<PAGE>
Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2000
Paging Network do Brasil S.A.
(Translation of registrant's name into English)
Rua Alexandre Dumas, 1,711
Chacara Santo Antonio
Sao Paulo, 04717-004, Brazil
(Address of principal executive offices)
<PAGE>
PAGING NETWORK DO BRASIL S.A.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
-----------------------------
Item 1. Financial Statements
a) Balance Sheet at December 31, 1999 (audited) and June 30, 2000
(unaudited)......................................................3
b) Statement of Operations for the three and six months ended
June 30, 1999 and 2000 (unaudited)...............................4
c) Statement of Cash Flows for the six months ended June 30,
1999 and 2000 (unaudited)........................................5
d) Statement of Shareholders' (Deficit) for the six months ended
June 30, 2000 (unaudited)........................................6
e) Notes to Financial Statements (unaudited)........................7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................14
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings................................................19
Item 2. Changes in Securities............................................19
Item 3. Defaults Upon Senior Securities..................................19
Item 4. Submission of Matters to a Vote of Security Holders..............19
Item 5. Other Information................................................19
Item 6. Exhibits.........................................................19
Signatures...............................................................20
2
<PAGE>
Item 1 (a)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
At December 31, 1999 and June 30, 2000
(Amounts in U.S. dollars)
<CAPTION>
December 31, June 31,
1999 2000
---------------------------------------
(Note 2) (Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents.......................................$ 67,026 $ 35,585
Trading securities.............................................. 27,580,015 27,040,419
Accounts receivable, net........................................ 206,868 128,750
Other accounts receivable....................................... 4,444,444
Refundable taxes................................................ 959,978 599,043
Pager inventories............................................... 1,868,006 1,145,808
Prepaid expenses and other current assets....................... 582,016 957,935
Pledged securities held-to-maturity - current................... 8,249,664 26,268
---------------- -----------------
Total current assets...................................... 39,513,573 34,378,252
Fixed assets, net.................................................. 13,519,247 9,012,754
Debt issuance costs, net........................................... 5,792,864 5,453,745
Other assets....................................................... 3,884,829 2,842,590
---------------- -----------------
Total assets..............................................$ 62,710,513 $ 51,687,341
================ =================
Liabilities and shareholders' (deficit)
Current liabilities:
Accounts payable................................................$ 211,977 $ 97,844
Accrued expenses................................................ 7,887,336 8,839,489
Payable to related parties...................................... 1,217,914 1,217,914
---------------- -----------------
Total current liabilities................................. 9,317,227 10,155,247
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................................................... 43,969,430 47,005,251
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................................................ (144,897,253) (160,435,803)
Accumulated other comprehensive income............................. 29,290,349 29,931,886
---------------- -----------------
Total shareholders' (deficit)............................ (115,576,144) (130,473,157)
---------------- -----------------
Total liabilities and shareholders' (deficit)............$ 62,710,513 $ 51,687,341
================ =================
See accompanying notes to financial statements
</TABLE>
3
<PAGE>
Item 1 (b)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
For the three months and six months ended June 30, 1999 and 2000
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Three months ended Six months ended
June 30, June 30,
-------------------------------- ---------------------------------
1999 2000 1999 2000
------------- ------------- -------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Services, rent and maintenance
revenue...................................$ 5,759,223 $3,438,041 $ 11,489,379 $ 7,719,147
Product revenue..................... 246,742 29,683 871,546 58,454
------------- ------------- ------------- -------------
Gross revenues......................... 6,005,965 3,467,724 12,360,925 7,777,601
Sales taxes......................... (573,888) (303,187) (1,178,504) (688,497)
------------- ------------- ------------- -------------
Total revenue.......................... 5,432,077 3,164,537 11,182,421 7,089,104
Cost of products sold.................. 120,340 308,347 1,488,311 362,040
Operating costs and expenses:
Services, rent and maintenance...... 1,853,090 1,282,429 3,550,415 2,595,247
Selling, general and administrative. 5,905,175 3,230,377 11,351,044 6,041,012
Depreciation and amortization....... 993,696 1,731,236 1,990,092 3,474,231
------------- ------------- ------------- -------------
Total operating costs and expenses 8,751,961 6,244,042 16,891,551 12,110,490
------------- ------------- ------------- -------------
Operating loss.................... (3,440,224) (3,387,852) (7,197,441) (5,383,426)
Other income (expense):................
