Form 6-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16
of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 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)
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 September 30,
2000 (unaudited)...................... .........................3
b) Statement of Operations for the three and nine months ended
September 30, 1999 and 2000 (unaudited).........................4
c) Statement of Cash Flows for the nine months ended September 30,
1999 and 2000 (unaudited).......................................5
d) Statement of Shareholders' (Deficit) for the nine months ended
September 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........................................15
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings................................................20
Item 2. Changes in Securities............................................20
Item 3. Defaults Upon Senior Securities..................................20
Item 4. Submission of Matters to a Vote of Security Holders..............20
Item 5. Other Information................................................20
Item 6. Exhibits.........................................................20
Signatures ..............................................................21
2
Item 1 (a)
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
At December 31, 1999 and September 30, 2000
(Amounts in U.S. dollars)
December 31, September 30,
1999 2000
-----------------------------------------
(Note 2) (Unaudited)
Assets
Current assets:
Cash and cash equivalents.................................. $ 67,026 $ 228,215
Trading securities......................................... 27,580,015 26,828,071
Accounts receivable, net................................... 206,868 40,265
Other accounts receivable.................................. 3,471,281
Refundable taxes........................................... 959,978 321,898
Pager inventories.......................................... 1,868,006 923,775
Prepaid expenses and other current assets.................. 582,016 919,888
Pledged securities held-to-maturity - current.............. 8,249,664 24,430
---------------- -----------------
Total current assets................................. 39,513,573 32,757,823
Fixed assets, net............................................. 13,519,247 8,109,755
Debt issuance costs, net...................................... 5,792,864 5,302,837
Other assets.................................................. 3,884,829 2,211,753
---------------- -----------------
Total assets......................................... $ 62,710,513 $ 48,382,168
================ =================
Liabilities and shareholders' (deficit)
Current liabilities:
Accounts payable........................................... $ 211,977 $ 140,011
Accrued expenses........................................... 7,887,336 13,094,434
Payable to related parties................................. 1,217,914 1,217,914
---------------- -----------------
Total current liabilities............................ 9,317,227 14,452,359
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 48,600,882
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) (172,445,002)
Accumulated other comprehensive income..................... 29,290,349 32,743,169
---------------- -----------------
Total shareholders' (deficit)........................ (115,576,144) (139,671,073)
---------------- -----------------
Total liabilities and shareholders' (deficit)........ $ 62,710,513 $ 48,382,168
================ =================
See accompanying notes to financial statements
3
Item 1 (b)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
For the three months and nine months ended September 30, 1999 and 2000
(Amounts in U.S. dollars)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------------------------------------------------
1999 2000 1999 2000
--------------- ------------------ --------------- ------------------
Revenues:
Services, rent and maintenance
revenue........................... $ 5,570,709 $ 2,828,451 $ 17,060,087 $ 10,547,599
Product revenue..................... 202,510 32,662 1,074,056 91,116
----------------------------------------------------------------------
Gross revenues......................... 5,773,219 2,861,113 18,134,143 10,638,715
Sales taxes......................... (604,288) (306,590) (1,782,792) (995,088)
----------------------------------------------------------------------
Total revenue.......................... 5,168,931 2,554,523 16,351,351 9,643,627
Cost of products sold.................. 395,330 149,279 1,883,641 511,319
Operating costs and expenses:
Services, rent and maintenance...... 1,681,273 922,805 5,231,688 3,518,052
Selling, general and administrative. 5,856,190 3,099,489 17,207,234 9,140,501
Depreciation and amortization....... 1,001,465 1,552,442 2,991,557 5,026,673
----------------------------------------------------------------------
Total operating costs and expenses 8,538,928 5,574,736 25,430,479 17,685,226
----------------------------------------------------------------------
Operating loss.................... (3,765,327) (3,169,492 (10,962,769) (8,552,918)
Other income (expense):
Interest expense.................... (4,345,120) (4,360,205) (13,073,869) (13,136,824)
Interest income..................... 3,162,789 878,574 21,193,447 2,336,705
Other (expense) or income........... (404,662) (31,795) (823,745) 1,047,852
