVA, Multiponto and San Francisco Comunicacoes Ltda., an affiliate of
IVP (the "License holders") and are valid through July 28, 2009. The Company has
entered into Operating Agreements with each of the License holders pursuant to
which the Company has the right to operate the paging licenses held by the
License holders. The Company has also entered into Agreements of Promise of
Assignment and Transfer of Permissions (the "Transfer Agreement") with each
License holder pursuant to which the License holders have agreed, subject to the
necessary approvals, to transfer their paging licenses to the Company. The
Company has already requested the approval of ANATEL for the transfer of the
license owned by TVA to the Company. As soon as such
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transfer is completed, the Company will request the approval for transfer and
consolidation of the remaining licenses and their respective frequencies. Under
the applicable paging legislation, operating agreements are permitted and do not
represent a transfer of the license.
TRADEMARKS
The Company markets its paging and related services under various names
and marks, including PageNet and PageMail. The Company's use of each of these
marks is granted by the terms of the Technical Services Agreement. Under the
Technical Services Agreement, the Company has use of the PageNet USA trademarks
and service marks in Brazil as long as PageNet USA holds such properties absent
breach by the Company of its obligations thereunder or Brazilian governmental
action requiring its termination. PageNet USA has applied to register the mark
PageNet in Brazil. PageNet USA has advised the Company that certain third
parties also have applied to register the PageNet name in Brazil. PageNet USA is
pursuing vigorously its registration of the PageNet mark. However, there can be
no assurance that PageNet USA will be successful in which case the Company may
not have the right to use the PageNet mark.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company currently leases 43,000 square feet of space in Sao Paulo
and 19,460 square feet of space in Rio de Janeiro and Brasilia to house its
corporate headquarters and operations, including dispatch centers, systems rooms
and a retail showroom. In addition, the Company leases an additional retail
showroom in downtown Sao Paulo. The Company is planning to decrease its leased
space in light of the slow down in the current paging business.
In each of the cities in which the Company has secured paging licenses,
the Company has entered into and will continue to enter into agreements for the
placement, construction and maintenance of paging transmitter antennas.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not a party to any legal proceedings that would have a
material adverse effect on its results of operations and financial condition.
ITEM 4. CONTROL OF REGISTRANT.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock, no par value (the "Common
Stock") and Preferred Stock, no par value (the "Preferred Stock") as of
April 21, 1999 as determined in accordance with Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), unless otherwise stated
with respect to (i) each person known by the Company to be the beneficial owner
of more than five percent of any class of the Company's voting securities and
(ii) all directors and executive officers of the Company, as a group.
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COMMON STOCK PREFERRED STOCK
------------ ---------------
NAME AND ADDRESS OF NUMBER NUMBER
BENEFICIAL OWNER OF SHARES PERCENTAGE(1) OF SHARES PERCENTAGE
- ---------------- --------- ------------- --------- ----------
<S> <C> <C> <C> <C>
Paging Brazil Holding Co., LLC
c/o Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017(2).......................... 939,955 68.2% -- --
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017(2)(3)....................... 939,955 68.2% 20,000 66.7%
Paging Network International N.V.
4965 Preston Park Blvd.
Plano, Texas 75093(4)................................ 325,982 19.1% -- --
IVP Paging (Cayman) L.P.
c/o Maples and Calder
P.O. Box 309
George Town, Grand Cayman
Cayman Islands, B.W.I................................ 325,982 23.7% 8,000 26.7%
Multiponto Telecomunicacoes Ltda.
Avenida Presidente Wilson No. 231
Rio de Janeiro, Brazil(5)............................ 122,243 8.6% 2,000 6.7%
Douglas M. Karp(6)
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017............................. 939,955 68.2% 20,000 66.7%
Gary D. Nusbaum(6)
Warburg, Pincus Ventures, L.P.
466 Lexington Avenue
New York, New York 10017............................. 939,955 68.2% 20,000 66.7%
All directors and executive officers as a group
(6 persons)(7)....................................... 28,844 2.1% -- --
</TABLE>
- -----------
(1) Calculated in accordance with Rule 13d-3 under the Exchange Act.
(2) Warburg Pincus owns 100% of the voting interests in Paging Brazil
Holding Co. ("LLC Holding LLC").
(3) The sole general partner of Warburg Pincus is Warburg, Pincus & Co., a
New York general partnership ("WP"). E.M. Warburg, Pincus & Co., LLC, a
New York limited liability company ("EMW LLC"), manages Warburg Pincus.
The members of EMW LLC are substantially the same as the partners of
WP. Lionel I. Pincus is the managing partner of WP and the managing
member of EMW LLC. WP has a 15% interest in the profits of Warburg
Pincus as the general partner, and also owns approximately 1.2% of the
limited partnership interest in Warburg Pincus.
(4) PageNet NV holds a subscription bond that is currently exercisable into
325,982 shares of Common Stock.
(5) Multiponto holds a subscription bond that is currently exercisable into
40,748 shares of Common Stock.
(6) All shares indicated as owned by Messrs. Karp and Nusbaum are owned by
Warburg Pincus and are included because of the affiliation of Messrs.
Karp and Nusbaum with Warburg Pincus. Messrs. Karp and Nusbaum,
Managers of Holding LLC, are Managing Directors and members of EMW LLC
and general partners of WP.
(7) Excludes directors qualifying shares.
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SHAREHOLDERS AGREEMENT
The relations among the Company's shareholders, Warburg Pincus, Holding
LLC, PageNet NV, IVP Cayman, Multiponto, TVA (together, the "Shareholders") and
Messrs. Trynin and Fregenal (together with other stockholding members of the
Company's management "Management Investors"), are governed by a Shareholders
Agreement, dated as of December 11, 1996 (as amended, the "Shareholders
Agreement"). The following describes certain terms of the Shareholders
Agreement:
BOARD OF DIRECTORS. The Company is managed by a Board of Directors that
is currently comprised of five members. For so long as IVP Cayman beneficially
owns at least 10% of the Common Stock outstanding on a fully diluted basis, IVP
Cayman will have the right to designate one director to the Board of Directors.
For so long as (i) PageNet NV beneficially owns at least 10% of the Common Stock
outstanding on a fully diluted basis or (ii) the Technical Services Agreement is
in full force and effect, PageNet NV shall have the right to designate one
director to the Board of Directors. For so long as Warburg Pincus beneficially
owns more shares of Common Stock outstanding on a fully diluted basis than any
other shareholder of the Company, Warburg Pincus will have the right if it so
chooses to designate a majority of the directors of the Board of Directors. In
the event Warburg Pincus is not entitled to designate a majority of the Board of
Directors, but Warburg Pincus beneficially owns at least 10% of the Common Stock
outstanding on a fully diluted basis, Warburg Pincus will have the right to
designate one director to the Board of Directors.
RESTRICTIONS ON TRANSFER OF STOCK. Neither IVP Cayman nor PageNet NV
will sell, assign, transfer or otherwise dispose of ("Transfer") any capital
stock of the Company ("Capital Stock") held by it without the prior written
approval of Warburg Pincus, which approval will not be unreasonably withheld.
Such restriction applies to IVP Cayman only for a period of five years following
the issuance of any such stock. The Management Investors may not Transfer stock
held by them for a period of five years following the issuance of such stock,
subject to certain exceptions.
PAGENET NV RIGHT OF FIRST OFFER. PageNet NV has a right of first offer
with respect to either the Transfer by any Shareholder or the Transfer by the
Company of any of its assets.
TAG-ALONG RIGHTS; DRAG-ALONG RIGHTS. The Shareholders Agreement
provides tag-along rights for (i) the Management Investors in the event that the
Shareholders Transfer all their shares of Common Stock and (ii) each Investor in
the event that another Shareholder Transfers any of its Capital Stock. In the
event that Warburg Pincus chooses to Transfer all its shares of Common Stock or
Preferred Stock to a proposed transferee, the Shareholders Agreement provides
that Warburg Pincus may require each other Shareholder to Transfer all its
shares of Common Stock or Preferred Stock, as the case may be, to such
transferee.
PREEMPTIVE RIGHTS. Except in connection with an underwritten public
offering or a merger of the Company, the Shareholders Agreement provides each
Shareholder with preemptive rights in connection with any issuance of equity
securities by the Company.
CONSENT RIGHTS OF PREFERRED STOCK. The consent of the holders of a
majority in interest of the outstanding Preferred Stock is required for any of
the following actions to be taken by the Company: (i) the acquisition or
disposition of significant assets outside the ordinary course of business, (ii)
the incurrence of any indebtedness or other commitment in excess of US$250,000,
(iii) the amendment of the by-laws (ESTATUTOS SOCIAIS) of the Company (the
"By-laws"), (iv) the guarantee of any third party indebtedness or the incurrence
of any lien outside the ordinary course of business, (v) transactions with
affiliates, (vi) the entry by the Company into a new business, (vii) the
issuance of any equity securities, and (viii) the winding up, liquidation or
dissolution of the Company. The consent rights of the holders of the Preferred
Stock with
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respect to the matters described in clauses (i) through (vi) above will not be
required in the event that Warburg Pincus ceases to beneficially own any shares
of Preferred Stock.
REGISTRATION RIGHTS AGREEMENT
In connection with the formation of the Company, the Company entered
into a Registration Rights Agreement with the Shareholders (the "Registration
Rights Agreement"), pursuant to which the Company granted registration rights
with respect to all shares of Common Stock and Preferred Stock owned by the
Shareholders. Such registration rights also extend to any capital stock of the
Company issued as a dividend in respect of such shares. Subject to certain
customary exceptions and limitations, the Company has agreed to provide two
demand registrations to the holders of Registrable Securities (as defined in the
Registration Rights Agreement), which may be exercised by the holders of more
than 50% of the Registrable Securities. The Registration Rights Agreement also
provides for piggyback registration rights in the event the Company files a
registration statement for the sale of its securities, subject to certain
customary exceptions and limitations. In addition, once the Company is qualified
to use Form F-3 or S-3 under the Securities Act, the holders of Registrable
Securities shall have the right to request four registrations on Form F-3 or S-3
to register all or a portion of such shares under the Securities Act, subject to
certain conditions. In general, all fees, costs and expenses of such
registration (other than underwriting discounts and selling commissions
applicable to sales of the Registrable Securities) will be borne by the Company.