Interest expense.................... (4,394,173) (4,418,486) (8,728,749) (8,776,620)
Interest income..................... 2,249,497 1,487,832 18,030,658 1,458,131
Other (expense) or income........... (280,560) 1,168,441 (419,083) 1,079,646
Currency exchange loss.............. (2,904,241) (3,511,063) (38,619,719) (726,646)
------------- ------------- ------------- -------------
Total other expense net........... (5,329,477) (5,273,276) (29,736,893) (6,965,489)
------------- ------------- ------------- -------------
Net loss............................... $ (8,769,701) $ (8,661,128) $ (36,934,334) $ (12,348,915)
============= ============= ============= =============
See accompanying notes to financial statements
</TABLE>
4
<PAGE>
Item 1 (c)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
For the six months ended June 30, 1999 and 2000
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
Six Months Ended
June 30,
----------------------------------
1999 2000
---------------- ---------------
<S> <C> <C>
Operating activities:
Net loss....................................................... $ (36,934,334) $ (12,348,915)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization................................ 1,990,092 2,166,328
Amortization of subscribers list............................. -- 1,307,903
Provision for losses on accounts receivable.................. 1,783,691 289,983
Amortization of debt issuance costs.......................... 295,909 339,120
Currency exchange loss....................................... 38,619,719 726,646
Loss (gain) on sale of equipment............................. 227,497 (1,097,636)
Changes in operating assets and liabilities:
(Increase) decrease in trading securities.................. (4,678,834) 333,192
Increase in accounts receivable............................ (2,083,017) (211,865)
(Increase) decrease in refundable taxes.................... (3,610,939) 357,572
(Increase) decrease in inventories......................... (1,444,982) 205,923
Increase in prepaid expenses and other current assets...... (561,295) (382,151)
Increase in other assets................................... (24,986) (220,471)
Decrease in accounts payable............................... (692,595) (172,058)
Increase in accrued expenses............................... 3,441,450 1,003,131
-------------- --------------
Net cash (used in) provided by operating activities...... (3,672,624) (7,703,298)
Investing activities:
Decrease pledged securities held-to-maturity............... 7,807,994 8,257,048
Purchase of fixed assets................................... (1,601,605) (521,494)
Proceeds from sale of equipment............................ 130,453 78,178
-------------- --------------
Net cash (used in) provided by investing activities.......... 6,336,842 7,813,732
Effect of exchange rate changes on cash........................... (2,839,138) (141,875)
-------------- --------------
Net decrease in cash and cash equivalents......................... (174,920) (31,441)
Cash and cash equivalents at beginning of period.................. 219,787 67,026
-------------- --------------
Cash and cash equivalents at end of period........................ $ 44,867 $ 35,585
============== ==============
See accompanying notes to financial statements
</TABLE>
5
<PAGE>
Item 1 (d)
<TABLE>
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF SHAREHOLDERS' DEFICIT
For the six months ended June 30, 2000
(Amounts in U.S. dollars)
(Unaudited)
<CAPTION>
<CAPTION>
Accumulated
Accumulated Other
Common Retained Comprehensive
Stock Deficit Income Total
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1999........... 30,760 $ (144,897,253) $ 29,290,349 $ (115,576,144)
Net loss for the period................ (12,348,915) (12,348,915)
Translation adjustment................. 641,537 641,537
Comprehensive loss for the period...... (11,707,378)
Monetary adjustment on redeemable
preferred stock...................... (153,815) (153,815)
Accrued dividends on redeemable
preferred stock...................... (3,035,820) (3,035,820)
Balance at June 30, 2000 30,760 $ (160,435,803) $ 29,931,886 $ (130,473,157)
See accompanying notes to financial statements.