Currency exchange loss.............. (8,741,066) (3,026,692) (47,360,785) (3,753,340)
----------------------------------------------------------------------
Total other expense net........... (10,328,059) (6,540,118) (40,064,952) (13,505,607)
----------------------------------------------------------------------
Net loss............................... $ (14,093,386) $ (9,709,610) $ (51,027,721) $ (22,058,525)
======================================================================
See accompanying notes to financial statements
4
Item 1 (c)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
For the nine months ended September 30, 1999 and 2000
(Amounts in U.S. dollars)
(Unaudited)
Nine Months Ended
September 30,
----------------------------------
1999 2000
---------------- ---------------
Operating activities:
Net loss....................................................... $ (51,027,721) $ (22,058,525)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization................................ 2,991,557 3,066,929
Amortization of subscribers list............................. - 1,959,744
Provision for losses on accounts receivable.................. 3,203,733 432,712
Amortization of debt issuance costs.......................... 417,099 490,028
Currency exchange loss..................................... 47,360,785 3,753,340
Loss (gain) on sale of equipment............................. 342,881 (1,090,594)
Impairment loss on long-lived assets 175,311 -
Changes in operating assets and liabilities:
(Increase) decrease in trading securities.................. (6,957,364) (108,329)
Increase in accounts receivable............................ (2,856,590) (266,110)
(Increase) decrease in refundable taxes.................... 51,920 628,556
(Increase) decrease in inventories......................... (848,779) 325,768
Increase in prepaid expenses and other current assets...... (247,633) 38,068
Increase in other assets................................... (1,235,885) (330,085)
Decrease in accounts payable............................... (824,449) (504,122)
Increase in accrued expenses............................... 8,168,898 5,469,144
----------------------------------
Net cash used in operating activities.................... (1,286,237) (8,193,476)
Investing activities:
Decrease pledged securities held-to-maturity............... 7,377,266 8,215,223
Purchase of fixed assets................................... (3,269,465) (682,917)
Proceeds from sale of equipment............................ 141,431 1,009,266
----------------------------------
Net cash provided by investing activities.................... 4,249,232 8,541,572
Effect of exchange rate changes on cash........................... (3,145,773) (186,907)
----------------------------------
Net decrease in cash and cash equivalents......................... (182,778) 161,189
Cash and cash equivalents at beginning of period.................. 219,787 67,026
----------------------------------
Cash and cash equivalents at end of period........................ $ 37,009 $ 228,215
==================================
See accompanying notes to financial statements
5
Item 1 (d)
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF SHAREHOLDERS' DEFICIT
For the nine months ended September 30, 2000
(Amounts in U.S. dollars)
(Unaudited)
Accumulated
Other
Common Accumulated Comprehensive
Stock Deficit Income Total
------------ ------------------- ------------------- -----------------
Balance at December 31, 1999......... $ 30,760 $ (144,897,253) $ 29,290,349 (115,576,144)
Net loss for the period.............. (22,058,525) (22,058,525)
Translation adjustment............... 3,452,820 3,452,820
---------------
Comprehensive loss for the period.... (18,605,705)
Monetary adjustment on redeemable
preferred stock.................... (857,772) (857,772)
Accrued dividends on redeemable
preferred stock.................... (4,631,452) (4,631,452)
----------------------------------------------------------------------
Balance at September 30, 2000 $ 30,760 $ (172,445,002) $ 32,743,169 $(139,671,073)
======================================================================
See accompanying notes to financial statements.
6
Item 1 (e)
PAGING NETWORK DO BRASIL S.A.
NOTES TO FINANCIAL STATEMENTS
September 30, 2000
(Unaudited)
(Amounts in U.S. dollars)
1. Organization and basis of presentation
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.
The financial statements have been prepared assuming that the Company will
continue as a going concern. The Company has experienced recurring net losses
and negative cash flow from operating activities and has a net capital
deficiency. In addition, the directors of the Company believe that insufficient
funds will be generated from the one-way paging operations to fund the remaining
interest payments through, and the amount due upon, the maturity of the Notes,
due to the declining subscriber base and technological decline of the one-way
paging business. As a result, the directors do not believe it is advisable for
PageNet do Brasil to make further scheduled interest payments on the Notes,
including a payment of $8,437,500 scheduled to be made on December 6, 2000.
These matters raise substantial doubt about the Company's ability to remain a
going concern. The financial statements do not include any adjustments to
reflect the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result from the
outcome of this uncertainty. The Company's plans are summarized in note 12.
