AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997
REGISTRATION NO. 333-29865
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PAGING NETWORK DO BRASIL S.A.
(Exact name of registrant as specified in its charter)
PAGING NETWORK OF BRAZIL INC.
(Translation of Registrant's name into English)
THE FEDERATIVE REPUBLIC OF BRAZIL 4841 NOT APPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
------------------------
RUA ALEXANDRE DUMAS, 1,711
CHACARA SANTO ANTONIO
SAO PAULO, 04717-004, BRAZIL
(TELEPHONE: 55-11-538-3800)
(Address and telephone number of registrants' principal
executive offices)
CT CORPORATION SYSTEM
1633 BROADWAY
NEW YORK, NY 10019
(TELEPHONE: 212-664-1666)
(Name, address and telephone number of agent for service)
------------------------------
COPY TO:
STEVEN J. GARTNER, ESQ.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
(212) 821-8000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
------------------------
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED BE REGISTERED OFFERING PRICE OFFERING PRICE FEE(1)
13 1/2% Senior Notes due 2005........ $125,000,000 100% $125,000,000 $37,878.79
(1) Previously paid.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
US$125,000,000
OFFER FOR ALL OUTSTANDING
13 1/2% SENIOR NOTES DUE 2005
[LOGO]
IN EXCHANGE FOR
UP TO US$125,000,000 PRINCIPAL AMOUNT OF
13 1/2% SENIOR NOTES DUE 2005
OF
PAGING NETWORK DO BRASIL S.A.
THE EXCHANGE OFFER
WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON OCTOBER 27, 1997, UNLESS EXTENDED.
---------------------
Paging Network do Brasil S.A., a Brazilian corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying Letter of Transmittal (which together constitute
the "Exchange Offer"), to exchange an aggregate principal amount of up to
US$125,000,000 of its 13 1/2% Senior Notes due 2005 (the "New Notes"), which
have been registered under the Securities Act of 1933 (the "Securities Act"),
pursuant to a Registration Statement (as defined herein) of which this
Prospectus constitutes a part, for a like principal amount of its outstanding
13 1/2% Senior Notes due 2005 (the "Old Notes"), of which US$125,000,000
aggregate principal amount is outstanding.
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except for certain transfer restrictions and
registration rights relating to the Old Notes and except that, if the Exchange
Offer is not consummated by November 3, 1997, the interest rate borne by the Old
Notes will increase by 0.50% per annum for the first 90-day period following
November 3, 1997 and will increase by an additional 0.50% per annum with respect
to each subsequent 90-day period up to a maximum amount of 2.00% per annum until
the Exchange Offer is consummated. The New Notes are being offered hereunder in
order to satisfy certain obligations of the Company under the Purchase Agreement
dated as of May 30, 1997 (the "Purchase Agreement") among the Company, Paging
Brazil Holding Co., LLC ("Holding LLC") and the initial purchasers of the Old
Notes (the "Initial Purchasers") and the Notes Registration Rights Agreement
dated June 6, 1997 (the "Notes Registration Rights Agreement") among the Company
and the Initial Purchasers. The New Notes evidence the same debt as the Old
Notes and will be issued under and entitled to the same benefits under the
Indenture (as defined herein). In addition, the New Notes and the Old Notes will
be treated as one series of securities under the Indenture. The New Notes and
the Old Notes are collectively referred to herein as the "Notes." See
"Description of the Notes."
Interest on the Notes of 13 1/2% per annum is payable semiannually in cash
in U.S. dollars in arrears on June 6 and December 6 of each year, commencing
December 6, 1997. The Notes will mature on June 6, 2005. At the closing of the
offering of the Old Notes, the Company used a portion of the net proceeds to
purchase a portfolio consisting of U.S. Government Securities (as defined
herein), representing funds sufficient to make the first six payments of
interest (exclusive of any Additional Amounts (as defined herein) or Additional
Interest (as defined herein) which may become payable) on the Notes, with any
balance to be retained by the Company. These securities were pledged as security
for the benefit of holders of the Notes. See "Description of the Notes--Escrow
Account." Payments under the Notes will be made in U.S. dollars free and clear
of, and without withholding or deduction for, any taxes imposed by Brazil to the
extent provided herein. See "Description of the Notes."
The Notes will be redeemable at the option of the Company, in whole or in
part, at any time on or after June 6, 2001 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any, thereon to the applicable
redemption date. Notwithstanding the foregoing, on or prior to June 6, 2000, the
Company may, at its option, use the net proceeds of one or more Significant
Equity Offerings (as defined herein) yielding gross cash proceeds of not less
than US$35.0 million to redeem up to an aggregate of 35% of the principal amount
of the Notes originally issued from the holders of Notes on a pro rata basis (or
as nearly pro rata as practicable), at a redemption price of 113 1/2% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption; PROVIDED that not less than US$81.25 million aggregate principal
amount of Notes would remain outstanding immediately after such redemption. In
addition, the Notes will be redeemable, in whole but not in part, at the option
of the Company at 100% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of redemption, at any time prior to maturity in
the event of certain changes affecting the withholding tax treatment of the
Notes. Upon a Change of Control, each holder of Notes will have the right to
require the Company to purchase such holder's Notes at 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the date of
purchase. In the event of a Change of Control, there can be no assurance that
the Company (i) will obtain necessary approval from the Brazilian Central Bank
to permit such purchase, in whole or in part, or (ii) will have available funds
sufficient to pay for all of the Notes that might be delivered by holders. See
"Description of the Notes."
The Notes will be senior unsecured obligations of the Company ranking PARI
PASSU in right of payment with all existing and future unsubordinated unsecured
indebtedness of the Company. As of June 30, 1997, the Company has no
indebtedness
(COVER CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT HOLDERS OF THE OLD NOTES SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE
OFFER AND THAT PROSPECTIVE INVESTORS IN THE NEW NOTES SHOULD CONSIDER IN
CONNECTION WITH SUCH INVESTMENT.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 24, 1997
2
(COVER CONTINUED FROM PREVIOUS PAGE)
ranking PARI PASSU with or junior in right of payment to the Notes. In addition,
there are currently no subsidiaries of the Company.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Securities and Exchange Commission (the "Commission") as set forth
in certain no-action letters addressed to other parties in other transactions.
However, the Company has not sought its own no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Based upon
these interpretations by the staff of the commission, the Company believes that
New Notes issued pursuant to this Exchange Offer in exchange for Old Notes may
be offered for resale, resold and otherwise transferred by a holder thereof
other than (i) a broker-dealer who purchased such Old Notes directly from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act or (ii) a person that is an "affiliate" (as defined in Rule
405 of the Securities Act) of the Company without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such New Notes are acquired in the ordinary course of such holder's
business and that such holder is not participating, and has no arrangement or
understanding with any person to participate, in the distribution of such New
Notes. Holders of Old Notes accepting the Exchange Offer will represent to the
Company in the Letter of Transmittal that such conditions have been met. Any
holder who participates in the Exchange Offer for the purpose of participating
in a distribution of the New Notes may not rely on the position of the staff of
the Commission as set forth in these no-action letters and would have to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any secondary resale transaction. A secondary resale
transaction in the United States by a holder who is using the Exchange Offer to
participate in the distribution of New Notes must be covered by a registration
statement containing the selling securityholder information required by Item 507
of Regulation S-K of the Securities Act.
Each broker-dealer (other than an "affiliate" of the Company) that receives
New Notes for its own account pursuant to the Exchange Offer must acknowledge
that it acquired the Old Notes as a result of market-making activities or other
trading activities and will deliver a prospectus in connection with any resale
of such New Notes. The Letter of Transmittal states that by so acknowledging and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. This Prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date (as defined herein), it
will make this Prospectus available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution" and "The Exchange Offer."
The New Notes are new securities for which there is currently no market. The
Company presently does not intend to apply for listing of the New Notes on any
securities exchange or for quotation through the National Association of
Securities Dealers Automated Quotation System ("NASDAQ"). The Company has been
advised by the Initial Purchasers, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Goldman, Sachs & Co. and Bear, Stearns & Co. Inc. that, following
completion of the Exchange Offer, they presently intend to make a market in the
New Notes; however, the Initial Purchasers are not obligated to do so and any
market-making activities with respect to the New Notes may be discontinued at
any time without notice. There can be no assurance that an active public market
for the New Notes will develop.
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding and will be entitled to all the rights and preferences and will be
subject to the limitations applicable thereto under the Indenture. Following
consummation of the Exchange Offer, the holders of Old Notes will continue to be
subject to the existing restrictions upon transfer thereof and the Company will
have no further obligation to such holders (other than the Initial Purchasers)
to provide for the registration under the Securities Act of the Old Notes held
by them. To the extent that Old Notes are tendered and accepted in the Exchange
Offer, a holder's ability to sell untendered Old Notes could be adversely
affected. It is not expected that an active market for the Old Notes will
develop while they are subject to restrictions on transfer.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 p.m., New York City time, on the
date the Exchange Offer expires, which will be October 27, 1997 (the "Expiration
Date"), unless the Exchange Offer is extended by the Company in its sole
discretion, in which case the term "Expiration Date" shall mean the latest date
and time to which the Exchange Offer is extended. Tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date. The Exchange Offer is not conditioned upon any minimum principal amount of
Old Notes being tendered for exchange. However, the Exchange Offer is subject to
certain conditions which may be waived by the Company and to the terms and
provisions of the Notes Registration Rights Agreement. Old Notes may be tendered
only in denominations of US$1,000 and integral multiples thereof. The Company
has agreed to pay the expenses of the Exchange Offer. See "The Exchange
Offer--Fees and Expenses." The New Notes will bear interest from the last
interest payment date of the Old Notes to occur prior to the issue date of the
New Notes or, if no such interest has been paid, from June 6, 1997. Holders of
the Old Notes whose Old Notes are accepted for exchange will not receive
interest on such Old Notes for any period subsequent to the last interest
payment date to occur prior to the issue date of the New Notes, if any, and will
be deemed to have waived the right to receive any interest payment on the Old
Notes accrued from and after such interest payment date or, if no such interest
has been paid, from June 6, 1997.
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of Old Notes as of September 25, 1997.
The Company will not receive any proceeds from this Exchange Offer. No
dealer-manager is being used in connection with this Exchange Offer. See "Use of
Proceeds" and "Plan of Distribution."
3
THE NEW NOTES MAY NOT BE OFFERED OR SOLD IN BRAZIL EXCEPT UNDER
CIRCUMSTANCES WHICH DO NOT CONSTITUTE A PUBLIC OFFERING OR DISTRIBUTION OF
SECURITIES UNDER BRAZILIAN LAWS AND REGULATIONS. THE NEW NOTES HAVE NOT BEEN,
AND WILL NOT BE, REGISTERED WITH THE COMISSAO DE VALORES MOBILIARIOS ("CVM"),
THE SECURITIES COMMMISSION OF BRAZIL.
------------------------
TABLE OF CONTENTS
PAGE
---------
Presentation of Certain Information........................................................................ 4
Enforceability of Civil Liabilities........................................................................ 4
Prospectus Summary......................................................................................... 5
Risk Factors............................................................................................... 15
The Company................................................................................................ 24
Use of Proceeds............................................................................................ 25
Exchange Rate Data......................................................................................... 26
Capitalization............................................................................................. 28
Selected Financial Data.................................................................................... 29
Management's Discussion and Analysis of Financial Condition and Results of Operations...................... 30
The Exchange Offer......................................................................................... 35
Industry................................................................................................... 42
Business................................................................................................... 45
Management................................................................................................. 56
Certain Transactions....................................................................................... 60
Principal Shareholders..................................................................................... 62
Description of the Notes................................................................................... 66
Book-Entry; Delivery and Form.............................................................................. 100
Tax Considerations......................................................................................... 101
Plan of Distribution....................................................................................... 105
Experts.................................................................................................... 106
Legal Matters.............................................................................................. 106
Available Information...................................................................................... 106
Index to Financial Statements.............................................................................. F-1
UNTIL DECEMBER 24, 1997, ALL BROKER-DEALERS EFFECTING TRANSACTIONS IN THE
NEW NOTES, WHETHER OR NOT PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF BROKER-DEALERS
TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
No broker-dealer, salesperson or other individual has been authorized to
give any information or to make any representations in connection with the
Exchange Offer other than those contained in this Prospectus and Letter of
Transmittal and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy the New
Notes in any jurisdiction to any person to whom it is unlawful to make such
offer or solicitation in such jurisdiction. The delivery of this Prospectus
shall not, under any circumstances, create any implication that the information
herein is correct at any time subsequent to its date.
3
PRESENTATION OF CERTAIN INFORMATION
The accounts of the Company, which are maintained in Brazilian REAIS, were
adjusted to conform with accounting principles generally accepted in the United
States of America and translated into United States dollars on the basis set
forth in Note 2 of the Financial Statements (as defined herein) of the Company.
All references in this Prospectus to (i) "U.S. dollars," "$" or "US$" are to
United States dollars and (ii) "REAIS," "REAL" or "R$" are to Brazilian REAIS.
ENFORCEABILITY OF CIVIL LIABILITIES
The Company is a Brazilian corporation with substantially all of its assets
and operations located, and substantially all of its revenues derived, outside
the United States. The Company has appointed CT Corporation System, New York,
New York, as its agent to receive service of process with respect to any action
brought against it in any federal or state court in the State of New York
arising from the offering of the Old Notes and the Exchange Offer. However, it
may not be possible for investors to enforce outside the United States judgments
against the Company obtained in the United States in any such actions, including
actions predicated upon the civil liability provisions of the United States
federal and state securities laws. In addition, all of the directors and
officers of the Company are residents of Brazil, and all or substantially all of
the assets of such persons are located outside the United States. As a result,
it may not be possible for investors to effect service of process within the
United States upon such persons, or to enforce against them judgments obtained
in United States courts, including judgments predicated upon the civil liability
provisions of the United States federal and state securities laws.
The Company has been advised by its Brazilian counsel, Xavier, Bernardes,
Braganca, Sociedade de Advogados, that judgments of U.S. courts for civil
liabilities predicated upon the federal securities laws of the United States,
subject to certain requirements described below, may be enforced in Brazil. A
judgment against the persons described above or the Company obtained outside of
Brazil would be enforceable in Brazil against such persons or the Company
without reconsideration of the merits upon ratification of that judgment by the
Brazilian Federal Supreme Court. The ratification generally will occur if the
foreign judgment (a) fulfills all formalities required for its enforceability
under the laws of the country where the foreign judgment is granted, (b) is
issued following personal service of process on the Company or the persons
described above, or on a properly appointed agent for service of process, (c) is
issued by a competent court after proper service of process, (d) is not subject
to appeal, (e) is authenticated by a Brazilian consular office in the country
where the foreign judgment is issued and is accompanied by a sworn translation
into Portuguese and (f) is not contrary to Brazilian law, national sovereignty
or public policy or "good morals" (as set forth in Brazilian law) and does not
contain any provision which is or would for any reason not be upheld by the
courts of Brazil. Notwithstanding the foregoing, no assurance can be given that
ratification would be obtained, that the process described above can be
conducted in a timely manner or that a Brazilian court would enforce a monetary
judgment for violation of the United States securities laws with respect to the
Notes. The Company has been further advised by its Brazilian counsel that
original actions predicated on the federal securities laws of the United States
may be brought in Brazilian courts and that Brazilian courts may enforce civil
liabilities in such actions against the Company, its directors and certain of
its officers named herein. A plaintiff (whether Brazilian or non-Brazilian) who
resides outside Brazil during the course of litigation in Brazil must provide a
bond to guarantee court costs and legal fees if the plaintiff owns no real
property in Brazil.
4
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS OF THE COMPANY AND THE NOTES THERETO (THE
"FINANCIAL STATEMENTS"), INCLUDED ELSEWHERE IN THIS PROSPECTUS. IN PARTICULAR,
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FACTORS SET FORTH UNDER
"RISK FACTORS." DATA CONCERNING PAGING SERVICES AVAILABLE IN BRAZIL AND CERTAIN
INFORMATION RELATING TO THE PAGING INDUSTRY IN BRAZIL AND THE UNITED STATES
REPRESENT ESTIMATES MADE BY THE COMPANY BASED IN PART ON PUBLIC STATEMENTS MADE
BY THIRD PARTIES AND COMPETITORS. WHILE THE COMPANY BELIEVES SUCH ESTIMATES TO
BE REASONABLE, THERE CAN BE NO ASSURANCE AS TO THEIR ACCURACY. UNLESS OTHERWISE
SPECIFIED, ALL OPERATING STATISTICS CONCERNING THE COMPANY ARE PRESENTED AS OF
JUNE 30, 1997. CERTAIN POPULATION DATA IN THIS PROSPECTUS ARE DERIVED FROM
REPORTS PREPARED BY INSTITUTO BRASILEIRO DE GEOGRAFIA E ESTATISTICA -- IBGE
(BRAZILIAN INSTITUTE FOR GEOGRAPHICS AND STATISTICS). CERTAIN OF THE STATEMENTS
IN THIS PROSPECTUS, INCLUDING STATEMENTS WITH REGARD TO THE COMPANY'S EXPECTED
PAGING OPERATIONS AND BUILDOUT, ITS STRATEGY FOR ITS PAGING BUSINESS AND RELATED
FINANCING AND CAPITAL EXPENDITURE PLANS, ARE FORWARD-LOOKING STATEMENTS. FOR A
DISCUSSION OF IMPORTANT FACTORS THAT COULD AFFECT SUCH MATTERS, SEE "RISK
FACTORS."
COMPANY OVERVIEW
PageNet do Brasil's objective is to become 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 currently
serves approximately 5,163 subscribers. The Company has installed 48 paging
transmitters in 10 cities (the "Existing Coverage Area"), commenced offering
paging services in greater Sao Paulo in January 1997, and plans to begin
marketing paging services in greater Rio de Janeiro in the first quarter of 1998
and in three additional cities in the first quarter of 1999. PageNet do Brasil
was formed by Paging Network International N.V. ("PageNet NV"), a wholly owned
subsidiary of Paging Network, Inc. ("PageNet"), 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 IVP-- 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. Management believes that a number of factors create a
favorable environment for the paging industry in Brazil, including: (i) Brazil's
large population, (ii) its growing and stable economy, (iii) the paging market's
relatively low penetration rate and high historical growth rate, and (iv) the
relatively high demand for reliable communications services. The Company
believes it will be well positioned to be a leading provider of paging services
in Brazil because of its state-of-the-art infrastructure, high quality services,
low cost structure and strategic relationships.
The Company has completed the buildout of the Sao Paulo system, installed
the infrastructure necessary to support its Sao Paulo operations and
substantially built out its paging system in Rio de Janeiro. The Company is
currently focused on Sao Paulo and Rio de Janeiro (the "Initial Markets") and
expects to offer paging services in Brasilia, Curitiba and Belo Horizonte (the
"Expansion Markets") by the first quarter of 1999. The Company currently offers
its Sao Paulo subscribers extended paging service in the other cities in the
Existing Coverage Area.
SUBSTANTIAL BUSINESS OPPORTUNITY
Brazil is the largest country in Latin America, with a population of
approximately 158 million people. Although the paging industry began in Brazil
in the 1960s, it remains largely underdeveloped, fragmented and
undercapitalized. The Company estimates that, as of December 1996, there were
approximately 800,000 pagers in operation in Brazil (up from an estimated
400,000 in 1995 and 200,000 in 1994), representing a market penetration of less
than one-half of one percent of the population and an annual
5
growth rate of 100% since 1994. The one-half of one percent penetration rate in
Brazil is considerably lower than the United States rate of approximately 15%.
Although Brazil's economy has strengthened significantly as a result of its
recent openness to direct foreign investment and its reduced inflation rate for
the past two years, the telecommunications industry is still underdeveloped. As
of December 1996, the approximately 13.5 million telephone lines in service in
Brazil corresponded to a penetration rate of only 8.7%, which places Brazil
among the least developed countries in the world for availability of basic
telephone service. The Company believes that a principal factor driving the
significant growth of paging services, and wireless communications generally, is
the demand for reliable, portable communications alternatives to Brazil's
underdeveloped telephone system.
Management believes that paging is a particularly attractive and practical
method of communications. Generally, a pager is a highly reliable, portable and
economical communications alternative to cellular telephone service and often
complements cellular telephone service due to its longer battery life and better
building penetration which allows subscribers to receive pages when cellular
service is not available. Additionally, paging service increases communications
with mobile employees and facilitates call management by allowing the subscriber
to act on messages at the subscriber's convenience. Moreover, in Brazil,
alphanumeric pagers are an alternative to traditional telephone service in the
home, for which the waiting list to obtain ordinary telephone lines from the
local service providers is approximately one to three years and, for many
Brazilians, is prohibitively expensive. Also, the cost and speed of deploying a
paging system is relatively low on a per subscriber basis as compared to other
communications devices: (i) the transmitters and terminals have a lower cost
than certain other wireless communication systems; (ii) paging system capital
expenditures are required only for transmission facilities and the acquisition
of pagers for leasing to customers; and (iii) most costs associated with
increasing the capacity of a paging system and acquiring additional pagers for
lease may be incurred as customers are added to the system.
BUSINESS HIGHLIGHTS
ATTRACTIVE LICENSE AREAS. Pursuant to operating agreements with TVA,
Multiponto and an affiliate of IVP, the Company has secured the use of their
respective paging licenses. The Existing Coverage Area is comprised of the
following 10 cities: Sao Paulo, Rio de Janeiro, Brasilia, Curitiba, Belo
Horizonte, Porto Alegre, Salvador, Recife, Belem and Goiania. The cities of Sao
Paulo and Rio de Janeiro are the business centers of Brazil and encompass a
population of approximately 33 million and represent an estimated two-thirds of
the Brazilian paging market. The remaining eight cities have strong business
communities and their combined metropolitan areas encompassed an aggregate
population of approximately 18 million. Management believes that a significant
market of potential business customers has been neglected by the Company's
competitors and, as the Company enters each of its markets, it intends to
actively target such business customers.
EQUITY SPONSORSHIP/STRATEGIC RELATIONSHIPS. The Company's investors include
PageNet, Warburg Pincus, TVA, IVP and Multiponto. PageNet is the largest
provider of paging services in the United States, with approximately 9.5 million
pagers in service in the United States, more than the combined number of pagers
in service of the second and third largest U.S. providers of paging services.
PageNet has entered into an agreement (the "Technical Services Agreement") with
the Company which provides the Company with PageNet's products, intellectual
property (including the exclusive use of PageNet's tradename in Brazil), paging
expertise, volume discounts and other capabilities. In addition, certain of the
equity investors have extensive experience in the Brazilian communications
industry. Warburg Pincus, IVP and Multiponto have provided approximately US$30
million of redeemable preferred and common equity capital to the Company, and
TVA, IVP and Multiponto have secured paging licenses for the Company's use.
EXPERIENCED MANAGEMENT TEAM. The Company's senior management team, which
has been in place since the Company's inception, has extensive experience in the
development, growth and management of
6
paging and other businesses in the United States and Brazil. Additionally,
members of the Company's senior management team have experience in formulating
and implementing marketing strategies directed at business and consumer paging
customers. The Company's management team includes former senior managers of two
of PageNet's largest operations in the United States, former senior managers of
multinational corporations operating in Brazil and former senior managers of
Brazilian paging companies.
STATE-OF-THE-ART PAGING NETWORK. The Company has built a state-of-the-art,
satellite-linked, FLEX-Registered Trademark- based paging network with 44
transmitters in the 10 cities comprising the Existing Coverage Area. Relative to
the systems of the Company's competitors, which use terrestrial communications
networks, the Company believes that its satellite-linked transmission systems
provide customers with more reliable receipt of pages. Moreover, rather than
relying on manufacturers or vendors, management has applied PageNet's expertise
to design and implement all aspects of the paging infrastructure buildout, from
transmitter site selection and transmitter installation alignment to satellite
linkage and the programming of the paging terminal. The Company has completed
the buildout of the Sao Paulo system where it introduced paging services in
January 1997. The Rio de Janeiro system buildout is substantially complete and
local operations are scheduled to commence there in the first quarter of 1998.
In addition to Sao Paulo and Rio de Janeiro, the Company has built transmitters
in eight other cities, and offers subscribers extended paging service in those
cities. The Company expects to launch local operations in the Expansion Markets
in the first quarter of 1999, and will evaluate, on an ongoing basis, the
opportunity for the introduction and provision of services in other markets.
ADVANCED INFORMATION SYSTEMS. The Company uses an advanced proprietary
management information system, customized for 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 increased volumes of data that the
Company expects to process in the future as the Company's subscriber base
continues to grow.
BUSINESS STRATEGY
The Company's strategy is to become a leading provider of paging services in
Brazil. The principal elements of the Company's business strategy are to: (i)
provide high quality paging services at a low cost, (ii) leverage the PageNet
relationship, (iii) gain rapid market penetration, and (iv) provide superior
customer service.
PROVIDE HIGH QUALITY PAGING SERVICES AT A LOW COST. The Company has
employed state-of-the-art FLEX-Registered Trademark- technology developed by
Motorola, Inc. and is using equipment similar to that used by PageNet in the
United States. Furthermore, the Company utilizes a fully redundant paging system
that is linked by satellite. Management believes that as the number of
subscribers grows, this advanced technology will allow the Company to be a
provider of high quality paging services at a low cost per subscriber.
LEVERAGE THE PAGENET RELATIONSHIP. The Company is implementing a marketing
strategy and operating procedures similar to those of PageNet in the United
States, and several members of the Company's senior management have had
significant experience managing PageNet operations in the United States.
Moreover, pursuant to the Technical Services Agreement, PageNet provides the
Company with access to PageNet's products, paging expertise, intellectual
property (including the exclusive use of PageNet's tradename in Brazil), volume
supplier discounts and other capabilities. The Company also expects to benefit
from the favorable relationships that PageNet has established with suppliers of
paging equipment and from its use of the PageNet brand name, which is well
established among multinational corporations. PageNet do Brasil is PageNet's
first venture in the Latin American paging market, and PageNet's only enterprise
in Brazil. See "Business--Trademarks."
7
GAIN RAPID MARKET PENETRATION. The Company seeks to gain subscribers in its
markets rapidly through extensive marketing and advertising and competitive
pricing. Unlike competitors whose primary focus has been the consumer market,
the Company focuses on both business and consumer paging customers. The Company
targets business customers through a commissioned direct sales force and through
telemarketing, and will target individual customers through advertising and
through retail distribution channels including the use of "retail showrooms"
located strategically throughout the Company's markets.
PROVIDE SUPERIOR CUSTOMER SERVICE. Management believes that its competitors
have not made customer service a primary focus of their business strategy and do
not provide the customer with service standards that are prevalent in the United
States. By focusing on key elements of customer satisfaction during the sales
process and over the life of the subscriber, the Company will provide high
levels of customer service similar to those provided by PageNet in the United
States. Moreover, similar to PageNet's practice in the United States, the
Company is introducing 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 innovation will allow it to ensure
superior customer satisfaction, thereby minimizing customer turnover and
increasing subscriber base growth.
FINANCING REQUIREMENTS
The Company commenced the buildout of systems for its paging services in May
1996 and plans to substantially complete the buildout of the Initial Markets by
the first quarter of 1998 and the Expansion Markets by the first quarter of
1999. The Company expects that the available net proceeds from the sale of the
Old Notes, together with cash on hand, will be sufficient to complete the
planned buildout of the Initial Markets only and that it will need to secure
additional financing to complete the planned buildout of the Expansion Markets.
See "Use of Proceeds."
The principal capital expenditure requirements to construct a paging system
involve the acquisition of pagers for leasing and the acquisition and
installation of transmission facilities, both of which are directly related to
the demand for paging service. Additional capital is required to fund operating
losses incurred during the initial stages of constructing and rolling out
services. The Company currently anticipates that its cash requirements
(comprised of capital expenditures, working capital requirements, debt service
requirements and anticipated operating losses) from inception in May 1996
through December 2000, will be approximately US$150 million, including
approximately US$100 million in capital expenditures, of which approximately
US$55 million is attributable to the purchase of pagers for leasing. The Company
estimates that, of the US$150 million, approximately US$80 million will be
required to fund the capital requirements for the Initial Markets through 2000.
The actual amounts required by the Company will vary based upon the timing and
success of the Company's rollout of services in its markets as well as the mix
between leased and purchased pagers. If demand for the Company's services is
less than expected, the Company should be able to reduce certain costs that are,
to a large extent, demand driven and/or delay the rollout of its services in the
Expansion Markets. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
8
THE EXCHANGE OFFER
The Exchange Offer.................. The Company is offering to exchange pursuant to the
Exchange Offer an aggregate principal amount of up to
US$125,000,000 principal amount of its 13 1/2% Senior
Notes due 2005 (the "New Notes"), for a like
principal amount of its 13 1/2% Senior Notes due 2005
(the "Old Notes"). The Company will issue the New
Notes on or promptly after the Exchange Date. As of
the date of this Prospectus, US$125,000,000 aggregate
principal amount of Old Notes is outstanding. The
terms of the New Notes are identical in all material
respects to the terms of the Old Notes for which they
may be exchanged pursuant to this offer, except that
the New Notes have been registered under the
Securities Act and are issued free from any covenant
regarding registration, and except that if the
Exchange Offer is not consummated by November 3,
1997, the interest rate borne by the Old Notes will
increase by 0.50% per annum for the first 90-day
period following November 3, 1997 and will increase
by an additional 0.50% per annum with respect to each
subsequent 90-day period up to a maximum of 2.00% per
annum until the Exchange Offer is consummated. The
New Notes will evidence the same debt as the Old
Notes and will be issued under and be entitled to the
same benefits under the Indenture as the Old Notes.
The Issuance of the New Notes and the Exchange Offer
is intended to satisfy certain obligations of the
Company under the Purchase Agreement and pursuant to
certain registration rights granted under the Notes
Registration Rights Agreement. See "The Exchange
Offer" and "Description of the Notes."
Interest Payments................... Interest on the New Notes shall accrue from the last
Interest Payment Date (June 6 or December 6) on which
interest was paid on the Old Notes surrendered or, if
no interest has been paid on such Old Notes, from
June 6, 1997. See "The Exchange Offer--Interest on
the New Notes."
Expiration Date..................... The Exchange Offer will expire at 5:00 p.m., New York
City time on October 27, 1997, unless extended by the
Company in its sole discretion. See "The Exchange
Offer--Expiration Date; Extensions; Amendments."
Exchange Date....................... The date of acceptance for exchange of the Old Notes
and the consummation of the Exchange Offer will be
the first business day following the Expiration Date,
unless extended. See "The Exchange Offer--Terms of
the Exchange."
9
Conditions of the Exchange Offer.... The Company's obligation to consummate the Exchange
Offer will be subject to certain conditions. See "The
Exchange Offer--Conditions to the Exchange Offer."
The Company reserves the right to terminate or amend
the Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such
condition.
Withdrawal Rights................... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date;
otherwise, all tenders will be irrevocable. See "The
Exchange Offer-- Withdrawal of Tenders."
Procedures for Tendering Notes...... See "The Exchange Offer--Procedures for Tendering."
Federal Income Tax Consequences..... The exchange of Old Notes for New Notes pursuant to
the Exchange Offer will not result in any income,
gain or loss to holders who participate in the
Exchange Offer or to the Company for U.S. Income tax
purposes. See "Tax Considerations."
Resale.............................. The Company is making the Exchange Offer in reliance
on the position of the staff of the Commission as set
forth in certain no-action letters addressed to other
parties in other transactions. However, the Company
has not sought its own no-action letter and there can
be no assurance that the staff of the Commission
would make a similar determination with respect to
the Exchange Offer as in such other circumstances.
Based on these interpretations by the staff of the
Commission, the Company believes that New Notes
issued pursuant to this Exchange Offer in exchange
for Old Notes may be offered for resale, resold and
otherwise transferred by a holder thereof other than
(i) a broker-dealer who purchase such Old Notes
directly from the Company to resell pursuant to Rule
144A or any other available exemption under the
Securities Act or (ii) a person that is an
"affiliate" (as defined in Rule 405 of the Securities
Act) of the Company without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's
business and that such holder is not participating,
and has no arrangement or understanding with any
person to participate, in the distribution of such
New Notes. Holders of Old Notes accepting the
Exchange Offer will represent to the Company in the
Letter of Transmittal that such conditions have been
met. Any holder who participates in the Exchange
Offer for the purpose of participating in a
distribution of the New Notes may not rely on the
position of the staff of the Commission as set forth
in these no-action letters and would have to comply
with the registration and prospectus delivery
10
requirements of the Securities Act in connection with
any secondary resale transaction. A secondary resale
transaction in the United States by a holder who is
using the Exchange Offer to participate in the
distribution of New Notes must be covered by a
registration statement containing the selling
securityholder information required by Item 507 of
Regulation S-K of the Securities Act. Each
broker-dealer (other than an "affiliate" of the
Company) that receives New Notes for its own account
pursuant to the Exchange Offer must acknowledge that
it acquired the Old Notes as the result of
market-making activities or other trading activities
and will deliver a prospectus in connection with any
resale of such New Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to
admit that it is an "underwriter" within the meaning
of the Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of
New Notes received in exchange for Old Notes where
such Old Notes were acquired by such broker-dealer as
a result of market-making activities or other trading
activities. In addition, pursuant to Section 4(3)
under the Securities Act, until December 24, 1997,
all dealers effecting transactions in the New Notes,
whether or not participating in the Exchange Offer,
may be required to deliver a Prospectus. The Company
has agreed that, for a period of 180 days after the
date of this Prospectus, it will make this Prospectus
available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution" and
"The Exchange Offer--Purpose of the Exchange Offer."
Remaining Old Notes................. Holders of Old Notes who do not tender their Old
Notes in the Exchange Offer or whose Old Notes are
not accepted for exchange will continue to hold such
Old Notes and will be entitled to all the rights and
preferences, and will be subject to the limitations,
applicable thereto under the Indenture. All
untendered and tendered but unaccepted Old Notes
(collectively, the "Remaining Old Notes") will
continue to bear legends restricting their transfer.