The Company has agreed to indemnify the holders of Registrable Securities from
any liability arising out of or relating to any untrue statement of a material
fact or any omission of a material fact in any registration statement or
prospectus filed by the Company pursuant to the Registration Rights Agreement,
subject to certain exceptions.
EQUITY REGISTRATION RIGHTS
In connection with the issuance of non-voting member interests of
Holding LLC (together with shares of Common Stock of the Company distributed in
respect thereof, the "Registrable Securities") to the Initial Purchasers of the
Notes, the Company and Holding LLC (together, the "Issuers") and Warburg Pincus,
IVP Cayman, Multiponto, TVA, and PageNet NV (together, the "Shareholders") and
the Initial Purchasers have entered into the Equity Registration Rights
Agreement, which provides that the holders of Registrable Securities have the
following registration rights and other rights and obligations with respect to
the Registrable Securities.
REGISTRATION RIGHTS. Subject to certain customary exceptions and
limitations, the holders of Registrable Securities will be entitled to require
the Company to effect up to two registrations, which may be exercised by holders
of at least 35% of Registrable Securities. The Equity Registration Rights
Agreement also provides for piggyback registration rights in the event that
either of the Issuers files a registration statement for the sale of its
securities, subject to certain customary limitations.
TAG-ALONG RIGHTS. Subject to certain customary exceptions and
limitations, in the event of a proposed direct or indirect sale or other
disposition (collectively, a "Transfer") of beneficial ownership of Common Stock
or any other common equity of the Company or any equity interests in Holding LLC
(whether now or hereafter issued), in any such case, by any Shareholder in any
transaction or a series of related transactions to any person or persons (such
other person or persons being hereinafter referred to as the "proposed
purchaser") at any time prior to the date of the consummation of one or more
bona fide underwritten public offerings of Common Stock of the Company, as a
result of which 20% of the outstanding shares of Common Stock are listed on a
United States national securities exchange or the Nasdaq National Market System
(the "Triggering Date"), each of the holders of Shares or Registrable Securities
(collectively, the "Subject Equity") shall have the right to require the
proposed purchaser to purchase from each of them up to a percentage of the
number of shares of Subject Equity owned by such holder equaling the percentage
derived by dividing the total number of shares of Common Stock which the
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Shareholders and their Affiliates propose to transfer by the total number of
shares of Common Stock beneficially owned by the Shareholders and their
Affiliates; PROVIDED that, in the event of a proposed Transfer, either at a time
or as a result of which would result in a Change of Control (as defined in the
Indenture), the holders of Registrable Securities will have the right to sell
all of their Subject Equity.
OBLIGATION TO SELL. Subject to certain customary exceptions and
limitations, in the event of any direct or indirect sale or other disposition of
beneficial ownership of all Common Stock of the Company then held by the
Shareholders prior to the Triggering Date in a transaction resulting in the
acquisition of beneficial ownership of all voting interests in the Company for
cash or freely marketable Securities (the "Subject Sale"), all holders of
Registrable Securities will be required to sell all Registrable Securities
beneficially owned by them on equivalent terms as applicable to the Subject
Sale; PROVIDED that (a) the consideration to be received by the holders of
Registrable Securities shall be the same type of consideration received by the
Shareholders and their respective Affiliates and, in any event, shall be cash or
freely transferable marketable securities, and (b) after giving effect to such
transaction, the Shareholders and their respective Affiliates shall not own,
directly or indirectly, any capital stock or rights to purchase capital stock of
the Company or Holding LLC.
ITEM 5. NATURE OF TRADING MARKET.
The Company's outstanding registered securities consist solely of the
U.S. dollar denominated 13.5% Senior Notes due 2005. There is no formal trading
market for such securities.
ITEM 6. EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.
Brazilian law provides that whenever there is a material imbalance, or
a serious risk of a material imbalance, in Brazil's balance of payments, the
Brazilian Government may, for a limited period of time, impose restrictions on
the remittance to foreign investors of the proceeds of their investments in
Brazil, as it did for approximately six months in 1989 and early 1990. The
Brazilian Government may also impose restrictions on the conversion of the
Brazilian currency into foreign currencies. Such restrictions may hinder or
prevent the Company from purchasing equipment required to be paid for in any
currency other than REAIS, paying scheduled interest and principal payments
under the Notes in U.S. dollars and making payment on judgments obtained in a
court in Brazil. Such restrictions could adversely affect the Company. The
Company could also be adversely affected by delays in, or a refusal to grant,
any required Brazilian governmental approval for conversion of REAL payments and
remittances abroad in respect of such dividends, distributions, interest and
principal payments.
The Brazilian Government currently restricts the ability of Brazilian
or foreign persons or entities to convert Brazilian currency into U.S. dollars
or other currencies other than in connection with certain authorized
transactions. The Central Bank has authorized the issuance of the Notes and
issued a certificate of registration (Certificate of Registration No. 241/33999,
of February 5, 1998) authorizing each of the scheduled payments of principal of,
premium on, and interest on the Notes and, subject to approval of the Central
Bank, by means of issuance of an addendum to the certificate of registration,
for payments of principal of, premium on and interest on the Notes upon any
early redemption of the Notes at the option of a holder of Notes (call option).
Specificconsent from the Central Bank is also needed for the payment of
principal of, premium, if any, on and interest on the Notes upon acceleration of
the Notes following an Event of Default. In addition, consent from the Central
Bank is needed for (i) payments in respect of the Notes upon redemption by the
Company in the event of certain changes in Brazilian law relating to tax
withholding, (ii) payments in respect of the Notes in the event of redemption of
the Notes by the Company, (iii) payments in respect of the Notes in the event of
certain asset sales, and (iv) payments in respect of the Notes in the event of a
change of control. There can be no assurance that any required consent from the
Central Bank will be obtained.
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<PAGE>
There can be no assurance that the Brazilian Government will not in the
future impose more restrictive foreign exchange regulations that would have the
effect of eliminating or restricting the Company's access to foreign currency
that would be required to meet its foreign currency obligations, including the
Notes. The likelihood of the imposition of such restrictions by the Brazilian
Government may be affected by, among other factors, the extent of Brazil's
foreign currency reserves, the availability of sufficient foreign currency on
the date a payment is due, the size of Brazil's debt service burden relative to
the economy as a whole, Brazil's policy toward the International Monetary Fund
and political constraints to which Brazil may be subject.
ITEM 7. TAXATION.
BRAZIL
Based upon the advice of Xavier, Bernardes, Braganca, Sociedade de
Advogados, Brazilian counsel to the Company, the following is a summary of the
material Brazilian income tax consequences to the Company in connection with the
sale and repayment of the Notes (including any interest thereon) and to
beneficial owners of the Notes that are non-residents of Brazil in connection
with the purchase, ownership and disposition of such Notes. This summary is
limited to the Company and to non-residents of Brazil which acquire the Notes at
the issue price from the Initial Purchasers, and does not address investors who
purchase Notes at a premium or market discount. In addition, this summary is
based on the Brazilian tax regulations as presently in effect and does not take
into account possible future changes in such tax laws. Prospective purchasers of
the Notes are advised to consult their tax advisers as to the consequences of a
purchase and sale of the Notes.
Individuals domiciled in Brazil and Brazilian companies are taxed in
Brazil on the basis of their worldwide income (which includes earnings of
Brazilian companies' foreign subsidiaries, branches and affiliates). The income
of non-Brazilian residents in general are taxed in Brazil only when derived from
Brazilian sources. Interest, fees, commissions and any other income (which for
the purposes of this paragraph includes any deemed income on the difference
between the issue price of the Notes and the price at which the Notes are
redeemed ("original discount")) payable by a Brazilian obligor to an individual,
company, entity, trust or organization domiciled outside Brazil is subject to
income tax withheld at source. The rate of withholding with respect to debt
obligations is 15% or such other lower rate as provided for in an applicable tax
treaty between Brazil and such other country where the recipient of the payment
has its domicile. Notwithstanding the foregoing, the applicable withholding
income tax rate for interest, commissions, expenses and discounts, payable to
persons or entities domiciled abroad, arising from negotiable instruments such
as the Notes, was reduced to zero, pursuant to Law No. 9.481 of August 13, 1997,
as modified by Article 20 of Law No. 9.532 of December 10, 1997, which restricts
such income tax reduction to negotiable instruments that (i) are placed abroad
with the previous approval of the Central Bank and (ii) have a minimum average
amortization term of at least 96 months. As a result, since the Notes have an
original maturity in excess of 96 months, such reduction will apply to payments
of interest and other income with respect to the Notes paid during 1999. Such
reduction should continue to apply after 1999 unless the provisions of the
above-mentioned law are modified by new tax legislation. In any event, if any
Notes are redeemed prior to the maturity date, such reduction will not apply and
upon any such redemption the Brazilian withholding tax will be applied on the
amount of interest (including original discount), fees and commissions paid on
such Notes from the date of issue through the date of redemption.
Under the terms of the Notes, the Company is required to gross-up
Noteholders for Brazilian withholding tax, subject to certain exceptions. The
Company has the right to redeem the Notes at par in the event of certain
increases in Brazilian withholding tax to a rate in excess of 15%.
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Any earnings or capital gains made abroad as a result of a transaction
between two non-residents of Brazil are not subject to tax in Brazil. However,
gains realized by a non-resident on the disposition of the Notes inside Brazil,
or to a Brazilian resident outside of Brazil, will be subject to Brazilian tax.