7
2. Summary of significant accounting policies
The unaudited 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 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 financial statements
for the year ended December 31, 1999 set forth in the Company's Annual Report on
Form 20-F filed with the Securities and Exchange Commission. The results of
operations for the interim periods presented herein are not necessarily
indicative of the results to be expected for the full year.
The balance sheet at December 31, 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.
8
Foreign currency hedge transactions
During 1999 and the nine months ended September 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 September 30, 2000, the Company had an investment which
was the equivalent of a U.S. dollar-denominated investment of $27.5 million and
$26.8 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.
Marketing and Advertising costs
The Company expenses the costs of advertising as incurred. Marketing and
Advertising expenses were $659,198 and $1,856,992 during the three and nine
months ended September 30, 1999 and $68,193 and $260,437 during the three and
nine months ended September 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 $213,584 at September 30, 2000. Charges to the allowance were
$1,157,968 and $3,094,968 during the three and nine months ended September 30,
1999 and $224,331 and $1,041,145 during the three and nine months ended
September 30, 2000.
9
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.
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 September
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 $700,000 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 $45,600,000 was used to purchase U.S. government securities,
scheduled interest and principal payments from which were in amounts sufficient
to provide for payment in full when due of the first six scheduled interest
payments on the Senior Notes through June 6, 2000. Debt issuance costs are
capitalized and amortized over the term of the debt using the effective yield
method.
10
The Senior Notes are redeemable on or after June 6, 2001 at the option of
the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after June 6,
2004, plus accrued interest. The Senior Notes contain certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness or issue preferred stock, pay dividends or make certain other
restricted payments. Upon a change of control, the Company is required to make
an offer to purchase the Senior Notes at a purchase price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest, if any. In
accordance with the covenants of the Senior Notes and the Company's current
level of leverage, at September 30, 2000, the Company is unable to make any
dividend payments.
5. Accrued expenses
Accrued expenses at December 31, 1999 and September 30, 2000 were comprised
of the following:
1999 2000
---- ----
Excise taxes payable.........................$ 207,506 $ 289,994
Withholding taxes payable.................... 231,853 231,853
Payroll and other benefits payable........... 1,014,403 917,455
Accrued interest payable from Senior Notes... 1,125,000 5,343,750
Contingency accrual ......................... 3,999,931 4,717,144
Other........................................ 1,308,643 1,594,238
---------- ----------
$7,887,336 $13,094,434
========== ===========
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 September 30, 2000 were $13,969,430 and
$18,600,882, respectively.
11
7. Fixed assets
Fixed assets at December 31, 1999 and September 30, 2000 were comprised of
the following:
Period
1999 2000 of Depreciation
---- ---- ---------------
Furniture and Fixtures.....$ 1,328,163 $ 932,366 10 years
Equipment.................. 10,321,054 7,833,367 5-10 years
Pagers..................... 6,513,073 6,240,539 2.5 years
Leasehold improvements..... 2,828,009 1,373,870 5 years
-----------------------------
20,990,299 16,380,142
Less - Accumulated
depreciation............... (7,471,052) (8,270,387)
-----------------------------
$ 13,519,247 $ 8,109,755
=============================
8. Comprehensive loss
The calculation of comprehensive loss for the three and nine months ended
September 30, 1999 and 2000 was as follows:
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------ -----------------------------------
1999 2000 1999 2000
---------------- ----------------- ---------------- ----------------
Net loss....................$ (14,093,386) $ (9,709,610) $(51,027,721) $ (22,058,525)
Foreign currency translation
adjustments................. 7,215,634 2,811,283 33,028,884 3,452,820
---------------------------------------------------------------------------------
Comprehensive loss..........$ (6,877,752) $ (6,898,327) $(17,998,837) $ (18,605,705)
---------------------------------------------------------------------------------
Accumulated comprehensive income, consisting entirely of foreign currency
translation adjustment is $32,743,169 at September 30, 2000 and $29,290,349 at
December 31, 1999.
9. Other assets
Other assets includes $ 2,366,396 at December 31, 1999 and $427,679 at
September 30, 2000 relating to the net intangible cost of acquisition paging
subscribers from Powernet Ltda, and $1,247,647 at December 31, 1999 and
$1,341,863 at September 30, 2000 relating to the withholding tax on interest
income.