</TABLE>
6
<PAGE>
Item 1 (e)
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
June 30, 2000
(Unaudited)
(Amounts in U.S. dollars)
1. Organization
Paging Network do Brasil S.A. (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 unaudited consolidated financial statements of the Company have been
prepared in accordance with generally accepted accounting principles in the
United States ("U.S. GAAP") for interim financial information. The Company's
reporting currency is the U.S. dollar. In the opinion of management, all
adjustments considered necessary for a fair presentation of the unaudited
interim consolidated financial statements have been included and are of a normal
recurring nature. These statements, however, do not include all information and
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. These statements should be read in conjunction with the Company's
consolidated financial statements for the year ended December 31, 1999 set forth
in the Company's Annual Report on Form 20-F filed with the Securities and
Exchange Commission. The results of operations for the interim periods presented
herein are not necessarily indicative of the results to be expected for the full
year.
7
<PAGE>
The balance sheet at December 31, 1999 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by U.S. GAAP for complete financial statements.
The Company's significant accounting policies are as follows:
Foreign currency translation
Until December 31, 1997, the financial statements were translated from
Brazilian reais to U.S. dollars in accordance with the provisions of Statement
of Financial Accounting Standards No. 52 (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. Transactions gains and losses associated
with the Company's net U.S. dollar liability position are reported in foreign
exchange (losses) gains in the statement of operations.
Foreign currency hedge transactions
During 1999 and the six months ended June 30, 2000, 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, 1999 and June 30, 2000, the Company had an investment which was the
equivalent of a U.S. dollar-denominated investment of $27.5 million and $27
million respectively. Currency gains on investment transactions that are
designated and are effective as economic hedges are reported in the financial
statements as yield adjustments that are included in the income statement as
adjustments to 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.
8
<PAGE>
Advertising cost
The Company expenses the costs of advertising as incurred. Advertising
expenses were $640,553 and $1,197,793 during the three and six months ended June
30, 1999 and $129,131 and $192,243 during the three and six months ended June
30, 2000.
Cash equivalents and trading securities
The Company considers all investments with a maturity of three months or
less when purchased to be cash equivalents. Trading securities are liquid
investments with a maturity of greater than three months, which are recorded at
fair value.
Allowance for doubtful accounts
The Company had an allowance for doubtful accounts of $822,017 at December
31, 1999, and $295,186 at June 30, 2000. Charges to the allowance were $891,105
and $1,936,105 during the three and six months ended June 30, 1999 and $314,511
and $816,814 during the three and six months ended June 30, 2000.
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
Long-lived assets and certain identifiable intangible assets held and used
by the Company are reviewed for impairment whenever events or changes in
circumstances warrant such a review. The carrying value of a long-lived or
intangible asset is considered impaired when the anticipated undiscounted cash
flow from such asset is separately identifiable and is less than its carrying
value. In that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair value of the asset. Fair value is determined
primarily using the anticipated cash flows discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of are
determined in a similar manner, except that fair values are reduced for the
costs to dispose.
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
9
<PAGE>
3. Related party transactions
The Company has agreed to reimburse its shareholders for certain
transaction costs associated with the formation of the Company and the
$125,000,000 Senior Notes offering consummated on June 6, 1997. As of June 30,
2000, the Company had a payable of approximately $968,000 to Warburg, Pincus and
approximately $250,000 to Paging Network, International and had a receivable of
approximately $556,000 from Warburg Pincus.