Pursuant to Decree 1,815 of February 8, 1996, REAIS resulting from the
conversion of the proceeds received by a Brazilian borrower from a foreign
currency loan (including those in connection with the issue of bonds or notes)
are subject to a tax on exchange transactions. Under Article 4 of Decree
1,815/96, the Minister of Finance is empowered to establish the applicable tax
rate, which was set by means of Portaria 241 of October 31, 1996. Portaria 241
was revoked by Portaria 85, enacted on April 24, 1997, which reduced to zero the
IOF rate applicable on the REAIS. The IOF tax is currently regulated by Decree
No. 2,219 dated May 2, 1997. Under Law 8,894 of June 21, 1994, such tax rate may
be increased up to 25%. In any event, the tax burden falls upon the Brazilian
borrower, not upon foreign creditors such as the holders of the Notes and will
be deducted from the proceeds of the issue of the Notes.
On August 15, 1996, the Brazilian Congress approved Constitutional
Amendment No. 12 creating a new temporary tax, the CONTRIBUICAO PROVISORIA SOBRE
MOVIMENTACAO FINANCEIRA ("CPMF"). Based on such Amendment, Law No. 9,311 of
October 24, 1996 was enacted, determining the creation of the CPMF tax. Under
Law No. 9,311/96, as modified by Law No. 9.539 of December 12, 1997, all
financial debt and money transfers effected on or within 24 months after January
23, 1997 will be subject to the assessment of the CPMF tax at the rate of 0.20%.
Funds arising from the collection of the CPMF tax will be applied only in the
public health system. Since January 23, 1999, CPMF was extinguished and Congress
has approved Constitutional Amendment No. 21, on March 19, 1999, in order to
reestablish CPMF at the rate of 0.38%, starting on June 19, 1999, for a period
of one year, and subsequently at the rate of 0.30%, for a period of two years.
There is no stamp, transfer or other similar tax in Brazil with respect
to the transfer, assignment or sale or any debt instrument outside Brazil
(including the Notes).
UNITED STATES
FEDERAL INCOME TAXATION
Based upon the advice of Willkie Farr & Gallagher, the following is a
summary of the material U.S. federal income tax consequences associated with the
purchase, ownership and disposition of a Note. This summary does not discuss all
of the tax consequences that may be relevant to certain types of investors
subject to special treatment under the U.S. federal income tax laws (such as
individual retirement accounts and other tax-deferred accounts, securities
broker-dealers, life insurance companies, tax-exempt organizations and foreign
persons, or to persons whose "functional currency" is other than the U.S. dollar
or to persons which hold Notes as part of a "straddle" or "conversion
transaction" or otherwise as part of a "synthetic asset") and is limited to
investors which hold Notes as capital assets. In addition, this summary is
limited to initial holders that acquire the Notes at the issue price from the
Initial Purchasers. This summary is based on the Internal Revenue Code of 1986,
as amended (the "Code"), final, temporary and proposed Treasury regulations
thereunder, revenue rulings, court cases, and other legal authorities as now in
effect (or proposed) and as currently interpreted, and does not take into
account possible changes in such tax laws or other legal authorities or such
interpretations. No rulings on any of the issues discussed below will be sought
from the U.S. Internal Revenue Service (the "IRS").
For purposes of this discussion, a "U.S. Holder" is an individual who
is a citizen or resident of the United States, a corporation, partnership or
other entity created under the laws of the United States or any political
subdivision thereof, an estate that is subject to United States federal income
taxation without regard to the source of income, or a trust if a United States
court is able to exercise primary supervision over the
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<PAGE>
administration of that trust and one or more United States fiduciaries have the
authority to control all substantial decisions of such trust.
NOTEHOLDERS ARE ADVISED TO CONSULT THEIR TAX ADVISERS AS TO THE
CONSEQUENCES OF A PURCHASE AND SALE OF NOTES, INCLUDING, WITHOUT LIMITATION, (I)
THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR NON-U.S. TAX LAWS TO WHICH
THEY MAY BE SUBJECT, AND OF ANY LEGISLATIVE OR ADMINISTRATIVE CHANGES IN LAW,
(II) THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE ISSUER'S DEDUCTION OF
BRAZILIAN TAXES AND OTHER AMOUNTS (AND OF THE PAYMENT BY THE ISSUER OF
ADDITIONAL AMOUNTS WITH RESPECT THERETO) WITH RESPECT TO PAYMENTS ON THE NOTES,
(III) THE AVAILABILITY FOR U.S. FEDERAL INCOME TAX PURPOSES OF A CREDIT OR
DEDUCTION FOR BRAZILIAN TAXES OR OTHER AMOUNTS AND (IV) THE CONSEQUENCES OF
PURCHASING THE NOTES AT A PRICE OTHER THAN THE ISSUE PRICE.
TAX CONSIDERATIONS APPLICABLE TO HOLDING NOTES
TAXATION OF INTEREST AND ADDITIONAL AMOUNTS ON NOTES. Interest on the
Notes and additional amounts relating thereto ("Additional Amounts") (I.E.,
without reduction for any Brazilian withholding taxes) will be taxable to a U.S.
Holder as ordinary income at the time it accrues or is received in accordance
with the U.S.
Holder's method of accounting for tax purposes.
A U.S. Holder will treat the gross amount of interest and Additional
Amounts relating thereto (I.E., without reduction for any Brazilian withholding
taxes, if any) as ordinary interest income in respect of the Notes. If the IRS
were to successfully contend that the Notes were issued at a discount for U.S.
federal income tax purposes, the Notes would bear "original issue discount"
("OID"). In such case, U.S. Holders of Notes would be required to accrue portion
of the OID in income as additional interest (whether such holder was a cash or
accrual taxpayer) in each taxable year during which such U.S. holder held such
Note. The amount of OID on a Note would be the excess of its "stated redemption
price at maturity" over the Note's "issue price." The amount of OID taken into
account in a particular year would be calculated under the constant yield to
maturity method. The effect of the OID rules, generally, would be that U.S.
Holders would recognize interest income in each year equal to the excess of the
product of (i) the yield to maturity on the Notes and (ii) the adjusted issue
price over the interest payments on the Notes. Generally, the adjusted issue
price of the Notes will be its issue price increased by previously accrued OID.
Under this method, the amount of OID included in the income of a U.S. Holder in
early years would be less than the includible amount in later years.
Pursuant to applicable OID rules, the possibility that Additional
Amounts may be payable in respect of Brazilian withholding taxes on interest
payments could subject the Notes to the rules applicable to contingent payment
debt instruments, regardless of whether or not Brazil actually imposes such a
withholding tax. The Notes will be excepted from the application of those rules
if two conditions are satisfied. First, the amounts and timing of the Additional
Amounts are known and second, it is significantly more likely than not that
interest payments on the Notes will continue to be subject to a Brazilian
withholding rate of zero, both as determined based on the facts and
circumstances existing at the date of issue of the Notes. Xavier, Bernardes,
Braganca, Sociedade de Advogados, Brazilian counsel to the Company, has advised
the Company that an income tax withholding rate of 15% would apply with respect
to interest payments on the Notes if Brazil were to discontinue the current zero
withholding on interest payments and that it is substantially more likely than
not that the current zero withholding rate will be continued indefinitely.
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Based upon the advice of its counsel, the Company intends to take the
position that the Notes are not subject to the rules applicable to contingent
debt instruments. However, because the determinations that form the basis of the
legal opinion are inherently factual, the IRS could challenge that position, and
if it were to successfully do so, gain realized by U.S. Holders with respect to
the Notes could be recharacterized as ordinary income rather than capital gain
and, therefore, at present U.S. federal income tax rates, subject to higher tax
rates for U.S. Holders who are individuals. The application of those rules could
also result in an unfavorable mismatch of income and deduction/foreign tax
credit for U.S. Holders. PROSPECTIVE U.S. HOLDERS SHOULD CONTACT THEIR OWN TAX
ADVISORS REGARDING THE APPLICATION OF THE OID RULES TO THE NOTES.
The calculation of foreign tax credits and, in the case of a U.S.
Holder that elects to deduct foreign taxes, the availability of deductions,
involves the application of rules that depend on a U.S. Holder's particular
circumstances. U.S. Holders should consult their own tax advisers regarding the
availability of foreign tax credits and the treatment of additional amounts.
SALE, EXCHANGE OR OTHER DISPOSITION OF NOTES. A U.S. Holder will
generally recognize gain or loss upon the sale, exchange, retirement or other
disposition of Notes equal to the difference between the amount realized on the
sale, exchange or other disposition of such Note and the U.S. Holder's adjusted
tax basis in the Notes. Such gain or loss generally would be capital gain or
loss, and would be long-term if the Notes were held more than one year.
EFFECT OF BRAZILIAN WITHHOLDING TAXES. It is believed that payments
with respect to a Note will not be subject to Brazilian withholding tax during
the fiscal year of 1999 unless the Note is redeemed prior to June 6, 2005. After
1999 such payments may be subject to Brazilian withholding tax at a rate of 15%.
In the case of any Note which is so redeemed, withholding taxes in respect of
interest previously paid may be imposed by Brazil at the time of redemption. Any
Brazilian tax withheld generally will be treated as a foreign income tax that
U.S. Holders may elect to deduct in computing their taxable income or, subject
to the limitations on foreign tax credits generally, credit against their U.S.
federal income tax liability. No such deduction or credit will be available to
the extent Brazil pays a subsidy to a U.S. Holder, a related person or the
Company, the amount of which is determined (directly or indirectly) by reference
to the amount of the withholding tax. While Brazil does not have a program or
policy of paying such subsidies at present, it has had programs of that nature
in the past and could implement such programs again in the future. For purposes
of determining a U.S. Holder's United States foreign tax credit, gain or loss on
the sale, redemption or other taxable disposition of a Note will generally
constitute United States source income. Interest (including Brazilian
withholding taxes imposed on payments on a Note and Brazilian withholding taxes
imposed with respect to any Additional Amounts payable by the issuer) will
generally constitute non-United States source income. Such interest will
generally constitute passive income. However, if a Note is redeemed prior to
June 6, 2005, and payments with respect to the Note are subject to Brazilian
withholding tax of five percent or more, the IRS might retroactively treat
interest paid with respect to the Note as high withholding tax interest. In any
event, a U.S. Holder may have insufficient foreign source income to utilize
fully any foreign tax credit attributable to such withholding taxes that could
otherwise be utilized (but such withholding taxes may instead be deductible by
the U.S. Holder). A U.S. Holder may be required to provide the IRS with a
certified copy of the receipt evidencing payment of withholding tax imposed in
respect of payments on the Notes (a "Certified Copy") in order to claim a
foreign tax credit in respect of such withholding tax. A U.S. Holder (or its
agent) may obtain a Certified Copy by providing written demand therefor to the
Principal Paying Agent. The Principal Paying Agent will contact the issuer,
which will provide such Certified Copy to the Principal Paying Agent for prompt
forwarding to the relevant U.S. Holder. The issuer will attach to each Certified
Copy a certificate stating (x) that the amount of withholding tax evidenced by
the Certified Copy was paid in connection with payments in respect of the
principal amount of notes then outstanding and (y) the amount of such
withholding tax paid per US$1,000 of principal amount of the Notes.