12
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 September 30, 2000 calculated in reais and
translated into U.S. dollars at September 30, 2000 closing rate were as follows.
2000 $ 162,000
2001 $ 966,000
2002 $ 259,000
2003 $ 118,000
2004 $ 39,600
Total rental expenses were $446,278 and $1,487,574 for the three and nine
months ended September 30, 1999 and $330,160 and $1,052,485 for the three and
nine months ended September 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 $76.3 million and $96.1 million at December 31, 1999
and at September 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
Transfer by Warburg, Pincus to IVP Paging and IVP Wireless of all of
Warburg Pincus's interests in Company. On November 22, 2000, Warburg, Pincus
transferred to IVP Paging (Cayman), L.P. ("IVP Paging") all Class A shares of
Paging Brazil Holding Co., LLC ("Holding Co.") owned by Warburg, Pincus and
transferred to IVP Wireless Telecommunications, Inc ("IVP Wireless) all shares
of the Company's redeemable preferred stock owned by Warburg, Pincus. Holding
Co. is a holding company that owns approximately 52.6% of the common stock of
the Company. Warburg Pincus's Class A shares represented approximately 87% of
the membership interests in Holding Co. Warburg, Pincus no longer has any
affiliation with the Company. This transfer did not constitute a "Change of
Control" under the Indenture pursuant to which the Company's 13-1/2% Senior
Notes were issued (the "Indenture") because IVP Paging and IVP Wireless were
each a "Permitted Holder" under the Indenture. The Company understands that IVP
Paging has transferred all of the Class A shares of Holding Co. to IVP Wireless.
IVP Wireless's offer to purchase the Senior Notes. Subsequent to the
transfers of shares to IVP Wireless described above, IVP Wireless announced an
offer to purchase for cash up to 100% of the outstanding $125,000,000 principal
amount of the Company's 13-1/2% Senior
13
Notes for 10% of their principal amount, without interest, and all of the
Non-Voting Class B Holding shares of Holding Co. for $0.0001 per share and
subject to the other terms and conditions in the offering document. As part of
the offer, IVP Wireless is also soliciting the consent of the holders of the
13-1/2% Senior Notes to certain amendments to the Indenture.
Due to the Company's financial problems, the Company's directors believe
that the Company's only options are to either restructure the capital base of
the Company and implement a new strategic business plan or to liquidate the
Company. Completion of the offering described above is a critical step in
restructuring of the capital base. The directors believe that with a
restructuring of the capital base, including significant further investment and
resolution of the negative net worth of the Company, the Company could implement
a new strategic plan to provide services in the emerging mobile internet
wireless services market in parts of Brazil. In the event that the directors
were not to pursue restructuring its capital base and a new strategic plan, the
directors have concluded that the Company will be liquidated. The directors
believe that, upon liquidation of the Company, holders of the Company's 13-1/2%
Senior Notes will receive less, and are likely to receive substantially less,
than 10% the principal amount of the Company's 13-1/2% Senior Notes. The
ultimate outcome of these uncertainties, including the Company's ability to
remain a going concern, cannot be determined at this time.
14
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Form 6-K contains forward-looking statements, which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. The following discussion
should be read in conjunction with the financial statements, including the notes
thereto, included in this report.
Results of operations
Three months and nine months ended September 30, 2000 compared with three
months and nine months ended September 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.
Three Months Ended Nine Months Ended
September 30, 1999 and 2000 September 30, 1999 and 2000
--------------------------- ---------------------------
1999 2000 1999 2000
---- ---- ---- ----
Total revenue..................... $ 5,168,931 $ 2,554,523 $ 16,351,351 $ 9,643,627
Cost of products sold............. (395,330) (149,279) (1,883,641) (511,319)
----------- ------------ ------------ -----------
Net revenue....................... 4,773,601 100% 2,405,244 100% 14,467,710 100% 9,132,308 100%
Operating costs and expenses:
Services, rent and maintenance.. 1,681,273 34% 922,805 38% 5,231,688 36% 3,518,052 39%
Selling, general and
administrative.................. 5,856,190 122% 3,099,489 129% 17,207,234 119% 9,140,501 100%
Depreciation and amortization... 1,001,465 20% 1,552,442 65% 2,991,557 20% 5,026,673 55%
----------- ------------ ------------ -----------
Total operating costs and
expenses.................... 8,538,928 175% 5,574,736 N/A 25,430,479 175% 17,685,226 N/A
----------- ------------ ------------ -----------
Operating loss.................... (3,765,327) (3,169,492) (10,962,769) (8,552,918)
Other income (expenses)......... (10,328,059 (6,540,118) (40,064,952) (13,505,607)
----------- ------------ -----------
Net loss.......................... (14,093,386) (9,709,610) (51,027,721) (22,058,525)
----------- ------------ -----------
Other data:.......................