In general, the Old Notes may not be offered or sold,
unless registered under the Securities Act, except
pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable
state securities laws. To the extent that the
Exchange Offer is effected, the trading market, if
any, for Remaining Old Notes could be adversely
affected. See "Risk Factors--Factors Relating to the
Company and the Notes--Consequences of Failure to
Properly Tender Old Notes Pursuant to the
11
Exchange Offer" and "The Exchange Offer--Terms of the
Exchange."
Exchange Agent...................... The exchange agent with respect to The Exchange Offer
is The Chase Manhattan Bank (the "Exchange Agent").
The address and telephone number of the Exchange
Agent are set forth in "The Exchange Offer--Exchange
Agent."
Use of Proceeds..................... There will be no proceeds to the Company from the
exchange pursuant to the Exchange Offer. See "Use of
Proceeds."
THE NEW NOTES
Issuer.............................. Paging Network do Brasil S.A., a Brazilian
corporation.
Maturity Date....................... June 6, 2005.
Interest Payment Dates.............. Interest on the New Notes will be payable
semiannually on each June 6 and December 6,
commencing December 6, 1997.
Ranking............................. The New Notes will be senior unsecured obligations of
the Company ranking PARI PASSU in right of payment
with all existing and future unsecured and
unsubordinated indebtedness of the Company. As of
June 30, 1997 there was no outstanding indebtedness
of the Company ranking PARI PASSU with or junior in
right of payment to the Notes. See "Capitalization."
Escrow Account...................... At the closing of the offering of the Old Notes, the
Company used approximately US$46 million of the net
proceeds of the Offering to purchase a portfolio of
U.S. Government Securities (the "Pledged Securities")
which was pledged by the Company to the Trustee for
the benefit of the holders of Notes and will be held
in the United States by the Trustee in the Escrow
Account (as defined herein). Such U.S. Government
Securities are expected to represent funds sufficient
to cover the first six payments of interest
(exclusive of any Additional Amounts or Additional
Interest which may become payable) on the Notes
through June 6, 2000. Such pledge will also secure
repayment of the principal amount of the Notes to the
extent of such security. See "Description of the
Notes."
Change of Control................... Following the occurrence of a Change of Control, the
Company will be required to make an offer to purchase
all of the outstanding Notes at a purchase price
equal to 101% of the principal amount thereof plus
accrued interest, if any, to the date of purchase and
purchase all Notes validly tendered pursuant thereto.
In the event of a Change of Control, there can be no
assurance that the Company (i) will obtain
12
necessary approval from the Brazilian Central Bank
(the "Central Bank") to permit such purchase, in
whole or in part, or (ii) will have available funds
sufficient to pay for all of the Notes that might be
delivered by holders. See "Risk Factors-- Risk
Factors Relating to Brazil--Controls and Restrictions
on U.S. Dollar Remittances" and "Description of the
Notes."
Withholding Taxes;
Additional Amounts................ Under a temporary rate reduction from withholding tax
under current Brazilian tax rules, interest in
respect of the Notes during 1997 will not be subject
to withholding tax. However, if the Notes are
redeemed for any reason prior to maturity following
their issuance, then the Company will be required to
pay an additional withholding tax retroactively on
interest, fees and commissions paid in connection
with the Notes from the date of issuance through the
date of such earlier redemption. Withholding taxes of
up to 15% will be payable in respect of the Notes if
the temporary rate reduction is not extended to years
after 1997. The Company has agreed to pay such
Additional Amounts as will result in receipt by the
holders of Notes of such amounts as would have been
received by them had no such withholding or deduction
been required, except as set forth under "Description
of the Notes--Additional Amounts." See "Tax
Considerations."
Optional Redemption................. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after
June 6, 2001 at the redemption prices set forth
herein, plus accrued and unpaid interest, if any,
thereon to the applicable redemption date.
Notwithstanding the foregoing, on or prior to June 6,
2000, the Company may, at its option, use the net
proceeds of one or more Significant Equity Offerings
yielding gross cash proceeds of not less than US$35.0
million to redeem up to an aggregate of 35% of the
principal amount of the Notes originally issued from
the holders of Notes on a pro rata basis (or as
nearly pro rata as practicable), at a redemption
price of 113 1/2% of the principal amount thereof,
plus accrued and unpaid interest to the date of
redemption; PROVIDED that no less than US$81.25
million aggregate principal amount of Notes would
remain outstanding immediately after such redemption.
See "Description of the Notes--Redemption."
Tax Redemption...................... In the event of certain changes affecting withholding
taxes applicable to payments on the Notes, the Notes
will be redeemable, in whole but not in part, at the
option of the Company, at 100% of the principal
amount thereof, plus
13
accrued and unpaid interest, if any, to the date of
redemption.
Asset Sale Offer.................... The Company will be required in certain circumstances
to make an offer to purchase Notes with a portion of
the net cash proceeds of certain asset sales at a
purchase price equal to 100% of the principal amount
thereof plus accrued interest, if any, to the date of
purchase. See "Description of the Notes--Certain
Covenants." The Company's ability to consummate such
offer will be subject to prior approval from the
Central Bank. See "Risk Factors--Risk Factors
Relating to Brazil--Controls and Restrictions on U.S.
Dollar Remittances."
Certain Covenants................... The indenture under which the Old Notes were issued
(the "Indenture") contains certain covenants that,
among other things, limits the ability of the Company
to (i) incur additional indebtedness or issue certain
preferred stock, (ii) pay dividends or make
distributions in respect of the capital stock of the
Company or make certain other restricted payments,
(iii) conduct a business other than a Permitted
Business (as defined herein), (iv) create certain
liens and (v) enter into certain transactions with
affiliates or other interested persons. In addition,
the Indenture limits the ability of the Company to
consolidate, merge or sell all or substantially all
of its assets. These covenants are subject to
important exceptions and qualifications. See
"Description of the Notes--Certain Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors relating to Brazil,
the Company and the Notes that should be considered by prospective investors.
14
RISK FACTORS
BEFORE MAKING AN INVESTMENT DECISION, PROSPECTIVE PURCHASERS SHOULD CONSIDER
CAREFULLY, IN LIGHT OF THEIR OWN FINANCIAL CIRCUMSTANCES AND INVESTMENT
OBJECTIVES, ALL THE INFORMATION SET FORTH HEREIN AND, IN PARTICULAR, THE SPECIAL
FACTORS APPLICABLE TO AN INVESTMENT IN BRAZIL AND APPLICABLE TO AN INVESTMENT IN
THE COMPANY, INCLUDING THOSE SET FORTH BELOW. IN GENERAL, INVESTING IN THE
SECURITIES OF ISSUERS IN DEVELOPING COUNTRIES, SUCH AS BRAZIL, INVOLVES A HIGHER
DEGREE OF RISK THAN INVESTING IN THE SECURITIES OF ISSUERS IN THE UNITED STATES
AND CERTAIN OTHER JURISDICTIONS. A NUMBER OF THE MATTERS DISCUSSED IN THIS
PROSPECTUS ARE NOT HISTORICAL OR CURRENT FACTS BUT RATHER ADDRESS POTENTIAL
FUTURE CIRCUMSTANCES AND DEVELOPMENTS. THE DISCUSSION OF SUCH MATTERS AND
SUBJECT AREAS IS QUALIFIED BY THE RISKS AND UNCERTAINTIES SURROUNDING FUTURE
EXPECTATIONS GENERALLY, AND ALSO MAY MATERIALLY DIFFER FROM THE COMPANY'S ACTUAL
EXPERIENCE INVOLVING ANY ONE OF THE FUTURE MATTERS OR SUBJECT AREAS. THE COMPANY
HAS ATTEMPTED TO IDENTIFY CERTAIN OF THE FACTORS THAT IT CURRENTLY BELIEVES WILL
CAUSE ACTUAL EXPERIENCE TO DIFFER FROM ITS EXPECTATIONS, PARTICULARLY THOSE RISK
FACTORS SET FORTH BELOW; HOWEVER, THERE CAN BE NO ASSURANCE THAT OTHER RISKS AND
UNCERTAINTIES MAY NOT MATERIALLY ADVERSELY IMPACT THE COMPANY'S ABILITY TO MEET
ITS BUSINESS OBJECTIVES.
RISK FACTORS RELATING TO BRAZIL
GENERAL. Social, economic or political instability, among other
developments in Brazil, could adversely affect the financial condition and
results of operations of the Company, the ability of the Company to repay the
Notes. In the past, Brazil has suffered from high levels of inflation, low real
growth rates and political uncertainty. Brazil is generally considered by
investors to be an "emerging market" and thus political, economic, social or
other developments in other such markets may adversely affect the market value
and liquidity of the Notes. For example, in December 1994, the Mexican
government sharply devalued the PESO, resulting in an economic crisis in Mexico.
The Mexican PESO crisis adversely affected the market value and liquidity of
securities issued by companies in many of the "emerging markets," including
Brazil. There can be no assurance that events in other such markets will not
adversely affect the market value and liquidity of the Notes.
ECONOMIC UNCERTAINTY; EFFECTS OF EXCHANGE RATE FLUCTUATIONS. Brazil has
experienced extremely high rates of inflation for many years. Inflation, as
measured by the Getulio Vargas Foundation's General Index of Market Prices (the
"IGPM Index"), was approximately 458% in 1991, 1,175% in 1992, 2,567% in 1993,
870% in 1994, 15% in 1995 and was an estimated 10% in 1996. Inflation,
government actions to combat inflation and public speculation about future
actions have had significant negative effects on the Brazilian economy in
general and have also contributed materially to economic uncertainty in Brazil.
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
which the Company may charge to a particular subscriber may not be increased
until the next anniversary of the subscriber's initial subscription date. Thus,
the Company is less able to offset expense increases with revenue increases.
Accordingly, inflation may have a material adverse effect on the Company's
results of operations and financial condition.
Beginning in 1994, the Brazilian Government commenced the "Real Plan," an
economic stabilization plan designed to reduce inflation by, among other things,
reducing certain public expenditures, collecting debts owed to the Brazilian
Government, increasing tax revenues and continuing the privatization of certain
state-owned enterprises. On July 1, 1994, as part of the Real Plan, the
Brazilian Government introduced a new currency, the REAL. There can be no
assurance that the Real Plan will continue to be successful in controlling the
level of inflation, that future governmental actions will not trigger an
increase in inflation or that inflation will not have a material adverse effect
on the Company's results of operations and financial condition.
15
Brazil's rate of inflation and the government's actions to combat inflation
have also affected the relationship of the value of Brazil's currency to the
value of the U.S. dollar. Historically, Brazil's currency frequently had been
devalued in relation to the U.S. dollar. However, after its introduction, the
REAL initially appreciated against the U.S. dollar. In an effort to address
concerns about the possible overvaluation of the REAL relative to the U.S.
dollar, and in light of the economic upheaval in Mexico that resulted from the
rapid devaluation of the Mexican PESO, the Brazilian government in March 1995
introduced new exchange rate policies which established a trading band for the
REAL against the U.S. dollar. From April 30, 1996 to April 30, 1997 the REAL
declined in value relative to the U.S. dollar by approximately 7.18%. There can
be no assurance that the REAL will not again be devalued relative to the U.S.
dollar, or that the REAL will not fluctuate significantly relative to the U.S.
dollar.
Substantially all of the Company's revenues are expected to be denominated
in REAIS. A substantial portion of the Company's indebtedness, including the
Notes, may be expected to be denominated in U.S. dollars. In addition, certain
of the Company's operating expenses, including a significant portion of its
equipment costs and reimbursement obligations under the Technical Services
Agreement, are denominated in U.S. dollars. Any devaluation of the Brazilian
currency relative to any foreign currency in which debt or other obligations of
the Company are denominated could result in a foreign exchange loss with respect
to such indebtedness or obligations, if such devaluation were in excess of
inflation and the rate at which the Company raises prices. Any devaluation could
also force the Company to seek additional financing although the Company's
ability to obtain such financing may be impaired by such event. As a result, the
relationship of Brazil's currency to the value of the U.S. dollar and other
currencies, and the rates of devaluation of Brazil's currency relative to the
prevailing rates of inflation, may adversely affect the Company's financial
condition and results of operations, as well as its ability to meet its debt
service obligations (including payment of principal of, premium, if any, and
interest on the Notes) and operating expenses. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Inflation and
Exchange Rates." Moreover, if the Company cannot increase its prices to match
the rate of inflation, even if the rate of inflation matches the rate of
devaluation, the Company's ability to meet its debt service obligations and
operating expenses may be impaired.
The Company may experience economic loss with respect to its investments and
fluctuations in its reported results of operations solely as a result of
currency rate fluctuations, which may have a material adverse effect on the
Company's financial condition. The Company intends to explore various
alternatives that may be available to hedge exchange rate risks, although there
can be no assurance that any such alternatives will be available on terms
acceptable to the Company.
CONTROLS AND RESTRICTIONS ON U.S. DOLLAR REMITTANCES. 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, although there
can be no assurance, is expected, in due course to issue a certificate of
registration authorizing each of the scheduled payments of principal of, premium
on, and interest on the Notes or for payments of principal of,
16
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. 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, as described under "Description of the
Notes--Redemption--Redemption for Changes in Withholding Taxes," (ii) payments
in respect of the Notes in the event of redemption of the Notes by the Company,
as described under "Description of the Notes--Redemption--Optional Redemption by
the Company," (iii) payments in respect of the Notes in the event of an Asset
Sale Offer, as described under "Description of the Notes--Certain
Covenants--Disposition of Proceeds of Asset Sales," and (iv) payments in respect
of the Notes in the event of a Change of Control Offer, as described under
"Description of the Notes-- Redemption--Mandatory Redemption--Offers to Purchase
upon Change of Control and Certain Asset Sales." There can be no assurance that
any required consent from the Central Bank will be obtained.
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.
POLITICAL UNCERTAINTY. Historically, the Brazilian Government has often
changed monetary, credit, tariff and other policies to influence the course of
Brazil's economy. Such government actions have included wage and price controls
as well as other measures, such as freezing bank accounts, imposing capital
controls and inhibiting imports and exports. A primary objective of the
Brazilian Government in recent years has been to control government spending.
Some progress has been made, but fiscal deficits remain high. Reducing the
deficit is made more difficult by Brazil's Constitution, which requires the
Brazilian Government to make substantial funds available to the state
administrations, while limiting the Brazilian Government's ability to raise
sufficient funds from taxes. Changes in policy involving, among other things,
tariffs, exchange controls, regulatory policy and taxation, as well as events
such as inflation, devaluation, social instability or other political, economic
or diplomatic developments, could adversely affect the Brazilian economy and
have a material adverse effect on the Company's results of operations and
financial condition.
The Brazilian political environment has been marked by high levels of
uncertainty since Brazil returned to civilian rule in 1985 after 20 years of
military government. The death of a President-elect in 1985 and the resignation
of another President in 1992 in the midst of his impeachment trial, as well as
frequent turnover at and immediately below the cabinet level, have contributed
to delays in the adoption of coherent and sustained policies to confront the
country's economic issues. Mr. Fernando Henrique Cardoso, Brazil's Finance
Minister at the time of implementation of the Real Plan, became President of
Brazil in January 1995. President Cardoso was elected by a coalition of
political parties and, as a result, his administration is required, from time to
time, to accept certain compromises. Even though the Brazilian Constitution
currently prohibits re-election of the President, presently a Constitutional
Amendment is being examined by the Brazilian Congress, which, if approved, will
make re-election possible. President Cardoso has supported the Real Plan, the
reduction of inflation, privatization measures and certain free-market policies;
however, the Real Plan has not been definitively approved by the Brazilian
Congress although the provisional measures which instituted the Real Plan have
been successively reenacted. There can be no assurance that any of the
administration's policies, including the Real Plan will be approved without
modifications by the legislature.
17
ENFORCEABILITY OF JUDGMENTS. The Company has been advised by its Brazilian
counsel, Xavier, Bernardes, Braganca, Sociedade de Advogados, that judgments for
monetary claims obtained in U.S. courts arising of or in relation to the
obligations of PageNet do Brasil in respect of the Indenture or the Notes will
be enforceable in Brazil without reconsideration of the merits upon ratification
by the Brazilian Federal Supreme Court. The ratification generally will occur if
the foreign judgment (a) fulfills all formalities required for its
enforceability under the laws of the country where the foreign judgment is
granted, (b) is issued following personal service of process on the Company or
on a properly appointed agent for service of process, (c) is issued by a
competent court after proper service of process, (d) is not subject to appeal,
(e) is authenticated by a Brazilian consular office in the country where the
foreign judgment is issued and is accompanied by a sworn translation into
Portuguese and (f) is not contrary to Brazilian law, national sovereignty or
public policy or "good morals" (as set forth in Brazilian law) and does not
contain any provision which is or would for any reason not be upheld by the
courts of Brazil. Notwithstanding the foregoing, no assurance can be given that
ratification would be obtained, that the process described above can be
conducted in a timely manner or that a Brazilian court would enforce such a
monetary judgment for violation of the United States securities laws with
respect to the Notes.
Any judgment obtained against the Company in a court in Brazil in respect of
the Indenture or the Notes will be expressed in the Brazilian currency
equivalent of the U.S. dollar judgment amount at the commercial exchange rate on
the date on which such judgment is obtained, and such Brazilian currency amount
will be corrected in accordance with the exchange variation until the judgment
holder receives effective payment. See "Enforceability of Civil Liabilities."
RISK FACTORS RELATING TO THE COMPANY AND THE NOTES
CONSEQUENCES OF FAILURE TO PROPERLY TENDER OLD NOTES PURSUANT TO THE
EXCHANGE OFFER. Holders of Old Notes who do not exchange their Old Notes for
New Notes pursuant to the Exchange Offer will continue to be subject to the
following restrictions on transfer with respect to their Old Notes: (i) the
Remaining Old Notes may be resold only if registered pursuant to the Securities
Act, if any exemption from registration is available thereunder, or if neither
such registration nor such exemption is required by law, and (ii) the Remaining
Old Notes will bear a legend restricting transfer in the absence of registration
or an exemption therefrom. The Company does not currently anticipate that it
will register the Old Notes under the Securities Act. To the extent that Old
Notes are tendered and accepted in connection with the Exchange Offer, any
trading market for Remaining Old Notes could be adversely affected.
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for New Notes should allow sufficient time to
ensure timely delivery. The Company is under no duty to give notification of
defects or irregularities with respect to tenders of Old Notes for exchange. Old
Notes that are not tendered or that are tendered but not accepted by the Company
for exchange, will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof under the Securities
Act and, upon consummation of the Exchange Offer, certain registration rights
under the Notes Registration Rights Agreement will terminate.
LIMITED OPERATING HISTORY; FUTURE OPERATING LOSSES AND NEGATIVE CASH
FLOW. The Company was recently formed and has only recently commenced
operations. Prospective investors, therefore, have no meaningful historical
financial or operating information about the Company upon which to base an
evaluation of an investment in the Notes. Businesses which are in their initial
stages of development present substantial business and financial risks and may
suffer significant losses. Such early stage businesses must develop business
relationships, establish operating procedures, hire staff and complete other
tasks appropriate for the conduct of their intended business activities. The
Company's prospects must be considered in light of
18
the uncertainties associated with the formation of a new business in a
developing market with limited comparable competitor experience and under a
regulatory framework which may change substantially as the Brazilian paging
industry develops.
The Company currently is deploying a paging network in the Initial Markets,
plans to have substantially completed the buildout of its paging networks in the
Expansion Markets by the first quarter of 1999 and has recently launched
commercial services in Sao Paulo. The continuing development, construction and
operation of the Company's paging network is expected to place significant
demands on the Company's management and operational and financial resources and
there can be no assurance that delays in completing the planned buildout and
launching service will not occur and adversely affect the Company's liquidity
and results of operations. The Company's future performance will depend, in
part, on the Company's ability to implement its operational and financial
systems successfully and on a timely basis (including certain of its management
information systems), to expand substantially its employee base and to train and
manage its employees, including customer service, marketing and sales personnel.
The Company was formed in April 1996 and has had net losses of approximately
US$13.2 million and an accumulated deficit of approximately US$15.0 million from
inception through June 30, 1997. The Company first generated revenues in March
1997 and has experienced cumulative negative cash flow of approximately US$19.3
million from inception through June 30, 1997. The Company expects to continue to
experience substantial negative cash flow and operating losses as it develops
its paging infrastructure and rolls out its services. The Company anticipates
that its negative cash flow and operating losses will increase significantly in
the foreseeable future, and there can be no assurance that the Company will ever
be profitable or will generate positive cash flow in future years. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
NEED FOR ADDITIONAL FINANCING AND LIQUIDITY. The net proceeds from the sale
of the Old Notes available for use by the Company (together with cash on hand as
of June 6, 1997 of approximately US$9 million) will be used to fund operating
losses, capital expenditures, and working capital needs in the development of
the Initial Markets. While the Company believes that these funds will be
sufficient for the planned development of the Initial Markets, there can be no
assurance that operating losses will not exceed expectations or that
unanticipated expenditures will not be necessary or desirable. In addition, the
Company will require additional licenses in order to achieve the capacity
necessary to fully implement its strategy for the Initial Markets. The Company
is expected to require additional financing to fund the buildout of paging
infrastructure in the Expansion Markets and to fund operating losses associated
with the rollout of services in such markets. The Company has no committed
sources of financing and there can be no assurance that additional financing
will be available to the Company on acceptable terms when required. Such
additional financing may take the form of additional debt, thereby further
substantially increasing the total leverage of the Company and the risks to
holders of the Notes associated therewith. If adequate sources of additional
financing are not available, the Company may be forced to delay, scale back or
eliminate any portion of its plans and may be unable to meet its obligations in
respect of the Notes and other liabilities as they become due. Any additional
financing may take the form of debt or equity; however, it is presently expected
that a substantial portion of the additional financing required will take the
form of debt. In addition, it should be noted that, for so long as the Company
would constitute a PFIC for U.S. federal income tax purposes (which is expected
to continue through 1998), it may be difficult for the Company to pursue a
public equity offering to U.S. persons. See "Tax Considerations--United States,"
"--Substantial Indebtedness; Effect of Financial Leverage" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
SUBSTANTIAL INDEBTEDNESS; EFFECT OF FINANCIAL LEVERAGE. Following the
issuance of the Old Notes, the Company has indebtedness that is substantial in
relation to its shareholders' equity and cash flow. As of June 30, 1997, the
Company had an aggregate of approximately US$125.0 million of indebtedness
outstanding, representing the Old Notes, or 80% of total invested capital. The
Company is expected to
19
incur substantial additional indebtedness following the offering of the Old
Notes in the future to pursue its business strategy. See "--Need for Additional
Financing and Liquidity" and "Capitalization." As a result of the substantial
indebtedness of the Company following the offering of the Old Notes, fixed
charges of the Company are expected to exceed its earnings for the foreseeable
future and there can be no assurance that the Company's operating cash flow will
be sufficient to pay interest on the Notes following the termination of the
escrow arrangement for the Notes or to pay Additional Amounts or Additional
Interest at any time. In addition, the Indenture imposes, and other agreements
governing future indebtedness may contain, significant operating and financial
restrictions on the Company. Such restrictions will affect, and in many respects
significantly limit or prohibit, among other things, the ability of the Company
to incur additional indebtedness and pay dividends. These restrictions, in
combination with the leveraged nature of the Company, could limit the ability of
the Company to effect future financings or otherwise may restrict the Company's
activities. Substantial leverage poses the risk that the Company may not be able
to generate sufficient cash flow to service its indebtedness, including the
Notes, and to adequately fund its operations. The Indenture permits the Company
to incur additional indebtedness under certain conditions, and the Company
expects to incur substantial additional indebtedness as so permitted. See
"Description of the Notes."
The Company's leverage could have important consequences to the holders of
the Notes, including the following: (i) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired in the future; (ii)
a substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal of and interest on its indebtedness,
thereby reducing the funds available to the Company for other purposes; (iii)
the Company's leverage may hinder its ability to adjust rapidly to changing
market conditions; and (iv) the leverage could make the Company more vulnerable
in the event of a downturn in general economic conditions or its business.
UNCERTAINTIES ASSOCIATED WITH A NEW INDUSTRY; CUSTOMER ACCEPTANCE AND MARKET
DEMAND. The success of the Company's operating strategies is subject to factors
that are beyond the control of the Company and impossible to predict due, in
part, to the limited history of paging services in Brazil. Consequently, the
size of the Brazilian market for paging services, the rates of penetration of
that market, the acceptance of paging by subscribers and commercial advertisers,
the sensitivity of potential subscribers to the price of equipment and monthly
fees, the extent and nature of the competitive environment and the immediate and
long-term viability of paging services in Brazil are uncertain.
DEPENDENCE ON PAGENET TECHNICAL SERVICES AND SUPPORT. The Company has
entered into the Technical Services Agreement with PageNet for the provision of
technical services and support. The initial term of the Technical Services
Agreement is five years (through December 1, 2001). The term may be extended for
successive three-year terms unless either party provides notice of termination
at least one year prior to expiration. PageNet may, however, terminate the
agreement (a) six months after it ceases to beneficially own five percent of the
shares of Common Stock of the Company (the "Common Stock") on a fully diluted
basis or (b) if any person other than Warburg Pincus owns 50% or more of the
Common Stock on a fully diluted basis. The license to use the PageNet name in
Brazil will survive any termination of the Technical Services Agreement absent a
breach by the Company of its obligations thereunder or if Brazilian governmental
action requires a termination of the license. If PageNet were to fail to perform
its obligations thereunder or the Technical Services Agreement were terminated
or expired without renewal, there can be no assurance that the Company would
find another provider of such services and support, which could have a material
adverse effect on the Company's results of operations and financial condition.
See "Certain Transactions--Formation Transactions."
REGULATION AND OWNERSHIP OF LICENSES. Substantially all of the Company's
business activities are regulated by the Brazilian Ministry of Communications
(the "Ministry of Communications"). Such regulation
20
relates to the licensing of paging services, the construction of paging
infrastructure and foreign investment in paging license holders, among other
things. Changes in these regulations or in the interpretation of existing
regulations and the authorization of competing technologies on an advantageous
basis may materially adversely affect the Company. Under applicable provisions
of Brazilian law currently in effect, a license to operate a paging system in
Brazil may not be transferred for a period of three years following the date on
which such license is built out by its initial license holder and without prior
approval of the Ministry of Communications. Applicable paging regulations allow
license holders to enter into mutual operating agreements which permit third
parties to resell paging services. The licenses pursuant to which the Company
will conduct its business are held by certain license holders (the
"Licenseholders") and the Company has entered into operating agreements with the
Licenseholders. The Company also has entered into transfer agreements with the
Licenseholders for the transfer of the licenses to the Company after such
three-year period subject to necessary approvals or such earlier date as
permissible by the Ministry of Communications. There also can be no assurance
that the Ministry of Communications will approve the transfer of the licenses
upon the expiration of the three-year period during which such transfer is
prohibited. See "Certain Transactions--Formation Transactions."
The agreements with the Licenseholders are also subject to the risk that the
Licenseholders may undergo bankruptcy or "concordata" proceedings which may
result in the rejection or termination of the operating agreements. Further,
there is a risk that acts or omissions by a Licenseholder could result in the
revocation of its paging license or the unavailability of such license to the
Company. While certain covenants have been included in the operating agreements
to limit such risk, there can be no assurance that such covenants will not be
violated or rendered ineffective. See "Certain Transactions--Formation
Transactions."
In addition, the Company's ability to use paging licenses, to cause them to
be renewed when they expire and to secure the use of new licenses in the future
is essential to the Company's operations. However, these licenses are granted by
the Ministry of Communications, and there can be no assurance that this
governmental agency will not seek to unilaterally limit, revoke or otherwise
adversely modify the terms of these licenses or the Company's ability to use
such licenses in the future, any of which could have a material adverse effect
on the Company; and in such event the Company may have limited or no legal
recourse. Furthermore, there can be no assurance that renewals of these licenses
will be granted or, if renewed, that the renewal terms will not be on
substantially less favorable terms, any of which could have a material adverse
effect on the Company. See "Business--Government Regulation."
DEPENDENCE ON KEY PERSONNEL. The success of the Company and its growth
strategy depends in large part on the ability of the Company to attract and
retain key management, marketing and operating personnel and, in particular the
Company's current President and Vice President of Operations. There can be no
assurance the Company will continue to attract and retain the qualified
personnel needed for its business. The failure of the Company to retain the
services of such officers and other key personnel could have a material adverse
effect on the Company's results of operations and financial condition. The
Company has entered into employment agreements, containing non-competition and
non-solicitation provisions, with its President and Vice President of
Operations. The Company believes that its future success will depend, in part,
on its ability to attract and retain highly talented managerial personnel. There
can be no assurance that it will be able to attract and retain the personnel it
requires on acceptable terms. See "Management--Employment Agreements."
DEPENDENCE ON SATELLITES. The Company's business is dependent upon the
operation of satellites by third parties. In order to service its paging
business, the Company utilizes BrasilSat One, a Brazilian satellite, under a
five-year contract with Embratel Sistema Telebras, the Brazilian state-owned
satellite and long distance telephone company. Although the Company has not
experienced nor does it expect to experience any significant disruption of its
transmissions, satellites are subject to significant risks that may prevent or
impair proper commercial operations, including satellite defects, destruction
and damage,
21
incorrect orbital placement and transmission interference from various causes,
including poor weather. See "Business--Paging Systems Equipment."
COMPETITIVE INDUSTRY. The wireless communications industry in Brazil has
been and is expected to be highly competitive. The Company competes with
providers of paging services utilizing 35 MHz band and 931 MHz band delivery
systems and any new wireless telecommunications technology systems which may be
introduced, as well as telephone and cellular services generally. A number of
the Company's potential competitors have greater experience in the Brazilian
paging industry than the Company and certain of its competitors may have access
to significant debt or equity capital to pursue aggressive business plans. The
Company presently expects that it will compete with, among others, paging
networks operated by Vicom Servicos de Radiochamada Ltda. ("Teletrim"), Mobitel
S.A. Telecomunicacoes ("Mobitel"), Promptel e Comunicacoes S.A. ("Conectel"),
Ino Servicos Especializados de Telecomunicacoes Ltda. ("Powernet"), a company
partially owned by Motorola International Development Corporation, and Intelco
S.A. ("Intelco"). In addition, future technological advances in the
telecommunications industry could create new services or products competitive
with the paging services currently provided by the Company. There can be no
assurance that the Company would not be adversely affected by such new services
or products. See "Business--Competition."
INVESTMENT COMPANY ACT OF 1940. The Investment Company Act of 1940, as
amended (the "1940 Act"), subjects "investment companies" to registration and
regulation. Generally, an investment company is an issuer that is or is deemed
to be primarily engaged in the business of investing, reinvesting, owning,
holding or trading in certain securities. The Company intends to invest the net
proceeds of the offering of the Old Notes (after acquiring the Pledged
Securities) in cash equivalents pending utilization as set forth in "Use of
Proceeds." The Company will invest the net proceeds of the Offering of the Old
Notes and to conduct its affairs in such a manner as will cause it not to be an
"investment company" for purposes of the 1940 Act.
In addition, as Holding LLC's sole business is to hold Common Stock of the
Company and certain cash assets, under certain circumstances Holding LLC might
be deemed to be an investment company subject to registration and regulation by
reason of its activities. Holding LLC has been advised by its counsel that,
among other reasons, so long as the Company is a "majority-owned subsidiary" (as
defined under the 1940 Act) of Holding LLC, Holding LLC will not be deemed to be
an investment company. The Company has agreed not to become an "investment
company" in the Indenture and Holding LLC has agreed not to become an investment
company in certain agreements to which it is a party. However, due to actions
beyond the control of the Company and Holding LLC, there can be no assurance
that the Company or Holding LLC will not be deemed to be an investment company
in the future.
Accordingly, in order to establish with certainty their status under the
1940 Act, the Company and Holding LLC intend to apply for an order of the U.S.
Securities and Exchange Commission declaring that they are primarily engaged in
a business other than that of investing, reinvesting, owning, holding or trading
in securities, or that they are otherwise exempt from registration under the
1940 Act. There can be no assurance that this order will be granted. It is
believed that Holding LLC could not operate as described herein if it were
required to register as an investment company. If it is ultimately determined
that Holding LLC was required to so register, it is anticipated that Holding LLC
would be liquidated, holders of non-voting member interests would receive a
distribution of Common Stock and other assets of Holding LLC in accordance with
their respective interests in Holding LLC and, thereafter, such holders that are
U.S. persons would be required to make certain tax elections as a means of
avoiding certain adverse tax consequences. Potential investors in the New Notes
should consult with their own legal advisors with respect to the consequences,
if any, to them as a result of acquiring or holding such New Notes if either the
Company or Holding LLC were deemed to be an investment company, or a company
owned or controlled by an investment company.
22
FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE. This Prospectus contains
certain forward-looking statements and information relating to the Company that
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. When used in
this Prospectus, the words "anticipate," "believe," "estimate" and "expect" and
similar expressions, as they relate to the Company or the Company's management,
are intended to identify forward-looking statements. Such statements reflect the
current views of the Company with respect to future events and are subject to
certain risks, uncertainties and assumptions, including the risk factors
described in this Prospectus. Should one or more of these risks or uncertainties
materialize, or should underlying assumptions prove incorrect, actual results
may vary materially from those described herein as anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements.
ABSENCE OF PUBLIC MARKET. There is no existing trading market for the New
Notes and there can be no assurance regarding the future development of a market
for the New Notes, the ability of holders of any of the New Notes to sell such
New Notes or the price at which such holders may be able to sell their New
Notes. If such a market were to develop, the New Notes could trade at prices
that may be higher or lower than the initial offering price depending on many
factors, including prevailing interest rates, the Company's operating results,
the market for similar New Notes and general macroeconomic and market conditions
in Brazil. The Company does not presently intend to apply for listing of any of
the New Notes on any national Securities exchange or on the NASDAQ system.