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ITEM 8. SELECTED FINANCIAL DATA.
The selected financial information for the Company set forth below for
the years ended December 31, 1997, 1998 and 1999 have been derived from the
Financial Statements of the Company, which have been audited by Ernst & Young,
Auditors Independentes S.C. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements of the Company included
elsewhere in this document. The Financial Statements have been prepared in
accordance with U.S. GAAP. The Company was a development stage company in 1996.
The Company began earning revenue from operations in March 1997 and, therefore,
is no longer a development stage company.
<TABLE>
<CAPTION>
Year Ended December, 31
-------------------------------------------------------------------------
FROM APRIL 17,
1996 (INCEPTION)
TO DECEMBER 31,
1996 1997 1998 1999
------------- ------------- ------------- -------------
(U.S. Dollars)
<S> <C> <C> <C> <C>
Total revenue ................... $ -- $ 10,203,867 $ 26,169,680 20,967,647
Cost of product sold ............ -- (6,952,092) (8,248,096) (2,873,907)
Operating costs and expenses:
Services, rent and maintenance -- 4,450,359 8,701,887 7,052,294
Selling and marketing ........ 129,464 8,088,531 11,342,788 6,867,852
General and administrative ... 4,776,593 10,876,022 16,721,759 14,349,743
Depreciation and amortization 55,582 1,380,028 4,571,641 4,281,151
------------- ------------- ------------- -------------
Operating loss .................. (4,961,639) (21,543,165) (23,416,491) (14,457,300)
Other income (expense) .......... 57,031 (3,890,357) (13,010,209) (37,720,556)
------------- ------------- ------------- -------------
Net loss ........................ $ (4,904,608) $ (25,433,522) $ (36,426,700) $ (52,177,856)
============= ============= ============= =============
<CAPTION>
YEAR ENDED DECEMBER, 31
-------------------------------------------------------------------------
1996 1997 1998 1999
------------- ------------- ------------- -------------
BALANCE SHEET DATA (U.S. Dollars)
<S> <C> <C> <C> <C>
Cash and cash equivalents ....... $ 12,444,689 $ 59,416,321 $ 40,077,420 $ 27,647,041
Pledged securities .............. -- 38,728,563 23,942,069 8,249,664
Working capital ................. 11,062,070 74,649,587 52,646,878 30,196,346
Fixed assets, net ............... 4,513,421 18,945,448 21,869,217 13,519,247
Total assets .................... 20,539,033 132,400,463 97,270,371 62,710,513
Total debt ...................... -- 125,000,000 125,000,000 125,000,000
Redeemable preferred stock ...... 20,451,427 33,661,424 37,945,014 43,969,430
Shareholders' equity (deficit) .. $ (4,875,936) $ (33,968,791) $ (73,468,856) $(115,576,144)
============= ============= ============= =============
</TABLE>
ITEM 9. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE HEREIN.
GENERAL
PageNet do Brasil is a leading provider of paging and wireless
messaging services in Brazil. The Company has secured licenses which enable it
to broadcast paging services throughout the country, and
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currently serves approximately 90,189 subscribers. The Company has installed 82
paging transmitters in 10 cities (the "Existing Coverage Area"), commenced
offering paging services in greater Sao Paulo in January 1997, began marketing
paging services in greater Rio de Janeiro in September 1997 and in Brasilia in
August 1999.
Although the Company's financial statements are presented pursuant to
U.S. GAAP in U.S. dollars, the Company's transactions are consummated in both
Brazilian reais and U.S. dollars. Inflation and devaluation in Brazil have had,
and may continue to have, substantial effects on the Company's results of
operations and financial condition.
For the purpose of management's discussion and analysis, net revenue is
defined as total revenue less sales tax and cost of product sold.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
YEAR ENDED
DECEMBER 31
-------------------------------
1998 1999
------------ ------------
Total revenue ........................ $ 26,169,680 $ 20,967,647
Cost of products sold ................ (8,248,096) (2,873,907)
------------ ------------
Net revenue .......................... 17,921,584 18,093,740
Operating costs and expenses:
Service, rent and maintenance ........ 8,701,887 7,052,294
Selling, general and administrative .. 28,064,547 21,217,595
Depreciation and amortization ........ 4,571,641 4,281,151
------------ ------------
Total operating costs and expenses 41,338,075 32,551,040
------------ ------------
Operating loss ....................... (23,416,491) (14,457,300)
Other income (expense) ............... (13,010,209) (37,720,556)
------------ ------------
Net loss ............................. $(36,426,700) $(52,177,856)
============ ============
Other data:
EBITDA1 .............................. $(18,844,850) $(10,176,149)
Number of subscribers at end of period 96,767 90,189
NET REVENUE. The Company's total revenues primarily consist of monthly
fees paid by subscribers for the paging service, as well as product sales to
both individuals and retailers, net of sales taxes. During the twelve months
ended December 31, 1999, the Company was offering service to
- --------
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.
The Company's EBITDA might not be comparable to EBITDA of other companies.
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<PAGE>
customers in Sao Paulo and Rio de Janeiro. Service in Brasilia began in August
1999. For twelve months ended December 31, 1999, the Company's net revenue was
$18,093,740 and $22,118,702 (before taxes) in service revenues, $1,090,089
(before taxes) in product sales to customers, cost of sales $2,873,907 and sales
taxes of $2,241,144. During twelve months ended December 31, 1998, the Company's
net revenue was $17,921,584 and $24,211,703 (before taxes) in service revenue
and $4,718,106 it product sales to customer, cost of sales $8,248,096 and sales
taxes $2,760,129. The cost of product sales in 1999 decreased in line with the
decrease in the volume of products sold. Average monthly revenue per subscriber
was approximately R$31.52 (US$17.35) and R$33.52 (US$28.88), respectively, for
the years ended December 31, 1999 and December 31, 1998. The number of
subscribers for the years ended December 31, 1999 and December 31, 1998 was
90,189 and 96,767, respectively. Of the 90,189 subscribers at December 31, 1999,
25,091 were subscribers that were acquired as a result of the Company's
acquisition of Powernet Ltda.'s subscriber list.
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 twelve months ended December 31,
1999, the Company incurred $7,052,294 of expenses in connection with the
operations in Sao Paulo, Rio de Janeiro and Brasilia. During the twelve months
ended December 31, 1998, the Company incurred service, rent and maintenance
expenses of $8,701,887.
SELLING AND MARKETING. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
twelve months ended December 31, 1999, the Company incurred $6,867,852 of
selling and marketing expenses. During the twelve months ended December 31,
1998, the Company incurred $11,342,788 of selling and marketing expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
compensation benefits, rent, bank fees, outside services and the provision for
losses on accounts receivable. During the twelve months ended December 31, 1999
and 1998, the Company incurred $14,349,743, and $16,721,759 respectively of
general and administrative expenses. For the twelve months ended December 31,
1999 and 1998, included in such amounts is approximately $3,593,931 and
$2,419,364, 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, cost of network installation
and cost of acquisition paging subscribers from Powernet. Depreciation and
amortization expenses were approximately $4,571,641 for the twelve months ended
December 31, 1998 and $4,281,150 the twelve months ended December 31, 1999.
OPERATING LOSS. For the twelve months ended December 31, 1999 the
Company generated an operating loss of $14,457,300 and for the twelve months
ended December 31, 1998 $23,416,491.
OTHER INCOME (EXPENSE). The other income and (expense) line breaks
down as follows:
Interest Expense--Interest expense was $17,524,455 for the twelve
months ended December 31, 1999, and $17,365,380 for the twelve months ended
December 31, 1998, primarily as a result of interest associated with the
Notes.
Interest Income--Interest Income, increased to $19,908,166 for the
twelve months ended December 31, 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. During the twelve months
ended December 31, 1998 the interest income was $11,935,917.
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Exchange and Translation (Losses)--The Company's reporting
currency is the U.S. dollar. Effective January 1, 1998, the Company
determined that Brazil ceased to be a highly inflationary economy under SFAS
No. 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 No. 52 for U.S. dollar reporting entities doing business in
highly inflationary economies.
Currency exchange losses from the depreciation of the REAL against the
U.S. dollar resulted in losses of $39,150,957 and $7,148,993 for the twelve
months ended December 31, 1999 and 1998, respectively, relating to all U.S.
dollar based transactions.
Other Expense--Bank charges, CPMF, losses with sale of fixed
assets and other were $953,310 for the twelve months ended December 31, 1999,
and $431,753 for the twelve months ended December 31, 1998.
NET LOSS. As explained above, net loss in the period presented is
primarily attributable to the currency exchange loss.