4. Senior notes
On June 6, 1997, the Company issued $125,000,000 principal amount of
13-1/2% Senior Notes due June 6, 2005. Interest is payable semi-annually in
arrears on June 6 and December 6 of each year. Of the $125,000,000 proceeds
approximately $45,600,000 was used to purchase U.S. government securities,
scheduled interest and principal payments from which are in amounts sufficient
to provide for payment in full when due of the first six scheduled interest
payments on the Senior Notes through June 6, 2000. Debt issuance costs are
capitalized and amortized over the term of the debt using the effective yield
method.
The Senior Notes are redeemable on or after June 6, 2001 at the option of
the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after June 6,
2004, plus accrued interest. The Senior Notes contain certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness or issue preferred stock, pay dividends or make certain other
restricted payments. Upon a change of control, the Company is required to make
an offer to purchase the Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any. In
accordance with the covenants of the Senior Notes and the Company's current
level of leverage, at June 30, 2000, the Company is unable to make any dividend
payments.
10
<PAGE>
5. Accrued expenses
Accrued expenses at December 31, 1999 and June 30, 2000 were comprised of
the following:
1999 2000
---- ----
Excise taxes payable..........................$ 207,506 $ 282,061
Withholding taxes payable..................... 231,853 231,853
Payroll and other benefits payable............ 1,014,403 1,905,889
Accrued interest payable from Senior Notes.... 1,125,000 1,125,000
Contingency accrual .......................... 3,999,931 4,566,816
Other......................................... 1,308,643 727,870
------------ -------------
$ 7,887,336 $ 8,839,489
============ =============
Contingency accrual is 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 amounts of accrued and unpaid dividends on the redeemable preferred
stock at December 31, 1999 and at June 30, 2000 were $13,969,430 and
$17,005,251, respectively.
7. Fixed assets
Fixed assets at December 31, 1999 and June 30, 2000 were comprised of the
following:
Period
1999 2000 of Depreciation
---- ----
Furniture and Fixtures...........$ 1,328,163 $ 955,579 10 years
Equipment........................ 10,321,054 7,963,941 5-10 years
Pagers........................... 6,513,073 6,354,240 2.5 years
Leasehold improvements........... 2,828,009 1,381,222 5 years
------------ ------------
20,990,299 16,654,982
Less-Accumulated depreciation.... (7,471,052) (7,642,228)
------------- ------------
$ 13,519,247 $ 9,012,754
============ ============
11
<PAGE>
8. Comprehensive loss
The calculation of comprehensive loss for the three and six months ended
June 30, 1999 and 2000 was as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
1999 2000 1999 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net loss........................$ (8,769,701) $ (8,661,128) $ (36,934,334) $ (12,348,915)
Foreign currency translation
adjustments..................... 2,279,873 3,144,528 25,813,250 641,537
-------------- -------------- -------------- --------------
Comprehensive loss..............$ (6,489,828) $( 5,516,600) $ (11,121,084) $ (11,707,378)
============== ============== ============== ==============
</TABLE>
Accumulated comprehensive income, consisting entirely of foreign currency
translation adjustment is $29,931,886 at June 30, 2000 and $29,290,349 at
December 31, 1999.
9. Other assets
Other assets includes $ 2,366,396 at December 31, 1999 and $1,095,157 at
June 30, 2000 relating to the net intangible cost of acquisition paging
subscribers from Powernet Ltda, and $1,247,647 at December 31, 1999 and
$1,332,004 at June 30, 2000 relating to the withholding tax on interest income.
10. Commitments
The Company has entered into various office space and transmission antenna
rental agreements. These agreements are readjusted periodically for inflation.
Rental expense commitments at June 30, 2000 calculated in reais and translated
into U.S. dollars at June 30, 2000 closing rate were as follows.
2000 $ 583,000
2001 $ 1,337,000
2002 $ 259,000
2003 $ 118,000
2004 $ 39,600
Total rental expenses were $481,016 and $1,041,269 for the three and six
months ended June 30, 1999 and $441,809 and $904,789 for the three and six
months ended June 30, 2000, respectively.