23
THE COMPANY
The Company is a corporation (SOCIEDADE ANONIMA) organized in December 1996
under the laws of Brazil. The Company's predecessor was formed in April 1996 by
Warburg Pincus and members of the Company's senior management. The Company's
principal executive offices are located at Rua Alexandre Dumas, 1,711, Chacara
Santo Antonio, Sao Paulo, 04717-004, Brazil, and its telephone number is
011-55-11-538-3800.
Holding LLC is a limited liability company organized in March 1997 under the
laws of Delaware. Holding LLC's principal executive offices are located at c/o
Warburg, Pincus Ventures, L.P., 466 Lexington Avenue, New York, New York 10017.
Holding LLC's sole assets will be Common Stock of the Company and cash which
will be used to fund expenses of Holding LLC. See "Certain
Transactions--Restructuring Transactions."
The following chart sets forth the Company's ownership structure:
[GRAPHIC]
- ------------------------
(1) Includes subscription bonds of PageNet NV, TVA and Multiponto, which are
currently exercisable. Does not include approximately 1.72% of Common Stock
held by management.
24
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes as described in
this Prospectus, the Company will receive in exchange Old Notes in like
principal amount, the terms of which are identical in all material respects to
those of the New Notes, except that the New Notes have been registered under the
Securities Act and are issued free of any covenant regarding transfer
restrictions. The Old Notes surrendered in exchange for the New Notes will be
retired and cancelled and cannot be reissued. Accordingly, the issuance of the
New Notes will not result in any change in the indebtedness of the Company.
The net proceeds received by the Company from the sale of the Old Notes were
approximately US$120.0 million. Of these net proceeds, approximately US$46
million were used to purchase the Pledged Securities. The scheduled interest and
principal payments on Pledged Securities will be in an amount sufficient to
provide for payment in full when due of the first six scheduled interest
payments (exclusive of any Additional Amounts or Additional Interest which may
become payable) on the Notes through June 6, 2000.
The Company intends to use the net proceeds (after purchasing the Pledged
Securities), together with the cash on hand as of June 6, 1997 of approximately
US$9 million, primarily to fund operating losses, capital expenditures and
working capital needs in the development and operations of the Initial Markets.
Capital expenditures will include the purchase of pagers for leasing,
transmitters and other equipment and additional licenses in the Initial Markets.
The remaining proceeds are expected to be used for working capital and general
corporate purposes in the Initial Markets and, to the extent available, for the
buildout of the Expansion Markets. The Company believes that the net proceeds,
together with the cash on hand, will be sufficient to fund the buildout of the
Initial Markets.
The Pledged Securities have been pledged as security for payment of interest
and, under certain circumstances, repayment of principal of, the Notes. See
"Description of the Notes--Escrow Account." The Trustee holds the Pledged
Securities pursuant to a Pledge Agreement pending disbursement.
Because of the number of factors that will determine when and how the
Company funds its capital expenditures and operations, management will retain a
significant amount of discretion over the application of the net proceeds of the
sale of the Old Notes. Pending application of the available net proceeds, the
Company will invest these net proceeds (exclusive of the Escrow Account) in cash
equivalents.
25
EXCHANGE RATE DATA
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 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 are strongly 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. After implementation of the
Real Plan, the Central Bank allowed the REAL to float with minimal intervention.
However, as described below, on March 6, 1995, the Central Bank announced its
intention to intervene in the foreign exchange markets and has subsequently
intervened in the markets and taken other actions affecting such markets.
On August 1, 1993, the CRUZEIRO REAL replaced the CRUZEIRO as the unit of
Brazilian currency, with each CRUZEIRO REAL being equal to 1,000 CRUZEIROS.
Beginning in 1994, the Brazilian Government began implementation of the Real
Plan. On July 1, 1994, the REAL replaced the CRUZEIRO REAL as the unit of
Brazilian currency, with each REAL being equal to 2,750 CRUZEIROS REAIS and
having an exchange rate of R$1.00 to US$1.00. According to Brazilian law, the
issuance of REAIS is controlled by quantitative limits backed by a corresponding
amount of U.S. dollars in reserves, but the Brazilian Government subsequently
expanded those quantitative limits and allowed the REAL to float, with parity
between the REAL and the U.S. dollar (R$1.00 to US$1.00) as a ceiling.
On March 6, 1995, the Central Bank announced that it would intervene in the
market and buy or sell U.S. dollars, establishing a band (FAIXA DE FLUTUACAO) 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. See "Risk Factors--Factors Relating to Brazil--Economic Uncertainty;
Effects of Exchange Rate Fluctuations" and "--Factors Relating to
Brazil--Controls and Restrictions on U.S. Dollar Remittances." 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.
26
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.
EXCHANGE RATES PER US$1.00(1)
-----------------------------------------------
PERIOD LOW HIGH AVERAGE(2) PERIOD-END
- --------------------------------------------------------------- ---------- ---------- ---------- -----------
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 (through May 28).......................................... 1.039500 1.073100 1.055344 1.073100
- ------------------------
(1) The information set forth above is based on information 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 authorized the issuance of the Notes and, although there
can be no assurance, is expected, in due course, after the Closing Date, to
issue a certificate of registration authorizing each of the scheduled payments
of principal of, premium on, and interest on 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 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, as
described under "Description of the Notes--Redemption--Redemption for Changes in
Withholding Taxes," (ii) payments in respect of the Notes in the event of
redemption of the Notes by the Company, as described under "Description of the
Notes--Redemption--Optional Redemption by the Company," (iii) payments in
respect of the Notes in the event of an Asset Sale Offer, as described under
"Description of the Notes--Certain Covenants--Disposition of Proceeds of Asset
Sales," and (iv) payments in respect of the Notes in the event of a Change of
Control Offer, as described under "Description of the
Notes--Redemption--Mandatory Redemption--Offers to Purchase upon Change of
Control and Certain Asset Sales." There can be no assurance that any required
consent from the Central Bank will be obtained.
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.
27
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of the Company at June 30, 1997. This table should be read in
conjunction with the Financial Statements and notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
AS OF JUNE 30,
1997
------------------
(U.S. DOLLARS IN
THOUSANDS)
Cash and cash equivalents..................................................................... $ 12,686
--------
--------
Short-term investments........................................................................ $ 69,486
Pledged Securities............................................................................ $ 45,775
--------
--------
Long-term debt:
Notes....................................................................................... $ 125,000
--------
Total long-term debt.................................................................... 125,000
Redeemable preferred stock, no par value, authorized 63,000; issued and outstanding
30,000(1)(2)................................................................................ 31,711
Shareholders' equity (deficit):
Common Stock, no par value, authorized 2,037,387, issued and outstanding 1,378,401(2)(3).... 31
Accumulated deficit......................................................................... (14,952)
--------
Total shareholders' equity (deficit).................................................... (14,921)
--------
Total capitalization................................................................ $ 141,790
--------
--------
- ------------------------
(1) 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 the fifth anniversary of its issuance, the dividend increases
to an effective annual rate of 14% compounding quarterly. On the sixth
anniversary of its issuance, all previously accrued dividends will be paid
in kind. The annual dividend rate will increase to 16% in the seventh year,
18% in the eighth year, and 20% in the ninth and tenth years. After the
sixth anniversary, subject to the covenants contained in the Indenture, all
dividends will be payable in cash. The Company is required, subject to the
terms of the Indenture, to redeem the redeemable preferred stock at US$1,000
per share plus accrued and unpaid dividends on the tenth anniversary of its
issuance. In the event no cash dividends are paid on the redeemable
preferred stock, the aggregate redemption price would be US$108.2 million in
year ten.
(2) Redeemable preferred stock includes accrued dividends of US$1,711,000.
(3) Excludes 407,314 shares of Common Stock reserved for issuance to certain
shareholders under subscription bonds outstanding at an exercise price of
US$0.025 per share.
28
SELECTED FINANCIAL DATA
The selected financial information for the Company set forth below for the
period ended December 31, 1996 have been derived from the Consolidated Financial
Statements of the Company, which have been audited by Ernst & Young, Auditores
Independentes S.C. The selected financial information for the Company for the
six months ended June 30, 1997 have been derived from the unaudited Consolidated
Financial Statements of the Company. 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 Prospectus. 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.
INCEPTION TO SIX MONTHS ENDED
DECEMBER 31, 1996 JUNE 30, 1997
----------------- -------------------
(U.S. DOLLARS IN THOUSANDS)
STATEMENT OF OPERATIONS DATA:
Total revenue.......................................................... $-- $382
Cost of product sold................................................... -- 264
Operating costs and expenses:
Services, rent and maintenance....................................... -- 1,699
Selling, general and administrative.................................. 4,906 5,891
Depreciation and amortization........................................ 56 411
------ ------
Operating loss......................................................... 4,962 7,883
Other income (expense)................................................. 57 (453)
------ ------
Net loss............................................................... $4,905 $8,336
------ ------
------ ------
Ratio of earnings to fixed charges (1)................................. -- --
JUNE 30, 1997
--------------
(U.S. DOLLARS
IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents....................................................................... $ 12,686
Short-term investments.......................................................................... 69,486
Pledged Securities.............................................................................. 45,775
Working capital................................................................................. 96,171
Fixed assets, net............................................................................... 8,568
Total assets.................................................................................... 149,888
Total debt...................................................................................... 125,000
Redeemable preferred stock...................................................................... 31,711
Shareholders' equity (deficit).................................................................. $ (14,921)
- ------------------------
(1) For the period from inception to December 31, 1996 and the six months ended
June 30, 1997 earnings were insufficent to cover fixed charges by $4,905,000
and $8,336,000, respectively.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED ELSEWHERE IN THIS
PROSPECTUS, AND IN CONJUNCTION WITH THE DISCUSSION OF THE METHOD OF PRESENTATION
OF FINANCIAL INFORMATION UNDER "SELECTED FINANCIAL DATA." AS A NEW BUSINESS, THE
COMPANY IS SUBJECT TO ALL OF THE SUBSTANTIAL RISKS INHERENT IN THE COMMENCEMENT
OF A NEW BUSINESS ENTERPRISE WITH NEW MANAGEMENT. ALTHOUGH THE COMPANY BEGAN
GENERATING REVENUES IN MARCH 1997, THERE CAN BE NO ASSURANCE THAT THE COMPANY
WILL BE PROFITABLE. ADDITIONALLY, THE COMPANY HAS A LIMITED BUSINESS HISTORY
THAT INVESTORS CAN ANALYZE TO AID THEM IN MAKING AN INFORMED JUDGMENT AS TO THE
MERITS OF AN INVESTMENT IN THE COMPANY.
OVERVIEW
The Company commenced the buildout of its paging service in May 1996 and
began offering paging service in Sao Paulo in January 1997. The Company has also
substantially completed the buildout of its paging system in Rio de Janeiro,
where the Company expects to begin offering paging service in the first quarter
of 1998, and has installed transmitters in eight additional cities in Brazil.
Revenues are expected to increase as the Company adds subscribers and
receives monthly fees from a growing subscriber base. As the Company continues
to develop systems, positive EBITDA(1) from more developed systems is expected
to be offset partially or completely by corporate overhead, negative EBITDA from
less developed systems and from development costs associated with establishing
new systems. This trend is expected to continue until the Company has a
sufficiently large subscriber base to absorb operating and development costs of
new systems or no longer develops or invests in new systems.
The Company both leases and sells pagers to customers. Average monthly
revenue and customer acquisition costs differ depending on whether the customer
leases or purchases the pager.
LEASED PAGER CUSTOMERS. In addition to the initial capital investment, each
new subscriber requires an incremental investment which will vary based on the
type of product and service purchased. In the Sao Paulo market, for example, the
Company expects the acquisition cost for a customer who leases a pager to
consist primarily of the cost of the pager, the cost of terminal capacity,
certain other equipment and supplies, marketing and selling costs. The Company
capitalizes pager costs and depreciates these costs over 2 1/2 years. The
Company expenses marketing and selling costs. The Company does not anticipate
charging its subscribers a service initiation fee, although it may decide to
charge such a fee in the future in certain markets. Monthly revenue per
subscriber is expected to be approximately US$40 on average in 1997 (which
includes the monthly leasing charge), and is expected to fall moderately over
time.
PURCHASED PAGER CUSTOMERS. In the Sao Paulo market, the Company expects the
acquisition cost for a customer who purchases a pager to consist primarily of
the cost of terminal capacity, certain other equipment and supplies, marketing
and selling costs. The Company expenses the cost of the pager, marketing and
selling costs. Monthly revenue per subscriber is expected to be approximately
US$28 on average in 1997 and is expected to fall moderately over time.
- ------------------------
(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, working capital
requirements 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.
30
The Company's operating revenues consist primarily of monthly fees paid by
subscribers for paging service and leasing costs. System operating expenses
include a portion of costs of compensation and benefits for the Company's
employees, transmitter site rentals, telephone line costs, pager costs,
transmission costs, vehicle rental costs, repair and maintenance expenditures
and service call costs. Depreciation and amortization expenses consist primarily
of depreciation of leased pagers, transmitters, paging terminals, telephone
lines and cost of network installation.
The development of a new system requires significant expenditures, a
substantial portion of which are incurred before the realization of revenues.
These expenditures, together with the associated early operating expenses,
result in negative cash flow until an adequate revenue generating subscriber
base is established. As the subscriber base increases, revenues, as well as some
costs, generally increase while other costs remain constant or increase at
proportionately lower levels. Accordingly, although costs increase in the
aggregate as the subscriber base grows, the average costs per subscriber
generally decrease and operating margins generally increase.
RESULTS OF OPERATIONS
THREE MONTH AND SIX MONTH PERIODS ENDED JUNE 30, 1997
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.
As a result of the development of the Company's business in Sao Paulo and
Rio de Janeiro (the "Initial Markets") during the periods presented, the
period-to-period comparisons of the Company's results of operations are not
necessarily meaningful and should not be relied upon as an indication of future
performance. The three month and six month periods ended June 30, 1996 reflect
operations from April 7, 1996, the date of the Company's inception.
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1996 1997 1996 1997
---------- ------------- ---------- -------------
(AMOUNTS IN U.S. DOLLARS) (AMOUNTS IN U.S. DOLLARS)
Net revenue................................................. $ -- $ 93,979 $ -- $ 117,957
Operating costs and expenses:
Services rent and maintenance............................... -- 865,350 -- 1,699,237
Selling, general and administrative......................... 70,183 3,416,192 70,183 5,890,942
Depreciation and amortization............................... 512 258,227 512 410,400
---------- ------------- ---------- -------------
Total operating costs and expenses........................ 70,695 4,539,769 70,695 8,000,579
---------- ------------- ---------- -------------
Operating loss.............................................. (70,695) (4,445,790) (70,695) (7,882,622)
Other income (expense)...................................... (11,011) (424,843) (11,011) (453,334)
---------- ------------- ---------- -------------
Net loss.................................................... $ (81,706) $ (4,870,633) $ (81,706) $ (8,335,956)
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
Other data:
EBITDA...................................................... $ (70,183) $ (4,187,563) $ (70,183) $ (7,472,222)
Number of Subscribers at end of period...................... -- 5,163 -- 5,163
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
31
three and six months ended June 30, 1997, the Company was only offering service
to customers in Sao Paulo. During such three and six month periods, the Company
generated US$215,944 and US$257,567 in service revenue and US$273,899 and
US$302,780 in product sales to customers, had cost of sales of US$246,065 and
US$264,193, and had sales tax of US$149,799 and US$178,197, respectively. During
the three and six month periods ended June 20, 1997, the Company's net revenue
was US$93,979 and US$117,957, respectively. The Company had no revenue for the
three and six months ended June 30, 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 three and six month periods
ended June 30, 1997, the Company incurred US$865,350 and US$1,699,237,
respectively, of expenses in connection with the continued buildout of its
paging network and the operation of the Sao Paulo system. During the three and
six month periods ended June 30, 1996, the Company did not incur any service,
rent and maintenance expenses.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses include compensation benefits, rent, commissions, advertising,
promotion, bank fees, outside services and the provision for losses on accounts
receivable. During the three and six month periods ended June 30, 1997, the
Company incurred US$3,416,192 and US$5,890,942, respectively, of selling,
general and administrative expenses. Included in such amounts is approximately
US$1,613,000 of costs associated with the formation of the Company. Such amounts
increased from the prior year as the Company did not have significant operations
in 1996.
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 US$512 for the three and six month periods ended June 30, 1996 to
US$258,227 and US$410,400 for the three and six month periods ended June 30,
1997, primarily due the purchase and installation of equipment necessary to
buildout its paging network.
OPERATING LOSS. For the three and six month periods ended June 30, 1997 the
Company generated an operating losses of US$4,445,790 and US$7,882,622,
respectively, primarily due to low volume from a low subscriber base and
expenses in connection with the development of the Company's business as
explained above.
INTEREST EXPENSE. Interest expense increased to US$1,065,607 and
US$1,110,775 for the respective three and six month periods ended June 30, 1997,
primarily as a result of interest associated with the Notes.
INTEREST INCOME. Interest income increased to US$1,115,455 and US$1,365,766
for the respective three and six month periods ended June 30, 1997, primarily as
a result of investing the net proceeds from the Senior Note offering and
issuance by the Company of its redeemable preferred stock.
EXCHANGE AND TRANSLATION (LOSSES). Exchange and translation losses
increased to US$474,691 and US$708,325 for the respective three and six month
periods ended June 30, 1997, primarily as a result of its short-term investments
in Brazil.
INCOME TAXES. The Company did not have taxable income during the periods
presented and expects to generate losses for the foreseeable future.
NET LOSS. As explained above, net loss in the period presented is primarily
attributable to the still small subscriber base and expenses incurred during the
period in connection with the development of the Company's business.
32
PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1996
During the period from inception through December 31, 1996, the Company did
not generate any operating revenues. The Company incurred expenses of
US$4,961,639 in connection with the commencement of operations and the buildout
of its service. These expenses primarily consisted of payroll expenses,
professional fees and rent.
The Company earned interest income in such period of US$117,210 and had
exchange and translation losses of US$60,179.
As a result, the Company incurred a net loss in such period of US$4,904,608.
This loss is primarily attributable to the expenses incurred during the period
in connection with the development of the Company's business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operations and expansion into new markets and product lines
will require substantial capital investment for the development and installation
of paging systems and for the procurement of pagers and paging equipment. The
Company made capital expenditures of US$4,464,765 for the six months ended June
30, 1997.
The Company commenced the buildout of systems for its paging services in May
1996 and plans to substantially complete the buildout of the Initial Markets by
the first quarter of 1998 and plans to expand into other markets by the first
quarter of 1999. As of June 30, 1997, the Company has (1) completed the buildout
of its Sao Paulo system, which served 5,163 subscribers, (2) installed
transmitters in Sao Paulo, Rio de Janeiro and each of the additional eight
cities where it has secured licenses and (3) hired personnel and infrastructure
necessary to support the Company's Sao Paulo operations. The Company expects
that the proceeds of the Offering of the Old Notes, together with cash on hand,
will be sufficient to complete the buildout of Initial Markets and that it will
need to secure additional financing (in the form of debt or equity depending on
market conditions and the availablility of such financing) to complete the
planned buildout of any one of the Expansion Markets.
The Company has a line of credit with a commercial bank for approximately
US$5,600,000, of which, as of June 30, 1997, approximately US$600,000 is backing
an outstanding letter of credit and approximately US$5,000,000 is available to
the Company for borrowing.
The principal capital expenditure requirements to construct a paging system
involve the acquisition of pagers for leasing and the acquisition and
installation of transmission facilities, both of which are directly related to
the demand for paging service. Additional capital is required to fund operating
losses incurred during the initial stages of construction and rolling out
services. The Company currently anticipates that its cash requirements
(comprised of capital expenditures, working capital requirements, debt service
requirements and anticipated operating losses) for the next twelve months will
be approximately US$40 million and will be funded out of the proceeds of the
Offering of the Old Notes and cash on hand. The Company also anticipates its
cash requirements, from inception in April 1996 through December 20000, will be
approximately US$150 million, including approximately US$100 million in capital
expenditures, of which approximately US$55 million is attributable to the
purchase of pagers for leasing. The Company estimates that, of the US$150
million, approximately US$80 million will be required to fund capital
requirements for the Initial Markets through 2000 and approximately US$15
million will be required to fund the capital requirements for the Expansion
Markets through 2000. The actual amounts required by the Company will vary based
upon the time and success of the Company's rollout of services in its markets as
well as the mix between leased and purchased pagers. If demand for the Company's
services is less than expected, the Company should be able to reduce certain
costs that are to a large extent demand driven and/or delay the rollout of its
services in the Expansion Markets.
The Company also from time to time may selectively pursue the acquisition of
existing paging systems, although it currently has no pending acquisitions. The
Company may implement alternative technologies in the future. If such new
systems are launched, acquisitions are consummated or alternative technologies
33
implemented, substantial additional funds may be required. The Company intends
to fund such future cash requirements through the issuance of additional debt
and/or equity capital, joint ventures or other arrangements. There can be no
assurance that the Company will be able to obtain such debt or equity capital on
satisfactory terms, or at all, to meet its future financing needs.
The Company has raised approximately US$155 million from issuance of the
Company's redeemable preferred stock and the Old Notes. While the Company
believes that the available portion of these funds will be sufficient for the
planned development of the Initial Markets, there can be no assurance that
operating losses will not exceed expectations or that unanticipated expenditures
will not be necessary or desirable. In addition, commencing in December 2002,
subject to restrictions on the Company's ability to pay dividends contained in
the Indenture, dividends on the Company's Preferred Stock will be payable
quarterly in cash out of earnings and profits of the Company. Moreover, if
growth exceeds expectations, additional funds may be required to finance the
Company's expansion. The Company will also require additional financing to
buildout and commence services in the Expansion Markets. The Company has no
committed sources of financing and there can be no assurance that additional
financing will be available to the Company on acceptable terms when required. If
adequate sources of additional financing are not available, the Company may be
forced to delay, scale back or eliminate any portion of its plans. See "Risk
Factors--Risk Factors Relating to the Company and the Offering--Need for
Additional Financing and Liquidity" and "Description of the Notes--Certain
Covenants--Limitation on Additional Indebtedness and Preferred Stock of
Restricted Subsidiaries."
The Company has used approximately US$46 million of the net proceeds to
purchase a portfolio of securities, to be held in the United States, consisting
of U.S. Government Securities, that are pledged as security sufficient to cover
the first six payments of interest on the Notes through June 6, 2000 and, under
certain circumstances, as security for repayment of principal of the Notes. See
"Use of Proceeds."
INFLATION AND EXCHANGE RATES
Inflation and exchange rate variations may 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 which 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.
Generally, the effects of inflation in Brazil have been offset in part by
devaluation of the Brazilian currency relative to the U.S. dollar. Devaluation
of the REAL may also have an adverse effect on the Company. The Company collects
substantially all of its revenues in REAIS, but pays certain of its expenses,
including interest on the Notes and a significant portion of its equipment
costs, in U.S. dollars. To the extent the REAL depreciates at a rate greater
than the rate at which the Company raises prices, the value of the Company's
revenues (as expressed in U.S. dollars) may be adversely affected. This effect
on the Company's revenues may negatively impact the Company's ability to fund
U.S. dollar-based expenditures. The Company may experience economic loss with
respect to its investments and fluctuations in its reported results of
operations solely as a result of currency rate fluctuations, which may have a
material adverse effect on the Company's financial condition. The Company
intends to explore various alternatives that may be available to hedge exchange
rate risks, although there can be no assurance that any such alternatives will
be available on terms acceptable to the Company. Accordingly, devaluation of the
REAL may have a material adverse effect on the Company's results of operations
and financial condition.
34
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
In connection with the sale of the Old Notes, the Company entered into the
Notes Registration Rights Agreement with the Initial Purchasers, pursuant to
which the Company agreed to use its best efforts to file with the Commission a
registration statement with respect to the exchange of the Old Notes for a
series of registered debt securities with terms identical in all material
respects to the terms of the Old Notes, except that the New Notes are issued
free from any covenant regarding transfer restrictions, and except that if the
Exchange Offer is not consummated by November 3, 1997, the interest rate borne
by the Old Notes will increase by 0.50% per annum for the first 90-day period
following November 3, 1997 and will increase by an additional 0.50% per annum
with respect to each subsequent 45-day period up to a maximum amount of 2.00%
per annum.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Commission as set forth in certain no-action letters addressed to
other parties in other transactions. However, the Company has not sought its own
no-action letter and there can be no assurance that the staff of the Commission
would make a similar determination with respect to the Exchange Offer as in such
other circumstances. Based upon these interpretations by the staff of the
Commission, the Company believes that New Notes issued pursuant to this Exchange
Offer in exchange for Old Notes may be offered for resale, resold and otherwise
transferred by a holder thereof other than (i) a broker-dealer who purchased
such Old Notes directly from the Company to resell pursuant to Rule 144A or any
other available exemption under the Securities Act or (ii) a person that is an
"affiliate" (as defined in Rule 405 of the Securities Act) of the Company
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are acquired in the ordinary
course of such holder's business and that such holder is not participating, and
has no arrangement or understanding with any person to participate, in the
distribution of such New Notes. Holders of Old Notes accepting the Exchange
Offer will represent to the Company in the Letter of Transmittal that such
conditions have been met. Any holder who participates in the Exchange Offer for
the purpose of participating in a distribution of the New Notes may not rely on
the position of the staff of the Commission as set forth in these no-action
letters and would have to comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any secondary resale
transaction. A secondary resale transaction in the United States by a holder who
is using the Exchange Offer to participate in the distribution of New Notes must
be covered by a registration statement containing the selling securityholder
information required by Item 507 of Regulation S-K of the Securities Act.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it acquired the Old Notes as a result
of market-making activities or other trading activities and will deliver a
prospectus in connection with any resale of such New Notes. This Prospectus, as
it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with resales of New Notes received in exchange for
Old Notes where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities. The Letter of
Transmittal states that by acknowledging and delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. The Company has agreed that for a period of 180
days after the Expiration Date, it will make this Prospectus available to
broker-dealers for use in connection with any such resale. See "Plan of
Distribution."
Except as aforesaid, this Prospectus may not be used for an offer to resell,
resale or other retransfer of New Notes.
The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Old Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
35
TERMS OF THE EXCHANGE
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will, unless such Old Notes are withdrawn in accordance with the
withdrawal rights specified in "--Withdrawal of Tenders" below, accept any and
all Old Notes validly tendered prior to 5:00 p.m., New York City time, on the
Expiration Date. The date of acceptance for exchange of the Old Notes, and
consummation of the Exchange Offer, is the Exchange Date, which will be the
first business day following the Expiration Date (unless extended as described
herein). The Company will issue, on or promptly after the Exchange Date, an
aggregate principal amount of up to US$125,000,000 of New Notes in exchange for
a like principal amount of outstanding Old Notes tendered and accepted in
connection with the Exchange Offer. The New Notes issued in connection with the
Exchange Offer will be delivered on the earliest practicable date following the
Exchange Date. Holders may tender some or all of their Old Notes in connection
with the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of US$1,000.
The terms of the New Notes are identical in all material respects to the
terms of the Old Notes, except that the New Notes have been registered under the
Securities Act and are issued free from any covenant regarding transfer
restrictions, and except that if the Exchange Offer is not consummated by
November 3, 1997, the interest rate borne by the Old Notes will increase by
0.50% per annum for the first 90-day period following November 3, 1997 and will
increase by an additional 0.50% per annum with respect to each subsequent 45-day
period up to a maximum amount of 2.00% per annum. The New Notes will evidence
the same debt as the Old Notes and will be issued under and be entitled to the
same benefits under the Indenture as the Old Notes. As of the date of this
Prospectus, US$125,000,000 aggregate principal amount of the Old Notes is
outstanding.
In connection with the issuance of the Old Notes, the Company arranged for
the Old Notes originally purchased by qualified institutional buyers to be
issued and transferable in book-entry form through the facilities of The
Depository Trust Company ("DTC"), acting as depository. Except as described in
"Book-Entry; Delivery and Form," the New Notes will be issued in the form of a
global note registered in the name of DTC or its nominee and each holder's
interest therein will be transferable in book-entry form through DTC. See
"Book-Entry; Delivery and Form."
Holders of Old Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Old Notes which are not tendered for
exchange or are tendered but not accepted in connection with the Exchange Offer
will remain outstanding and be entitled to the benefits of the Indenture, but
will not be entitled to any registration rights under the Notes Registration
Rights Agreement.
The Company shall be deemed to have accepted validly tendered Old Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purposes of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Old Notes will be returned,
without expense, to the tendering holder thereof as promptly as practicable
after the Expiration Date.
Holders who tender Old Notes in connection with the Exchange Offer will not
be required to pay brokerage commissions or fees or, subject to the instructions
in the Letter of Transmittal, transfer taxes with respect to the exchange of Old
Notes in connection with the Exchange Offer. The Company will pay all charges
and expenses, other than certain applicable taxes described below, in connection
with the Exchange Offer. See "-- Fees and Expenses."
36
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
October 27, 1997, unless extended by the Company in its sold discretion, in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended.
The Company reserves the right, in its sole discretion (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer and to refuse to accept Old Notes not previously accepted, if any
of the conditions set forth below under "--Conditions to the Exchange Offer"
shall not have been satisfied and shall not have been waived by the Company (if
permitted to be waived by the Company) and (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral or
written notice thereof to the registered holders. If the Exchange Offer is
amended in a manner determined by the Company to constitute a material change,
the Company will promptly disclose such amendment by means of a prospectus
supplement that will be distributed to the registered holders of the Old Notes,
and the Company will extend the Exchange Offer for a period of five to ten
business days, depending upon the significance of the amendment and the manner
of disclosure to the registered holder, if the Exchange Offer would otherwise
expire during such five to ten business day period.
If the Company determines to make a public announcement of any delay,
extension, amendment or termination of the Exchange Offer, the Company shall
have no obligation to publish, advertise or otherwise communicate any such
public announcement, other than by making a timely release to an appropriate
news agency.
INTEREST ON THE NEW NOTES
The New Notes will bear interest at the rate of 13 1/2% per annum. Interest
on the New Notes shall accrue from the last Interest Payment Date (June 6 or
December 6) on which interest was paid on the Old Notes surrendered or, if no
interest has been paid on the Old Notes, from June 6, 1996.
Interest on the New Notes will be payable semiannually on June 6 and
December 6 of each year, commencing on the first Interest Payment Date following
the issuance thereof.
Holders of Old Notes whose Old Notes are accepted for exchange will not
receive interest on such Old Notes for any period subsequent to the last
interest payment date to occur prior to the issue date of the New Notes, and
will be deemed to have waived the right to receive any interest payment on the
Old Notes accrued from and after such interest payment date.
CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or to exchange, any Old Notes for any New
Notes, and may terminate or amend the Exchange Offer before the acceptance of
any Old Notes for exchange if:
(a) any action or proceeding is instituted or threatened in any
court or by or before any governmental agency relating to the Exchange
Offer which, in the Company's reasonable good faith judgment, would be
expected to impair the ability of the Company to proceed with the
Exchange Offer, or
(b) any law, statute, rule or regulation is adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by the
Commission or its staff, which, in the Company's reasonable good faith
judgment, would be expected to impair the ability of the Company to
proceed with the Exchange Offer.
37
If the Company determines in its reasonable good faith judgment that any of
the foregoing conditions exist, the Company may (i) refuse to accept any Old
Notes and return all tendered Old Notes to the tendering holders, (ii) extend
the Exchange Offer and retain all Old Notes tendered prior to the expiration of
the Exchange Offer, subject, however, to the rights of holders who tendered such
Old Notes to withdraw their tendered Old Notes which have not been withdrawn. If
such waiver constitutes a material change to the Exchange Offer, the Company
will promptly disclose such waiver by means of a prospectus supplement that will
be distributed to the registered holders, and the Company will extend the
Exchange Offer for a period of five to ten business days, depending upon the
significance of the waiver and the manner of disclosure to the registered
holders, if the Exchange Offer would otherwise expire during such five to ten
business days.
PROCEDURES FOR TENDERING
Only a holder of record of Old Notes on September 23, 1997 may tender such
Old Notes in connection with the Exchange Offer. To tender in connection with
the Exchange Offer, a holder must complete, sign and date the Letter of
Transmittal, or a facsimile thereof, have the signatures thereon guaranteed if
required by the Letter of Transmittal and mail or otherwise deliver such Letter
of Transmittal or such facsimile, together with the Old Notes (unless such
tender is being effected pursuant to the procedure for book-entry transfer
described below) and any other required documents, to the Exchange Agent prior
to 5:00 p.m., New York City time, on the Expiration Date.
Any financial institution that is a participant in DTC's Book-Entry Transfer
Facility system may make book-entry delivery of the Old Notes by causing DTC to
transfer such Old Notes into the Exchange Agent's account in accordance with
DTC's procedure for such transfer. Although delivery of Old Notes may be
effected through book-entry transfer into the Exchange Agent's Account at DTC,
the Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received or confirmed by the Exchange Agent at its addresses set forth
under the caption "Exchange Agent," below, prior to 5:00 p.m., New York City
time, on the Expiration Date. DELIVERY OF DOCUMENTS TO DTC IN ACCORDANCE WITH
ITS PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT.
The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure deliver to the Exchange Agent before the Expiration Date. No
Letter of Transmittal or Old Notes should be sent to the Company. Holders may
request their respective brokers, dealers, commercial banks, trust companies or
nominees to effect the tenders for such holders.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal and delivery of such owner's
Old Notes, either make appropriate arrangements to register ownership of the Old
Notes in such owner's name or obtain a properly completed bond power from the
registered holder. The transfer of registered ownership may take considerable
time.
Signature on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by an Eligible Institution (as defined below) unless
the Old Notes tendered pursuant thereto are tendered (i) by a registered holder
who has not completed the box entitled "Special Payment Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal, or (ii) for the
account of an Eligible
38
Institution. In the event that signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act") (an "Eligible
Institution").