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998
------------ ------------
<S> <C> <C>
Total revenue ........................ 10,203,867 26,169,680
Cost of products sold ................ (6,952,092) (8,248,096)
------------ ------------
Net revenue .......................... 3,251,775 17,921,584
Operating costs and expenses:
Services rent and maintenance ........ 4,450,359 8,701,887
Selling, general and administrative .. 18,964,553 28,064,547
Depreciation and amortization ........ 1,380,028 4,571,641
------------ ------------
Total operating costs and expenses 24,794,940 41,338,075
------------ ------------
Operating loss ....................... (21,543,165) (23,416,491)
Other income (expense) ............... (3,890,357) (13,010,209)
------------ ------------
Net loss ............................. $(25,433,522) $(36,426,700)
============ ============
Other data:
EBITDA ............................... $(20,163,137) $(18,844,850)
Number of subscribers at end of period 47,260 96,767
</TABLE>
NET REVENUE. The Company's total revenues primarily consist of monthly
fees paid by subscribers for the paging service, as well as product sales to
both individuals and retailers, net of sales taxes. During the twelve months
ended December 31, 1998, the Company was offering service to customers in Sao
Paulo and Rio de Janeiro. Service in Rio de Janeiro began in September 1997. For
twelve months ended December 31, 1998, the Company generated $17,921,584 (net)
and $24,211,703 (before taxes) in service revenues, $4,718,106 (before taxes) in
product sales to customers, cost of sales $8,248,096 and sales taxes of
$2,760,129. During twelve months ended December 31, 1997, the Company's net
revenue were $3,251,775 and $4,217,273 (before taxes) in service revenue and
$7,564,045 it product sales to customer, cost of sales $6,952,092 and sales
taxes $1,577,451.
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, costs and repair and maintenance expenditures
and service call costs. During the twelve months ended December 31, 1998, the
Company incurred $8,701,887 of expenses in connection with the operations in Sao
Paulo and Rio de Janeiro.
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<PAGE>
During the twelve months ended December 31, 1997, the Company incurred service,
rent and maintenance expenses of $4,450,359. As a result of the improvement in
available telecommunications services available in Brazil and the Company's
interest in cutting costs, in the last quarter of 1998 the Company consolidated
its customer dispatch operations. Without any change in service quality, all
dispatch calls originating in Rio de Janeiro are now routed to Sao Paulo. In
addition to savings resulting from labor and management, the Company also
downsized it Rio de Janeiro office space by almost 50% to 19,460 square feet.
The cost of this organizational and systems reconfiguration was $1.4 million.
SELLING AND MARKETING. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
twelve months ended December 31, 1998, the Company incurred $11,342,788 of
selling and marketing expenses. During the twelve months ended December 31,
1997, the Company incurred $8,088,531 of selling and marketing expenses.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
compensation benefits, rent, bank fees, outside services and the provision for
losses on accounts receivable. During the twelve months ended December 31, 1998
and 1997, the Company incurred $16,721,759, and $10,876,022 respectively of
general and administrative expenses. For the twelve months ended December 31,
1998 and 1997, included in such amounts is approximately $2,419,364 and
$977,010, 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 $1,380,028 for the twelve months ended December 31, 1997
$4,571,641 for the twelve months ended December 31, 1998, primarily due the
purchase and installation of equipment necessary to buildout its paging network
and the buildout of the Rio de Janeiro office during prior year.
OPERATING LOSS. For the twelve months ended December 31, 1998 the
Company generated an operating losses of $23,416,491 and for the twelve months
ended December 31, 1997 $21,543,165.
OTHER INCOME (EXPENSE). The other income (expense) line breaks down
as follows:
Interest Expense--Interest expense was $17,365,380 for the twelve
months ended December 31, 1998, and $9,892,031 for the twelve months ended
December 31, 1997. The increase resulted from additional interest expense on
the Senior Notes.
Interest Income--Interest Income increased to $11,935,917 for the
twelve months ended December 31, 1998 primarily as a result of investing the
net proceeds from the Note offering and issuance by the Company of its
redeemable preferred stock. During the twelve months ended December 31, 1997
the interest income was $9,419,572.
Exchange and Translation (Losses)--Exchange and translation losses
was $3,417,898 for the twelve months ended December 31, 1997 primarily as a
result of its short-term investments in Brazil. Effective January 1, 1998,
the Company began using the real as its functional currency. Unless Brazil
returns to a highly inflationary status, the Company does not expect to incur
future exchange and translation gains and losses.
Currency Exchange Loss--Currency exchange losses from the
depreciation of the real against the U.S. dollar resulted in losses of
$7,148,993 for the twelve months ended December 31, 1998. During the twelve
months ended December 31, 1997 the Company did not have a currency exchange
gain or loss, the functional currency was U.S. dollar.
-29-
<PAGE>
Other Expense--Bank charges, CPMF, losses with sale of fixed
assets and other were $431,753 for the twelve months ended December 31, 1998,
and $ 0 for the twelve months ended December 31, 1997.
NET LOSS. As explained above, net loss in the period presented is
primarily attributable to the still small subscriber base and expenses incurred
during the period in connection with the development of the Company's business.
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH PERIOD ENDED DECEMBER 31,
1996 (FROM INCEPTION ON APRIL 7, 1996)
As a result of the development of the Company's business in Sao Paulo
and Rio de Janeiro during the periods presented, the period-to-period
comparisons of the Company's results of operations are not necessarily
meaningful and should not be relied upon as an indication of future performance.
The period ended December 31, 1996 reflects operations from April 7, 1996, the
date of the Company's inception.
<TABLE>
<CAPTION>
PERIOD ENDED
DECEMBER 31,
-------------------------------
1996 1997
------------ ------------
<S> <C> <C>
Net revenue ........................... $ -- $ 3,251,775
Operating costs and expenses:
Services rent and maintenance ......... -- 4,450,359
Selling, general and administrative ... 4,906,057 18,964,553
Depreciation and amortization ......... 55,582 1,380,028
------------ ------------
Total operating costs and expenses 4,961,639 24,794,940
------------ ------------
Operating loss ........................ (4,961,639) (21,543,165)
Other income (expense) ................ 57,031 (3,890,357)
------------ ------------
Net loss .............................. $ (4,904,608) $(25,433,522)
============ ============
Other data:
EBITDA ................................ $ (4,906,057) $(20,163,137)
Number of subscribers at end of period -- 47,260
</TABLE>
NET REVENUE. The Company's total revenues primarily consist of monthly
fees paid by subscribers for the paging service, as well as product sales to
both individuals and retailers, net of sales taxes. During the twelve months
ended December 31, 1997, the Company was offering service to customers in Sao
Paulo and in September 1997 began offering services in Rio de Janeiro. During
such twelve month period, the Company generated $4,217,273 in service revenue
and $7,564,045 in product sales to customers, had cost of sales of $6,952,092,
and had sales tax of $1,577,451. During the twelve month period ended December
31, 1997, the Company's net revenue was $3,251,775. The Company had no revenue
for the period ended December 31, 1996 (from inception on April 7, 1996).
SERVICE, RENT AND MAINTENANCE EXPENSES. Service, rent and maintenance
expenses include a portion of costs of compensation and benefits for the
Company's dispatch and technical employees, transmitter site rentals, telephone
line costs, transmission costs, vehicle rental costs and repair and maintenance
expenditures and service call costs. During the twelve month period ended
December 31, 1997, the Company incurred $4,450,359 of expenses in connection
with the continued buildout of its paging network and the operations of the Sao
Paulo and Rio de Janeiro systems. During the period ended December 31, 1996
(from inception on April 7, 1996), the Company did not incur any service, rent
and maintenance expenses.
-30-
<PAGE>
SELLING AND MARKETING. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
twelve month period ended December 31, 1997, the Company incurred $8,088,531 of
selling and marketing expenses. Such amounts increased from the prior year as
the Company did not have significant operations in 1996.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
compensation benefits, rent, bank fees, outside services and the provision for
losses on accounts receivable. During the twelve month period ended December 31,
1997, the Company incurred $10,876,022 of general and administrative expenses.
Included in such amount is approximately $2,500,000 of costs associated with the
formation of the Company.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
consist primarily of depreciation of leased pagers, transmitters, paging
terminals, leasehold improvements, telephone lines and cost of network
installation. Depreciation and amortization expenses increased from
approximately $55,582 for the period ended December 31, 1996 (from inception on
April 7, 1996) to $1,380,028 for the twelve month period ended December 31,
1997, primarily due the purchase and installation of equipment necessary to
buildout its paging network and the buildout of the Rio de Janeiro office.
OPERATING LOSS. For the twelve month period ended December 31, 1997 the
Company generated an operating losses of $21,543,165 primarily due to low volume
from a low subscriber base and full year expenses in connection with the
development of the Company's business as explained above.
OTHER INCOME (EXPENSES). The other income (expense) line breaks down
as follows:
Interest Expense--Interest expense was $9,892,031 for the twelve
month period ended December 31, 1997, primarily as a result of interest
associated with the Notes.
Interest Income--Interest income increased to $9,419,572 for the
twelve month period ended December 31, 1997 primarily as a result of
investing the net proceeds from the Note offering and issuance by the Company
of its redeemable preferred stock.
Exchange and Translation (Losses)--Exchange and translation losses
increased to $3,417,898 for the twelve month period ended December 31, 1997
primarily as a result of its short-term investments in Brazil.
During 1997, the Company entered into foreign currency swap agreements
to hedge its foreign currency exposure. At December 31, 1997, the Company had an
investment which was the equivalent of a U.S. dollar denominated investment with
a fixed interest rate in the amount of $53,361,000. The Company expects to
continue to enter into such contracts as its debt and a significant amount of
its payables are dollar denominated.
NET LOSS. As explained above, net loss in the period presented is
primarily attributable to the still small subscriber base and expenses incurred
during the period in connection with the development of the Company's business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations in 1999 continued to require capital to fund
capital investment and ongoing operating losses. For the twelve months ended
December 31, 1999 and 1998, the Company
-31-
<PAGE>
made capital expenditures of $4,366,365 and $11,808,542, respectively, and had
negative cash flow of $12,430,379 and $19,338,901, respectively.
The Company will also be required to make two interest payments on the
Senior Notes in an aggregate amount equal to $16,875,000 in 2000, half of which
will be funded from pledged securities and the other half from available cash.
Given the Company's cash position as of December 31, 1999, the ability
of the Company to continue as a going concern and to meet its obligations as
they come due will, in the short term, be dependent upon the Company's ability
to implement cost-cutting strategies that will substantially reduce operating
losses and result in break even cash flow in 2000. Although the Company is
hopeful that this can be achieved, it should be noted that the Company has
generated negative cash flows since its inception.
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. Therefore, inflation may have a material adverse effect
on the Company's results of operations and financial condition.