EBITDA(1)......................... $(2,763,862) $ (1,617,050) $ (7,971,212) $(3,526,245)
Number of subscribers at end of
period............................ 114,881 58,495 114,881 58,495
- --------
(1) EBITDA is defined as operating loss plus depreciation and amortization. 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 EBITDA might not be comparable to EBITDA
of other companies.
15
Net revenue. For the three months and nine months ended September 30, 2000,
the Company's net revenue was $2,405,244 and $9,132,308 consisting of $2,828,451
(before taxes) and $10,547,599 (before taxes) in services revenues, $32,662
(before taxes) and $91,116 (before taxes) in product sales to customers, cost of
products sold of $149,279 and $511,319 and sales taxes of $306,590 and $995,088,
respectively. During the three months and nine months ended September 30, 1999,
the Company's net revenue was $4,773,601 and $14,467,710 consisting of
$5,570,709 (before taxes) and $17,060,087 (before taxes) in services revenues
and $202,510 (before taxes) and $1,074,056 (before taxes) in product sales to
customers, cost of products sold $395,330 and $1,883,641 and sales taxes
$604,288 and $1,782,792, respectively. Average monthly revenue per unit for the
three month period ended September 30, 2000 was approximately R$26.93 (US$14.65)
for a base of 58,495 subscribers and for the three month period ended September
30, 1999 was approximately R$30.00 (US$16.81) for a base of 114,881 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 nine months
ended September 30, 2000, the Company incurred $922,805 and $3,518,052 of
expenses in connection with the operations in Sao Paulo, Rio de Janeiro and
Brasilia, respectively. During the three months and nine months ended September
30, 1999, the Company incurred service, rent and maintenance expenses of
$1,681,273 and $5,231,688, respectively. The Company's service rent and
maintenance expenses decreased as a consequence of the reduction of the numbers
of 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 nine months ended September 30, 2000 the Company incurred
$465,147 and $1,604,585 of selling and marketing expenses respectively. During
the three months and nine months ended September 30, 1999, the Company incurred
$1,650,273 and $6,208,247 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 to focus on the business
market only. Marketing expenses also decreased as advertising has not been a key
component of the Company in consequence of the 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 nine
months ended September 30, 2000 and 1999 the Company incurred $2,634,342 and
$7,535,916 and $4,205,917 and $10,998,987, 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 nine
months ended September 30, 2000 and September 30, 1999, included in such amounts
approximately $142,729 and $432,712 and $1,420,042 and $3,203,733, respectively,
of costs associated with the provision for losses on accounts receivable.
16
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 $1,552,442 and $5,026,673 for the three months and
nine months ended September 30, 2000, which includes a $651,841 and $1,959,744
amortization charge for the Powernet subscriber list respectively, and
$1,001,465 and $2,991,557 for the three months and nine months ended September
30, 1999.
Operating loss. For the three months and nine months ended September 30,
2000 the Company generated operating loss of $3,169,492 and $8,552,918 and for
the three months and nine months ended September 30, 1999 was $3,765,327 and
$10,962,769, respectively.
Other income (expense). The other income (expense) line breaks down as
follows:
Interest expense - Interest expense was $4,360,205 and $13,136,824 for the
three months and nine months ended September 30, 2000, and $4,345,120 and
$13,073,869 for the three months and nine months ended September 30, 1999,
primarily as a result of interest associated with Senior Notes.
Interest income - Interest income for the three months and nine months
ended September 30, 1999 was $3,162,789 and $21,193,447 as a result of investing
the available local cash of $31,521,677. For the three months and nine months
ended September 30, 2000, the investment of $26,828,071 local cash, generated
interest income of $878,574 and $2,336,705, respectively. The interest income
was generated due to the REAL depreciation .