11. 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 $79.3 million and $90.1
12
<PAGE>
million at December 31, 1999 and at June 30, 2000, 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 purpose, a valuation allowance of 100% has been
recognized.
12. Recent events
The Company has entered into an agreement to outsource its call center with
Atento do Brasil Ltda, a Brazilian company specializing in call center service.
In accordance with the agreement, the Company sold fixed assets with a net book
value of $2,115,882 for $4,444,444, which will be collected in ten equal monthly
installments beginning in August 2000.
Effective June 26, 2000, Antonio Eduardo de Carvalho Brigagao replaced
Thomas C. Trynin as the Company's Chief Executive Officer. Prior to his
appointment as Chief Executive Officer, Mr. Brigagao, who is 57 years old, was
the co-founder and president of Carvalho Brigagao, Finance and Technology, a
Brazil-based technology firm that provided consulting services to the Company.
Prior to founding Carvalho Brigagao, Mr. Brigagao served as president of
Credicard S.A., a joint venture of leading Latin American banks, Citibank, Itau
and Unibanco, as well as director of Mastercard International--Latin America.
No other events or transactions have occurred since June 30, 2000 or are
pending that would have a material effect on the financial statements at that
date or for the six months then ended, or that are of such significance in
relation to the Company's affairs to require mention in a note to the financial
statements in order to make them not misleading regarding the financial
position, results of operations, or cash flows of the Company.
13
<PAGE>
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 6-K contains forward-looking statements, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. The following discussion
should be read in conjunction with the financial statements, including the notes
thereto, included in this report.
Results of operations
Three months and six months ended June 30, 2000 compared with three months
and six months ended June 30, 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, total revenue was
defined as service, rent and maintenance revenue and product revenue less sales
taxes.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, 1999 and 2000 June 30, 1999 and 2000
----------------------------------- ----------------------------------
1999 2000 1999 2000
-------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenue..................... $5,432,077 $3,164,537 $11,182,421 $7,089,104
Cost of products sold............. (120,340) (308,347) (1,488,311) (362,040)
Net revenue....................... 5,311,737 100% 2,856,190 100% 9,694,110 100% 6,727,064 100%
Operating costs and expenses:
Services rent and maintenance... 1,853,090 35% 1,282,429 44% 3,550,415 37% 2,595,247 38%
Selling, general and
administrative.................... 5,905,175 111% 3,230,377 114% 11,351,044 117% 6,041,012 90%
Depreciation and amortization... 993,696 19% 1,731,236 45% 1,990,092 21% 3,474,231 52%
---------- ---------- ----------- ----------
Total operating costs and
expenses.................... 8,751,961 165% 6,244,042 60% 16,891,551 174% 12,110,490 180%
---------- ---------- ----------- ----------
Operating loss.................... (3,440,224) (3,387,852) (7,197,441) (5,383,426)
Other income (expenses)......... (5,329,477) (5,273,276) (29,736,893) (6,965,489)
---------- ---------- ----------- ----------
Net loss.......................... (8,769,701) (8,661,128) (36,934,334) (12,348,915)
========== ========== =========== ===========
Other data:.......................
EBITDA(1)........................ $(2,446,528) $(1,656,616) $ (5,207,349) $(1,909,195)
Number of subscribers at end of
period............................ 106,219 64,966 106,219 64,966
----------
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. The Company's EBITIDA might
not be comparable to EBITIDA of other companies.