Devaluation of the real has an adverse effect on the Company. The
Company collects all of its revenues in reais, but pays certain expenses,
(including pagers, a significant portion of its transmission equipment costs and
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 negatively impacts the Company's
ability to fund U.S. dollar-based expenditures. Accordingly, devaluation of the
real has 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.
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<PAGE>
ITEM 10. DIRECTORS AND OFFICERS OF REGISTRANT.
The following section sets forth certain information as of April 21,
1999 with respect to each person who is an executive officer or director of the
Company:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Thomas C. Trynin........................... President, Chief Executive Officer and Director
Wilson Olivieri............................ Vice President, Chief Operations Officer
Mozart Nino................................ Vice President, Chief Finance Officer
Maria Regina Mangabeira Albernaz Lynch..... Director
Horacio Bernardes Neto..................... Director
Helena de Araujo Lopes Xavier.............. Director
</TABLE>
With the exception of Wilson Olivieri and Mozart Nino, each of the
above-named persons has served in the indicated position since the formation of
the Company in December 1996. Mr. Nino joined PageNet as of August 1999.
MANAGEMENT COMMITTEE OF HOLDING LLC
Holding LLC is managed by a Management Committee appointed solely by
holders of a majority of the voting member interests. As of April 21, 1999, the
following persons are members of the Management Committee:
<TABLE>
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Douglas M. Karp............................ Manager, Chairman of Management Committee
Gary D. Nusbaum............................ Manager, Member of Management Committee
Mark Knickrehm............................. Member of Management Committee
H. Brian Thompson.......................... Member of Management Committee
Thomas C. Trynin........................... Member of Management Committee
</TABLE>
With the exception of Messrs. Nusbaum and Knickrehm, each of the
above-named persons has served in the indicated position(s) since the formation
of Holding LLC in March 1997. Mr. Nusbaum replaced David E. Libowitz as Manager
and Member of Management Committee in the second quarter of 1998 and Mr.
Knickrehm replaced Barry A.
Fromberg as Member of Management Committee in the second quarter of 1998.
ITEM 11. COMPENSATION OF DIRECTORS AND OFFICERS.
For the year ended December 31, 1999, the aggregate compensation,
including bonuses, of all executive officers of the Company was approximately
US$783,000. Members of the Board of Directors of the Company and Managers and
Members of the Management Committee of Holding LLC (the "Members") who are not
officers of the Company do not receive a salary from the Company.
Neither the Company nor Holding LLC has set aside funds to provide
pension, retirement or similar benefits to the Directors and executive officers
of the Company or Members of the Management Committee of Holding LLC.
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<PAGE>
ITEM 12. OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES.
Not applicable.
ITEM 13. INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS.
FORMATION TRANSACTIONS
In connection with its formation, the Company has been a party to the
following transactions with its executive officers, directors and five percent
shareholders:
In December 1996, the Company entered into a Securities Subscription
Agreement with PageNet NV, Warburg Pincus, IVP Cayman, Multiponto and TVA
pursuant to which, among other things, the Company issued shares of Common
Stock, Preferred Stock and subscription bonds to purchase Common Stock. The
Company believes that the terms of the Securities Subscription Agreement were
negotiated at arm's-length by the initial investors in the Company. In
connection with the formation of the Company, the Company granted registration
rights to Warburg Pincus, IVP Cayman, PageNet NV, Multiponto and TVA with
respect to all shares of Common Stock and Preferred Stock owned by them.
In December 1996, the Company and PageNet USA entered into a Technical
Services Agreement pursuant to which PageNet USA will provide technical services
and support, including (i) assistance with the conversion and construction of
the Company's paging infrastructure; (ii) access to the PageNet USA personnel
and management supervision to assist the Company in providing paging services;
(iii) training of key members of the Company's management; (iv) making available
on an exclusive basis in Brazil, technology, software, new product development,
and system design; and (v) interfacing with vendors to seek favorable prices and
services, comparable to those obtained by PageNet USA. In addition, pursuant to
the terms of the Technical Services Agreement, PageNet USA granted to the
Company, among other things, an exclusive, royalty-free license (the
"Intellectual Property License") to use the trademarks PageNet and VoiceNow and
the tradename Paging Network in connection with the Company's advertisement,
promotion, marketing, sale, development, and provision of telecommunications
services in Brazil. Subject to certain rights to sublicense, the Intellectual
Property License is non-transferable. In consideration of the performance of
PageNet USA's obligations under the Technical Services Agreement, the Company
has granted PageNet NV the right (in the form of subscription bonds) to purchase
325,982 shares of the Common Stock at an exercise price of approximately US$.025
per share. The initial term of the Technical Services Agreement is five years.
The initial term will be extended for successive three-year terms unless either
party gives notice of its intent not to so extend at least one year prior to the
end of the then current term. PageNet USA may, however, terminate the agreement
(i) six months after it ceases to beneficially own at least five percent of the
Common Stock outstanding on a fully diluted basis including the subscription
bonds to purchase such Common Stock or (ii) if any entity other than Warburg
Pincus owns 50% or more of the Common Stock outstanding on a fully diluted basis
including the subscription bonds to purchase such Common Stock. The Intellectual
Property License will survive the termination of the Technical Services
Agreement absent breach by the Company of its obligations thereunder or if
Brazilian governmental action requires a termination of the Intellectual
Property License. In the event the Intellectual Property License is terminated,
PageNet USA will not, for a period of two years from such termination, use the
trademarks PageNet or VoiceNow in Brazil for Licensed Services (as defined in
the Intellectual Property License). In addition, the Company is subject to
certain performance standards and other obligations, the non-compliance with
which permit PageNet USA to terminate the Technical Services Agreement
(including the Intellectual Property License). The Company believes that the
Technical Services Agreement was negotiated at arm's-length by the initial
investors in the Company.
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<PAGE>
In December 1996, the Company entered into Operating Agreements with
each of the Licenseholders pursuant to which the Licenseholders have granted the
Company the exclusive right to resell paging services utilizing the paging
licenses held by the Licenseholders (the "Licenses"). The Company and each
Licenseholder have also entered into Transfer Agreements, pursuant to which the
Licenseholders have agreed to transfer the Licenses to the Company following the
three year waiting period mandated by Brazilian law or on such earlier date as
may be permitted by Brazilian law. In consideration of the performance by each
Licenseholder of its obligations under such agreements, the Company has (i)
issued and sold to IVP Cayman 325,982 shares of the Common Stock for a purchase
price of approximately US$.025 per share, (ii) issued and sold to Multiponto
81,495 shares of the Common Stock for a purchase price of approximately US$.025
per share and has granted Multiponto the right (in the form of subscription
bonds) to purchase up to 40,748 shares of Common Stock at a price of
approximately US$.025 per share and (iii) has granted TVA the right (in the form
of subscription bonds) to purchase up to 40,748 shares of Common Stock at a
price of US$.025 per share. The Company believes that the Operating Agreements
and the Transfer Agreements were negotiated at arm's-length by the initial
investors in the Company. Given that certain acts or omissions by a
Licenseholder could result in the revocation of its paging licenses or
unavailability of such licenses to the Company, the Licenseholders have agreed
to several covenants in the Operating Agreements designed to limit such risk to
the Company.
RESTRUCTURING TRANSACTIONS
In connection with the sale of the Old Notes, Warburg Pincus
contributed all shares of Common Stock directly owned by it to Holding LLC in
exchange for 100% of the voting member interests in Holding LLC. In addition,
pursuant to a subscription agreement (the "Subscription Agreement") with the
Company, Holding LLC purchased shares of Common Stock equivalent to 7.0% of the
Common Stock on a fully diluted basis for the capital accounts of the holders of
non-voting member interests in Holding LCC (such transactions collectively
referred to as the "Restructuring").
The Subscription Agreement imposes a number of covenants on the Company
for the benefit of Holding LLC, including (i) providing certain financial
information concerning the Company and its subsidiaries that Holding LLC is
required to provide to its Members, (ii) subject to debt instruments to which
the Company is a party, distributing cash to Holding LLC in an amount that is
intended to approximate the Members' U.S. federal income tax liability on the
net income allocated to the Members for U.S. federal income tax purposes by
Holding LLC (but there can be no assurance that such amount will be sufficient
in all cases to discharge such tax liabilities), (iii) creating a sponsored
American Depositary Receipt program for the Common Stock that will be in effect
on or prior to the occurrence of a Liquidation Event (as defined in the
Subscription Agreement) and (iv) notifying Holding LLC at the appropriate time
that there is no material likelihood that PageNet do Brasil should be considered
a "passive foreign investment company" for U.S. federal income tax purposes for
its current or any future taxable year. The Company believes that the
Restructuring was negotiated at arm's-length with Holding LLC.
All future transactions between the Company and its officers,
directors, principal shareholders or their respective affiliates, will be on
terms no less favorable to the Company than can be obtained from unaffiliated
third parties.
PART II
ITEM 14. DESCRIPTION OF SECURITIES TO BE REGISTERED.
Not applicable.
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<PAGE>
PART III
ITEM 15. DEFAULTS UPON SENIOR SECURITIES.
There has not been any default with respect to any senior indebtedness
of the Company.
ITEM 16. CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS.
There have not been any changes in the Notes or in use of proceeds from
the offering of Notes. The Notes are unsecured obligations of the Company.
PART IV
ITEM 17. FINANCIAL STATEMENTS.
Not applicable. See "Item 18. Financial Statements."
ITEM 18. FINANCIAL STATEMENTS.
See pages F-1 through F-11.
ITEM 19. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS
The following financial statements, together with the report of
Ernst & Young Auditores Independentes S.C. thereon, are filed as
part of this Annual Report.
Report of Independent Auditors.
Balance Sheet at December 31, 1998 and 1999.
Statement of Operations for the Years Ended December 31, 1997,
1998 and 1999.
Statement of Shareholders' Equity (Deficit) for the Years
Ended December 31, 1997, 1998 and 1999.
Statement of Cash Flows for the Years Ended December 31, 1997,
1998 and 1999.