If the Letter of Transmittal is signed by a person other than the registered
holder of any Old Notes listed therein, such Old Notes must be endorsed by such
registered holder or accompanied by a properly completed bond power, in each
case signed or endorsed in blank by such registered holder as such registered
holder's name appears on such Old Notes.
If the Letter of Transmittal or any Old Notes or bond powers are signed or
endorsed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and unless waived by the
Company, evidence satisfactory to the Company of their authority to so act must
be submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance and withdrawal of tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes whose acceptance by the Company would, in
the opinion of U.S. counsel for the Company, be unlawful. The Company also
reserves the right to waive any defects, irregularities or conditions of tender
as to any particular Old Notes either before or after the Expiration Date. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Old Notes must be accrued within such time as the
Company shall determine. Although the Company intends to request the Exchange
Agent to notify holders of defects or irregularities with respect to tenders of
Old Notes, neither the Company, the Exchange Agent nor any other person shall
have any duty or incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration date.
In addition, the Company reserves the right, as set forth above under
caption "--Conditions to the Exchange Offer," to terminate the Exchange Offer.
By tendering, each holder represents to the Company that, among other
things, the New Notes acquired in connection with the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Notes, whether or not such person is the holder, that neither the holder nor any
such other person has an arrangement or understanding with any person to
participate in the distribution of such New Notes and that neither the holder
nor any such other person is an "affiliate" (as defined in rule 405 under the
Securities Act) of the Company. If the holder is a broker-dealer which will
receive New Notes for its own account in exchange of Old Notes, it will
acknowledge that it acquired such Old Notes as the result of market making
activities or other trading activities and it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, or (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the
39
Exchange Agent, or (iii) cannot complete the procedure for book-entry transfer,
prior to the Expiration Date, may effect a tender of their Old Notes if:
(a) the tender is made through an Eligible Institution;
(b) Prior to the Expiration Date, the Exchange Agent received from
such Eligible Institution a properly completed and duly executed Notice
of Guaranteed Deliver (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate
number(s) of such Old Notes and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing
that with five business days after the Expiration Date, the Letter of
Transmittal (or facsimile thereof) together with the certificate(s)
representing the Old Notes to be tendered in proper form for transfer (or
confirmation of a book-entry transfer into the Exchange Agent's account
at DTC of Old Notes delivered electronically) and any other documents
required by the Letter of Transmittal will be deposited by the Eligible
Institution with the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof) as well as the certificate(s) representing all
tendered Old Notes in proper form for transfer (or confirmation of a
book-entry transfer into the Exchange Agent's account at DTC of Old Notes
delivered electronically) and all other documents required by the Letter
of Transmittal are received by the Exchange Agent within five business
days after the Expiration Date.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00p.m, New York City time, on the Expiration Date.
To withdraw a tender of Old Notes in connection with the Exchange Offer, a
written or facsimile transmission notice of withdrawal must be received by the
Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City
time, on the Expiration Date. Any such notice of withdrawal must (i) specify the
name of the person who deposited the Old Notes to be withdrawn (the
"Depositor"), (ii) identify the Old Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Old Notes), (iii) be
signed by the Depositor in the same manner as the original signature on the
Letter of Transmittal by which such Old Notes were tendered (including any
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee register the transfer of such Old Notes into the
name of the person withdrawing the tender, and (iv) specify the name in which
any such Old Notes are to be registered, if different from that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not be have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly re-tendered. Any Old Notes which have been
tendered but which are not accepted for exchange or which are withdrawn will be
returned to the holder thereof without cost to such holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer. Properly withdrawn Old Notes may be re-tendered by following one of the
procedures described above under the caption "-- Procedures for Tendering" at
any time prior to the Expiration Date.
EXCHANGE AGENT
The Chase Manhattan Bank has been appointed as Exchange Agent in connection
with the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent, at its offices at 450 West 33rd Street, 15th
Floor, New York New York 10001. The Exchange Agent's telephone number is (212)
946-3014 and facsimile number is (212) 946-8177.
40
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer.
The Company will pay certain other expenses to be incurred in connection
with the Exchange Offer, including the fees and expenses of the Trustee,
accounting and certain legal fees.
Holders who tender their Old Notes for exchange will not be obligated to pay
any transfer taxes in connection therewith. If, however, New Notes are to be
delivered to, or are to be issued in the name of, any person other than the
registered holder of the Old Notes tendered, or if tendered Old Notes are
registered in the name of any person other than the person signing the Letter of
Transmittal, or if a transfer tax is imposed for any reason other than the
exchange of Old Notes in connection with the Exchange Offer, then the amount of
any such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendered holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes
as reflected in the Company's accounting records on the date of the exchange.
Accordingly, no gain or loss for accounting purposes will be recognized by the
Company upon the consummation of the Exchange Offer. Any expenses of the
Exchange Offer that are paid by the Company will be amortized by the Company
over the term of the New Notes under generally accepted accounting principles.
CONSEQUENCES OF FAILURE TO PROPERLY TENDER OLD NOTES IN THE EXCHANGE
Issuance of the New Notes in exchange for the Old Notes pursuant to the
Exchange Offer will be made only after timely receipt by the Exchange Agent of
such Old Notes, a properly completed and duly executed Letter of Transmittal and
all other required documents. Therefore, holders of the Old Notes desiring to
tender such Old Notes in exchange for New Notes should allow sufficient time to
ensure timely delivery. The Company is under no duty to give notification of
defects or irregularities with respect to tenders of Old Notes for exchange. Old
Notes that are not tendered or that are tendered but not accepted by the Company
for exchange, will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof under the Securities
Act and, upon consummation of the Exchange Offer, certain registration rights
under the Notes Registration Rights Agreement will terminate.
In the event the Exchange Offer is consummated, the Company will not be
required to register the Remaining Old Notes. Remaining Old Notes will continue
to be subject to the following restrictions on transfer: (i) the Remaining Old
Notes may be resold only if registered pursuant to the Securities Act, if any
exemption from registration is available thereunder, or if neither such
registration nor such exemption is required by law, and (ii) the Remaining Old
Notes will bear a legend restricting transfer in the absence of registration or
an exemption therefrom. The Company does not currently anticipate that it will
register the Old Notes under the Securities Act. To the extent that Old Notes
are tendered and accepted in connection with the Exchange Offer, any trading
market for Remaining Old Notes could be adversely affected.
41
INDUSTRY
OVERVIEW
Paging provides a communications link to a paging service subscriber
throughout the paging service area. Each transmission point is comprised of a
radio transmitter which sits atop a building or tower and services the area
within an approximate 25 mile radius from its location, depending upon signal
power and the surrounding terrain. Typically, a series of transmitters are
linked together and broadcast messages simultaneously (known as simulcasting) to
cover a relatively large and densely populated region. Transmitters are also
linked together to provide national coverage for a paging service subscriber.
Generally, the cost of paging services to the subscriber increases as the area
covered by such paging services increases.
The paging service subscriber carries a pager which is a radio receiver
tuned to a specific frequency and which only accepts messages sent out on that
specific frequency based on a special frequency-unique code. An individual
accesses a paging subscriber's pager by calling a paging terminal and leaving
information. Once the information is left, the paging terminal encodes the
information and sends it to each of the transmitters, which then, in turn and
simultaneously, broadcast the information in the paging service area. Typically,
a paging subscriber receives the information within less than one minute after
the information is left with the paging terminal. Transmitters can be connected
to the paging terminal by dedicated telephone lines, microwave links or
satellites. The most sophisticated paging systems use satellites to link their
transmitters. This allows for the easiest and most reliable transmission of
messages. In a satellite-linked system, the information received by the paging
terminal is encoded and sent via satellite to receivers which are attached to
each of the transmitters in the service area. The receivers then transform the
satellite signal into a signal that is simulcast in the service area for receipt
by the paging unit.
The type of information left by an individual and accepted by a pager is
dependent on the type of service the subscriber has chosen. The "tone only"
pager is one of the oldest and simplest types of service, allowing the sender to
signal to the subscriber that there is a message waiting: the pager is equipped
with a beeper that, when triggered, indicates that the subscriber must call a
pre-determined telephone number, typically an answering service or the
subscriber's office, to gain additional information. The "numeric" display pager
is the most popular type of pager in the United States. A numeric pager allows a
person to send a message consisting of up to 20 numeric characters (typically a
telephone number), using a touch tone telephone, which is then displayed on the
subscriber's pager. The "alphanumeric" pager currently provides the subscriber
with the ability to receive and store the most information, allowing a person to
send a textual message containing from 40 (which is typical) up to 1,990
characters, by calling a dispatch center or by using a computer to
electronically transmit the message which is then displayed on the subscriber's
pager. In many cases, the information-rich alphanumeric message eliminates the
need to make another call or alters the timing of another call.
Additional services may be combined with some of the above services for an
additional cost to the subscriber including a customized greeting to the sender,
voice mail attached to the pager which allows the sender to leave a voice
message (which must be accessed by telephone), and an extended subscriber
service area which allows a subscriber to be paged in a larger geographic area.
Typically, a subscriber is assigned a unique telephone number identifying
that subscriber to the paging terminal when a call is placed to his or her
pager. However, in areas where access to direct dial telephone numbers are
limited, paging companies have employed a personal identification number ("PIN")
system whereby a sender calls a dispatch center and gives the operator the
subscriber's PIN followed by the message. The transmission of messages through
transmitters and the subsequent receipt of those messages by the pager has been
accomplished by using a number of different paging protocols that allow messages
to be broadcast at faster and faster speeds. Transmitter manufacturers have
created technology that substantially increases transmission speed, which in
turn increases frequency capacity. The most recent technological innovation,
known as FLEX-Registered Trademark-, allows for the broadcast of messages at
three times the speed and capacity of the traditional paging protocol.
42
THE UNITED STATES PAGING INDUSTRY
The United States paging industry has been in existence since 1949 when the
Federal Communications Commission allocated a group of radio frequencies for use
in providing one-way and two-way types of mobile communications services. The
industry grew slowly at first as the quality and reliability of equipment was
developed and the market began to perceive the benefits of mobile
communications. Equipment reliability improved dramatically in the 1970s and
potential customers gained a better understanding of the time savings and
efficiencies that paging services could provide. The 1980s saw significant
developments in the paging industry. New companies began offering monthly
numeric paging service at affordable rates, thereby stimulating demand and
developing the paging industry. This development led to industry consolidation
and transformed the business from a local into a national business. Although
alphanumeric paging was available in the 1980s, it was not until the mid 1990s
with the development of the FLEX-Registered Trademark- transmission protocol
that alphanumeric service became economically viable. In addition to the growth
of alphanumeric paging, the 1990s have been characterized by three other
significant changes: the introduction of national paging at reasonable prices
allowing customers to access national coverage for less than US$30 per month,
the substantial consolidation of medium-sized paging companies and the rapid
growth in the consumer market through the development of the reseller
distribution channel.
In the United States, customers utilizing numeric pagers typically pay
approximately US$65 for the pager and US$10 per month for local service, while
those who take advantage of the more sophisticated alphanumeric pagers typically
pay approximately US$150 for the pager and US$15 per month for local service and
up to US$55 per month for enhanced services, including approximately US$30 per
month for nationwide service. Depending on the credit rating of a business or an
individual, these products may be leased rather than purchased, for an
additional monthly charge of US$1 to US$3, included in the price. Each of these
services is subject to call limits and also may be augmented with additional
revenue enhancing services such as customized greetings, voice mail or extended
coverage. As prices have decreased in the United States, customers have chosen
to pay for the ability to get pages in wider geographic areas, and consequently
nationwide paging has been an increasingly important product in the United
States during the last three years.
PAGENET
PageNet is the largest provider of paging services in the United States,
with approximately 9.5 million pagers in service in the United States as of
December 31, 1996, more than the combined number of pagers in service of the
second and third largest U.S. providers of paging services. PageNet was formed
in 1981, aggressively entered the U.S. paging market, and rapidly gained market
share to become a dominant paging service provider. In 1983, PageNet began to
build new paging systems in geographic markets not previously served by PageNet
and since then has established 49 new independent paging operations in major
metropolitan markets and regional clusters. PageNet has employed a low price and
high quality aggressive marketing strategy which has proved successful in making
it the largest paging company in the United States.
PageNet, an equity owner of PageNet do Brasil, has entered into the
Technical Services Agreement which provides the Company with access to PageNet's
products, paging expertise, intellectual property (including the exclusive use
of PageNet's tradename in Brazil), volume supplier discounts and other
capabilities.
BRAZILIAN PAGING INDUSTRY
OVERVIEW. The paging industry in Brazil is in its formative stage. Although
paging services were first offered in 1968, the industry remained undeveloped
until the early 1990s when, following the Brazilian Government's codification of
a regulatory framework for paging services in 1991, several paging companies
entered the Sao Paulo market. In contrast to the United States, where the wide
availability of touch tone
43
telephones has made numeric pagers the service of choice, in Brazil touch tone
telephones are far less common and as a result alphanumeric paging service
accounts for approximately 95% of the paging market. Moreover, the
information-rich messages transmitted to alphanumeric pagers often eliminate the
need for a return telephone call by delivering a complete message.
Paging is one of the areas within the Brazilian telecommunications sector
that is open to private investment and, over the last three years, the Brazilian
paging market has experienced rapid growth. The Company estimates that, as of
December 1996, there were approximately 800,000 pagers in operation in Brazil
(up from approximately 400,000 in 1995 and 200,000 in 1994), representing a
market penetration of less than one-half of one percent of the population and an
annual growth rate of 100% since 1994.
The Company believes that the demand for paging services in Brazil is high
as a result of the convergence of three factors: Brazil's large population, its
growing and stable economy and a state-owned telephone infrastructure that is
insufficient and expensive. The waiting list to obtain ordinary telephone lines
from the local service providers is approximately one to three years and
although there has developed a private market for the immediate purchase of
telephone lines, the cost of a telephone line in the private market is
approximately US$3,000, which is often too expensive for the average wage
earner. For those who desire reliable portable communications, paging service
offers an economical alternative to cellular telephone service, which is far
more expensive and currently subject to long waiting lists to obtain service.
EXISTING MARKETING STRATEGIES. Prior to 1996, there was very little
marketing by Brazilian paging operators. Most advertising was limited to small
announcements in newspapers and in a few magazines. Paging companies had limited
financial resources and, due to significant concurrent demand for pagers,
expended few resources on promotional activities. This trend began to change in
the second half of 1995 with the entrance of new competitors into the paging
market. Operators began to focus on the need to quickly capture market share.
Consequently, several paging companies have expanded their advertising campaigns
to include radio, outdoors and full color announcements in major magazines.
Currently, the Company estimates that corporate customers account for
approximately 30% of industry sales. Management believes that most major paging
operators have focused on the consumer market as opposed to the business market
which tends to be more oriented towards leasing, due to limited access to
working capital. While all major paging operators in Brazil maintain direct
sales personnel and stores, the tendency recently has been to emphasize the
development of alternative distribution channels allowing retailers to sell
pagers and paging services on behalf of the paging company to individual
customers for a fee. Generally, the paging company provides retailers with
pagers at wholesale prices and the retailer then sells the pagers to the
customer. The Brazilian reseller market, unlike the U.S. market, is in its most
formative stages. Resellers typically receive both pagers and bulk paging
service from the paging company, and provide both the pager and the paging
service to the customer, while maintaining responsibility for various
administrative costs over the life of the subscriber.
Although the Sao Paulo and Rio de Janeiro metropolitan areas together
account for approximately 67% of the existing paging market in Brazil, their
paging penetration rates are only approximately 2.2% and 1.8%, respectively. As
of December 31, 1996, two companies, Teletrim and Mobitel, together accounted
for an aggregate of approximately 330,000 pagers in service including
approximately 45% of the Sao Paulo market and approximately 62% of the Rio de
Janiero market.
44
BUSINESS
COMPANY OVERVIEW
PageNet do Brasil's objective is to become 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 currently
serves approximately 5,163 subscribers. The Company has installed 48 paging
transmitters in the Existing Coverage Area, commenced offering paging services
in greater Sao Paulo in January 1997, and plans to begin marketing paging
services in greater Rio de Janeiro in the first quarter of 1998 and in three
additional cities in the first quarter of 1999. PageNet do Brasil was formed by
PageNet NV, a wholly owned subsidiary of PageNet, the largest paging company in
the United States, Warburg Pincus, a private equity fund, TVA, a leading pay
television company in Brazil, and a wholly owned subsidiary of Abril S.A., Latin
America's largest publishing enterprise, IVP Cayman, the general partner of
which is IVP, a private investment fund focused on Brazil, and Multiponto, an
equity investor focused on the Brazilian telecommunications sector. Management
believes that a number of factors create a favorable environment for the paging
industry in Brazil, including: (i) Brazil's large population, (ii) its growing
and stable economy, (iii) the paging market's relatively low penetration rate
and high historical growth rate, and (iv) the relatively high demand for
reliable communications services. The Company believes it will be well
positioned to be a leading provider of paging services in Brazil because of its
state-of-the-art infrastructure, high quality services, low cost structure and
strategic relationships.
The Company has completed the buildout of the Sao Paulo system, installed
the infrastructure necessary to support its Sao Paulo operations and
substantially built out its paging system in Rio de Janeiro. The Company is
currently focused on the Initial Markets (Sao Paulo and Rio de Janeiro) and
expects to offer paging services in the Expansion Markets (Brasilia, Curitiba
and Belo Horizonte) by the first quarter of 1999. The Company currently offers
its Sao Paulo subscribers extended paging service in the other cities in the
Existing Coverage Area.
BUSINESS STRATEGY
The Company's strategy is to become a leading provider of paging services in
Brazil. The principal elements of the Company's business strategy are to: (i)
provide high quality paging services at a low cost, (ii) leverage the PageNet
relationship, (iii) gain rapid market penetration, and (iv) provide superior
customer service.
PROVIDE HIGH QUALITY PAGING SERVICES AT A LOW COST. The Company has
employed state-of-the-art FLEX-Registered Trademark- technology developed by
Motorola, Inc. and is using equipment similar to that used by PageNet in the
United States. Furthermore, the Company utilizes a fully redundant paging system
that is linked by satellite. Management believes that as the number of
subscribers grows, this advanced technology will allow the Company to be a
provider of high quality paging services at a low cost per subscriber.
LEVERAGE THE PAGENET RELATIONSHIP. The Company is implementing a marketing
strategy and operating procedures similar to those of PageNet in the United
States, and several members of the Company's senior management have had
significant experience managing PageNet operations in the United States.
Moreover, pursuant to the Technical Services Agreement, PageNet provides the
Company with access to PageNet's products, paging expertise, intellectual
property (including the exclusive use of PageNet's tradename in Brazil), volume
supplier discounts and other capabilities. The Company also expects to benefit
from the favorable relationships that PageNet has established with suppliers of
paging equipment and from its use of the PageNet brand name, which is well
established among multinational corporations. PageNet do Brasil is PageNet's
first venture in the Latin American paging market, and PageNet's only enterprise
in Brazil. See "--Trademarks."
GAIN RAPID MARKET PENETRATION. The Company seeks to gain subscribers in its
markets rapidly through extensive marketing and advertising and competitive
pricing. Unlike competitors whose primary
45
focus has been the consumer market, the Company focuses on both business and
consumer paging customers. The Company targets business customers through a
commissioned direct sales force and through telemarketing, and will target
individual customers through advertising and through retail distribution
channels including the use of "retail showrooms" located strategically
throughout the Company's markets.
PROVIDE SUPERIOR CUSTOMER SERVICE. Management believes that its competitors
have not made customer service a primary focus of their business strategy and do
not provide the customer with service standards that are prevalent in the United
States. By focusing on key elements of customer satisfaction during the sales
process and over the life of the subscriber, the Company will provide high
levels of customer service similar to those provided by PageNet in the United
States. Moreover, similar to PageNet's practice in the United States, the
Company is introducing 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
account. 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 innovation will allow it to ensure
superior customer satisfaction, thereby minimizing customer turnover and
increasing subscriber base growth.
THE COMPANY'S MARKETS
The Company has secured two licenses which enable it to broadcast paging
services on specified frequencies throughout Brazil. In addition, the Company
has secured 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, plans to begin marketing paging services in Rio de
Janeiro by the first quarter of 1998 and currently offers extended paging
coverage in the remainder of the Existing Coverage Area.
ESTIMATED
EXISTING COVERAGE AREA(1) POPULATION
- -------------------------------------------------------------- ---------------
(IN MILLIONS)
INITIAL MARKETS:
Sao Paulo..................................................... 22.7
Rio de Janeiro................................................ 10.9
EXPANSION MARKETS:
Brasilia...................................................... 1.7
Curitiba...................................................... 2.0
Belo Horizonte................................................ 3.4
EXTENDED COVERAGE:
Porto Alegre.................................................. 2.7
Salvador...................................................... 2.6
Recife........................................................ 2.8
Belem......................................................... 1.7
Goiania....................................................... 1.3
-----
Total................................................... 51.8
- ------------------------
(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)
INITIAL MARKETS. The Company has installed 48 paging transmitters in 10
cities and has recently commenced offering paging services in greater Sao Paulo,
the largest metropolitan area in the country with
46
a population of approximately 22.7 million. The Company occupies 43,000 square
feet of office space in Sao Paulo and has (i) approximately 10,000 subscribers;
(ii) installed paging transmitters in each of the nine additional cities where
it has secured licenses to broadcast paging services, including Rio de Janeiro,
(iii) hired the personnel and other infrastructure to support the Company's
operations (including its dispatch center and sales force); (iv) customized and
installed its proprietary billing/collection/inventory/ customer service
information system; (v) linked all of its paging transmitters via satellite; and
(vi) has opened a retail location at the Company's headquarters in the center of
Sao Paulo's business district.
In Rio de Janeiro, the Company has installed 12 transmitters and linked them
via satellite for immediate sale of extended coverage to Sao Paulo customers.
The Company plans to hire key local personnel, lease facilities and acquire
telephone lines from TELERJ, the state-owned telephone company in Rio de
Janeiro, beginning in the fourth quarter of 1997.
EXPANSION MARKETS. The Company has installed transmitters in Brasilia,
Curitiba and Belo Horizonte, and plans to develop local offices in these and
other cities as opportunities arise. The extent to which the Company will
develop local offices in any city will depend upon a number of factors,
including business and consumer demand, general economic conditions, the
presence of competing businesses and telephone infrastructure. Moreover, the
Company will consider attractive opportunities to enter other markets on an
ongoing basis.
SUBSCRIBER CAPACITY. The Company currently has sufficient license capacity
in its Initial and Expansion Markets to provide paging services to approximately
600,000 subscribers, of which the Company can currently serve 150,000 based on
its existing infrastructure. The Company expects to expand its infrastructure
based on the demand for paging services in each market and will use a portion of
the proceeds from the issuance of the Old Notes to acquire the equipment
necessary for any such expansion.
EXTENDED COVERAGE. 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 Area. The Company has installed
transmitters in Porto Alegre, Salvador, Recife, Belem and Goiania and intends to
offer its customers in the Initial Markets and the Expansion Markets extended
paging coverage in all of these cities.
Management expects that the ability to offer nationwide coverage will
increase the Company's marketability and ultimately its subscriber base. While
there is no immediate additional capital expenditure required for the provision
of nationwide service, should the Company decide to offer extended coverage in
additional cities, the Company would incur additional capital expenses in the
future for the installation of transmitters in other cities in Brazil in order
to develop a nationwide paging network. The Company expects that the incremental
cost to build a nationwide network would quickly be offset by the revenue
generated from sales of nationwide paging service in Brazil.
OPERATIONS AND SYSTEMS
OVERVIEW. The Company's day-to-day operations for the provision of paging
service to its subscribers are substantially similar to those of PageNet 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 up-front 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
47
payment policies. The dispatch center, which receives the calls from individuals
sending 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 a state-of-the-art dispatch center,
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 increased volumes of data that the
Company expects to process in the future as the Company's subscriber base
continues to grow.
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 differentiating its service from that
of its competitors.
BILLING AND COLLECTIONS. The Company utilizes the Brazilian custom of
invoicing customers through the banking system. Billing information is
electronically transmitted to the Company's bank which then sends 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 will monitor customer payment patterns and is further developing 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 uplink 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.
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 expects
to provide service at a lower cost and with higher quality than its competitors
through the use of its advanced FLEX-Registered Trademark- technology and
satellite-linked network,
48
customized information systems, and focus on customer service. In its marketing
and advertising, the Company will also highlight the PageNet brand name which is
associated with worldwide leadership and quality in the paging business. The
Company expects to price its high quality service competitively and utilize
various sales channels to distribute its product. The Company will focus on both
the business market and the consumer market.
BUSINESS MARKET
CUSTOMER SEGMENTATION. The Company plans to target 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. In addition, the Company expects that the PageNet name
will be recognized by U.S.-based multinational companies giving it a competitive
advantage over other paging companies in acquiring multinational accounts.
Management believes that most major paging operators have focused on the
consumer market as opposed to the business market due to limited access to
working capital and an inability to offer the higher standard of service
demanded by business customers. 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. The Company
estimates that, as of December 31, 1996, businesses accounted for approximately
30% of total pagers in service in Brazil.
Subject to appropriate credit policies, the Company plans to lease pagers to
businesses, thereby reducing the business customer's capital outlay and
increasing the Company's revenue per unit. The Company has identified more than
20,000 business targets for sales in its early months and generally expects that
businesses will account for approximately 40% to 50% of the total units in
service in Brazil.
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, unlike its competitors, the Company employs a separate team of account
representatives, whose primary function is to serve existing accounts. In
addition, 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, 1996,
individuals accounted for approximately 70% of total pagers in service in
Brazil. Management believes that consumer demand for paging service arises from
four factors: (i) the increased consumer purchasing power due to Brazil's stable
and growing economy; (ii) the need for reliable, portable communications
services; (iii) delayed access to telephone service or the prohibitive cost of
immediate access; and (iv) the higher cost and lower reliability of cellular
telephone service.
Advertising is a key component of the Company's consumer marketing strategy.
To that end, management has hired P/P Asociados, an advertising firm with
extensive experience in consumer products, which was awarded the TOP Marketing
in Retail Award in 1995. The Company's initial advertising campaign will be
followed by an advertising maintenance program, both of which will include the
use of newspapers, magazines, billboards and radio.
DISTRIBUTION. In Sao Paulo, the Company's advertising campaign will direct
consumers to the Company's retail showrooms that will be located strategically
throughout the area. Additionally, the Company is developing a retail outlet
distribution channel through which the Company may provide pagers to the
retailer at wholesale prices. Once purchased by a subscriber, the pager is
activated on the Company's standard retail contract as a subscriber-owned pager.
The Company may also distribute indirectly under marketing agreements with
unrelated marketing organizations, or "resellers," as developed by PageNet in
49
the United States. Typically, in the United States, the paging company offers
resellers paging services in bulk quantities at a wholesale monthly rate that is
lower than the regular retail rates, and the resellers endeavor to resell the
paging services to subscribers for a higher price. In the United States, because
resellers bear the economic burden of pager capital investment, direct selling
expense and certain administrative costs including billing for paging service,
collections and customer service, the reseller network has been a very
attractive distribution channel. Management is in discussions with retailers and
resellers regarding adapting these methods for the Brazilian market; however,
there can be no assurance that either of these distribution channels will ever
be used.
PRODUCTS
INITIAL PRODUCTS. Initially, the Company will offer PIN-based alphanumeric
paging with dispatch service included, at a competitive price. Additional
product enhancements will be available to subscribers, including extended
coverage in Rio de Janeiro, pager protection against loss or theft and pager
maintenance.
SUBSEQUENT PRODUCTS. Within the first year of operation, the Company
expects to offer additional products, many of which will be new products to the
Brazilian paging market. These products are expected to 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) PageMail, 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; and
(vii) self dispatch, which allows subscribers to send pages directly from their
personal computers, without accessing the dispatch center. Although the
Company's current principal focus is offering its initial products at
competitive prices and achieving rapid market penetration, the Company
anticipates that these additional products may enhance revenues and attract more
technologically demanding customers when and if such subscriber products are
implemented and offered.
FUTURE PRODUCTS. In the future, the Company may deploy new paging or
paging-related products. One such product in an advanced development stage is
VoiceNow. Developed jointly by PageNet and Motorola, Inc., VoiceNow subscribers
would carry a portable receiver, approximately the same size as an alphanumeric
pager, that is capable of receiving, storing and playing brief voice messages.
Although the Company has access to this and additional technologies through its
relationship with PageNet, 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 uplinks,
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, with the technical support of PageNet, has supervised the entire paging
infrastructure buildout from transmitter site selection to transmitter
installation alignment to programming of the paging terminal.
50
The Company has secured satellite access from Embratel Sistema Telebras, the
Brazilian state-owned 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-Registered Trademark--based technology.
The FLEX-Registered Trademark- 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-Registered Trademark- the more
reliable method of transmitting paging messages. Additionally, the technological
improvements of FLEX-Registered Trademark- allow a paging service provider to
utilize less of its transmission system capacity for each message. The improved
efficiency of the FLEX-Registered Trademark--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-Registered Trademark--based paging message
transmission system is the improved battery life of
FLEX-Registered Trademark--based pagers. Because FLEX-Registered Trademark-
technology has improved the timing of message delivery, the batteries of
FLEX-Registered Trademark--based pagers tend to last longer than those of pagers
using POCSAG technology.
The Company's paging transmission system is fully redundant which allows 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 equipment used in the Company's paging operations is available for
purchase from more than one source and the Company anticipates that equipment
and pagers will continue to be available to the Company in the foreseeable
future, consistent with normal manufacturing and delivery lead times. Because of
the high degree of compatibility among different models of transmitters,
computers and other paging equipment manufactured by suppliers, the Company has
designed its systems without being dependent upon any single source of such
equipment.
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. The Company's relationship with PageNet provides it with
access to volume discounts on all of its supplies. PageNet has arranged with its
U.S. suppliers to ensure that the Company will receive favorable prices on all
supplies, including pagers. There can be no assurance that PageNet's arrangement
with its suppliers will continue or that the Company will be able to receive all
of its supplies at prices comparable to those obtained by PageNet.
COMPETITION
The Company does experience and will continue to experience direct
competition from one or more competitors in all the locations in which it plans
to operate. Competition for subscribers to the Company's paging services in most
geographic markets will be based primarily on price, quality of services offered
and the geographic area covered. The Company believes that its price, quality of
its services and its geographic coverage areas will generally compare favorably
with those of its competitors.
Although some 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. Among
the Company's competitors are Teletrim, Mobitel, Conectel, Powernet and Intelco.
In the Sao Paulo and Rio de Janeiro metropolitan areas, which together are
estimated to represent approximately 67% of the current paging market in Brazil,
more than eight competitors share a market of approximately 540,000 pagers.
While there is healthy competition in the paging market, no single competitor
dominates the market. The current industry leaders, Teletrim and Mobitel, each
service fewer than 200,000 subscribers. In Sao Paulo, the Company's main
competitors will be Teletrim, which holds
51
approximately 25% of the market, and Mobitel, which holds approximately 20% of
the market. In Rio de Janeiro, Teletrim holds approximately 44% of the market
while Mobitel and Powernet hold approximately 18% and 14%, respectively. In the
regions of Brazil outside of Sao Paulo and Rio de Janeiro, which account for
approximately 33% of the existing paging market in Brazil, Mobitel leads the
major operators, primarily due to its strong presence in Brasilia. Approximately
65% of the market outside of Sao Paulo and Rio de Janeiro is held by smaller
paging operators.
The primary focus of the Company's competitors in the Brazilian paging
market has been the consumer market, rather than the business market. Management
believes that the corporate customer in the business markets will be more likely
to maintain service, remit payments on a timely basis, purchase enhanced
services and have a better appreciation for the paging service. The Company
believes that it will be able to maintain a lower than average churn rate due to
the high quality of its service and its emphasis on the corporate customer and
business accounts.
EMPLOYEES
As of June 30, 1997, the Company had a total of 163 employees. 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. The Company
anticipates that it will employ approximately 300 people by the end of 1997 as a
result of the launch of Sao Paulo operations.
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
includes a provision establishing 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 will be made in stages of two concession
areas at a time, with all concessions expected to be granted by early 1998. The
city of Sao Paulo and surrounding municipalities are included in the first group
of concessions.
A bill of the General Telecommunications Law was submitted to Congress by
the Federal Government in December 1996, and is designed to eventually replace
the current Telecommunications Code enacted in 1962. The bill focuses on the
following matters: (i) creation of a telecommunication regulatory agency, (ii)
privatization of the Telebras System, and (iii) organization of the
telecommunications system, including the grant of licenses. The bill as
currently drafted permits the Federal Government, under certain conditions, to
impose foreign ownership restrictions relating to the capital stock of companies
providing telecommunications services.
52
DEVELOPMENT OF PAGING REGULATIONS. The Ministry of Communications is the
governmental body responsible for the granting of paging licenses in Brazil and
is also the body in charge of regulating the exploitation of such services in
Brazil. Currently, there are four Ordinances, the first of which was enacted by
the Ministry of Infrastructure and the other three of which were enacted by the
Ministry of Communications, that regulate paging services: (i) Ordinance No.
232, of October 23, 1991, which establishes the principles applicable to the
exploitation of paging services; (ii) Ordinance No. 257, of October 23, 1991,
which establishes complementary conditions and procedures applicable to the
exploitation of paging services, as well as the guidelines for public bids and
analysis of related proposals; (iii) Ordinance No. 579, of August 2, 1994, which
created the modality of restricted national exploitation; and (iv) Ordinance No.
1306, of November 29, 1996, which establishes the conditions for the use of the
frequencies by paging services.