</TABLE>
14
<PAGE>
Net revenue. For the three months and six months ended June 30, 2000, the
Company's net revenue was $2,856,190 and $6,727,064 consisting of $3,438,041
(before taxes) and $7,719,148 (before taxes) in services revenues, $46,764
(before taxes) and $96,891 (before taxes) in product sales to customers, cost of
sales of $308,347 and $362,040 and sales taxes of $303,187 and $688,497
respectively. During the three months and six months ended June 30, 1999, the
Company's net revenue was $5,311,737 and $9,694,110 consisting of $5,759,223
(before taxes) and $11,489,379 (before taxes) in services revenues and $246,742
(before taxes) and $871,546 (before taxes) in product sales to customers, cost
of sales $120,340 and $1,488,311 and sales taxes $573,888 and $1,178,506,
respectively. During the three months ended June 30, 2000, the cost of products
sold primarily consist of $250,000 adjustment to the net realizable value of
inventory. Average monthly revenue per unit for the three month period ended
June 30, 2000 was approximately R$29.21 (US$16.46) for a base of 64,966
subscribers and for the three month period ended June 30, 1999 was approximately
R$34.00 (US$19.21) for a base of 106,219 subscribers.
Service, rent and maintenance expenses. Service, rent and maintenance
expenses include a portion of costs of compensation and benefits for the
Company's dispatch and technical employees, transmitter site rentals, telephone
line costs, transmission costs, vehicle rental costs, repair and maintenance
expenditures and service call costs. During the three months and six months
ended June 30, 2000, the Company incurred $1,282,429 and $2,595,247 of expenses
in connection with the operations in Sao Paulo, Rio de Janeiro and Brasilia,
respectively. During the three months and six months ended June 30, 1999, the
Company incurred service, rent and maintenance expenses of $1,853,090 and
$3,550,415 respectively. The Company's service rent and maintenance expenses
decreased as a consequence of the reduction of the numbers units in service.
Selling and marketing expenses. Selling and marketing expenses include
commissions to salesmen and retailers, advertising and promotion. During the
three months and six months ended June 30, 2000 the Company incurred $544,913
and $1,139,438 of selling and marketing expenses respectively. During the three
months and six months ended June 30, 1999, the Company incurred $2,205,247 and
$4,557,974 of selling and marketing expenses respectively. The Company's selling
expense decreased primarily due to the reduction of retailers' commission in
consequence of Company's strategy change. Marketing expenses also decreased as
advertising has not been a key component of the Company in consequence of
current market situation.
General and administrative expenses. General and administrative expenses
include compensation benefits, rent, bank fees, outside services and the
provision for losses on accounts receivable. During the three months and six
months ended June 30, 2000 and 1999 the Company incurred $2,685,464 and
$4,901,574 and $3,699,928 and $6,793,070 respectively, of general and
administrative expenses. The Company's general and administrative expenses
decreased as a result of cost and expense cutting. For the three months and six
months ended June 30, 2000 and June 30, 1999, included in such amounts
approximately $72,794 and $289,983 and $1,056,797 and $1,783,691, respectively,
of costs associated with the provision for losses on accounts receivable.
Therefore, during the three months end six months ended at June 30, 2000
compared with the same period of the prior year, the general and administrative
expenses decreased basically due to the reduction of costs associated with the
provision for
15
<PAGE>
losses on accounts receivable. This reduction has been in line with the
decreased of service revenue.
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 $1,731,236 and $3,474,231 for the three months and
six months ended June 30, 2000, which includes a $656,427 and $1,307,903
amortization charge for the Powernet subscriber list respectively, and $993,696
and $1,990,092 for the three months and six months ended June 30, 1999.
Operating loss. For the three months and six months ended June 30, 2000 the
Company generated operating loss of $3,387,852 and $5,383,426 and for the three
months and six months ended June 30, 1999 was $3,440,224 and $7,197,441
respectively.
Other income (expense). The other income (expense) line breaks down as
follows:
Interest expense - Interest expense was $4,418,486 and $8,776,620 for the
three months and six months ended June 30, 2000, and $4,394,173 and $8,728,749
for the three months and six months ended June 30, 1999, primarily as a result
of interest associated with Senior Notes.