Notes to Financial Statements.
(B) EXHIBITS
3.1* -- Bylaws of Paging Network do Brasil S.A. (English
Translation).
4.1* -- Indenture dated as of June 1, 1997 between Paging
Network do Brasil S.A. and The Chase Manhattan Bank,
as Trustee (including exhibits).
4.2* -- Form of Senior Note (included in Exhibit 4.1).
10.1* -- Purchase Agreement dated as of May 30, 1997 among
Paging Network do Brasil S.A., Paging Brazil Holding
Co., LLC and the Initial Purchasers.
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<PAGE>
10.2* -- Notes Registration Rights Agreement dated as of
June 6, 1997 among Paging Network do Brasil S.A. and
the Initial Purchasers.
10.3* -- Equity Registration Rights Agreement, dated as of
June 6, 1997 among Paging Network do Brasil S.A.,
Paging Brazil Holding Co., LLC, Warburg, Pincus
Ventures, L.P., Paging Network International N.V.,
IVP Paging (Cayman) L.P., Multiponto Telecomunicacoes
Ltda., TVA Sistema Televisao S.A., the Initial
Purchasers and Chase Mellon Shareholder Services.
10.4* -- Escrow and Pledge Agreement, dated as of June 6,
1997 between Paging Network do Brasil S.A. and The
Chase Manhattan Bank.
10.5* -- Shareholder Agreement, dated as of December 11,
1996 among Paging Network do Brasil S.A., Warburg,
Pincus Ventures, L.P., Paging Network International
N.V., IVP Paging (Cayman) L.P., Multiponto
Telecomunicacoes Ltda. and TVA Sistema Televisao S.A.
10.6* -- Shareholders Agreement Amendment No. 1 and Waiver,
dated as of March 10, 1997 among Paging Network do
Brasil S.A., Warburg, Pincus Ventures, L.P., Paging
Network International N.V. IVP Paging (Cayman) L.P.,
Multiponto Telecomunicacoes Ltda. and TVA Sistema
Televisao S.A.
10.7* -- Securities Subscription Agreement dated as of
December 11, 1996 among Paging Network do Brasil
S.A., Warburg, Pincus Ventures, L.P., Paging Network
International N.V., IVP Paging (Cayman) L.P.,
Multiponto Telecomunicacoes Ltda. and TVA Sistema
Televisao S.A.
10.8* -- Registration Rights Agreement dated as of December
11, 1996 among Paging Network do Brasil S.A.,
Warburg, Pincus Ventures, L.P., Paging Network
International N.V., IVP Paging (Cayman) L.P.,
Multiponto Telecomunicacoes Ltda., TVA Sistema
Televisao S.A., Thomas C. Trynin and Marco A.
Fregenal.
10.9* -- Technical Services Agreement dated as of December
11, 1996 between Paging Network do Brasil S.A. and
Paging Network, Inc.
10.10*-- Operating Agreement and Other Covenants dated
December 11, 1996 between Paging Network do Brasil
S.A. and Multiponto Telecomunicacoes Ltda. 10.11* --
Agreement of Promise of Assignment and Transfer of
Permissions dated December 11, 1996 between Paging
Network International N.V. and Multiponto
Telecomunicacoes Ltda.
10.12*-- Operating Agreement and Other Covenants dated
December 11, 1996 between Paging Network do Brasil
S.A. and TVA Sistema Televisao S.A.
10.13*-- Agreement of Promise of Assignment and Transfer of
Permissions dated December 11, 1996 between Paging
Network do Brasil S.A. and TVA Sistema Televisao S.A.
10.14*-- Operating Agreement and Other Covenants dated
December 11, 1996 between Paging Network do Brasil
S.A. and San Francisco Comunicacoes Ltda.
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<PAGE>
10.15*-- Agreement of Promise of Assignment and Transfer of
Permissions dated December 11, 1996 between Paging
Network do Brasil S.A. and San Francisco Comunicacoes
Ltda.
10.16+-- Employment Agreement dated December 11, 1996 between
Paging Network do Brasil S.A. and Thomas C. Trynin.
- ---------
* Incorporated herein by reference to the Exhibit to the Company's Registration
Statement on Form F-4, Registration No. 333-29865.
+ Incorporated herein by reference to the Exhibit to the Company's Form 20-F
for the fiscal year ended 1999.
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<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the Registrant certifies that it meets all of the requirements for
filing on Form 20-F and has duly caused this annual report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PAGING NETWORK DO BRASIL S.A.
(Registrant)
By: /s/ Thomas C. Trynin
--------------------------
Thomas C. Trynin
President and
Chief Executive Officer
Date: May 4, 2000
-39-
<PAGE>
PAGING NETWORK DO BRASIL S.A.
INDEX TO FINANCIAL STATEMENTS
Report of Independent Auditors...............................................F-2
Balance Sheet at December 31, 1998 and 1999..................................F-3
Statement of Operations for the Years Ended
December 31, 1997, 1998 and 1999...........................................F-4
Statement of Shareholders' Equity (Deficit) for the Years Ended
December 31 1997, 1998 and 1999............................................F-5
Statement of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999...........................................F-6
Notes to Financial Statements................................................F-7
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
Paging Network do Brasil S.A.
Sao Paulo, Brazil
We have audited the accompanying balance sheets of Paging Network do
Brasil S.A. as of December 31, 1998 and 1999, and related statements of
operations, shareholders' (deficit) and cash flows for each of the three years
in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosure in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Paging Network do
Brasil S.A. at December 31, 1999 and 1998 and the results of its operations
and its cash flows for each of the three years in the period ended December
31, 1999, in conformity with accounting principles generally accepted in the
United States.
ERNST & YOUNG
Auditores Independentes S.C.
Sao Paulo, Brazil
March 31, 2000
F-2
<PAGE>
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1999
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................. $ 219,787 $ 67,026
Trading securities .................................... 39,857,633 27,580,015
Accounts receivable, net .............................. 567,291 206,868
Refundable taxes ...................................... 1,383,380 959,978
Pager inventories ..................................... 2,233,240 1,868,006
Prepaid expenses and other current assets ............. 415,535 582,016
Pledged securities held-to-maturity - current ......... 15,764,225 8,249,664
------------- -------------
Total current assets ................................ 60,441,091 39,513,573
Fixed assets, net .......................................... 21,869,217 13,519,247
Pledged securities held-to-maturity ........................ 8,177,844 --
Debt issuance costs, net ................................... 6,443,007 5,792,864
Other assets ............................................... 339,212 3,884,829
------------- -------------
Total assets ........................................ $ 97,270,371 $ 62,710,513
============= =============
LIABILITIES AND SHAREHOLDERS' (DEFICIT) Current liabilities:
Accounts payable ...................................... $ 1,376,981 $ 211,977
Accrued expenses ...................................... 5,199,318 7,887,336
Payable to related parties ............................ 1,217,914 1,217,914
------------- -------------
Total current liabilities ........................... 7,794,213 9,317,227
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 43,969,430
Shareholders' (deficit)
Common stock, without par value
Authorized - 2,037,387 shares
Issued and outstanding 1,378,401 shares ............... 30,760 30,760
Accumulated deficit ........................................ (77,096,213) (144,897,253)
Accumulated other comprehensive income .................... 3,596,597 29,290,349
------------- -------------
Total shareholders' (deficit) ....................... (73,468,856) (115,576,144)
------------- -------------
Total liabilities and shareholders' (deficit) ....... $ 97,270,371 $ 62,710,513
============= =============
-------------
</TABLE>
See the accompanying notes to financial statements.
F-3
<PAGE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Services, rent and maintenance revenue $ 4,217,273 $ 24,211,703 $ 22,118,702
Product revenue ...................... 7,564,045 4,718,106 1,090,089
------------ ------------ ------------
Gross revenues ............................ 11,781,318 28,929,809 23,208,791
Sales taxes .......................... (1,577,451) (2,760,129) (2,241,144)
------------ ------------ ------------
Total revenue ........................ 10,203,867 26,169,680 20,967,647
Cost of products sold ..................... (6,952,092) (8,248,096) (2,873,907)
------------ ------------ ------------
3,251,775 17,921,584 18,093,740
Operating costs and expenses:
Services, rent and maintenance ....... 4,450,359 8,701,887 7,052,294
Selling, general and administrative .. 18,964,553 28,064,547 21,217,595
Depreciation and amortization ........ 1,380,028 4,571,641 4,281,151
------------ ------------ ------------
Total operating costs and expenses . 24,794,940 41,338,075 32,551,040
------------ ------------ ------------
Operating loss ..................... (21,543,165) (23,416,491) (14,457,300)
Other income (expense):
Interest expense ..................... (9,892,031) (17,365,380) (17,524,455)
Interest income ...................... 9,419,572 11,935,917 19,908,166
Other expense ........................ -- (431,753) (953,310)
Foreign currency exchange loss ....... -- (7,148,993) (39,150,957)
Exchange and translation loss ........ (3,417,898) -- --
------------ ------------ ------------
Total other expense ................ (3,890,357) (13,010,209) (37,720,556)
------------ ------------
Net loss .................................. $(25,433,522) $(36,426,700) $(52,177,856)
============ ============ ============
</TABLE>
See the accompanying notes to financial statements.