Pursuant to paging regulations, a paging operator must first obtain a paging
license from the Ministry of Communications 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 local, national and nationwide
restricted paging licenses. Local paging licenses allow the license holder to
provide separate paging services in one or more localities, in accordance with
the service area indicated therein. National licenses require the license holder
to, within the first year from the date of issuance of the license, provide
service in three states and within ten years, provide services in a minimum of
10 states. Pursuant to the terms of Ordinance No. 579, a license holder may
request that the Ministry of Communications transform its local licenses into a
nationwide restricted license, which allows for the provision of integrated
services, if such license holder is providing services in at least 12 localities
in at least six different Brazilian States and its system is capable of
simultaneous or sequential operation. Once the license holder has been granted a
nationwide restricted license, it may utilize its frequency nationwide, except
in localities where the frequency was previously given to a local license
holder.
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.
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.
Furthermore, Decree No. 2196/97 specifically provides that the Ministry of
Communications shall issue complementary regulations regarding each of the
modalities of Special Telecommunication Services, which shall regulate the
specific conditions for the exploitation of the services, including: technical
characteristics, rights and obligations of the licensee and of the users,
conditions for interconnection of networks, expansion of the services and use of
the public network, as well as conditions regarding the use of frequencies,
prices and tariffs.
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
53
of the conditions of the contract, assuming all rights and obligations of the
transferor. However the minimum term for transfer of the licenses shall be
established by the complementary regulations referred above.
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 licenses had been issued. The Ministry of Communications
has estimated that another 1,000 local licenses will be issued in the near
future. In April 1997, two of the Licenseholders (TVA and Multiponto) were
granted nationwide restricted licenses by the Ministry of Communications. As of
May 1997, only twelve national licenses were issued by the Ministry of
Communications.
PAGING LICENSES. Under Ordinance No. 232/91, paging licenses are granted by
the Ministry of Communications for a period of 15 years and are renewable for
successive 15 year periods. The nationwide restricted licenses which, under the
terms of Ordinance No. 579/94 result from the aggregation of local licenses are
granted by the Ministry of Communications for a period of ten years, regardless
of the remaining term of the original local licenses. Under Decree No. 2196/97,
the original license terms are assured, but renewal terms may vary from 10 to 15
years as established in complementary regulations still to be issued. Renewal of
the license by the Ministry of Communications 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 the Ministry of Communications and the licensee, 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 during the first
three years, commencing from the date of issuance of the operating license,
(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 the Ministry of Communications 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 the Ministry of Communications. A license may
not be directly transferred by a license holder to a third party until after the
expiration of the three year waiting period. 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 Ministry of Communications. Licenses may be
revoked prior to their expiration by the Ministry of Communications 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 the Ministry of Communications, 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 the Ministry of
Communications: (i) the initial license, granted in the form of a ministerial
ordinance which entitles the license holder to develop paging services under a
certain frequency and in certain localities; (ii) the Project 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 is required to construct and start the operation of its service within
12 months of the issuance of the paging license. 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 the recently obtained nationwide
restricted 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
54
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 US$57 per transmitter installed.
Subject to certain exceptions, generally any paging licenses not already
issued are to be granted pursuant to a public auction administered by the
Ministry of Communications. 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 Company believes that as the
market for pagers grows, the Ministry of Communications will amend current
regulations allowing the Company to receive additional frequency allocations if
needed. The Company anticipates needing additional licenses in the Initial
Markets only. There can be no assurance that the Company will receive the
additional licenses, which may materially alter the Company's market
projections.
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 "Licenseholders") and are valid through July 28, 2009. The Company
has entered into Operating Agreements with each of the Licenseholders pursuant
to which the Company has the right to operate the paging licenses held by the
Licenseholders. The Company has also entered into Agreements of Promise of
Assignment and Transfer of Permissions (the "Transfer Agreement") with each
Licenseholder pursuant to which the Licenseholders have agreed, subject to the
necessary approvals, to transfer their paging licenses to the Company after the
three year period established by Brazilian law, during which such licenses are
not allowed to be transferred, or on such earlier date as may be permitted by
Brazilian law. Under the applicable paging legislation, operating agreements are
permitted and do not amount to a transfer of the license. See "Risk
Factors--Risk Factors Relating to the Company and the Notes--Government
Regulations" and "Certain Transactions--Formation Transactions."
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 with PageNet. Under
the Technical Services Agreement, the Company has use of the PageNet trademarks
and service marks in Brazil for so long as PageNet holds such properties absent
breach by the Company of its obligations thereunder or Brazilian governmental
action requiring its termination. PageNet has applied to register the mark
PageNet in Brazil. PageNet has advised the Company that certain third parties
also have applied to register the PageNet name in Brazil. PageNet intends to
pursue vigorously its registration of the PageNet mark. However, there can be no
assurance that PageNet will be successful in which case the Company may not have
the right to use the PageNet mark. See "Certain Transactions--Formation
Transactions."
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.
PROPERTIES
The Company currently leases 43,000 square feet of office space in Sao Paulo
under a five-year lease. This space houses the Company's corporate headquarters
as well as its Sao Paulo operation, including its dispatch center, systems room
and a retail showroom. In addition, the Company expects to lease an additional
retail showroom in downtown Sao Paulo.
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.
55
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following section sets forth certain information as of the date of this
Prospectus with respect to each person who is an executive officer or director
of the Company:
NAME POSITION
- -------------------------------------------------------- --------------------------------------------------------
Thomas C. Trynin........................................ President, Chief Executive Officer and Director
Marco A. Fregenal....................................... Vice President of Operations
Wilson Olivieri......................................... Treasurer and Chief Financial Officer
Maria Regina Mangabeira Albernaz Lynch.................. Director
Horacio Bernardes Neto.................................. Director
Renato Abucham.......................................... Director
Helena de Araujo Lopes Xavier........................... Director
THOMAS C. TRYNIN has been the President, the Chief Executive Officer and a
Director of the Company and a member of the Management Committee of Holding LLC
since the formation of each. Prior to joining the Company and since 1993, Mr.
Trynin was a Vice President of Paging Network of Philadelphia. For the three
years prior to working for Paging Network of Philadelphia, Mr. Trynin was a Vice
President of Budget Rent-a-Car of Philadelphia. Mr. Trynin is 36 years old.
MARCO A. FREGENAL has been Vice President of Operations of the Company since
its formation. For the three years prior to joining the Company, Mr. Fregenal
was a Branch Manager and then a Vice President of Paging Network of Philadelphia
and Paging Network of New York, respectively. Before joining Paging Network of
Philadelphia, Mr. Fregenal held the position of Director of Operations and
Customer Service of MorCom Inc., a direct mail and printing firm. Mr. Fregenal
is 33 years old.
WILSON OLIVIERI has been the Treasurer and Chief Financial Officer of the
Company since its formation. For the three years prior to joining the Company,
Mr. Olivieri served as a General Manager and Chief Financial Officer of PepsiCo
do Brasil Ltda., Pizza Hut Division. Mr. Olivieri has also served as a Chief
Financial Officer of Polaroid do Brasil Ltda. during the year of 1992 and as
Planning Manager and Controller of PepsiCo do Brasil Ltda., Food Division from
1989 to 1992. Mr. Olivieri is 38 years old.
MARIA REGINA MANGABEIRA ALBERNAZ LYNCH has been a Director of the Company
since its formation. Ms. Lynch has been a partner of Xavier, Bernardes,
Braganca, Sociedade de Advogados, counsel to the Company, since 1995. Prior to
joining Xavier, Bernardes, Braganca, Sociedade de Advogados, Ms. Lynch held
positions as an associate with, and a partner of, Castro, Barros, Sobral e
Xavier Advogados from 1981 to 1995. Ms. Lynch is 43 years old.
HORACIO BERNARDES NETO has been a Director of the Company since its
formation. Mr. Bernardes has been a senior partner of Xavier, Bernardes,
Braganca, Sociedade de Advogados since 1995. Prior to joining Xavier, Bernardes,
Braganca, Sociedade de Advogados, Mr. Bernardes was a partner of Castro, Barros,
Sobral e Xavier Advogados from 1979 to 1995. Mr. Bernardes is the
President-elect of the Association Internationale des Jeunes Avocats. Mr.
Bernardes is 42 years old.
RENATO ABUCHAM has been a Director of the Company since its formation. Mr.
Abucham has been a Managing Director of Ecoban do Brasil Ltda. since 1987 and
has served as a Director of the Commerce Association of Sao Paulo and
Coordinator of its Chamber of International Financial Operations since 1992. Mr.
Abucham is 54 years old.
56
HELENA DE ARAUJO LOPES XAVIER has been a Director of the Company since its
formation. Ms. Xavier has been a partner of Xavier, Bernardes, Braganca,
Sociedade de Advogados since 1995. Prior to joining Xavier, Bernardes, Braganca
Sociedade de Advogados, Ms. Xavier was an associate of Castro, Barros, Sobral e
Xavier Advogados from 1991 to 1995, and served as a Professor of Administrative
Law and Administrative Procedural Law at the Autonomous University Luis de
Camoes-Lisbon, during the year of 1991. Ms. Xavier is 45 years old.
At present, the Board of Directors of the Company (the "Board of Directors")
is composed of five directors. The Company, Warburg Pincus, PageNet NV, IVP
Cayman, Multiponto, TVA and each other shareholder of the Company are parties to
the Shareholders Agreement, pursuant to which, among other things, Warburg
Pincus has the right to designate a majority of the members of 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. See "Principal Shareholders--Shareholders Agreement."
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. Currently, the following persons
are members of the Management Committee:
NAME POSITION
- -------------------------------------------------------- --------------------------------------------------------
Douglas M. Karp......................................... Manager, Chairman of Management Committee
David E. Libowitz....................................... Manager, Member of Management Committee
Barry A. Fromberg....................................... Member of Management Committee
H. Brian Thompson....................................... Member of Management Committee
Thomas C. Trynin........................................ Member of Management Committee
DOUGLAS M. KARP has served as a Manager and Chairman of the Management
Committee of Holding LLC since its formation. Mr. Karp has been a Managing
Director of E.M. Warburg, Pincus & Co., LLC or its predecessor ("EMW LLC") since
May 1991. Prior to joining EMW LLC, Mr. Karp held several positions with Salomon
Inc, including Managing Director from January 1990 to May 1991, Director from
January 1989 to December 1989 and Vice President from October 1986 to December
1988. Mr. Karp is a director of LCI International, Inc., TV Filme, Inc., TresCom
International, Inc. and several privately held companies. Mr. Karp is 42 years
old.
DAVID E. LIBOWITZ has served as a Manager and a Member of the Management
Committee of Holding LLC since its formation. Mr. Libowitz is a Vice President
of EMW LLC and has been associated with EMW LLC since July 1991. Mr. Libowitz
serves on the board of directors of TV Filme, Inc., Caribiner International,
Inc. and certain privately held companies. Mr. Libowitz is 34 years old.
BARRY A. FROMBERG has served as a Member of the Management Committee of
Holding LLC since its formation. Mr. Fromberg has served as Senior Vice
President--International of PageNet and Chairman of the Board of Directors and
Chief Executive Officer of PageNet NV since December 1995. Mr. Fromberg served
as Senior Vice President--Finance and Administration and Chief Financial Officer
for PageNet from May 1993 to December 1995. Prior thereto, Mr. Fromberg served
as Executive Vice President and Chief Financial Officer for Simmons
Communications, Inc. from 1987 to 1993. Mr. Fromberg is 42 years old.
H. BRIAN THOMPSON has served as a Member of the Management Committee of
Holding LLC since its formation. Mr. Thompson has been Chairman of the Board of
Directors and Chief Executive Officer of
57
LCI International, Inc. and its subsidiaries since July 1991. Mr. Thompson
previously served as Executive Vice President of MCI Communications Corporation
where he was responsible for all eight of MCI's operating divisions and various
other senior management capacities from 1981 to 1990. These capacities included
Executive Vice President responsible for all staff functions, Divisional
President and Senior Vice President responsible for strategic development and
corporate planning. Mr. Thompson is a director of Microdyne Corporation, Comcast
UK Cable Partners Limited and Golden Books Family Entertainment, Inc. Mr.
Thompson is 58 years old.
THOMAS C. TRYNIN has been the President, the Chief Executive Officer and a
Director of the Company and a Member of the Management Committee of Holding LLC
since the formation of each. Prior to joining the Company and since 1993, Mr.
Trynin was a Vice President of PageNet of Philadelphia. For the three years
prior to working for PageNet, Mr. Trynin was a Vice President of Budget
Rent-a-Car of Philadelphia. Mr. Trynin is 36 years old.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Messrs.
Thomas C. Trynin and Marco A. Fregenal (each, an "Executive"), pursuant to which
Mr. Trynin has agreed to serve full time as the President and Chief Executive
Officer of the Company and Mr. Fregenal has agreed to serve full time as the
Vice President of Operations of the Company. Mr. Trynin's annual base salary is
US$137,500 and Mr. Fregenal's annual base salary is US$115,000. Each Executive
will be eligible to receive an annual bonus, in an amount to be determined by
the Board of Directors (but not to exceed 50% of the base salary). As Messrs.
Trynin and Fregenal resided in the United States prior to joining the Company,
each employment agreement also provides for additional compensation as a result
of their relocation ("relocation compensation"), including a foreign service
incentive equal to 10% of the base salary, a goods and services allowance to
cover cost of living adjustments and a foreign housing allowance. If the Company
terminates the Executive without "just cause" or if the Executive resigns for
"good reason" (in each case as defined in the employment agreement), the
Executive shall be entitled to receive an additional 12 months' base salary and
the relocation compensation for a period of 45 days following the termination of
employment. The initial term of each employment agreement is two years, which
will be automatically extended for one additional period of two years, unless
the Company or the Executive provides the other with a notice of termination at
least three months prior to the expiration of the initial term. The employment
agreements also include customary non-competition and confidentiality
provisions. Also pursuant to the employment agreement, Warburg Pincus has
granted the Executive certain "tag-along" rights in the event that Warburg
Pincus sells or otherwise disposes of a majority of its shares of Common Stock.
Upon execution of their respective employment agreements, Mr. Trynin was granted
17,603 shares of Common Stock and Mr. Fregenal was granted 13,202 shares of
Common Stock. These shares of Common Stock are subject to forfeiture in the
event the Executive's employment is terminated by the Company for "just cause"
or by the Executive other than for "good reason" before such Executive has
completed five years of employment, with 100%, 80%, 60%, 40% and 20% of the
shares subject to forfeiture if the employment is terminated during the first,
second, third, fourth and fifth years of employment, respectively.
SHARES OF COMMON STOCK RESERVED FOR MANAGEMENT
In addition to the shares already issued to Messrs. Trynin and Fregenal, the
Company has reserved 101,340 shares of Common Stock for issuance to members of
the Company's management at the discretion of the Board of Directors. Such
shares may be issued pursuant to a stock option plan adopted by the Company or
directly to management members, in either case subject to vesting or forfeiture
provisions as determined by the Board of Directors.
58
COMPENSATION FOR EXECUTIVE OFFICERS, DIRECTORS AND MEMBERS OF THE MANAGEMENT
COMMITTEE
For the year ended December 31, 1996, the aggregate compensation, including
bonuses, of all Executive Officers of the Company was approximately US$600,000.
Neither members of the Board of Directors of the Company, nor Members of the
Management Committee of Holding LLC (the "Members") receive a salary from the
Company.
Due to the recent commencement of operations of 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.
59
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. See
"Principal Shareholders-- Registration Rights Agreement."
In December 1996, the Company and PageNet entered into a Technical Services
Agreement pursuant to which PageNet 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 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. In addition, pursuant to the
terms of the Technical Services Agreement, PageNet 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'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 (after
giving effect to the Common Stock split of approximately 40.75 for 1, the
"Common Stock Split"). 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 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 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 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. See "Risk Factors--Risk Factors Relating to the Company and the
Offering--Dependence on PageNet Technical Services and Support."
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
60
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 and after giving effect to the Common Stock
Split, 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. See "Risk Factors--Risk Factors Relating to the Company and the
Offering--Regulation and Ownership of Licenses." and "Business--Government
Regulation--Paging License Ownership; Operating Agreements; Agreements to
Transfer Licenses."
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.
61
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Common Stock and Preferred Stock as determined in accordance with
Rule 13d-3 under 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.
COMMON STOCK PREFERRED STOCK
------------------------- --------------------------
NAME AND ADDRESS OF NUMBER NUMBER
BENEFICIAL OWNER OF SHARES PERCENTAGE(1) OF SHARES PERCENTAGE
- --------------------------------------------------------------- ---------- ------------- ----------- -------------
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%
All directors and executive officers as a group
(7 persons)(7)............................................... 30,805 2.2% -- --
- ------------------------
(1) Calculated in accordance with Rule 13d-3 under the Exchange Act.
(2) Pursuant to the Restructuring, Warburg Pincus contributed 814,955 shares of
Common Stock held by it to Holding LLC in exchange for 100% of the Class A
Holding Shares. Pursuant to the LLC Agreement, Warburg exercises voting
control over all the shares of Common Stock held by Holding LLC. See
"Certain Transactions--Restructuring Transactions."
(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 Mr. Karp are owned by Warburg Pincus and
are included because of Mr. Karp's affiliation with Warburg Pincus. Mr.
Karp, a Manager of Holding LLC, is a Managing Director and member of EMW LLC
and a general partner of WP.
(7) Excludes directors qualifying shares.
62
SHAREHOLDERS AGREEMENT
The relations among the Company's shareholders, Warburg Pincus, 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 as of March 10, 1997 (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. Each Shareholder has agreed to waive its preemptive
rights in connection with the issuance of shares of Common Stock to Holding LLC.
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
63
Stock with 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, 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
Shareholders and their Affiliates propose to transfer by the total number of
shares of Common Stock
64
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.
65
DESCRIPTION OF THE NOTES
The Old Notes were issued and the New Notes are issued under an Indenture
dated as of June 1, 1997 between Paging Network do Brasil S.A. (the "Company")
and The Chase Manhattan Bank, as trustee (the "Trustee"), a copy of which is
available upon request to the Company. The terms of the New Notes are identical
in all material respects to the terms of the Old Notes, except for certain
transfer restrictions and registration rights relating to the Old Notes and
except that if the Exchange Offer is not consummated by November 3, 1997, the
interest rate borne by the Old Notes will increase by 0.50% per annum for the
first 90-day period following November 3, 1997 and will increase by an
additional 0.50% per annum with respect to each subsequent 45-day period up to a
maximum amount of 2.00% per annum. The following summary of certain provisions
of the Indenture does not purport to be complete and is subject to, and is
qualified in its entirety by reference to, the Trust Indenture Act of 1939 and
to all of the provisions of the Indenture, including the definitions of certain
terms therein and those terms made a part of the Indenture by reference to the
Trust Indenture Act, as in effect on the date of the Indenture, and to the Trust
Indenture Act, in the case of the Exchange Notes, if any, or the effectiveness
of a Notes Shelf Registration Statement. Whenever particular provisions or
definitions of the Indenture, the Notes or the terms defined therein are
referred to herein, such provisions or definitions are incorporated herein by
reference. The definitions of certain capitalized terms used in the following
summary are set forth below under "--Certain Definitions."
Remaining Old Notes still outstanding after the consummation of the Exchange
Offer and New Notes issued in connection with the Exchange Offer will be treated
as a single class of securities under the Indenture.
GENERAL
The Notes will be issued only in registered form, without coupons, in
denominations of US$1,000 and integral multiples of US$1,000. See "Book-Entry;
Delivery and Form." The Company has appointed The Chase Manhattan Bank to serve
as Registrar, Co-Paying Agent and Trustee under the Indenture at its offices at
450 West 33rd Street, New York, New York 10001 and Chase Trust Company ("Chase
Japan") to serve as Principal Paying Agent under the Indenture at its offices at
2-1, Marunouchi 1-chome, Chiyoda-ku, Tokyo 100, Japan. The Trustee, the
Registrar, the Company and the Principal Paying Agent are responsible for, among
other things, (i) maintaining a record of the registration of ownership,
exchange and transfer of the Notes and accepting Notes for exchange and
transfer, (ii) ensuring that payments of the principal and interest received
from the Company or any Guarantor in respect of the Notes are duly paid to the
registered holders thereof, (iii) transmitting to the Company any notices or
other communications from holders of Notes and (iv) transmitting to the holders
of Notes notice of the occurrence of any Default after obtaining knowledge
thereof. No service charge will be made for any registration of transfer or
exchange of the Notes, except for any tax or other governmental charge that may
be imposed in connection therewith.
MATURITY, INTEREST AND PRINCIPAL
The Notes are general unsecured senior obligations of the Company, limited
to US$125,000,000 aggregate principal amount, and will mature on June 6, 2005.
See "--Ranking of the Notes."
Interest on the Notes will be payable, in cash at a rate of 13 1/2% per
annum, semi-annually in arrears on each June 6 and December 6 (each, an
"Interest Payment Date"), commencing December 6, 1997, to the holders of record
of Notes at the close of business on the May 15 and November 15 immediately
preceding such Interest Payment Date. Interest will accrue from the most recent
Interest Payment Date to which interest has been paid or duly provided for or,
if no interest has been paid or duly provided for, from the Issue Date. Interest
will be computed on the basis of a 360-day year of twelve 30-day months.
Interest on overdue principal and, to the extent permitted by law, on overdue
installments of interest will accrue at the rate of interest borne by the Notes.
66
Whenever in the Indenture or in this "Description of the Notes" there is
mentioned, in any context, the payment of amounts based upon the payment of
principal, premium, if any, interest or of any other amount payable under or
with respect to any Note, such mention shall be deemed to include mention of the
payment of Additional Amounts to the extent that, in such context, Additional
Amounts are, were or would be payable in respect thereof.
ADDITIONAL AMOUNTS
All payments made by the Company or any Guarantor under or with respect to
the Notes or any Guarantee will be made free and clear of and without
withholding or deduction for or on account of any present or future taxes,
duties, assessments or governmental charges of whatever nature ("Taxes") imposed
or levied by or on behalf of any taxing authority within the Federative Republic
of Brazil or Japan, unless the Company or any Guarantor is required to withhold
or deduct any amount for or on account of Taxes by law or by the interpretation
or administration thereof. If the Company or any Guarantor is required to
withhold or deduct any amount for or on account of Taxes imposed by a taxing
authority within the Federative Republic of Brazil or Japan from any payment
made under or with respect to the Notes, the Company or such Guarantor will pay
such additional amounts ("Additional Amounts") as may be necessary so that the
net amount received by each holder of Notes (including Additional Amounts) after
such withholding or deduction will not be less than the amount the holder would
have received if such Taxes had not been withheld or deducted. No such
Additional Amounts will be payable with respect to a payment made to a holder of
Notes (an "Excluded Holder") with respect to any Tax which would not have been
imposed, payable or due: (i) but for the fact that the holder (or where the
holder is an estate, nominee, trust or partnership, any fiduciary, settlor,
beneficiary or member) is a domiciliary, national or resident of, or engaging in
business, maintaining a permanent establishment or is physically present in, the
Federative Republic of Brazil or Japan; (ii) but for the failure to comply with
a request by the Company or any Guarantor to satisfy any certification,
identification or other reporting requirements, whether imposed by statute,
treaty, regulation or administrative practices, concerning nationality,
residence or connection with the Federative Republic of Brazil or Japan; or
(iii) if, where presentation is required, the presentation for payment had
occurred within 30 days after the date such payment was due and payable or was
provided for, whichever is later. The obligation to pay Taxes and Additional
Amounts in respect of Taxes shall not apply to (a) any estate, inheritance,
gift, sales, transfer, personal property or any similar Tax or (b) any Tax which
is payable otherwise than by deduction or withholding from payments made under
or with respect to the Notes. The Company or the Guarantor, as applicable, will
(i) make such withholding or deduction and (ii) remit the full amount deducted
or withheld to the relevant authority (the "Taxing Authority") in accordance
with applicable law. The Company or the Guarantor, as applicable, will obtain
certified copies of tax receipts evidencing the payment of any Taxes so deducted
or withheld from each Taxing Authority imposing such Taxes and will provide such
certified copy to the Principal Paying Agent for prompt forwarding to the
holder. The Company or the Guarantor, as applicable, 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. The
Indenture will further provide that, if the Company or any Guarantor conducts
business in any jurisdiction (the "Taxing Jurisdiction") other than the
Federative Republic of Brazil or Japan in a manner which causes Holders to be
liable for taxes on payments under the Notes or any Guarantee, as the case may
be, for which they would not have been so liable but for such conduct of
business in the Taxing Jurisdiction, the Additional Amounts provision described
above shall be considered to apply to such Holders as if references in such
provision to "Taxes" included taxes imposed by way of deduction or withholding
by such Taxing Jurisdiction. See "Tax Considerations--United States--Tax
Considerations Applicable to Holding Notes--Effect of Brazilian Withholding
Taxes."
At least 30 days prior to each date on which any payment under or with
respect to the Notes is due and payable (unless such obligation to pay
Additional Amounts arises after the 30th day prior to such date,
67
in which case it shall be promptly thereafter), if the Company or any Guarantor
will be obligated to pay Additional Amounts with respect to such payment, the
Company or such Guarantor will deliver to the Trustee and each Paying Agent an
Officers' Certificate stating the fact that such Additional Amounts will be
payable and the amounts so payable and will set forth such other information
necessary to enable the Trustee and each Paying Agent to pay such Additional
Amounts to holders of Notes on the payment date. Each Officers' Certificate
shall be relied upon until receipt of a further Officers' Certificate addressing
such matters.
ESCROW ACCOUNT
The Indenture provided that upon the closing of the offering of the Old
Notes, the Company purchase and pledge to the Trustee for the benefit of holders
of the Notes the Pledged Securities in such amount as will be sufficient upon
receipt of scheduled interest and principal payments of such securities, based
on the report of an internationally recognized firm of independent public
accountants selected by the Company, to provide for payment in full of the first
six scheduled interest payments due on the Notes through June 6, 2000.
Accordingly, the Company used approximately US$46 million of the net proceeds of
the sale of the Old Notes to acquire the Pledged Securities. The Pledged
Securities are pledged by the Company to the Trustee for the benefit of the
holders of Notes pursuant to the Pledge Agreement and are held in the United
States by the Trustee in the Pledge Account (as defined herein). A failure by
the Company to pay interest on the Notes in a timely manner through June 6, 2000
will constitute an immediate Event of Default under the Indenture, with no grace
or cure period. The Pledge Account does not include collateral to secure any
Additional Amounts which might become payable with respect to the Notes. See "--
Additional Amounts."
Pursuant to the Pledge Agreement, interest earned on the Pledged Securities
will be added to the Pledge Account. In the event that the funds or Pledged
Securities held in the Pledge Account exceed the amount sufficient, based on the
report of an internationally recognized firm of independent public accountants
selected by the Company, to provide for payment in full of the first six
scheduled interest payments due on the Notes (or, in the event an interest
payment or payments have been made, an amount sufficient to provide for payments
in full or any interest payments remaining, up to and including the sixth
scheduled interest payment) the Trustee will be permitted to release to the
Company at the Company's request any such excess amount. The Notes will be
secured by a security interest in the Pledged Securities and in the Pledge
Account and, accordingly, the Pledged Securities and the Pledge Account will
also secure repayment of the principal amount of the Notes to the extent of such
security.
Pursuant to the Pledge Agreement, if the Company makes the first six
scheduled interest payments on the Notes in a timely manner, immediately after
the sixth scheduled interest payment any remaining Pledged Securities will be
released from the Pledge Account and thereafter the Notes will be unsecured.
REDEMPTION
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the Company's
option prior to maturity.
OPTIONAL REDEMPTION BY THE COMPANY. The Notes will be redeemable, in whole
or in part, at any time on or after June 6, 2001 at the option of the Company,
upon not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
68
unpaid interest to the redemption date, if redeemed during the 12-month period
beginning June 6 of the years indicated below:
REDEMPTION
YEAR PRICE
- --------------------------------------------------------------------------------- -----------
2001............................................................................. 106.75%
2002............................................................................. 104.50%
2003............................................................................. 102.25%
2004 and thereafter.............................................................. 100.00%
Notwithstanding the foregoing, on or prior to June 6, 2000, the Company may,
at its option, use the net proceeds of one or more Significant Equity Offerings
(as defined below) yielding gross cash proceeds of not less than US$35,000,000
(or, to the extent non-U.S. dollar denominated, the U.S. Dollar Equivalent
thereof) to redeem up to an aggregate of 35% of the principal amount of the
Notes originally issued from the holders of Notes on a PRO RATA basis (or as
nearly PRO RATA as practicable), at a redemption price of 113 1/2% of the
principal amount thereof, plus accrued and unpaid interest to the redemption
date; PROVIDED that not less than US$81,250,000 aggregate principal amount of
Notes would remain outstanding immediately after such redemption. To effect the
foregoing redemption, the Company must mail a notice of redemption not later
than 60 days after the consummation of the Significant Equity Offering that
resulted in the requisite gross proceeds.
As used above, "Significant Equity Offering" means a public offering of
Capital Stock (other than Disqualified Capital Stock) of the Company (or
American Depositary Receipts or Global Depositary Receipts representing such
Capital Stock) either (x) in the United States pursuant to an offering
registered under the Securities Act or (y) in Brazil pursuant to an offering
registered with the Comissao de Valores Mobiliarios ("CVM") and listed on the
Sao Paulo Stock Exchange or Rio de Janeiro Stock Exchange and/ or (z) in the
United Kingdom pursuant to an offering that results in such Capital Stock (or
Global Depositary Receipts representing such Capital Stock) being listed on the
London Stock Exchange or the Luxembourg Stock Exchange.
REDEMPTION FOR CHANGES IN WITHHOLDING TAXES. The Notes may be redeemed at
the option of the Company, in whole but not in part, at any time prior to
maturity if (A) there is any change in or amendment to the Treaty to Avoid
Double Taxation entered into between the Federative Republic of Brazil and
Japan, approved by Legislative Decree No. 43 dated November 23, 1967, and
enacted in Brazil by Decree No. 61,899 dated December 14, 1967, as amended by
Decree No. 81,194 dated January 9, 1978, which has the effect of increasing the
rate of tax applicable under such treaty to a rate exceeding 15.0% of interest
payable; or (B) (i) as the result of any change in or amendment to the laws or
regulations of the Federative Republic of Brazil or Japan, the Company has or
will become obligated to pay, or (ii) any act is taken by a taxing authority of
the Federative Republic of Brazil or Japan after the date of issuance of the
Notes (whether or not such act is taken with respect to the Company or any
Affiliate thereof) that results in a substantial probability that the Company
will be required to pay, Additional Amounts (excluding interest and penalties)
in excess of the Additional Amounts that the Company would be obligated to pay
if Brazilian Taxes (excluding interest and penalties) were payable with respect
to such payments of interest at a rate of 15.0% and such obligation cannot be
avoided by the Company, taking reasonable measures available to it, upon not
more than 60 nor less than 30 days' notice to the holders of such Notes (with
copies to the Trustee and each Paying Agent) at a redemption price of 100% of
the principal amount thereof, plus accrued and unpaid interest to the redemption
date, plus any such Additional Amounts payable with respect to such redemption
price and interest as provided under "--Additional Amounts." Prior to the giving
of notice of redemption of the Notes as described herein and as a condition to
any such redemption, the Company will deliver to the Trustee an Officers'
Certificate (together with a copy of the written opinion of counsel to the
effect that the applicable rate has so increased, or the Company has or will
become so obligated, or that an act taken by a taxing authority of Brazil has
resulted in a substantial probability that the Company will become so obligated
to pay Additional Amounts as a result of such
69
change, amendment, interpretation or act), stating that the Company is entitled
to effect such redemption and setting forth in reasonable detail a statement of
facts relating thereto. No notice of redemption shall be given earlier than 60
days prior to the earliest date on which the Company would be obligated or there
is a substantial probability that the Company would be obligated to pay such
Additional Amounts were a payment in respect of the Notes then due and, at the
time such notice of redemption is given, such obligation to pay, or such
substantial probability that the Company will be required to pay, such
Additional Amounts remains in effect.
SELECTION; EFFECT OF REDEMPTION NOTICE. Notice of an optional redemption
must be given no less than 30 nor more than 60 days prior to the applicable
redemption date. In the case of a partial redemption, selection of the Notes for
redemption will be made by lot, PRO RATA or by such other method as the Trustee
in its sole discretion deems fair and appropriate or in such manner as complies
with the requirements of the principal securities exchange, if any, on which the
Notes being redeemed are listed and DTC; PROVIDED that any redemption following
one or more Significant Equity Offerings will be made on a PRO RATA or on as
nearly a PRO RATA basis as practicable (subject to the procedures of DTC). Upon
giving of a redemption notice, interest on Notes called for redemption will
cease to accrue from and after the date fixed for redemption (unless the Company
defaults in providing the funds for such redemption) and, upon redemption on
such redemption date, such Notes will cease to be outstanding.
MANDATORY REDEMPTION
SINKING FUND. The Company will not be required to make any mandatory
sinking fund payments in respect of the Notes.
OFFERS TO PURCHASE UPON CHANGE OF CONTROL AND CERTAIN ASSET
SALES. Following the occurrence of a Change of Control, the Company will be
required to make an offer to purchase all outstanding Notes at a price of 101%
of the principal amount thereof, plus accrued and unpaid interest, if any, to
the date of purchase, and purchase all Notes validly tendered pursuant thereto.
In addition, the Company may be obligated to make an offer to purchase Notes
with a portion of the Net Cash Proceeds of certain Asset Sales at a price of
100% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. See "--Certain Covenants--Change of Control" and
"--Disposition of Proceeds of Asset Sales," respectively.
70
BRAZILIAN CENTRAL BANK CONSENT FOR OPTIONAL AND MANDATORY REDEMPTION OF NOTES
The consent of the Brazilian Central Bank is needed for the payment of
principal of, premium on and interest on the Notes upon acceleration of the
Notes following an Event of Default. In addition, the consent of the Brazilian
Central Bank is needed for payments in respect of the Notes upon (i) a
redemption or repurchase by the Company at its option, (ii) a Change of Control
or (iii) an Asset Sale. See "Risk Factors--Risk Factors Relating to
Brazil--Controls and Restrictions on U.S. Dollar Remittances."