Interest income - Interest income for the three months and six months ended
June 30, 1999 was $2,249,497 and $18,030,658 as a result of investing the
available local cash of $31,846,387. For the three months and six months ended
June 30, 2000, the investment of $27,040,419 local cash, generated interest
income of $1,487,832 and $1,458,131, respectively. Basically, the interest
income of period was generated in the last quarter due to the REAL depreciation
- R$1,7473 at March 31, 2000 to R$1,80 at June 30, 2000.
Currency exchange loss - The loss from the depreciation of the REAL against
the U.S. dollar was $3,511,063 and $726,646 for the three months and six months
ended June 30, 2000 and $2,904,241 and $38,619,719 for the three months and six
months ended June 30, 1999.
Other expense or income - This item includes Bank charges, CPMF (tax over
financial transactions), gains or losses with sale of fixed assets and other.
During the three months and six months ended June 30, 1999, the result was loss
of $280,560 and $419,083, respectively. During the three months and six months
ended at June 30, 2000, the result was gain of $1,168,441 and $1,079,646,
respectively. The result generated in last quarter was a consequence of gain on
sale of fixed assets of $ 2,305,573, resulting from the Company's outsourcing of
call center services and a loss of $ 1,079,908 in write-down of fixed assets.
Net loss. As show above, net loss for the three and six months ended June
30, 1999 was $8,769,701 and $36,934,334, respectively, and for the three and six
months ended June 30, 2000 was $8,661,128 and $12,348,915 respectively.
16
<PAGE>
Liquidity and capital resources
For the six months ended June 30, 1999 and June 30, 2000 the Company made
capital expenditures of $1,601,605 and $521,494 respectively, and had negative
cash flow of $571,037 and $8,186,166, respectively.
The Company will also be required to make a interest payment on the Senior
Notes in an aggregate amount equal to $8,437,500 in December 2000, which must be
funded from available cash.
Given the Company's cash position as of June 30, 2000, the ability of the
Company to continue as a going concern and to meet its obligations as they come
due will depend 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
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 "Currency exchange gain (loss)"
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.
17
<PAGE>
Recent events
The Company has entered into an agreement to outsource its call center with
Atento do Brasil Ltda, a Brazilian company specializing in call center service.
In accordance with the agreement, the Company sold fixed assets with a net book
value of $2,115,882 for $4,444,444, which will be collected in ten equal monthly
installments beginning in August 2000.
Effective June 26, 2000, Antonio Eduardo de Carvalho Brigagao replaced
Thomas C. Trynin as the Company's Chief Executive Officer. Prior to his
appointment as Chief Executive Officer, Mr. Brigagao, who is 57 years old, was
the co-founder and president of Carvalho Brigagao, Finance and Technology, a
Brazil-based technology firm that provided consulting services to the Company.
Prior to founding Carvalho Brigagao, Mr. Brigagao served as president of
Credicard S.A., a joint venture of leading Latin American banks, Citibank, Itau
and Unibanco, as well as director of Mastercard International--Latin America.
No other events or transactions have occurred since June 30, 2000 or are
pending that would have a material effect on the financial statements at that
date or for the six months then ended, or that are of such significance in
relation to the Company's affairs to require mention in a note to the financial
statements in order to make them not misleading regarding the financial
position, results of operations, or cash flows of the Company.
18
<PAGE>
PART II
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits
3.1* -- By laws of Paging Network do Brasil S.A. (English Translation).
4.1* -- Indenture dated as of June 1, 1997 between Paging Network do Brasil
S.A. and The Chase Manhattan Bank, as Trustee (including exhibits).
4.2* -- Form of Senior Note (included in Exhibit 4.1).
----------
* Incorporated herein by reference to the Exhibit to the Company's
Registration Statement on Form F-4, Registration No. 333-29865.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
PAGING NETWORK DO BRASIL S.A.
(Registrant)
By: /s/ Antonio Eduardo de Carvalho Brigagao
----------------------------------------
Antonio Eduardo de Carvalho Brigagao
President and
Chief Executive Officer
Date: August 29, 2000
20