Currency exchange loss - The loss from the depreciation of the REAL against
the U.S. dollar was $3,026,692 and $3,753,340 for the three months and nine
months ended September 30, 2000 and $8,741,066 and $47,360,785 for the three
months and nine months ended September 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 nine months ended September 30, 1999, the result was
loss of $404,662 and $823,745 respectively. During the three months and nine
months ended at September 30, 2000, the result was loss of $31,795 and gain of
$1,047,852 respectively. During the nine months ended September 30, 2000 the
result generated was a consequence of gain on sale of fixed assets, resulting
from the Company's outsourcing of call center services.
Net loss. As show above, net loss for the three and nine months ended
September 30, 1999 was $14,093,386 and $51,027,721, respectively, and for the
three and nine months ended September 30, 2000 was $9,709,610 and $22,058,525,
respectively.
Liquidity and capital resources
For the nine months ended September 30, 1999 and September 30, 2000, the
Company made capital expenditures of $3,269,465 and $682,917 respectively, and
had negative cash flow of $8,518,734 and $590,755, respectively.
17
The Company is required to make an interest payment on the Senior Notes in
an aggregate amount equal to $8,437,500 in December 2000 funded from available
cash.
The Company's declining subscriber base and technological decline of the
one way paging and the fact that it has generated negative cash flows since its
inception raise substantial doubt about the Company's ability to remain a going
concern.
The directors of the Company have concluded that it is not in the best
interest of the Company to make any further scheduled interest payments on the
outstanding Senior Notes including the scheduled semiannual interest payment due
December 2000.
Please refer to note 1 and note 12 of the Notes to Financial Statements.
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.
Recent events
Transfer by Warburg, Pincus to IVP Paging and IVP Wireless of all of
Warburg Pincus's interests in Company. On November 22, 2000, Warburg, Pincus
transferred to IVP Paging (Cayman), L.P. ("IVP Paging") all Class A shares of
Paging Brazil Holding Co., LLC ("Holding Co.") owned by Warburg, Pincus and
transferred to IVP Wireless Telecommunications, Inc
18
("IVP Wireless) all shares of the Company's redeemable preferred stock owned by
Warburg, Pincus. Holding Co. is a holding company that owns approximately 52.6%
of the common stock of the Company. Warburg Pincus's Class A shares represented
approximately 87% of the membership interests in Holding Co. Warburg, Pincus no
longer has any affiliation with the Company. This transfer did not constitute a
"Change of Control" under the Indenture pursuant to which the Company's 13-1/2%
Senior Notes were issued (the "Indenture") because IVP Paging and IVP Wireless
were each a "Permitted Holder" under the Indenture. The Company understands that
IVP Paging has transferred all of the Class A shares of Holding Co. to IVP
Wireless.
IVP Wireless's offer to purchase the Senior Notes. Subsequent to the
transfers of shares to IVP Wireless described above, IVP Wireless announced an
offer to purchase for cash up to 100% of the outstanding $125,000,000 principal
amount of the Company's 13-1/2% Senior Notes for 10% of their principal amount,
without interest, and all of the Non-Voting Class B Holding shares of Holding
Co. for $0.0001 per share and subject to the other terms and conditions in the
offering document. As part of the offer, IVP Wireless is also soliciting the
consent of the holders of the 13-1/2% Senior Notes to certain amendments to the
Indenture.
Due to the Company's financial problems, the Company's directors believe
that the Company's only options are to either restructure the capital base of
the Company and implement a new strategic business plan or to liquidate the
Company. Completion of the offering described above is a critical step in
restructuring of the capital base. The directors believe that with a
restructuring of the capital base, including significant further investment and
resolution of the negative net worth of the Company, the Company could implement
a new strategic plan to provide services in the emerging mobile internet
wireless services market in parts of Brazil. In the event that the directors
were not to pursue restructuring its capital base and a new strategic plan, the
directors have concluded that the Company will be liquidated. The directors
believe that, upon liquidation of the Company, holders of the Company's 13-1/2%
Senior Notes will receive less, and are likely to receive substantially less,
than 10% the principal amount of the Company's 13-1/2% Senior Notes. The
ultimate outcome of these uncertainties, including the Company's ability to
remain a going concern, cannot be determined at this time.
19
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.
20
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: November 29, 2000
21