RANKING
The indebtedness of the Company and the Guarantors evidenced by the Notes
and the Guarantees will rank senior in right of payment to all indebtedness of
the Company or such Guarantors, as the case may be, that is subordinated to the
Notes or such Guarantees, as applicable, by its terms and will rank PARI PASSU
in right of payment with all other existing or future unsecured and
unsubordinated indebtedness of the Company or such Guarantors, as the case may
be. At the Issue Date, it is expected that there will be no outstanding
indebtedness of the Company ranking PARI PASSU with or junior in right of
payment to the Notes. As of the date of this Prospectus, the Company has no
Subsidiaries and, accordingly, there are no Guarantors. The Notes will be
effectively subordinated in right of payment to all liabilities, including trade
payables, of any Subsidiaries organized or acquired by the Company hereafter,
except to the extent such Subsidiaries are required to become Guarantors as set
forth under "--Certain Covenants--Issuance of Guarantees by Material Restricted
Subsidiaries; Release of Guarantees." See "Use of Proceeds" and
"Capitalization."
CERTAIN COVENANTS
Set forth below are certain covenants that are contained in the Indenture.
LIMITATION ON ADDITIONAL INDEBTEDNESS AND PREFERRED STOCK OF RESTRICTED
SUBSIDIARIES. The Indenture provides that (i) the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create, incur,
assume, issue, guarantee or in any manner become directly or indirectly liable
for or with respect to, contingently or otherwise, the payment of (collectively,
to "incur") any Indebtedness (including any Acquired Indebtedness) and (ii) the
Company will not permit any Restricted Subsidiary that is not a Guarantor to
issue any Preferred Stock, in each case, except for Permitted Indebtedness;
PROVIDED that (a) the Company and any Guarantor will be permitted to incur
Indebtedness (including Acquired Indebtedness) and (b) any Restricted Subsidiary
that is not a Guarantor will be permitted to issue Preferred Stock, if, in each
case, after giving PRO FORMA effect to such incurrence or issuance and any
concurrent financing (including the application of the net proceeds therefrom),
the ratio of (x) Total Consolidated Indebtedness and Subsidiary Preferred Stock
to (y) Annualized Pro Forma Consolidated Operating Cash Flow for the latest
fiscal quarter for which consolidated financial statements of the Company are
available preceding the date of such incurrence or issuance would be either (1)
less than or equal to 5.75 to 1.00 if such incurrence or issuance is on or prior
to December 31, 2000 or (2) less than or equal to 5.00 to 1.00 if such
incurrence or issuance is on or after January 1, 2001.
LIMITATION ON RESTRICTED PAYMENTS. The Indenture provides that the Company
will not, and will not permit any of the Restricted Subsidiaries to, make,
directly or indirectly, any Restricted Payment unless:
(i) no Default shall have occurred and be continuing at the time of or
after giving effect to such Restricted Payment;
(ii) immediately after giving effect to such Restricted Payment, the
Company would be able to incur US$1.00 of Indebtedness under the proviso of
the covenant described under "Limitation on Additional Indebtedness and
Preferred Stock of Restricted Subsidiaries"; and
(iii) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after the
Issue Date (including any Designation Amount) does not exceed an amount
equal to the sum of (a) the difference between (x) the Cumulative Adjusted
Available Cash Flow determined at the time of such Restricted Payment and
(y) 150% of the
71
cumulative Consolidated Interest Expense of the Company determined for the
period commencing on the Issue Date and ending on the last day of the latest
fiscal quarter for which consolidated financial statements of the Company
are available preceding the date of such Restricted Payment PLUS (b) the
aggregate net cash proceeds received by the Company (x) as capital
contributions to the Company after the Issue Date or (y) from the issue or
sale (other than to a Restricted Subsidiary) of its Capital Stock (other
than Disqualified Stock) on or after the Issue Date (including, without
duplication, upon the exercise of options, warrants or rights) PLUS (c) the
aggregate net proceeds received by the Company from the issuance (other than
to a Restricted Subsidiary) on or after the Issue Date of its Capital Stock
(other than Disqualified Stock) upon the conversion of, or exchange for,
Indebtedness of the Company or a Restricted Subsidiary PLUS (d) in the case
of the disposition or repayment of any Investment constituting a Restricted
Payment (other than an Investment made pursuant to clause (v) of the
following paragraph) made after the Issue Date an amount equal to the lesser
of the return of capital with respect to such Investment and the cost of
such Investment, in either case, less the cost of the disposition of such
Investment PLUS (e) in the case of the Revocation of the Designation of a
Subsidiary as an Unrestricted Subsidiary, an amount equal to the
consolidated net Investment (exclusive of the net amount of any Investment
made in such Subsidiary while it was an Unrestricted Subsidiary) in such
Subsidiary on the date of Revocation but not in an amount exceeding the sum
of (1) the Designation Amount with respect to such Subsidiary and (2) the
net amount of any Investment made in such Subsidiary while it was an
Unrestricted Subsidiary, MINUS (f) 50% of the aggregate outstanding
principal amount of Indebtedness incurred pursuant to clause (e) of the
definition of "Permitted Indebtedness." For purposes of the preceding
clauses (b)(y) and (c) and without duplication, the value of the aggregate
net cash proceeds received by the Company upon the issuance of Capital Stock
either upon the conversion of convertible Indebtedness or in exchange for
outstanding Indebtedness or upon the exercise of options, warrants or rights
will be the net cash proceeds received upon the issuance of such
Indebtedness, options, warrants or rights plus the incremental amount
received by the Company upon the conversion, exchange or exercise thereof.
For purposes of determining the amount expended for Restricted Payments,
cash distributed shall be valued at the face amount thereof and property other
than cash shall be valued at its Fair Market Value.
The provisions of this covenant shall not prohibit (i) the payment of any
dividend or other distribution within 60 days after the date of declaration
thereof, if at such date of declaration such payment would comply with the
provisions of the Indenture; (ii) so long as no Default shall have occurred and
be continuing, the purchase, redemption, retirement or other acquisition of any
shares of Capital Stock of the Company (A) in exchange for or conversion into or
(B) out of the net cash proceeds of the substantially concurrent issue and sale
(other than to a Restricted Subsidiary) of shares of Capital Stock of the
Company (other than Disqualified Stock); PROVIDED that any such net cash
proceeds pursuant to the immediately preceding clause (B) are excluded from
clause (iii)(b) of the preceding paragraph; (iii) so long as no Default shall
have occurred and be continuing, the purchase, redemption, retirement,
defeasance or other acquisition of (A) Preferred Stock of any Restricted
Subsidiary that is not a Guarantor made by exchange for or conversion into, or
out of the net cash proceeds of, a substantially concurrent issue and sale
(other than to a Restricted Subsidiary) of (x) Capital Stock (other than
Disqualified Stock) of the Company or (y) other Preferred Stock of such
Restricted Subsidiary having an Average Life to Stated Maturity equal to or
greater than the Average Life to Stated Maturity of the Preferred Stock being
purchased, redeemed, retired, defeased or otherwise acquired or (B) Subordinated
Indebtedness made by exchange for or conversion into, or out of the net cash
proceeds of, a substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of (x) Capital Stock (other than Disqualified Stock) of
the Company or (y) other Subordinated Indebtedness having an Average Life to
Stated Maturity equal to or greater than the Average Life to Stated Maturity of
the Subordinated Indebtedness being purchased, redeemed, retired, defeased or
otherwise acquired PROVIDED that any such net cash proceeds pursuant to the
immediately preceding clause (iii)(A) or (iii)(B) are excluded from clause
(iii)(b) of the preceding paragraph; (iv) from and after the date that any
Shareholder Commitments shall cease to be effective
72
under applicable law, so long as no Default shall have occurred and be
continuing, dividends in respect of Capital Stock of the Company, after taking
account of all preceding and contemporaneous dividends and distributions in
respect of Capital Stock of the Company, in an amount not exceeding the amount
mandated by applicable law; (v) so long as no Default shall have occurred and be
continuing, any Investment constituting a Restricted Payment by the Company or
any Restricted Subsidiary in any person (including any Unrestricted Subsidiary)
in an amount not to exceed US$10,000,000 (or, to the extent non-U.S. dollar
denominated, the U.S. Dollar Equivalent thereof) in the aggregate at any time
outstanding; (vi) so long as no Default shall have occurred and be continuing
and prior to a Liquidation Event (as defined in the LLC Agreement) with respect
to Holding LLC, dividends to Holding LLC in an amount not exceeding the amount
necessary for Members of Holding LLC to pay Taxes attributable solely to their
interest in Holding LLC; (vii) the redemption, repurchase, retirement or other
acquisition of any Capital Stock of the Company from an employee or former
employee of the Company or any of its Subsidiaries in connection with such
employee's death, disability or termination of employment; PROVIDED that the
amount expended by the Company or any of its Restricted Subsidiaries in
connection with such redemption, repurchase, retirement or other acquisition
does not exceed US$500,000 (or, to the extent non-U.S. dollar denominated, the
U.S. Dollar Equivalent thereof) per year; PROVIDED, FURTHER, that any portion of
such permitted amount which is not expended in one year may be carried forward
for up to two consecutive years; or (viii) so long as no Default shall have
occurred and be continuing, the making of a direct or indirect Investment
constituting a Restricted Payment out of the proceeds of a concurrent capital
contribution in respect of existing Capital Stock (other than Disqualified
Capital Stock) of the Company or from the issue or sale (other than to a
Subsidiary) of Capital Stock (other than Disqualified Capital Stock) of the
Company; PROVIDED that any such net cash proceeds are excluded from clause
(iii)(b) of the second preceding paragraph. Restricted Payments of the type set
forth in the preceding clauses (iv), (v), (vi) and (vii) shall be included in
making the determination of available amounts under clause (iii) of the
preceding paragraph.
The Indenture provides that the Company will be required to obtain, as a
condition to the issuance of the Notes, and to thereafter maintain, enforceable
written commitments (the "Shareholder Commitments") from each shareholder of the
Company agreeing that such shareholder will not exercise its voting rights to
receive mandatory statutory dividends (without limiting such shareholder's right
otherwise to receive dividends pursuant to and in compliance with the covenant
described under "Limitation on Restricted Payments"), provided that a
Shareholder Commitment will cease to be effective on the first to occur of (w)
the date that shares of Capital Stock of the Company are issued and listed on a
Brazilian securities exchange in connection with a bona fide public offering of
such shares or the date that any shares of the Capital Stock of the Company are
otherwise effectively listed and traded on any Brazilian securities exchange;
(x) the date that none of the Notes remain outstanding; (y) June 6, 2002; or (z)
the date that such commitment is no longer effective, enforceable or legal under
applicable Brazilian laws and regulations (including without limitation any
construction or interpretation thereof by the CVM, any court or any other
governmental authority). The Indenture will provide that the Company will obtain
Shareholder Commitments in connection with any future issuances of Capital Stock
to the extent the Shareholder Commitment would then be effective, enforceable
and legal under the terms of the foregoing proviso.
LIMITATION ON LIENS SECURING CERTAIN INDEBTEDNESS. The Indenture provides
that the Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Liens of any kind against or upon
any of its property or assets, or any proceeds therefrom, which secure either
(i) Subordinated Debt Securities unless the Notes and the Guarantees, as
applicable, are secured by a Lien on such property, assets or proceeds that is
senior in priority to the Liens securing such Subordinated Debt Securities or
(ii) Pari Passu Debt Securities unless the Notes and the Guarantees, as
applicable, are equally and ratably secured with the Liens securing such Pari
Passu Debt Securities. The Indenture will also provide that the Company will not
create, incur or suffer to exist any Lien of any kind (other than the Lien
73
of the Pledgee) against or upon the Pledged Securities and will not terminate
the Lien of the Pledgee on the Pledged Securities.
ISSUANCE OF GUARANTEES BY MATERIAL RESTRICTED SUBSIDIARIES; RELEASE OF
GUARANTEES. The Indenture provides that each Material Restricted Subsidiary
will become a guarantor of the Notes (each a "Guarantor" and collectively the
"Guarantors"). Each Guarantor will fully and unconditionally guarantee
(collectively, the "Guarantees"), jointly and severally, on a senior unsecured
basis to each holder of a Note the due and punctual payment of the principal of,
premium, if any, and interest on, and all other amounts owing in respect of such
Note (and any Additional Amounts payable in respect thereof) and under the
Indenture. Each Guarantor will deliver a written instrument in the form attached
to the Indenture evidencing its Guarantee.
Pursuant to each Guarantee, if the Company defaults in payment of any amount
owing in respect of any Notes, the Guarantor will be obligated to duly and
punctually pay the same. Pursuant to the terms of the Indenture, each of the
Guarantors has agreed that its obligations under its Guarantee will be
unconditional, irrespective of the validity, regularity or enforceability of the
Notes or the Indenture, the absence of any action to enforce the same or any
other circumstance which might otherwise constitute a legal or equitable
discharge or defense of a guarantor.
If no Default exists or would exist under the Indenture, concurrently with
any sale or disposition (by merger or otherwise) of any Guarantor (other than a
transaction subject to the provisions described under "--Consolidation, Merger,
Sale of Assets, Etc.") by the Company or a Restricted Subsidiary to any person
that is not an Affiliate of the Company or any of the Restricted Subsidiaries
which is in compliance with the terms of the Indenture, such Guarantor will
automatically and unconditionally be released from all obligations under its
Guarantee.
BUSINESS OF THE COMPANY AND RESTRICTED SUBSIDIARIES. The Indenture will
provide that the Company will not, and will not permit any of the Restricted
Subsidiaries to, be principally engaged in any business or activity other than a
Permitted Business.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Indenture provides that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, create or otherwise
enter into or cause to become effective any consensual encumbrance or consensual
restriction of any kind on the ability of any Restricted Subsidiary to (a) pay
dividends, in cash or otherwise, or make any other distributions on its Capital
Stock or any other interest or participation in, or measured by, its profits
owned by the Company or any Restricted Subsidiary, (b) pay any Indebtedness owed
to the Company or a Restricted Subsidiary, (c) make any Investment in the
Company or any Restricted Subsidiary or (d) transfer any of its property or
assets to the Company or to any Restricted Subsidiary, except for (i) any such
customary encumbrance or restriction contained in a security document creating a
Lien permitted under the Indenture to the extent such encumbrance or restriction
applies to action following a default in respect of the applicable secured
obligation, (ii) any such encumbrance or restriction pursuant to any agreement
existing on the Issue Date, (iii) any such encumbrance or restriction with
respect to a Restricted Subsidiary that is not a Restricted Subsidiary on the
Issue Date which encumbrance or restriction is in existence at the time such
person becomes a Restricted Subsidiary but not created in contemplation thereof,
(iv) any such encumbrance or restriction existing under any agreement that
refinances, replaces or amends an agreement containing a restriction permitted
by clause (iii) above, PROVIDED that the terms and conditions of any such
restrictions are not materially less favorable to the holders of Notes than
those under or pursuant to the agreement being replaced or amended or the
agreement evidencing the indebtedness refinanced, (v) any such encumbrance or
restriction imposed pursuant to an agreement which has been entered into for the
sale or disposition of all or substantially all of the Capital Stock or assets
of such Restricted Subsidiary and (vi) customary non-assignment provisions in
leases entered into in the ordinary course of business and consistent with past
practices.
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Indenture provides that the
Company will not, and will not permit, cause, or suffer any Restricted
Subsidiary to, conduct any business or enter into any transaction
74
or series of related transactions with or for the benefit of any of their
respective Affiliates or any beneficial holder of ten percent or more of any
class of Capital Stock of the Company or any officer or director of the Company
or any Restricted Subsidiary (each an "Affiliate Transaction"), except on terms
that are fair and reasonable to the Company or such Restricted Subsidiary, as
the case may be. Each Affiliate Transaction involving aggregate payments or
other property having a Fair Market Value in excess of US$2,000,000 (or, to the
extent non-U.S. dollar denominated, the U.S. Dollar Equivalent of such amount)
shall be approved by the Board of Directors of the Company, such approval to be
evidenced by a Resolution of the Board of Directors (delivered to the Trustee)
stating that the Board of Directors of the Company (including a majority of the
Disinterested Directors) has determined that such transaction complies with the
foregoing provisions. In addition to the foregoing, with respect to any
Affiliate Transaction involving aggregate consideration in excess of
US$5,000,000 (or, to the extent non-U.S. dollar denominated, the U.S. Dollar
Equivalent of such amount) or more, the Company must obtain a written opinion
(delivered to the Trustee) from an Independent Financial Advisor stating that
the terms of such Affiliate Transaction to the Company or the Restricted
Subsidiary, as the case may be, are fair from a financial point of view.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and/or any of the
Restricted Subsidiaries; PROVIDED in any such case, no officer, director or
beneficial holder of 10% or more of any class of Capital Stock of the Company
shall beneficially own any Capital Stock of any such Restricted Subsidiary, (ii)
transactions between the Company and any Restricted Subsidiary that are solely
for the benefit of the Company or a Guarantor, (iii) transactions between or
among Unrestricted Subsidiaries, (iv) any dividend permitted by the covenant
"Limitation on Restricted Payments," (v) directors' fees, indemnification and
similar arrangements, officers' indemnification, employee stock option or
employee benefit plans, employee salaries and bonuses or legal fees paid or
created in the ordinary course of business, (vi) payments made to a License
Vehicle in reimbursement of expenses to the extent increased to maintain the
effectiveness of any paging licenses used by the Company or any Restricted
Subsidiary and (vii) payments pursuant to each of the following arrangements as
in effect on June 6, 1997: (A) the Technical Services Agreement, (B) the
Subscription Agreement, (C) the Paging License Operating Agreements and (D) the
Paging License Transfer Agreements.
CHANGE OF CONTROL. Following the occurrence of a Change of Control (the
date of such occurrence being the "Change of Control Date"), the Company shall
notify the holders of the Notes, in the manner prescribed by the Indenture, of
such occurrence and shall make an offer to purchase (the "Change of Control
Offer"), on a business day (the "Change of Control Payment Date") not later than
60 days following the Change of Control Date, all Notes then outstanding at a
purchase price equal to 101% of the principal amount thereof plus accrued and
unpaid interest, if any, to any Change of Control Payment Date. Notice of a
Change of Control Offer shall be given to holders of Notes, not less than 25
days nor more than 45 days before the Change of Control Payment Date. The Change
of Control Offer is required to remain open for at least 20 business days and
until the close of business on the Change of Control Payment Date. The Company's
obligations may be satisfied if a third party makes the Change of Control Offer
in the manner, at the times and otherwise in compliance with the requirements
applicable to a Change of Control Offer made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
One of the events that constitutes a Change of Control under the Indenture
is a sale, assignment, conveyance, transfer, lease or other disposition of all
or substantially all of the assets of the Company. The Indenture will be
governed by New York law, and there is no established quantitative definition
under New York law of "substantially all" of the assets of a corporation.
Accordingly, if the Company were to engage in a transaction in which it disposed
of less than all of its assets, a question of interpretation could arise as to
whether such disposition was of "substantially all" of its assets and whether
the Company was required to make a Change of Control Offer.
75
If a Change of Control Offer is made, there can be no assurance that the
Company or the Guarantors will have available funds sufficient to pay for all of
the Notes that might be delivered by holders of Notes seeking to accept the
Change of Control Offer.
If the Company makes a Change of Control Offer, the Company will comply with
all applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable United States or foreign securities laws and regulations and any
applicable requirements of any securities exchange on which the Notes are
listed.
DISPOSITION OF PROCEEDS OF ASSET SALES. The Indenture provides that the
Company will not, and will not permit any Restricted Subsidiary to, make any
Asset Sale, unless (a) the Company or such Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Sale at least equal to
the Fair Market Value of the shares or assets sold or otherwise disposed of and
(b) at least 75% of such consideration consists of cash or Cash Equivalents
(provided that the following shall be deemed cash for purposes of this provision
and be treated as Net Cash Proceeds, subject to application as hereinafter
provided: the amount of (x) any liabilities (as shown on the balance sheet or in
the notes thereto of the Company or such Restricted Subsidiary) of the Company
or such Restricted Subsidiary that are assumed (and from which the Company or
such Restricted Subsidiary is unconditionally released) in connection with such
Asset Sale by the transferee or purchaser of such assets or on behalf of such
transferee or purchaser by a third party and (y) any notes or other assets
received by the Company or such Restricted Subsidiary from such transferee or
purchaser that are immediately sold or transferred (on a non-recourse basis) for
cash or Cash Equivalents). To the extent the Net Cash Proceeds of any Asset Sale
are not required to be applied to repay, and permanently reduce the commitments
under, any Specified Indebtedness or are required but are not so applied, the
Company or such Restricted Subsidiary, as the case may be, may apply such Net
Cash Proceeds within 365 days thereof, to an investment in properties and assets
that will be used in a Permitted Business (or in Capital Stock of any person
that will become a Restricted Subsidiary as a result of such investment if such
person principally owns properties and assets that will be used in a Permitted
Business) of the Company or any Restricted Subsidiary ("Replacement Assets").
Pending the final application of any such Net Cash Proceeds in accordance with
the second sentence of this paragraph or to an Asset Sale Offer, the Company or
such Restricted Subsidiary may invest such Net Cash Proceeds in any manner not
prohibited by the Indenture and may temporarily repay Specified Indebtedness.
The Pro Rata Share of Net Cash Proceeds from any Asset Sale that are neither
used to repay, and permanently reduce the commitments under, any Specified
Indebtedness nor invested in Replacement Assets within such 365-day period shall
constitute "Excess Proceeds" subject to disposition as provided below.
Within 30 days after the aggregate amount of Excess Proceeds equals or
exceeds US$10,000,000 (or, to the extent non-U.S. dollar denominated, the U.S.
Dollar Equivalent of such amount), the Company shall make an offer to purchase
(an "Asset Sale Offer"), from all holders of the Notes, Notes having an
aggregate purchase price equal to such Excess Proceeds at a price in cash equal
to 100% of the outstanding principal amount thereof plus accrued and unpaid
interest, if any, to the purchase date. Each Asset Sale Offer shall remain open
for a period of 20 business days or such longer period as may be required by
law. To the extent that the aggregate purchase price for Notes tendered pursuant
to an Asset Sale Offer is less than the Excess Proceeds available for such
offer, the Company and the Restricted Subsidiaries may use such deficiency for
general corporate purposes. If the aggregate purchase price for the Notes
validly tendered and not withdrawn by holders thereof exceeds the Excess
Proceeds available for such offer, Notes to be purchased will be selected on a
PRO RATA basis or as nearly PRO RATA as practicable. Upon completion of such
Asset Sale Offer, the amount of Excess Proceeds shall be reset to zero.
If the Company is required to make an Asset Sale Offer, the Company will
comply with all applicable tender offer laws and regulations, including, to the
extent applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any
other applicable United States or foreign securities laws and regulations and
any applicable requirements of any securities exchange on which the Notes are
listed.
76
REPORTS. The Indenture provides that, whether or not the Company has a
class of securities registered under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), following the Exchange Offer or the effectiveness
of any Notes Shelf Registration Statement, the Company shall furnish without
cost to each holder of Notes and file with the Commission (whether or not the
Company is a public reporting company at the time), the Trustee and the Initial
Purchasers: (i) within 120 days after the end of each fiscal year of the
Company, annual reports on Form 20-F (or any successor form) containing the
information required to be contained therein (or required in such successor
form); (ii) within 60 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 6-K (or any successor form)
containing substantially the same information required to be contained in Form
10-Q (or required in any successor form); and (iii) promptly from time to time
after the occurrence of an event required to be therein reported, such other
reports on Form 6-K (or any successor form) containing substantially the same
information required to be contained in Form 8-K (or required in any successor
form). Prior to the effectiveness of the Exchange Offer Registration Statement
or the filing of any Notes Shelf Registration Statement with the Commission, the
Company will file with the Trustee and provide the Initial Purchasers, all of
the information that would have been required to have been filed with the
Commission pursuant to clauses (i), (ii) and (iii) above. Each of the reports
will be prepared in accordance with U.S. GAAP consistently applied and will be
prepared in accordance with the applicable rules and regulations of the
Commission.
The Indenture also provides that, for so long as any Transfer Restricted
Notes remain outstanding, the Company will furnish to the holders of the Notes
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act.
LIMITATION ON DESIGNATIONS OF UNRESTRICTED SUBSIDIARIES. The Indenture
provides that the Company may designate any Subsidiary of the Company as an
"Unrestricted Subsidiary" under the Indenture (a "Designation") only if:
(a) no Default shall have occurred and be continuing at the time of or
after giving effect to such Designation; and
(b) the Company would be permitted under the Indenture to make an
Investment under all applicable provisions of the covenant "Limitation on
Restricted Payments" at the time of Designation (assuming the effectiveness
of such Designation) in an amount (the "Designation Amount") equal to the
Fair Market Value of the Investment of the Company and the Restricted
Subsidiaries in such Subsidiary on such date.
In the event of any such Designation, (i) the Company shall be deemed to
have made an Investment constituting a Restricted Payment pursuant to the
covenant "Limitation on Restricted Payments" for all purposes of the Indenture
in the Designation Amount and (ii) upon such Designation, the Subsidiary that is
the subject of such Designation shall be deemed to be released from its
Guarantee, if any. The Indenture will further provide that the Company shall not
and shall not permit any Restricted Subsidiary to, at any time (x) guarantee any
Indebtedness of any Unrestricted Subsidiary (including any undertaking,
agreement or instrument evidencing such Indebtedness); PROVIDED that the Company
or any Restricted Subsidiary may pledge Capital Stock or Indebtedness of any
Unrestricted Subsidiary on a non-recourse basis such that the pledgee has no
claim whatsoever against the pledgor other than to obtain such pledged property
or (y) become or be directly or indirectly liable for any Indebtedness of any
Unrestricted Subsidiary or (z) be directly or indirectly liable for any
Indebtedness which provides that the holder thereof may (upon notice, lapse of
time or both) declare a default thereon or cause the payment thereof to be
accelerated or payable prior to its final scheduled maturity upon the occurrence
of a default with respect to any Indebtedness of any Unrestricted Subsidiary
(including any right to take enforcement action against such Unrestricted
Subsidiary), except in the case of clause (x) or (y) to the extent permitted
under the covenant "Limitation on Restricted Payments."
77
The Indenture will further provide that the Company may revoke any
Designation of a Subsidiary as an Unrestricted Subsidiary (a "Revocation") if:
(a) no Default shall have occurred and be continuing at the time of and
after giving effect to such Revocation; and
(b) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if incurred at such
time, have been permitted to be incurred for all purposes of the Indenture;
and
(c) such Subsidiary issues a Guarantee to the extent required under
"--Issuance of Guarantees by Material Restricted Subsidiaries; Release of
Guarantees."
All Designations and Revocations must be evidenced by Board Resolutions of
the Company delivered to the Trustee certifying compliance with the foregoing
provisions.
LIMITATION ON STATUS AS INVESTMENT COMPANY. The Indenture will provide that
the Company will not, and will not permit any of its Subsidiaries or controlled
Affiliates to, conduct its business in a fashion that would cause the Company to
be required to register as an "investment company" (as that term is defined in
the Investment Company Act of 1940, as amended (the "Investment Company Act")),
or otherwise become subject to regulation under the Investment Company Act. For
purposes of establishing the Company's compliance with this provision, any
exemption which is or would become available under Section 3(c)(1) or Section
3(c)(7) of the Investment Company Act will be disregarded.
CONSOLIDATION, MERGER, SALE OF ASSETS, ETC.
The Indenture provides that the Company will not, in a single transaction or
through a series of transactions, consolidate, amalgamate or combine with or
merge with or into or, directly or indirectly, sell, assign, convey, lease,
transfer or otherwise dispose of all or substantially all of its properties and
assets to any person or persons, and the Company will not permit any of the
Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in the sale, assignment, conveyance, lease, transfer or disposition
of all or substantially all of the properties and assets of the Company and the
Restricted Subsidiaries, taken as a whole, to any person or persons, unless (a)
the Company shall be the continuing person or the resulting, surviving or
transferee person (in either case, the "surviving entity") shall be a company
organized and existing under the laws of the Federative Republic of Brazil or
any State or political subdivision thereof; (b) the surviving entity shall
expressly assume all of the obligations of the Company under the Notes and the
Indenture and shall execute a supplemental indenture to effect such assumption
which supplemental indenture shall be delivered to the Trustee and shall be in
form reasonably satisfactory to the Trustee; (c) immediately after giving effect
to such transaction or series of transactions on a pro forma basis (including,
without limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions),
the Company or the surviving entity (assuming such surviving entity's assumption
of the Company's obligations under the Notes and the Indenture), as the case may
be, would be able to incur US$1.00 of Indebtedness under the proviso of the
covenant "Limitation on Additional Indebtedness and Preferred Stock of
Restricted Subsidiaries"; (d) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness incurred or anticipated to be incurred in
connection with or in respect of such transaction or series of transactions), no
Default shall have occurred and be continuing; (e) each Guarantor shall have
delivered a written instrument in form satisfactory to the Trustee confirming
its Guarantee; and (f) the Company or the surviving entity, as the case may be,
shall have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel stating that such transaction or series of transactions, and, if a
supplemental indenture is required in connection with such transaction or series
of transactions to effectuate such assumption, such supplemental indenture
complies with this covenant and that all conditions precedent in the Indenture
relating to the transaction or series of transactions have been satisfied. In
addition to the foregoing, in the case of any merger, consolidation or
combination involving a Guarantor as a result of which such Guarantor's
Guarantee is not released as provided under "Certain Covenants--Issuance of
Guarantees by
78
Material Restricted Subsidiaries; Release of Guarantees," such Guarantor or the
resulting, surviving or transferee person (if other than such Guarantor) shall
expressly assume all of such Guarantor's obligations under its Guarantee and the
Indenture and shall execute a supplemental indenture to effectuate such
assumption, which supplemental indenture shall be delivered to the Trustee and
shall be in form and substance satisfactory to the Trustee.
The Indenture provides that upon any consolidation, combination or merger or
any transfer of all or substantially all of the assets of a person subject to,
and in accordance with, the foregoing, the surviving entity shall succeed to,
and be substituted for, and may exercise every right and power of the Company or
such Guarantor, as the case may be, under the Indenture and the applicable
Guarantee with the same effect as if such surviving entity had been named as
such; provided that, solely for purposes of computing Cumulative Adjusted
Available Cash Flow for purposes of clause (iii) of the first paragraph of the
covenant "Limitation on Restricted Payments" above, the Cumulative Adjusted
Available Cash Flow of any persons other than the Company and the Restricted
Subsidiaries shall only be included for periods subsequent to the effective time
of such merger, consolidation, combination or transfer of assets.
The Indenture provides that, for all purposes of the Indenture and the Notes
(including the provisions of this covenant and the covenants "Limitation on
Additional Indebtedness and Preferred Stock of Restricted Subsidiaries,"
"Limitation on Restricted Payments" and "Limitation on Liens"), Subsidiaries of
any Surviving Entity will, upon such transaction or series of transactions,
become Restricted Subsidiaries or Unrestricted Subsidiaries as provided pursuant
to the covenant described under "Limitation on Designations of Unrestricted
Subsidiaries" and all Indebtedness, and all Liens on property or assets, of the
Company and the Restricted Subsidiaries immediately prior to such transaction or
series of transactions will be deemed to have been incurred upon such
transaction or series of transactions.
The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear whether the foregoing provisions are applicable.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture:
(i) default in the payment of the principal of, or premium, if any, on
the Notes when due, at maturity, upon redemption or otherwise (including
pursuant to a Change of Control Offer or an Asset Sale Offer); or
(ii) default in the payment of interest on the Notes when it becomes due
and payable and continuance of such default for a period of 30 days or more;
PROVIDED, HOWEVER, that a failure to pay interest (but not Additional
Amounts) on the Notes in a timely manner through June 6, 2000 will
constitute an immediate Event of Default under the Indenture, with no grace
or cure period; or
79
(iii) (a) failure to comply with the covenant described under
"Consolidation, Merger, Sale of Assets, Etc." or (b) failure to comply with
any other covenant or other term in the Indenture (other than those
specified in clause (i) or (ii)) and, such default continues for a period of
45 days after notice to the Company thereof by the Trustee or to the Company
and the Trustee by holders of at least 25% of the aggregate principal amount
of the Notes then outstanding; or
(iv) (a) failure to pay, following any applicable grace period, any
installment of principal due (whether at maturity or otherwise) under one or
more classes or issues of Indebtedness in an aggregate principal amount of
US$5,000,000 (or, to the extent non-U.S. dollar denominated, the U.S. Dollar
Equivalent of such amount) or more or (b) failure by the Company or any
Restricted Subsidiary to perform any other term, covenant, condition or
provision of one or more classes or issues of indebtedness in an aggregate
principal amount of the equivalent of US$5,000,000 (or, to the extent
non-U.S. dollar denominated, the U.S. Dollar Equivalent of such amount) or
more and, in the case of this clause (b), such failure results in an
acceleration of the maturity thereof; PROVIDED, that, in the case of a
termination or expiration of an Interest Rate Protection Obligation or
Currency Agreement requiring that the monetary liability thereunder be paid,
no Event of Default shall occur if such payment is made within 30 days after
such payment is due; or
(v) one or more judgments, orders or decrees for the payment of money
shall be entered in an amount or amounts of US$5,000,000 (or, to the extent
non-U.S. dollar denominated, the U.S. Dollar Equivalent of such amount) or
more, either individually or in the aggregate, against the Company or any
Restricted Subsidiary or any of their respective properties and shall not be
discharged or satisfied and there shall have been a period of 60 days during
which a stay of enforcement of such judgment, order or decree, by reason of
pending appeal or otherwise, shall not be in effect; or
(vi) certain events of bankruptcy, dissolution, insolvency,
reorganization, administration, sequestration or similar proceedings
involving the Company or a Material Restricted Subsidiary of the Company; or
(vii) there shall have occurred any seizure, compulsory acquisition,
expropriation or nationalization of substantially all of the assets of the
Company and the Restricted Subsidiaries, taken as a whole; or
(viii) the Company asserts or admits in writing that the Pledge Agreement
is unenforceable or is not in full force and effect; or
(ix) any Guarantee ceases to be in full force and effect or is declared
null and void or any Guarantor denies that it has any further liability
under any Guarantee or gives notice to that effect (other than by reason of
the termination of the Indenture or the release of any Guarantee in
accordance with the Indenture).