F-4
<PAGE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF SHAREHOLDERS' DEFICIT
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON ACCUMULATED COMPREHENSIVE
STOCK DEFICIT INCOME TOTAL
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Balance as of December 31, 1996 ................. $ 28,672 $ (4,904,608) $ -- $ (4,875,936)
Issuance of common stock ........................ 2,088 -- -- 2,088
Net loss for the period ......................... -- (25,433,522) -- (25,433,522)
Accrued dividends on redeemable preferred stock . (3,661,421) (3,661,421)
------------- ------------- ------------- -------------
Balance as of December 31, 1997 ................. 30,760 (33,999,551) -- (33,968,791)
Net loss for the period ......................... -- (36,426,700) -- (36,426,700)
Foreign currency translation adjustment ......... -- -- 3,596,597 3,596,597
-------------
Comprehensive loss for the year ................. (32,830,103)
Monetary adjustment on redeemable preferred stock -- (2,386,372) -- (2,386,372)
Accrued dividends on redeemable preferred stock . -- (4,283,590) -- (4,283,590)
------------- ------------- ------------- -------------
Balance as of December 31, 1998 ................. 30,760 (77,096,213) 3,596,597 (73,468,856)
Net loss for the period ......................... -- (52,177,856) -- (52,177,856)
Foreign currency translation adjustment ......... -- -- 25,693,752 25,693,752
-------------
Comprehensive loss for the year ................. (26,484,104)
Monetary adjustment on redeemable preferred stock -- (9,598,768) -- (9,598,768)
Accrued dividends on redeemable preferred stock . -- (6,024,416) -- (6,024,416)
------------- ------------- ------------- -------------
Balance as of December 31, 1999 ................. $ 30,760 $(144,897,253) $ 29,290,349 $(115,576,144)
============= ============= ============= =============
</TABLE>
See the accompanying notes to financial statements
F-5
<PAGE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
(AMOUNTS IN U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1998 1999
------------- ------------- -------------
<S> <C> <C> <C>
Operating activities:
Net loss .................................................................. $ (25,433,522) $ (36,426,700) $ (52,177,856)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization ........................................... 1,380,028 4,571,641 4,072,451
Amortization of subscriber list ......................................... -- -- 208,699
Provision for losses on accounts receivable ............................. 977,010 2,419,364 3,593,931
Amortization of debt issuance costs ..................................... 329,530 431,180 650,142
Currency exchange loss .................................................. -- 7,148,993 39,150,957
Provision for loss on long-lived assets ................................. -- 1,112,292 185,481
Loss on sale of equipment ............................................... -- 72,492 415,229
Changes in operating assets and liabilities:
Decrease in trading securities .................................... 6,874,783 15,080,936 15,683,962
Decrease (increase) in accounts receivable ........................ (1,796,845) (2,166,818) (3,233,508)
Decrease (increase) in refundable taxes ........................... 558,942 (1,224,234) (14,921)
Decrease (Increase) in pager inventories .......................... (4,719,355) 4,132,452 (308,019)
Decrease (Increase) in prepaid expenses and other current assets .. 462,079 (268,207) (296,642)
Increase in other assets .......................................... (316,020) (49,293) (1,269,454)
Decrease in accounts payable ...................................... (651,549) (454,104) (849,362)
Increase in accrued expenses ...................................... 3,678,961 1,249,939 4,027,862
Increase (decrease) in payable to related parties ................. (283,124) (304,120) --
------------- ------------- -------------
Net cash (used in) provided by operating activities ........... (18,939,082) (4,674,187) 9,838,952
Investing activities:
Purchase of subscriber list ............................................. -- -- (2,541,881)
Decrease (increase) pledged securities held-to-maturity ................. (104,612,659) 15,284,017 (641,052)
Purchase of fixed assets ................................................ (15,812,055) (11,808,542) (4,366,365)
Proceeds from sale of equipment ......................................... -- 366,853 1,011,268
------------- ------------- -------------
Net cash (used in) provided by investing activities ........... (120,424,714) 3,842,328 (6,538,030)
Financing activities:
Proceeds from the sale of common and redeemable preferred stock ......... 9,550,660 -- --
Proceeds of senior notes, net of debt issuance cost ..................... 117,745,451 -- --
------------- ------------- -------------
Net cash provided by financing activities ..................... 127,296,111 -- --
Effect of exchange rate changes on cash ...................................... -- 674,642 (3,453,683)
------------- ------------- -------------
Net decrease in cash and cash equivalents .................................... (12,067,685) (157,217) (152,761)
Cash and cash equivalents at beginning of period ............................. 12,444,689 377,004 219,787
------------- ------------- -------------
Cash and cash equivalents at end of period ................................... $ 377,004 $ 219,787 $ 67,026
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest on senior notes .............................................. $ 8,437,500 $ 16,875,000 $ 16,875,000
</TABLE>
See the accompanying notes to financial statements
F-6
<PAGE>
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 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.
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.
Under the terms of the Technical Services Agreement executed in
December 1996, the Company granted to PageNet N.V. the right to purchase up to
325,982 shares of Common Stock of the Company at $.025 per share. Under the
terms of the Operating Agreement executed in December 1996, the Company granted
Multiponto Telecomunicacoes Ltda and TVA Sistema de Televisao S.A. the right to
purchase up to 40,748 shares each of Common Stock of the Company at $.025 per
share.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States ("U.S. GAAP"). The
Company has adopted the U.S. dollar as its reporting currency
The Company's significant accounting policies are as follows:
FOREIGN CURRENCY TRANSLATION
F-7
<PAGE>
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 (SFAS 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 its 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 (loss) 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.
FOREIGN CURRENCY HEDGE TRANSACTIONS
During 1998 and 1999, the Company entered into various foreign currency
transactions including swap agreements, with maturities of one to 12 months, to
hedge its foreign currency exposure. At December 31, 1998 and 1999, the Company
had an investment which was the equivalent of a U.S. dollar-denominated
investment of $40 million and $27 million, respectively. During 1998 and 1999,
these transactions reduced a portion of the devaluation risk associated with the
Company's $125 million dollar Senior notes payable. Currency gains on investment
transactions designated as hedges are yield adjustments and included in interest
income.
The counterparties to the Company's swap agreements consist of a number
of major international financial institutions. The credit ratings and
concentration of risk of these financial institutions are monitored on a
continuing basis and present no significant credit risk to the Company.
REVENUE RECOGNITION
The Company recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Sales of pagers
are recognized upon delivery. Sales commissions are included in selling, general
and administrative expenses. The Company will rent certain pagers under
month-to-month arrangements.
ADVERTISING COSTS
The Company expenses the costs of advertising as incurred. Advertising
expenses during 1997, 1998 and 1999 were $2,100,000, $3,437,000 and $1,858,212,
respectively.
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.
F-8
<PAGE>
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company had an allowance for doubtful accounts of $1,400,000 at
December 31, 1998 and $822,017 at December 31, 1999. Charges to the allowance
during 1997, 1998 and 1999 were $0, $2,000,000 and $4,171,914, respectively.
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.
PLEDGED SECURITIES HELD-TO-MATURITY
Pledged securities held-to-maturity consist of U.S. government
securities, recorded at amortized cost which approximates market.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No.
121, "Impairment of Long-Lived Assets to Be Disposed Of," the Company records
impairment losses on long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows estimated to be
generated by those assets are less than the assets' carrying amount. The
Company continuously monitors conditions that may affect the carrying value
of its fixed assets.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual result could differ from those estimates.
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 December
31, 1999, the Company had a payable of approximately $968,000 to Warburg,
Pincus, approximately $250,000 to Paging Network International and had a
receivable of approximately $346,000 from Warburg Pincus.
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,
scheduled interest and principal payments from which 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 using the effective yield
method.
The Senior Notes are redeemable on or after June 6, 2001 at the option
of the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after June 6,
2004, plus accrued interest. The Senior Notes contain certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness or issue preferred stock, pay dividends or make certain other
restricted payments. Upon a change of control, the Company is required to make
an offer to purchase the Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any. In
accordance with the covenants of the Senior Notes and the Company's current
level of leverage, at December 31, 1999, the Company is unable to make any
dividend payments.
F-9
<PAGE>
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 are comprised of the
following:
1998 1999
---------- ----------
Excise taxes payable ............. $ 334,174 $ 207,506
Withholding taxes payable ........ 247,733 231,853
Payroll and other benefits payable 1,439,289 1,014,403
Accrued interest payable ......... 1,125,000 1,125,000
Tax contingency accrual* ......... -- 3,380,720
Other ............................ 2,053,122 1,927,854
---------- ----------
$5,199,318 $7,887,336
========== ==========
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 are to 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 are 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 1999 was $7,945,014 and $13,969,430,
respectively.
7. FIXED ASSETS
Fixed assets at December 31, 1998 and 1999 are comprised of the
following:
<TABLE>
<CAPTION>
PERIOD OF
1998 1999 DEPRECIATION
----------- ----------- -------------
<S> <C> <C> <C>
Furniture and fixtures.................. $ 1,915,206 $ 1,328,163 10 years
Equipment............................... 13,643,133 10,321,054 5-10 years
Pagers.................................. 7,888,885 6,513,073 2.5 years
Leasehold improvements.................. 4,104,869 2,828,009 5 years
27,552,093 20,990,299
Less - Accumulated depreciation......... (5,682,876) (7,471,052)
----------- -----------
$21,869,217 $13,519,247
=========== ===========
</TABLE>
8. OTHER ASSETS
Other assets on December 31, 1999, includes $ 2,366,396 relating to the
net intangible cost of acquisition paging subscribers from Powernet Ltda.
F-10
<PAGE>
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 December 31, 1999 calculated in reais and
translated into U.S. dollars at the December 31, 1999 closing exchange rate are
as follows.
2000 $ 1,401,000
2001 $ 1,347,000
2002 $ 261,000
2003 $ 119,000
2004 $ 40,000
Total rental expense for the years ended December 31, 1997, 1998 and
1999 was $ 2,011,000, $3,020,600 and $1,923,261, respectively.
10. INCOME TAXES
The Company has not recognized any future income tax benefit for its
net operating loss carryforwards as it is more likely than not that it will not
be able to realize a benefit from such losses in the future. The net operating
loss carryforwards amounted to $14.9 million, $27.3 million and $73.4 million at
December 31, 1997, 1998 and 1999, respectively. Under Brazilian law, net
operating losses may be carried forward for an unlimited period of time. Use of
these losses, however, is restricted to 30% of taxable income in a tax period.
For reporting purposes, a valuation allowance of 100% has been recognized.
11. YEAR 2000
The Company has recorded no interruptions or problems in connection
with its Year 2000 conversion plans.
12. RECENT EVENTS
On December, 1999, the Company finalized an agreement to acquire 30,606
paging subscribers from Powernet Ltda., a Brazilian paging company wholly owned
subsidiary of Motorola, for US$ 3,390,240.
F-11