If an Event of Default (other than an Event of Default specified in clause
(vi) with respect to the Company or clause (vii)) occurs and is continuing, then
the Trustee or the holders of at least 25% in aggregate principal amount of the
outstanding Notes may by written notice, and the Trustee upon request of the
holders of not less than 25% in principal amount of the outstanding Notes shall,
declare the principal of all the outstanding Notes to be due and payable
immediately, together with all accrued and unpaid interest and premium, if any,
thereon. Upon any such declaration, such amount shall become due and payable
immediately. If an Event of Default specified in clause (vi) with respect to the
Company or clause (vii) occurs and is continuing, then such amount will IPSO
FACTO become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any holder.
After a declaration of acceleration or any IPSO FACTO acceleration pursuant
to clauses (vi) or (vii), the holders of a majority in aggregate principal
amount of outstanding Notes may, by notice to the Trustee, rescind such
declaration of acceleration and its consequences if all existing Events of
Default, other than nonpayment of the principal of, and accrued and unpaid
interest on, the Notes that has become due solely
80
as a result of such acceleration, have been cured or waived and if the
rescission of acceleration would not conflict with any judgment or decree. The
holders of a majority in principal amount of the outstanding Notes also have the
right to waive past defaults under the Indenture, except a default in the
payment of the principal of, or any interest on, any outstanding Note, or in
respect of a covenant or a provision that cannot be modified or amended without
the consent of all holders of Notes.
No holder of any of the Notes has any right to institute any proceeding with
respect to the Indenture or any remedy thereunder, unless the holders of at
least 25% in principal amount of the outstanding Notes have made written
request, and offered reasonable indemnity, to the Trustee to institute such
proceeding as Trustee, the Trustee has failed to institute such proceeding
within 45 days after receipt of such notice and the Trustee has not within such
45-day period received directions inconsistent with such written request by
holders of a majority in principal amount of the outstanding Notes. Such
limitations do not apply, however, to a suit instituted by a holder of a Note
for the enforcement of the payment of the principal of, premium, if any, or any
accrued and unpaid interest on, such Note on or after the respective due dates
expressed in such Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default shall occur and be continuing, the Trustee is
not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the holders unless such holders
shall have offered to such Trustee reasonable security or indemnity. Subject to
certain provisions concerning the rights of the Trustee, the holders of a
majority in principal amount of the outstanding Notes have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the Trustee, or exercising any trust, or power conferred on the Trustee.
The Indenture provides that the Trustee will, within 30 days after the
occurrence of any Default, give to the holders of the Notes notice of such
Default known to it, unless such Default shall have been cured or waived;
PROVIDED that, except in the case of a Default in payment of principal of or
premium, if any, on any Note when due or in the case of any Default in the
payment of any interest on the Notes or in the case of any Default arising from
the occurrence of any Change of Control, the Trustee shall be protected in
withholding such notice if it determines in good faith that the withholding of
such notice is in the interest of such holders.
The Company is required to furnish to the Trustee annually a statement as to
compliance with all conditions and covenants under the Indenture.
SATISFACTION AND DISCHARGE OF THE INDENTURE; DEFEASANCE
The Company and the Guarantors may terminate their obligations under the
Indenture, when (1) either: (A) all Notes theretofore authenticated and
delivered have been delivered to the Trustee for cancellation, or (B) all such
Notes not theretofore delivered to the Trustee for cancellation will become due
and payable (a "Discharge") under irrevocable arrangements satisfactory to the
Trustee for the giving of notice of redemption by the Trustee in the name, and
at the expense, of the Company, and the Company has irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient to pay and
discharge the entire indebtedness on the Notes, not theretofore delivered to the
Trustee for cancellation, for principal of, premium, if any, on and interest to
the date of deposit or maturity or date of redemption; (2) the Company has paid
or caused to be paid all other sums then due and payable under the Indenture by
the Company; and (3) the Company has delivered to the Trustee an officers'
certificate and an opinion of counsel, each stating that all conditions
precedent under the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
81
The Company may elect, at its option, to have its obligations discharged
with respect to the outstanding Notes ("legal defeasance"). Such defeasance
means that the Company will be deemed to have paid and discharged the entire
indebtedness represented by the outstanding Notes, except for (1) the rights of
holders of such Notes to receive payments in respect of the principal of and any
premium and interest on such Notes when payments are due, (2) the Company's
obligations with respect to such Notes concerning issuing temporary Notes,
registration of transfer of Notes, mutilated, destroyed, lost or stolen Notes
and the maintenance of an office or agency for payment and money for security
payments held in trust, (3) the rights, powers, trusts, duties and immunities of
the Trustee, and (4) the defeasance provisions of the Indenture. In addition,
the Company may elect, at its option, to have its obligations released with
respect to certain covenants in the Indenture, including covenants relating to
Asset Sales and a Change of Control ("covenant defeasance"), and any omission to
comply with such obligation shall not constitute a Default or an Event of
Default with respect to the Notes. In the event covenant defeasance occurs,
certain events (not including non-payment, bankruptcy and insolvency events)
described under "Events of Default" will no longer constitute an Event of
Default with respect to the Notes.
In order to exercise either legal defeasance or covenant defeasance with
respect to outstanding Notes: (1) the Company must irrevocably have deposited or
caused to be deposited with the Trustee as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for, and
dedicated solely to the benefits of the holders of such Notes: (A) money in an
amount, or (B) U.S. Government Obligations which through the scheduled payment
of principal and interest in respect thereof in accordance with their terms will
provide, not later than the due date of any payment, money in an amount, or (C)
a combination thereof, in each case sufficient without reinvestment, in the
opinion of an internationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee to pay and
discharge, and which shall be applied by the Trustee to pay and discharge, the
entire Indebtedness in respect of the principal of and premium, if any, and
interest on such Notes on the maturity thereof or (if the Company has made
irrevocable arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name and at the expense of the Company) the
redemption date thereof, as the case may be, in accordance with the terms of the
Indenture and such Notes; (2) in the case of legal defeasance, the Company shall
have delivered to the Trustee an opinion of U.S. counsel stating that, since the
date of the Indenture, there has been a change in the applicable U.S. federal
income tax law, and based thereon such opinion shall confirm that, under then
applicable U.S. federal income tax law, the holders of such Notes will not
recognize gain or loss for U.S. federal income tax purposes as a result of the
deposit, defeasance and discharge to be effected with respect to such Notes and
will be subject to federal income tax on the same amount, in the same manner and
at the same times as would be the case if such deposit, defeasance and discharge
were not to occur; (3) in the case of covenant defeasance, the Company shall
have delivered to the Trustee an opinion of U.S. counsel to the effect that the
holders of such outstanding Notes will not recognize gain or loss for U.S.
federal income tax purposes as a result of the deposit and covenant defeasance
to be effected with respect to such Notes and will be subject to U.S. federal
income tax on the same amount, in the same manner and at the same times as would
be the case if such deposit and covenant defeasance were not to occur; (4) the
Company shall have delivered to the Trustee an opinion of Brazilian counsel to
the effect that the holders of such Notes will not be subject to taxes as a
result of the deposit and defeasance to be effectuated with respect to such
Notes; (5) no Default with respect to the outstanding Notes shall have occurred
and be continuing at the time of such deposit after giving effect thereto or, in
the case of legal defeasance, no Default relating to bankruptcy or insolvency
shall have occurred and be continuing at any time on or prior to the 91st day
after the date of such deposit (it being understood that this condition shall
not be deemed satisfied until after such 91st day); (6) such legal defeasance or
covenant defeasance shall not cause the Trustee to have a conflicting interest
within the meaning of the Trust Indenture Act (assuming all Notes were in
default within the meaning of such Act); (7) such defeasance or covenant
defeasance shall not result in a breach or violation of, or constitute a default
under, any other agreement or instrument to which the Company or any Guarantor
is a party or by which it is bound; (8) such legal defeasance or covenant
82
defeasance shall not result in the trust arising from such deposit constituting
an investment company within the meaning of the Investment Company Act unless
such trust shall be registered under such Act or exempt from registration
thereunder; and (9) the Company shall have delivered to the Trustee an officers'
certificate and an opinion of counsel stating that all conditions precedent with
respect to such defeasance or covenant defeasance have been complied with.
AMENDMENT AND WAIVERS
From time to time the Company and the Guarantors when authorized by
resolutions of their respective Boards, and the Trustee, without the consent of
the holders of the Notes, may amend, waive or supplement the Indenture, the
Notes or the Guarantees for certain specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies, to provide for the
assumption of the Company's obligations to holders of the Notes in the case of a
merger or consolidation, to make any change that would provide any additional
rights or benefits to the holders of the Notes, to add Guarantors with respect
to the Notes, to secure the Notes, maintaining the qualification of the
Indenture under the Trust Indenture Act or making any change that does not
adversely affect the rights of any holder. Other amendments and modifications of
the Indenture, the Notes or the Guarantees may be made by the Company and the
Guarantors and the Trustee with the consent of the holders of not less than a
majority of the aggregate principal amount of the outstanding Notes; PROVIDED
that no such modification or amendment may, without the consent of the holder of
each outstanding Note affected thereby, (i) reduce the principal amount of,
extend the fixed maturity of the Notes, or alter or waive the redemption
provisions of the Notes (other than, subject to clause (vii) below, provisions
relating to repurchase of Notes upon the occurrence of an Asset Sale or a Change
of Control), (ii) change the currency in which any Notes or the Guarantees or
any premium or the accrued interest thereon is payable, (iii) reduce the
percentage in principal amount outstanding of Notes who must consent to an
amendment, supplement or waiver or consent to take any action under the
Indenture, the Notes or the Guarantees, (iv) impair the right to institute suit
for the enforcement of any payment on or with respect to the Notes or the
Guarantees, (v) waive a default in payment with respect to the Notes or any
Guarantee, (vi) reduce the rate or extend the time for payment of interest on
the Notes, (vii) following the occurrence of an Asset Sale or a Change of
Control, alter the obligation to purchase Notes as a result thereof in
accordance with the Indenture or waive any default in the performance thereof,
(viii) adversely affect the ranking of the Notes or the Guarantees, (ix) amend
or modify the provisions described under "--Additional Amounts", (x) permit the
creation of any Lien (other than the Lien of the Pledgee) on the Pledged
Securities or terminate the Lien of the pledgee on the Pledged Securities or
(xi) release any Guarantor from any of its obligations under its Guarantee or
the Indenture, except in compliance with the terms of the Indenture.
FOREIGN EXCHANGE RESTRICTIONS; CURRENCY INDEMNITY
Payments in respect of the Notes or any Guarantee shall be made in United
States dollars as at the time of payment shall be legal tender for the payment
of public and private debts in that currency. In the event that on any payment
date in respect of the Notes or any Guarantee, any restrictions or prohibition
of access to the Brazilian foreign exchange market exists, the Company and each
Guarantor agree to pay all amounts payable under the Notes in U.S. dollars by
means of any legal procedure existing in Brazil (except commencing legal
proceedings against the Brazilian Central Bank), on any due date for payment
under the Notes. All costs and taxes payable in connection with the procedures
referred to in this covenant shall be borne by the Company and each Guarantor.
U.S. dollars are the sole currency of account and payment for all sums
payable by the Company and the Guarantors under or in connection with the Notes,
including damages. Any amount received or recovered in a currency other than
U.S. dollars (whether as a result of, or of the enforcement of, a judgment or
order of a court of any jurisdiction, in the winding-up or dissolution of the
Company or any Guarantor or otherwise) by any holder of a Note in respect of any
sum expressed to be due to it from the
83
Company and the Guarantors shall only constitute a discharge to the Company and
the Guarantors to the extent of the U.S. dollar amount which the recipient is
able to purchase with the amount so received or recovered in that other currency
on the date of that receipt or recovery (or, if it is not practicable to make
that purchase on that date, on the first date on which it is practicable to do
so). If that U.S. dollar amount is less than the U.S. dollar amount expressed to
be due to the recipient under any Note, the Company and the Guarantors, jointly
and severally, shall indemnify it against any loss sustained by it as a result.
In any event, the Company and the Guarantors, jointly and severally, shall
indemnify the recipient against the cost of making any such purchase. For the
purposes of this paragraph, it will be sufficient for the holder of a Note to
certify in a satisfactory manner (indicating sources of information used) that
it would have suffered a loss had an actual purchase of U.S. dollars been made
with the amount so received in that other currency on the date of receipt or
recovery (or, if a purchase of U.S. dollars on such date had not been
practicable, on the first date on which it would have been practicable, it being
required that the need for a change of date be certified in the manner mentioned
above). This indemnity constitutes a separate and independent obligation from
other obligations of the Company and each Guarantor, shall give rise to a
separate and independent cause of action, shall apply irrespective of any
indulgence granted by any holder of a Note and shall continue in full force and
effect despite any other judgment, order, claim or proof for a liquidated amount
in respect of any sum due under any Note.
DISCHARGE AND INDEMNIFICATION
Any payment to be made in respect of the Notes or the Guarantees by the
Company or any Guarantor to or to the order of a Paying Agent shall be in
satisfaction PRO TANTO of the obligations of the Company under the Notes. The
Company will indemnify the Holders against any failure on the part of any Paying
Agent to pay any sum due in respect of the Notes and will pay such sum to the
Trustee on demand. This indemnity constitutes a separate and independent
obligation from the other obligations of the Company under the Notes, will give
rise to a separate and independent cause of action, will apply irrespective of
any waiver granted by the Trustee and/or any holder of Notes and will continue
in full force and effect despite any judgment, order, claim, or proof for a
liquidated amount in respect of any sum due under the Indenture, the Notes or
any judgment or order.
REGARDING THE TRUSTEE AND PAYING AGENTS
The Chase Manhattan Bank serves as Trustee and Co-Paying Agent under the
Indenture and as Pledgee under the Pledge Agreement. Chase Japan will serve as
Principal Paying Agent. The Indenture provides that, except during the
continuance of an Event of Default, the Trustee thereunder will perform only
such duties as are specifically set forth in the Indenture. If an Event of
Default has occurred and is continuing, the Trustee will exercise such rights
and powers vested in it under the Indenture and use the same degree of care and
skill in its exercise as a prudent person would exercise under the circumstances
in the conduct of such person's own affairs.
The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee thereunder,
should it become a creditor of the Company or a Guarantor, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; PROVIDED that if it acquires any conflicting
interest (as defined herein) it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture, the Pledge Agreement, the Notes and the Guarantees will each
provide that such agreements will be governed by and construed in accordance
with laws of the State of New York without giving effect to principles of
conflicts of law, except that matters relating to the authorization by the
84
Company or any Guarantor of the Indenture, the Pledge Agreement, the Notes and
the Guarantees shall be governed by the applicable laws of the Federative
Republic of Brazil.
ENFORCEABILITY OF JUDGMENTS
Service of process upon the Company or any Guarantor in an action (other
than an insolvency, liquidation or bankruptcy proceeding or any other proceeding
in the nature of an in rem or quasi in rem proceeding) to enforce their
obligations under the Indenture, the Notes and the Guarantees may be obtained
within the United States by service upon CT Corporation System. See "Risk
Factors--Factors Relating to Brazil--Enforceability of Judgments." Since
substantially all of the assets of the Company, the Guarantors and their
respective subsidiaries are outside the United States, any judgment obtained in
the United States against the Company or any Guarantor, including judgments with
respect to the payment of amounts owing with respect to the Notes or the
Guarantees, may not be collectible within the United States.
Judgments for monetary claims obtained in U.S. courts arising out of or in
relation to the obligations of the Company and the Guarantors under the
Indenture and the Notes will be enforceable in Brazil, provided that such
judgment has been previously confirmed by the Brazilian Federal Supreme Court.
In order to be confirmed by the Brazilian Federal Supreme Court, such foreign
judgment must meet the following conditions: (a) it must comply with all
formalities required for its enforceability under the laws of the country where
it was issued; (b) it must have been given by a competent court after the proper
service of process on the parties; (c) it must not be subject to appeal; (d) it
must not offend Brazilian national sovereignty, public policy or good morals;
and (e) it must be duly authenticated by a competent Brazilian consulate and be
accompanied by a sworn translation thereof into Portuguese. Notwithstanding
foregoing, no assurance can be given that such confirmation will be obtained,
that process described above can be conducted in a timely manner or that a
Brazilian court will enforce such monetary judgment. See "Enforceability of
Civil Liabilities."
Any judgment obtained against the Company or any Guarantor in a court in
Brazil under any Note or under the Indenture will be expressed in the Brazilian
currency equivalent to the U.S. dollar amount of such sum at the commercial
exchange rate of the date at which such judgment is obtained, and such Brazilian
currency amount will be corrected in accordance with the exchange variation
until the judgment holder receives effective payment.
CERTAIN BANKRUPTCY LAW CONSIDERATIONS
Brazilian bankruptcy laws grant extensive powers to the courts. Brazilian
Bankruptcy Law (Decree-law No. 7,661, of June 21, 1945, the "Brazilian
Bankruptcy Law") establishes two different proceedings for the resolution of
debts of commercial companies which are insolvent or do not pay their
obligations when due: the bankruptcy proceeding ("falencia") and the
reorganization proceeding ("concordata"). Both proceedings apply to all
unsecured creditors of a company which is declared bankrupt or which is under a
reorganization proceeding. In the event that the Company or any Guarantor is
declared bankrupt or enters into a concordata, the Notes will be considered
general unsecured indebtedness of the Company or such Guarantor and therefore
will be subject to such proceedings.
Under a bankruptcy proceeding (essentially a liquidation proceeding),
payments in respect of the Notes or the Guarantees will be subject to an order
of priority. Generally, Brazilian Bankruptcy Law and other applicable rules
establish that claims of employees for wages or indemnity and tax claims have
priority over other claims against the bankrupt estate. Other claims are subject
to the following order of priority: (a) secured credits, (b) credits with
special privileges over certain assets, (c) credits with general privilege and
(d) unsecured credits. Credits in foreign currency are converted into Brazilian
currency on the date the Company is declared bankrupt and are not subject to
adjustment in accordance with the
85
exchange variation. Such amount in Brazilian currency must be monetarily
adjusted to account for inflation (in accordance with the rules applicable from
time to time) and bears no interest.
The general rule under Brazilian Bankruptcy Law is that all of the assets of
a company in bankruptcy proceedings, including those in the possession of third
parties under a deposit or pledge must be collected to the bankrupt estate. In
the event the Company is declared bankrupt or enters into a concordata,
Brazilian Bankruptcy Law provides that the Pledged Securities be collected along
with the other assets of the Company. The credits due in connection with the
Pledged Securities shall be considered secured credits and shall have priority
in the payments made under the bankruptcy proceedings.
Under a concordata proceeding, which is a protection available under the
Brazilian Bankruptcy Law for commercial companies experiencing financial
distress to avoid the declaration of bankruptcy, the Company's or Guarantors'
unsecured credits existing at the time the concordata is declared are
rescheduled for one of the periods defined in the law which in virtually all
cases is 24 months (in which event 40% of the debt must be paid in the first
year). The benefit may be given by the court without any prior consultation with
or manifestation by the creditors, so long as the beneficiary demonstrates,
INTER ALIA, that its assets are worth at least 50% of its unsecured
indebtedness. The concordata proceeding has the following basic characteristics:
(i) it only affects unsecured creditors; (ii) it does not affect the day-to-day
management of the Company, the other commercial obligations of the Company and
the obligations assumed after the date on which the concordata is declared;
(iii) amounts due in foreign currency subject to the concordata are converted
into local currency on the date on which the concordata is accepted by the court
and are not subject to adjustment in accordance with the exchange variation;
(iv) amounts due under the concordata, either in local currency or converted
into local currency, must be monetarily adjusted to account for inflation (in
accordance with the rules applicable from time to time) and bear interest at the
rate of 12% per annum; and (v) a company under concordata which fails to meet
its rescheduled obligations will be declared bankrupt.
CONSENT TO JURISDICTION AND SERVICE
The Indenture provides that the Company and each Guarantor will appoint CT
Corporation System as its agent for service of process in any suit, action or
proceeding with respect to the Indenture, the Notes and the Guarantees and for
actions brought under federal or state securities laws brought in any Federal or
state court located in the City of New York and will submit to such
jurisdiction. See "Enforceability of Civil Liabilities."
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for any other capitalized terms used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a person existing at the time
such person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by such person and not incurred in connection with, or in
anticipation of, such person becoming a Restricted Subsidiary or such Asset
Acquisition.
"Affiliate" of any specified person means any other person which, directly
or indirectly, controls, is controlled by or is under direct or indirect common
control with, such specified person. For the purposes of this definition,
"control" when used with respect to any person means the power to direct the
management and policies of such person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
86
"Annualized Pro Forma Consolidated Operating Cash Flow" means Consolidated
Operating Cash Flow for the latest fiscal quarter for which consolidated
financial statements of the Company are available multiplied by four. For
purposes of calculating "Consolidated Operating Cash Flow" for any fiscal
quarter for purposes of this definition, (i) any Subsidiary of the Company that
is a Restricted Subsidiary on the date of the transaction giving rise to the
need to calculate "Annualized Pro Forma Consolidated Operating Cash Flow" (the
"Transaction Date") (or would become a Restricted Subsidiary in connection with
the transaction that requires determination of such amount) shall be deemed to
have been a Restricted Subsidiary at all times during such fiscal quarter and
(ii) any Subsidiary of the Company that is not a Restricted Subsidiary on the
Transaction Date (or would cease to be a Restricted Subsidiary in connection
with the transaction that requires the determination of such amount) shall be
deemed not to have been a Restricted Subsidiary at any time during such fiscal
quarter. In addition to and without limitation of the foregoing, for purposes of
this definition, "Consolidated Operating Cash Flow" shall be calculated after
giving effect on a PRO FORMA basis for the applicable fiscal quarter to, without
duplication, any Asset Sales or Asset Acquisitions (including, without
limitation, any Asset Acquisition giving rise to the need to make such
calculation as a result of the Company's or one of the Restricted Subsidiaries'
(including any person who becomes a Restricted Subsidiary as a result of the
Asset Acquisition) incurring Acquired Indebtedness) occurring during the period
commencing on the first day of such fiscal quarter to and including the
Transaction Date (the "Reference Period"), as if such Asset Sale or Asset
Acquisition occurred on the first day of the Reference Period.
"Asset Acquisition" means (i) any capital contribution (by means of
transfers of cash or other property to others or payments for property or
services for the account or use of others, or otherwise) by the Company or any
Restricted Subsidiary, or any acquisition or purchase of Capital Stock of any
other person by the Company or any Restricted Subsidiary, in either case
pursuant to which such person shall become a Restricted Subsidiary or shall be
merged with or into the Company or any Restricted Subsidiary, or (ii) any
acquisition by the Company or any Restricted Subsidiary of the assets of any
person which constitutes substantially all of an operating unit or line of
business of any person (provided that such business shall be a Permitted
Business) or which is otherwise outside of the ordinary course of business.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition and is not for security purposes) or other
disposition (that is not for security purposes) to any person other than the
Company or a Restricted Subsidiary, in one transaction or a series of related
transactions, of (i) any Capital Stock of any Restricted Subsidiary, (ii) any
license (or contractual rights to use any licenses) for the provision of paging
services or a related business held by the Company or any Restricted Subsidiary
(whether by sale of Capital Stock, assignment of contractual rights or
otherwise) other than the transfer of any such license to a License Vehicle,
(iii) any assets of the Company or any Restricted Subsidiary which constitute
substantially all of an operating unit or line of business of the Company or any
Restricted Subsidiary or (iv) any other property or asset of the Company or any
Restricted Subsidiary outside of the ordinary course of business. For the
purposes of this definition, the term "Asset Sale" shall not include (i) any
disposition of properties or assets of the Company or one or more of the
Restricted Subsidiaries that is governed under "Consolidation, Merger, Sale of
Assets, Etc.", (ii) sales of property or equipment that have become worn out,
obsolete or damaged or otherwise unsuitable for use in connection with the
business of the Company or any Restricted Subsidiary, as the case may be, (iii)
any dividend paid to all shareholders of the Company on a proportional basis
made pursuant to and in compliance with the covenant described under
"--Limitation on Restricted Payments," or (iv) the disposition of Capital Stock
of any Unrestricted Subsidiary. For purposes of the covenant "Disposition of
Proceeds of Asset Sales," the term "Asset Sale" shall not include any sale,
conveyance, transfer, lease or other disposition of any property or asset,
whether in one transaction or a series of related transactions, either (x)
involving assets with a Fair Market Value not in excess of US$2,000,000 (or, to
the extent non-U.S. dollar denominated, the U.S. Dollar Equivalent of such
amount) or (y) in connection with a Capitalized Lease Obligation.
87
"Average Life to Stated Maturity" means, with respect to any Indebtedness or
Preferred Stock, as at any date of determination, the quotient obtained by
dividing (i) the sum of the products of (a) the number of years from such date
to the date or dates of each successive scheduled principal or other return of
capital (including, without limitation, any sinking fund requirements) of such
Indebtedness or Preferred Stock multiplied by (b) the amount of each such
principal or other payment by (ii) the sum of all such principal or other
payments.
"Board" means the Board of Directors of the Company or any other competent
corporate body of a Guarantor, as the case may be.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary or General Counsel of the Company or a Guarantor, as
applicable to have been duly adopted by its Board and to be in full force and
effect on the date of such certification, and delivered to the Trustee.
"Brazilian Taxes" means any tax, duty, levy, impost, assessment or other
governmental charge of whatever nature (including penalties, interest and any
other liabilities related thereto) imposed by a taxing authority in Brazil.
"Capital Stock" means, with respect to any person, any and all capital stock
or shares, interests, participations, rights in, or other equivalents (however
designated and whether voting or non-voting) (including share appreciation
rights) of, such person's capital stock or shares, whether outstanding on the
Issue Date or issued after the Issue Date, and any and all rights, warrants or
options exchangeable for or convertible into such capital stock or shares.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed, immovable or movable) that is
required to be classified and accounted for as a finance lease under U.S. GAAP
and, for the purpose of the Indenture, the amount of such obligation at any date
shall be the capitalized amount thereof at such date, determined in accordance
with U.S. GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity of
365 days or less issued or directly and fully guaranteed or insured by the
Federative Republic of Brazil or the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the
Federative Republic of Brazil or the United States of America, as the case may
be, is pledged in support thereof or such Indebtedness constitutes a general
obligation of it); (ii) deposits, certificates of deposit or acceptances with a
maturity of 365 days or less of any institution which is a Brazilian regulated
bank or a member of the Federal Reserve System having combined capital and
surplus and undivided profits (or any similar capital concept) of not less than
US$50,000,000 (or, to the extent non-U.S. dollar denominated, the U.S. Dollar
Equivalent of such amount) at the time of deposit; (iii) commercial paper with a
maturity of 365 days or less issued by a corporation (other than an Affiliate of
the Company) incorporated or organized under the laws of the Federative Republic
of Brazil or any jurisdiction thereof or the United States or any state thereof
or the District of Columbia and rated at least "A-1" by S&P or "P-1" by Moody's
or their respective Brazilian affiliates; (iv) Investments with a maturity of
365 days or less of any person that is fully and unconditionally guaranteed by a
bank referred to in clause (ii); (v) repurchase agreements and reverse
repurchase agreements relating to marketable direct obligations issued or
unconditionally guaranteed by the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States
Government, respectively, in each case maturing within one year from the date of
acquisition; and (vi) Investments in any money market fund in the United States
having assets in excess of US$500 million which is substantially invested in the
instruments referred to in clauses (i) through (v).
"Change of Control" is defined to mean the occurrence of any of the
following events: (a) any "person" or "group" (as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act), other than one or more of the
Permitted Holders, is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a person shall be deemed to
have "beneficial ownership" of all
88
securities that such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total Voting Stock of the Company; PROVIDED,
HOWEVER, that the Permitted Holders "beneficially own" (as so defined) in the
aggregate a lower percentage of the Voting Stock than such other person and do
not have the right or ability by voting power, contract or otherwise to elect or
designate for election a majority of the Board of Directors of the Company; or
(b) the Company consolidates with, or merges with or into, another person or
sells, assigns, conveys, transfers, leases or otherwise disposes of all or
substantially all of its assets (determined on a consolidated basis) to any
person, or any person consolidates with, or merges with or into, the Company, in
any such event pursuant to a transaction in which the outstanding Voting Stock
of the Company is converted into or exchanged for cash, securities or other
property, other than (A) any such transaction where (i) the outstanding Voting
Stock of the Company is converted into or exchanged for (1) Voting Stock (other
than Disqualified Stock) of the surviving or transferee corporation and/or (2)
cash, securities and other property in an amount which could be paid by the
Company as a Restricted Payment under the Indenture and (ii) the "beneficial
owners" of the Voting Stock of the Company immediately prior to such transaction
own, directly or indirectly, not less than a majority of the Voting Stock of the
surviving or transferee corporation immediately after such transaction or (B)
any such transaction as a result of which Permitted Holders own 35% or more of
the total Voting Stock of the surviving or transferee corporation immediately
after such transaction, unless any person or group (other than Permitted
Holders) beneficially owns in the aggregate a greater percentage of the Voting
Stock; or (c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of the Company (together with any
new directors whose election by the Board of the Company or whose nomination for
election by the stockholders of the Company was approved by a vote of a majority
of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of the
Company then in office (other than by action of the Permitted Holders pursuant
to the Company's Shareholder Agreement or by-laws, in each case, as in effect on
the Issue Date, or otherwise); PROVIDED THAT, to the extent that one or more
regulatory approvals are required for one or more of the events or circumstances
described above to become effective under applicable law, such events or
circumstances shall be deemed to have occurred at the time such approvals have
been obtained and become effective under applicable law.
"Class A Preferred Stock" means shares of the Company's redeemable preferred
stock (acoes preferenciais), with no par value, outstanding on June 6, 1997 and
any identical shares thereof paid as dividends thereon.
"Class B Holding LLC Shares" means the Class B Member Interests of Holding
LLC.
"Class B Members" means the holders from time to time of non-voting member
interests in Holding LLC.
"Common Stock" means any Capital Stock other than Preferred Stock.
"Consolidated Income Tax Expense" means, with respect to any period, the
provision for Brazilian corporation, local, foreign and other income taxes of
the Company and the Restricted Subsidiaries for such period as determined on a
consolidated basis in accordance with U.S. GAAP.
"Consolidated Interest Expense" means, with respect to any period, without
duplication, the sum of (i) the interest expense (including, without limitation,
any payments similar to those required under the "Additional Amounts" provisions
of the Indenture) of the Company and the Restricted Subsidiaries for such period
as determined on a consolidated basis in accordance with U.S. GAAP and shall, in
any event, include, without limitation, (a) any amortization of debt discount,
(b) the net cost under any Currency Agreements and Interest Rate Protection
Obligations (including any amortization of discounts), (c) the interest portion
of any deferred payment obligation, (d) all commissions, discounts and other
fees and charges owed with respect to letters of credit, bills of exchange,
promissory notes and bankers' acceptance
89
financing and (e) all accrued interest, PLUS (ii) all but the principal
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by such person during such period as determined on a
consolidated basis in accordance with U.S. GAAP, PLUS (iii) all dividends
declared, paid or accumulated on (a) Disqualified Capital Stock of the Company
or any Guarantor or (b) Preferred Stock of any Restricted Subsidiary.
"Consolidated Net Income" means, with respect to any period, the
consolidated net income of the Company and the Restricted Subsidiaries for such
period, adjusted, to the extent included in calculating such net income, by
excluding, without duplication, (i) all extraordinary gains or losses (on an
after-tax basis) of such person (net of fees and expenses relating to the
transaction giving rise thereto) for such period, (ii) except to the extent
actually received by the Company or any Restricted Subsidiary, income of the
Company and the Restricted Subsidiaries derived from or in respect of all
Investments in persons other than any Restricted Subsidiary, (iii) net income
(or loss) of any other person combined with such person in a "pooling of
interests" basis attributable to any period prior to the date of combination,
(iv) any gain or loss, net of taxes realized by such person, upon the
termination of any employee pension benefit plan during such period, (v) gains
or losses in respect of any Asset Sales (on an after-tax basis and net of fees
and expenses relating to the transaction giving rise thereto) during such period
and (vi) the net income of any Restricted Subsidiary for such period to the
extent that the declaration of dividends or similar distributions by that
Restricted Subsidiary to the Company or any Restricted Subsidiary of that income
is not at the time permitted, directly or indirectly, by operation of the terms
of its charter or constituent documents or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Restricted Subsidiary; PROVIDED such amounts could not otherwise be loaned to
the Company on terms having a maturity that is later than the 180th day
following either (i) the final maturity of the Notes or (ii) the repayment in
full of the Notes.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Net Income of the Company and the Restricted Subsidiaries for such
period (a) increased by (to the extent reducing Consolidated Net Income) the sum
of (i) the Consolidated Income Tax Expense of the Company and the Restricted
Subsidiaries for such period (other than Taxes attributable to extraordinary,
unusual or non-recurring gains or losses); (ii) Consolidated Interest Expense
for such period; (iii) depreciation of the Company and the Restricted
Subsidiaries for such period, determined on a consolidated basis in accordance
with U.S. GAAP; (iv) amortization of the Company and the Restricted Subsidiaries
for such period, including, without limitation and without duplication,
amortization of capitalized debt issuance costs for such period, all determined
on a consolidated basis in accordance with U.S. GAAP; and (v) any other non-cash
charges that were deducted in computing Consolidated Net Income (excluding any
non-cash charge which requires an accrual or reserve for cash charges for any
future period) of the Company and the Restricted Subsidiaries for such period in
accordance with U.S. GAAP and (b) decreased by any non-cash gains to the extent
increasing Consolidated Net Income. "consolidation" means, with respect to the
Company, the consolidation of the accounts of the Restricted Subsidiaries with
those of the Company, all in accordance with U.S. GAAP; PROVIDED that
"consolidation" will not include consolidation of the accounts of any
Unrestricted Subsidiary with the accounts of the Company. The term
"consolidated" has a correlative meaning to the foregoing.
"Credit Facility" means (i) any commercial term loan and/or revolving credit
facility (including any letter of credit subfacility) entered into principally
with commercial banks and/or other financial institutions typically party to
commercial loan agreements or (ii) any credit facility entered into with any
vendor or supplier (or any financial institution acting on behalf of such a
vendor or supplier) of equipment (including pagers) for the purpose of financing
the acquisition of such equipment by the Company or any Restricted Subsidiary.
"Cumulative Adjusted Available Cash Flow" means, as at any date of
determination, the positive cumulative Consolidated Operating Cash Flow realized
during the period commencing on the Issue Date
90
and ending on the last day of the most recent fiscal quarter immediately
preceding the date of determination for which consolidated financial information
of the Company is available or required to be available under the Indenture or,
if such cumulative Consolidated Operating Cash Flow for such period is negative,
the negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any of the Restricted Subsidiaries against fluctuations in currency
values.
"Debt Securities" means any debt securities (including any guarantee of such
securities) issued by the Company and/or any Guarantor, whether in a public
offering or a private placement; it being understood that the term "Debt
Securities" shall not include (i) any borrowings under any Credit Facility or
(ii) any commercial bank borrowings or similar borrowings, recourse transfers of
financial assets, capital leases or other types of borrowings issued in a manner
not customarily viewed as a 'securities offering.'
"Deeply Subordinated Shareholder Indebtedness" means any Indebtedness of the
Company (but not of any Subsidiary of the Company) for money borrowed from and
held by either (x) a Permitted Holder or (y) another person whose obligations
have been guaranteed by a Permitted Holder, PROVIDED such Indebtedness of the
Company (i) has been expressly subordinated in right of payment, and (ii)
provides for no payments of interest or principal prior to the end of the sixth
month after the earlier of (x) the final maturity of the Notes or (y) the
repayment in full of the Notes; PROVIDED, FURTHER, that the terms of the
subordination agreement are in the form annexed to the Indenture and the Company
receives one or more Opinions of Counsel as to the validity and enforceability
of such subordination agreement.
"Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
"Designation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Designation Amount" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"Disinterested Director" means, with respect to any transaction or series of
transactions, a member of the Board of the Company other than a director who has
any material direct or indirect financial interest in or with respect to such
transaction or series of transactions or is an Affiliate, beneficial holder of
10% or more of any class of Capital Stock or officer, director or employee of
any person who has any direct or indirect financial interest in or with respect
to such transaction or series of transactions.
"Disqualified Capital Stock" means, with respect to any person, any Capital
Stock (other than the Class A Preferred Stock) which, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable, except to the extent exchangeable at the option of such person
subject to the terms of any debt instrument to which such person is a party), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or is exchangeable for Indebtedness
(other than at the option of such person), or is redeemable at the option of the
holder thereof, in whole or in part, in any such case on or prior to the earlier
of (x) the final maturity date of the Notes or (y) the repayment in full of the
Notes.
"Eligible Institution" means a United States commercial banking institution
that has combined capital and surplus of not less than $500 million or its
equivalent in foreign currency, whose debt is rated "A-3" or higher or "A-" or
higher according to Moody's or S&P (or such similar equivalent rating by at
least one "nationally recognized statistical rating organization" (as defined in
Rule 436 under the Securities Act)) respectively, at the time as of which any
investment or rollover therein is made.
"Expansion Markets" means all markets in Brazil other than Rio de Janeiro
and Sao Paulo.
91
"Fair Market Value" means, with respect to any asset or property, the price
that could be negotiated in an arms-length free market transaction, for cash,
between a willing seller and a willing buyer, neither of whom is under pressure
or compulsion to complete the transaction. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board of the Company
acting in good faith and shall be evidenced by a Board Resolution of the Company
delivered to the Trustee; PROVIDED THAT, for purposes of the covenant
"Disposition of Proceeds of Asset Sales", the covenant "Limitation on
Transactions with Affiliates" and clause (b) of the covenant "Limitation on
Designations of Unrestricted Subsidiaries" in the case of any transaction or
series of related transactions which involve aggregate consideration of more
than US$5,000,000 (or, to the extent non-U.S. dollar denominated, the U.S.
Dollar Equivalent of such amount), Fair Market Value shall also be determined by
an Independent Financial Advisor.
"guarantee" means, as applied to any obligation, (i) a guarantee (other than
by endorsement of negotiable instruments for collection in the ordinary course
of business), direct or indirect, in any manner, of any part or all of such
obligation and (ii) an agreement, direct or indirect, contingent or otherwise,
the practical effect of which is to assure in any way the payment or performance
(or payment of damages in the event of non-performance) of all or any part of
such obligation, including, without limiting the foregoing, the payment of
amounts drawn down by letters of credit.
"Guarantee" has the meaning set forth under "--Certain Covenants--Issuance
of Guarantees by Material Restricted Subsidiaries; Release of Guarantees."
"Guarantor" has the meaning set forth under "--Certain Covenants--Issuance
of Guarantees by Material Restricted Subsidiaries; Release of Guarantees."
"Holding LLC" means Paging Brazil Holding Co., LLC, a Delaware limited
liability company.
"Indebtedness" means, with respect to any person, without duplication, (i)
any liability, contingent or otherwise, of such person (A) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of such
person or only to a portion thereof), whether as a cash advance, bill, overdraft
or money market facility loan, or (B) evidenced by a note, debenture or similar
instrument or letters of credit (including a purchase money obligation) or by
any book-entry mechanism or (C) for the payment of money relating to a
Capitalized Lease Obligation or other obligation relating to the deferred
purchase price of property or (D) in respect of an Interest Rate Protection
Obligation or any foreign exchange contract, currency swap agreement or other
similar agreement; (ii) any liability of others of the kind described in the
preceding clause (i) which the person has guaranteed or which is otherwise its
legal liability; (iii) any obligation secured by a Lien (other than a Lien on
Indebtedness or Capital Stock of an Unrestricted Subsidiary which represents the
sole recourse of the secured party to the property or assets of such person for
any default in respect of the secured obligation) to which the property or
assets of such person are subject, whether or not the obligations secured
thereby shall have been assumed by or shall otherwise be such person's legal
liability; and (iv) the maximum repurchase or redemption price of any
Disqualified Stock of such person not held by the Company or a Guarantor. In no
event shall "Indebtedness" include trade payables incurred in the ordinary
course of business (or letters of credit issued in respect thereof) or
guarantees in the ordinary course of business in respect of real property leases
relating to housing for executives of the Company or any of its Subsidiaries.
For purposes of the covenants "Limitation on Additional Indebtedness and
Preferred Stock of Restricted Subsidiaries" and "Limitation on Restricted
Payments" and the definition of "Events of Default," in determining the
principal amount of any Indebtedness (1) to be incurred by the Company or a
Restricted Subsidiary or which is outstanding at any date, (x) the principal
amount of any Indebtedness which provides that an amount less than the principal
amount thereof shall be due upon any declaration of acceleration thereof shall
be the accreted value thereof at the date of determination, unless the Company
elects, for the purposes of the covenants described under "Limitation on
Additional Indebtedness and Preferred Stock of Restricted Subsidiaries" and
"Limitation on Restricted Payments," to incur the extended principal amount or
final accreted value
92
thereof upon the issuance as Indebtedness permitted under such covenants, and
(y) effect shall be given to the impact of any Currency Agreements with respect
to such Indebtedness and (2) outstanding at any time under any Currency
Agreement of the Company or any Restricted Subsidiary shall be the net payment
obligation under such Currency Agreement of such person at such time.
Notwithstanding the foregoing, interest, fees and other expenses on Indebtedness
shall not be deemed to be Indebtedness if such interest, fees or other expenses
are payable on a current basis no less frequently than semi-annually and are
paid when due or within any applicable grace period. For the purposes of this
definition, the amount of Indebtedness represented by any guarantee under which
recourse is limited to a particular asset or assets subject to a Lien in favor
of the guaranteed party shall be deemed to be the lower of (x) an amount equal
to the amount of the guaranteed obligation and (y) the Fair Market Value of such
asset or assets at such time.
"Independent Financial Advisor" means a Brazilian or United States
investment or merchant banking firm or public accounting firm of national
standing in the Federative Republic of Brazil or the United States (i) which
does not, and whose directors and executive officers and Affiliates do not, have
an investment in the Company or any of its Affiliates and (ii) which, in the
judgment of the Board of the Company is otherwise independent with respect to
the Company and its Affiliates and qualified to perform the task for which it is
to be engaged. A trustee or nominee for the true parties in interest shall not
be excluded from the definition of "Independent Financial Advisor" solely as a
result of such trustee or nominee status.
"Interest Rate Protection Obligations" means the obligations of any person
pursuant to any arrangement with any other person whereby, directly or
indirectly, such person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include without limitation, interest rate swaps, caps,
floors, collars, forward interest rate agreements and similar agreements.
"Investment" means, with respect to any person, any advance, loan, account
receivable (other than an account receivable or prepaid expense, including but
not limited to trade credit, arising in the ordinary course of business), or
other extension of credit (including, without limitation, by means of any
guarantee) or any capital contribution to (by means of transfers of property to
others, payments for property or services for the account or use of others, or
otherwise), or any purchase of any shares, stocks, bonds, notes, debentures or
other securities of, any other person. In addition, any foreign exchange
contract, currency swap agreement or other similar agreement made or entered
into by any person shall constitute an Investment by such person.
Notwithstanding the foregoing, in no event shall any issuance of Capital Stock
(other than Disqualified Stock) of the Company in exchange for Capital Stock,
property or assets of another person constitute an Investment by the Company in
such other person.
"Issue Date" means the original date of issuance of the Old Notes.
"License Vehicle" means any SOCIEDADE ANONIMA or COMPANHIA LIMITADA
organized under Brazilian law for the sole purpose of holding paging licenses
granted by the Brazilian Ministry of Communications for the exclusive and
unrestricted use and exploitation of such licenses by the Company or any
Restricted Subsidiary pursuant to an operating or similar agreement between such
License Vehicle and the Company or such Restricted Subsidiary the terms of which
shall not be materially less advantageous to the Company or such Restricted
Subsidiary than the Paging License Operating Agreements in effect on the Issue
Date; PROVIDED that a License Vehicle shall not at any time have any liabilities
(contingent or otherwise) except such nominal amounts as may arise in connection
with its organization and administration, which amounts shall be promptly
discharged, and such governmental fees and charges as may arise, which amounts
shall be promptly discharged.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance upon or with respect to any
93
property of any kind. A person shall be deemed to own subject to a Lien any
property which such person has acquired or holds subject to the interest of a
vendor or lessor under any conditional sale agreement, capital lease or other
title retention agreement.
"Material Restricted Subsidiary" means any Restricted Subsidiary of the
Company which, at any date of determination, (A) would have been a "Significant
Subsidiary" under the definition of such term in Rule 1-02 of Regulation S-X
issued under the Securities Act, as in effect on the Issue Date, (but
substituting "5 percent" for each occurrence of "10 percent" in such definition
for all purposes other than "--Events of Default") or (B) contributed 5% (or,
for purposes of "--Events of Default," 10%) or more to Consolidated Operating
Cash Flow of the Company on a pro forma basis in the immediately preceding
fiscal quarter or (C) is an obligor under any Indebtedness (other than to the
Company or a Restricted Subsidiary) in an aggregate principal amount equal to or
exceeding US$2,000,000 (or, to the extent non-U.S. dollar denominated, the U.S.
Dollar Equivalent thereof).
"Moody's" means Moody's Investors Service, Inc.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents (including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents and cash received in connection with the concurrent sale or other
disposition of other non-cash consideration upon consummation of any such Asset
Sale) net of (i) brokerage commissions and other fees and expenses (including
fees and expenses of legal counsel and investment bankers) related to such Asset
Sale, (ii) provisions for all Taxes payable as a result of such Asset Sale,
(iii) amounts required to be paid to any person (other than the Company or any
Restricted Subsidiary) owning a beneficial interest in or having a Lien on the
assets subject to the Asset Sale, (iv) other amounts required to be treated as
Net Cash Proceeds pursuant to the covenant "Disposition of Proceeds of Asset
Sales," and (v) appropriate amounts to be provided by the Company or any
Restricted Subsidiary, as the case may be, as a reserve required in accordance
with U.S. GAAP against any liabilities associated with such Asset Sale and
retained by the Company or any Restricted Subsidiary, as the case may be, after
such Asset Sale, including, without limitation, pension and other
post-employment benefit liabilities, liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an Officers'
Certificate of the Company delivered to the Trustee.
"Pager Acquisition Financing" means one or more facilities entered into with
any vendor or supplier of pagers (or any financial institution financing
purchases from such vendor or supplier) in order to finance the acquisition of
pagers from such vendor or supplier.
"Paging License Operating Agreements" means the Operating Agreement and
Other Covenants between the Company and each of the Licenseholders dated
December 11, 1996.
"Paging License Transfer Agreements" means the Agreements of Promise of
Assignment and Transfer of Permissions between the Company and each
Licenseholder, dated December 11, 1996.
"Pari Passu Debt Securities" means any Debt Securities of the Company or any
Guarantor which rank PARI PASSU in right of payment with the Notes or the
Guarantees, as applicable.
"Permitted Business" means (i) the delivery or distribution of wireless
communications, paging and messaging services and equipment in the Federative
Republic of Brazil and (ii) any business or activity reasonably related thereto,
including, without limitation, the resale of extended paging services outside of
the Federative Republic of Brazil to the Brazilian customers of the Company or
the Restricted Subsidiaries and any other material business conducted by the
Company or any Restricted Subsidiary on the Issue Date, and (iii) the
acquisition, holding or exploitation of any license relating to the delivery of
the services referred to in clauses (i) and (ii) of this definition.
94
"Permitted Holders" means (i) Warburg, Pincus Ventures, L.P., (ii) Paging
Network International N.V., (iii) IVP--International Venture Partners, Inc.,
(iv) Multiponto Telecomunicacoes Ltda. and (v) Abril S.A., or any of their
respective controlled Affiliates.
"Permitted Indebtedness" means the Indebtedness or Preferred Stock set forth
in the following clauses (each of which shall be given independent effect):
(a) Indebtedness under the Notes, the Guarantees and the Indenture and
related rights of contribution and subrogation among the Company and the
Guarantors;
(b) Indebtedness of the Company outstanding on the Issue Date;
(c) Indebtedness of the Company and/or any Guarantor to the extent
incurred to finance the construction of paging infrastructure, the purchase
of equipment (including pagers) for use in and the installation and
construction costs related to the construction of paging infrastructure in
the Expansion Markets, or to support the operations or working capital
related to the Expansion Markets; provided the aggregate principal amount of
Indebtedness incurred under this clause (c) shall not exceed at any time
outstanding the following amount (or, to the extent non-U.S. dollar
denominated, the U.S. Dollar Equivalent of such amount): the product of (x)
US$100 and (y) the lesser of (1) the aggregate number of subscribers of the
Company and the Restricted Subsidiaries (whether or not such subscribers are
in the Expansion Markets) and (2) 250,000; PROVIDED that the amount
permitted to be incurred pursuant to this clause (c) shall be increased by
an amount equal to any unutilized amount of Indebtedness permitted to be
incurred pursuant to clause (d) of this definition;
(d) Indebtedness of the Company and/or any Guarantor in an amount not to
exceed at any time outstanding US$25,000,000 minus any amount added to the
amount of Indebtedness permitted to be incurred pursuant to clause (c) of
this definition under the proviso to such clause (c) (or to the extent
non-U.S. dollar denominated, the U.S. Dollar Equivalent of such amount);
PROVIDED that the aggregate amount of Indebtedness incurred from Permitted
Holders or their Affiliates under this clause (d) that is not in the form of
Deeply Subordinated Shareholder Indebtedness (x) shall not exceed at any
time outstanding US$10,000,000 (or, to the extent non-U.S. dollar
denominated, the U.S. Dollar Equivalent thereof) and (y) must be for working
capital purposes of the Company and the Guarantors;
(e) Indebtedness of the Company and/or any Guarantor in an amount not to
exceed the product of two times the amount of Total Incremental Invested
Equity Capital, determined at the time of incurrence of such Indebtedness;
(f) Indebtedness or Preferred Stock of any Restricted Subsidiary owed or
issued to and held by the Company or a Restricted Subsidiary and
Indebtedness of the Company owed to and held by any Restricted Subsidiary;
PROVIDED that a new incurrence of Indebtedness or issuance of Preferred
Stock shall be deemed to have occurred upon (x) any sale or other
disposition of any Indebtedness of the Company or a Restricted Subsidiary
referred to in this clause (f) to any person other than the Company or a
Restricted Subsidiary or (y) any sale or other disposition of Capital Stock
of a Restricted Subsidiary, or Designation of a Restricted Subsidiary as an
Unrestricted Subsidiary, which holds Indebtedness of the Company or
Indebtedness or Preferred Stock of another Restricted Subsidiary such that
such Restricted Subsidiary, in any such case, ceases to be a Restricted
Subsidiary;
(g) Indebtedness of the Company and/or any Restricted Subsidiary under
Interest Rate Protection Obligations relating to (i) Indebtedness of the
Company or any Restricted Subsidiary (which Indebtedness (x) bears interest
at fluctuating interest rates and (y) is otherwise permitted to be incurred
under the covenant "Limitation on Additional Indebtedness and Preferred
Stock of Restricted Subsidiaries"), and/or (ii) Indebtedness for which a
lender has provided a commitment in an amount reasonably anticipated to be
incurred by the Company or a Restricted Subsidiary in the following 180 days
after such Interest Rate Protection Obligation has been incurred, but only
to the
95
extent that the notional principal amount of such Interest Rate Protection
Obligations does not exceed the principal amount of the Indebtedness (and/or
Indebtedness subject to commitments) to which such Interest Rate Protection
Obligations relate; PROVIDED in no event shall any Restricted Subsidiary
incur Indebtedness under an Interest Rate Protection Obligation under this
clause (g) relating to Indebtedness of the Company;
(h) Indebtedness of the Company and/or any Restricted Subsidiary under
Currency Agreements relating to (i) Indebtedness of the Company or a
Restricted Subsidiary and/or (ii) obligations to purchase or sell assets,
properties or services or license programming rights, in each case, incurred
in the ordinary course of business of the Company or any Restricted
Subsidiary; PROVIDED that such Currency Agreements do not increase the
Indebtedness or other obligations of the Company and the Restricted
Subsidiaries outstanding other than as a result of fluctuations in foreign
currency exchange rates or by reason of fees, indemnities and compensation
payable thereunder; PROVIDED, FURTHER, in no event shall any Restricted
Subsidiary incur Indebtedness under any Currency Agreement under this clause
(h) relating to Indebtedness or obligations of the Company;
(i) Indebtedness of the Company and/or any Restricted Subsidiary in
respect of "bid," performance or advance payment bonds of the Company or any
Restricted Subsidiary or surety or "bid," performance or advance payment
bonds provided by the Company or any Restricted Subsidiary incurred in the
ordinary course of business in connection with the construction or operation
of a Permitted Business;
(j) Indebtedness of the Company and/or any Restricted Subsidiary to the
extent it represents a replacement, renewal, refinancing, refunding,
defeasance or extension of outstanding Indebtedness of the Company or any
Restricted Subsidiary incurred pursuant to the provisos of the covenant
"Limitation on Additional Indebtedness and Preferred Stock of Restricted
Subsidiaries" or any of clause (a), (b), (c) or (e) of this definition;
PROVIDED that (i) Indebtedness of the Company or a Guarantor may not be
replaced, renewed, refinanced or extended under this clause (j) with
Indebtedness of any Restricted Subsidiary that is not a Guarantor and (ii)
any such replacement, renewal, refinancing or extension shall not exceed the
sum of the principal amount (or, if such Indebtedness provides for a lesser
amount to be due and payable upon a declaration of acceleration thereof, an
amount no greater than such lesser amount) of the Indebtedness being
replaced, renewed, refinanced or extended plus the amount of accrued
interest or accretion thereon and the amount of any reasonably determined
prepayment premium necessary to accomplish such replacement, renewal,
refinancing or extension and such reasonable fees and expenses incurred in
connection therewith; and
(k) Indebtedness of the Company and/or any Restricted Subsidiary in an
amount not to exceed US$2,000,000 (or to the extent non-U.S. dollar
denominated, the U.S. Dollar Equivalent of such amount) at any time
outstanding.
"Permitted Investments" means (a) cash and Cash Equivalents; (b) Investments
in prepaid expenses, negotiable instruments held for collection and lease,
utility and workers' compensation, performance and other similar deposits; (c)
Interest Rate Protection Obligations permitted to be incurred pursuant to clause
(g) of the definition of Permitted Indebtedness; (d) Currency Agreements; (e)
bonds, notes, debentures or other securities received as a result of Asset Sales
permitted under the covenant "Disposition of Proceeds of Asset Sales"; (f) any
Investment in another person in exchange for Capital Stock (other than
Disqualified Stock) of the Company; (g) loans and advances to employees of the
Company or any of the Restricted Subsidiaries in the ordinary course of business
in an aggregate amount not to exceed US$1,000,000 (or, to the extent non-U.S.
dollar denominated, the U.S. Dollar Equivalent of such amount) at any time
outstanding; (h) any Investment in Capital Stock obligations of any person made
in settlement of claims by the Company or any Restricted Subsidiary against such
person; (i) the contribution of (x) any paging license in exchange for Capital
Stock of a License Vehicle or (y) any cash to a License Vehicle in exchange for
Capital Stock of such License Vehicle, to the extent such cash is used for the
purpose of
96
acquiring Brazilian paging licenses; (j) loans and advances to resellers and
other distributors in the ordinary course of business not to exceed at any time
an aggregate amount of US$2,000,000; (k) any Investment acquired by the Company
or any of the Restricted Subsidiaries (A) in exchange for any other Investment
or accounts receivable held by the Company or any such Restricted Subsidiary in
connection with or as a result of a bankruptcy, workout or reorganization or
recapitalization of the issuer of such other Investment or accounts receivable
or (B) as a result of the foreclosure by the Company or any of the Restricted
Subsidiaries with respect to any secured Investment or default; and (l) any
Investment in U.S. Government Securities in accordance with the provisions of
the Pledge Agreement or in connection with a legal or covenant defeasance of the
Notes or other Debt Securities in accordance with their terms.
"Pledge Account" means an account established in the United States with the
Trustee pursuant to the terms of the Pledge Agreement for the deposit of the
Pledged Securities purchased by the Company with a portion of the net proceeds
from the Offering.
"Pledge Agreement" means the Collateral Pledge and Security Agreement, dated
as of the date of the Indenture, by and between the Trustee and the Company,
governing the disbursement of funds from the Pledge Account.
"Pledged Securities" means the securities purchased by the Company with a
portion of the net proceeds from the Offering, which shall initially consist of
U.S. Government Securities, to be deposited in the Pledge Account.
"Preferred Stock" means, with respect to any person, any and all shares,
interests, participations or other equivalents (however designated) of such
person's preferred or preference stock or shares whether now outstanding, or
issued after the Issue Date to the extent it carries any preference in respect
of the distribution of assets in the event of a liquidation or insolvency of
such person as compared with any other Capital Stock of such person.
"Pro Rata Share" means a fraction, (i) the numerator of which is the
aggregate principal amount of Notes outstanding on the applicable purchase date
and (ii) the denominator of which is the sum of (x) the aggregate principal
amount of Notes outstanding on such date and (y) if there are Pari Passu Debt
Securities or other unsubordinated Indebtedness of the Company or any Guarantor
that requires that Net Cash Proceeds be used to offer to purchase or repay such
Pari Passu Debt Securities or other unsubordinated Indebtedness of the Company
or any Guarantor, the outstanding principal amount of such Pari Passu Debt
Securities or other unsubordinated Indebtedness of the Company or such Guarantor
or Guarantors on such date.
"Restricted Payment" means any of the following: (i) the declaration or
payment of any dividend or any other distribution on Capital Stock of the
Company or any payment made to the direct or indirect holders (in their
capacities as such) of Capital Stock of the Company (other than dividends or
distributions payable solely in Capital Stock (other than Disqualified Stock) of
the Company or in options, warrants or other rights to purchase Capital Stock
(other than Disqualified Stock) of the Company); (ii) the purchase, redemption
or other acquisition or retirement for value of any Capital Stock of the Company
(other than any such Capital Stock owned by the Company or a Restricted
Subsidiary); (iii) the making of any principal payment on, or the purchase,
redemption, defeasance or other acquisition or retirement for value, prior to
any scheduled maturity, scheduled repayment or scheduled sinking fund payment
of, any Subordinated Indebtedness (other than any Subordinated Indebtedness held
by the Company or a Restricted Subsidiary); or (iv) the making of any Investment
(other than a Permitted Investment) in any person (other than an Investment by a
Restricted Subsidiary in the Company or an Investment by the Company or a
Restricted Subsidiary in either (x) a Restricted Subsidiary or (y) a person that
becomes a Restricted Subsidiary as a result of such Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of the Company, by a Board Resolution delivered to
the Trustee, as an Unrestricted Subsidiary
97
pursuant to and in compliance with the covenant "Limitation on Designations of
Unrestricted Subsidiaries." Any such Designation may be revoked by a Board
Resolution delivered to the Trustee, subject to the provisions of such covenant.
"Revocation" has the meaning set forth under "--Certain
Covenants--Limitation on Designations of Unrestricted Subsidiaries."
"S&P" means Standard & Poor's Ratings Group.
"Specified Indebtedness" means any Indebtedness of any Restricted Subsidiary
that is not a Guarantor which is not subordinated to any other Indebtedness of
such Restricted Subsidiary.
"Subordinated Debt Securities" means any Debt Securities (and any guarantee
of any Debt Security) which would constitute Subordinated Indebtedness.
"Subordinated Indebtedness" means any Indebtedness of the Company or any
Guarantor which is expressly subordinated in right of payment to the Notes or
any Guarantees.
"Subscription Agreement" means the Subscription Agreement dated June 6, 1997
among the Company and Holding LLC pursuant to which 125,000 shares of Common
Stock are issued to Holding LLC.
"Subsidiary" means, with respect to any person, (i) any corporation of which
the outstanding Voting Stock having at least a majority of the votes entitled to
be cast in the election of directors shall at the time be owned, directly or
indirectly, by such person, or (ii) any other person of which at least a
majority of Voting Stock is at the time, directly or indirectly, owned by such
person.
"Technical Services Agreement" means the Technical Services Agreement dated
as of December 11, 1996.
"Total Consolidated Indebtedness and Subsidiary Preferred Stock" means, at
any date of determination, an amount equal to the sum of (i) the aggregate
principal amount of all Indebtedness of the Company and the Restricted
Subsidiaries outstanding as of the date of determination and (ii) the aggregate
liquidation preference of all Preferred Stock of Restricted Subsidiaries that
are not Guarantors issued and outstanding as of the date of determination (other
than Indebtedness owing to and Preferred Stock held by the Company or a
Restricted Subsidiary that is a Guarantor).
"Total Incremental Invested Equity Capital" means, at any time of
determination, the sum of, without duplication, (i) the aggregate cash proceeds
received by the Company from capital contributions in respect of existing
Capital Stock (other than Disqualified Stock) or the issuance or sale of Capital
Stock (other than Disqualified Stock but including Capital Stock issued upon the
conversion of convertible Indebtedness or from the exercise of options, warrants
or rights to purchase Capital Stock (other than Disqualified Stock)) subsequent
to the Issue Date, other than to a Subsidiary of the Company, PLUS (ii) the
aggregate cash proceeds received by the Company or any Restricted Subsidiary
from the sale, disposition or repayment of any Investment made after the Issue
Date and constituting a Restricted Payment (other than any Investment made
pursuant to clause (v) of the second paragraph of the covenant "Limitation on
Restricted Payments") in an amount equal to the lesser of (a) the return of
capital with respect to such Investment and (b) the initial amount of such
Investment, in either case, less the cost of the disposition of such Investment,
PLUS (iii) an amount equal to the lesser of (x) the consolidated net Investment
on the date of Revocation made by the Company and/or any of the Restricted
Subsidiaries of any Subsidiary in accordance with the covenant described
under"--Certain Covenants--Limitation on Designations of Unrestricted
Subsidiaries" and (y) the Designation Amount with respect to such Subsidiary,
MINUS (iv) the aggregate amount of all Restricted Payments declared or made on
and after the Issue Date.
"Unrestricted Subsidiary" means any Subsidiary of the Company (other than a
Guarantor) designated as such pursuant to and in compliance with the covenant
"Limitation on Designations of Unrestricted
98
Subsidiaries." Any such designation may be revoked by a Board Resolution of the
Company delivered to the Trustee, subject to the provisions of such covenant.
"U.S. Dollar Equivalent" means, with respect to any monetary amount in a
currency other than the U.S. dollar, at any time for the determination thereof,
the amount of U.S. dollars obtained by converting such foreign currency involved
in such computation into U.S. dollars at the spot rate for the purchase of U.S.
dollars with the applicable foreign currency as quoted by Reuters at
approximately 11:00 a.m. (New York time) on the date not more than two business
days prior to such determination. For purposes of determining whether any
Indebtedness can be incurred (including Permitted Indebtedness), any Investment
can be made and any Affiliate Transaction can be undertaken (a "Tested
Transaction"), the "U.S. Dollar Equivalent" of such Indebtedness, Investment or
Affiliate Transaction shall be determined on the date incurred, made or
undertaken and no subsequent change in the U.S. Dollar Equivalent shall cause
such Tested Transaction to have been incurred, made or undertaken in violation
of the Indenture.
"U.S. GAAP" means generally accepted accounting principles and practices in
the United States consistently applied by a corporation or as between
corporations and over time, as in effect from time to time; PROVIDED that, for
purposes of determining compliance with the covenants "Limitation on Additional
Indebtedness and Preferred Stock of Restricted Subsidiaries" and "Limitation on
Restricted Payments," U.S. GAAP shall mean such generally accepted accounting
principles and practices as adopted by the Company on the Issue Date and as are
consistent with those set forth in this Offering Memorandum.
"U.S. Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantee the full faith and credit of the United States is pledged.
"Voting Stock" means, with respect to any person, the Capital Stock of any
class or kind ordinarily having the power to vote for the election of directors
or other members of the governing body of such person.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which 100% of the outstanding Capital Stock is owned by the Company or another
Wholly Owned Restricted Subsidiary. For purposes of this definition, any
directors' qualifying shares or investments by foreign nationals mandated by
applicable law shall be disregarded in determining the ownership of a Restricted
Subsidiary.
99
BOOK-ENTRY; DELIVERY AND FORM
Except as set forth below, the New Notes will be issued in the form of one
or more registered notes in global form without coupons (each a "Global Note").
Upon issuance, each Global Note will be deposited with, or on behalf of, The
Depository Trust Company ("DTC") and registered in the name of Cede & Co., as
nominee of DTC.
Old Notes originally purchased by or transferred to (i) institutional
"accredited investors" (as defined in Rule 501(a)(1), (2), (3) or (7) under the
Securities Act) who are not "qualified institutional buyers" (as defined in Rule
144A under the Securities Act and referred to as "QIBs"), (ii) QIBs, who elected
to take physical delivery of their certificates instead of holding their
interest in Global Notes, or (iii) any other holders who are not QIBs, which Old
Notes were issued in registered form without coupons (the "Old Certificated
Notes") are exchangeable for New Notes in registered form without coupons (the
"New Certificated Notes").
Interests in the Global Notes will be exchangeable or transferable, as the
case may be, for New Certificated Notes if (i) DTC notifies the Company that it
is unwilling or unable to continue as depositary for such Global Notes, or DTC
ceases to be a "Clearing Agency" registered under the Exchange Act, and a
successor depositary is not appointed by the Company within 90 days, or (ii) an
Event of Default has occurred and is continuing with respect to such Notes. Upon
the occurrence of any of the events described in the preceding sentence, the
Company will cause the appropriate New Certificated Notes to be delivered.
100
TAX CONSIDERATIONS
BRAZIL
Based upon the opinion 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, with respect to the tax events
which take place during the calendar year of 1997, 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 Provisional Measure No. 1.563, of
December 31, 1996, published in the Official Gazette of January 2, 1997 and
republished in the Official Gazette of April 24, 1997, which restricts such
income tax reductions to negotiable instruments placed abroad with the previous
approval of the Central Bank, with 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 the fiscal year of 1997. It is not
certain whether such reduction will continue to apply after 1997. 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. See
"Description of the Notes--Additional Amounts" and "Description of the
Notes--Brazilian Central Bank Consent for Optional and Mandatory Redemption of
Notes."
Under the terms of the Notes, the Company is required to gross-up
Noteholders for Brazilian withholding tax, subject to certain exceptions. See
"Description of the Notes--Additional Amounts." 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%. See "Description of the
Notes--Redemption for Changes in Withholding Taxes."
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
101
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. See "Description of the Notes--Additional Amounts."
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 all financial debt and money transfers effected on or 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.
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 opinion 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 administration of that trust and
one or more United States fiduciaries have the authority to control all
substantial decisions of such trust.
PROSPECTIVE PURCHASERS OF THE NOTES 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.
102
TAX CONSIDERATIONS APPLICABLE TO HOLDING NOTES
TAXATION OF INTEREST AND ADDITIONAL AMOUNTS ON NOTES. Interest on the Notes
and additional amounts relating thereto (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 a sufficiently large portion of the purchase price
should not be allocated to the Notes, the Notes would bear OID for U.S. federal
income tax purposes. U.S. Holders of Notes would be required to accrue 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, a portion of the
OID. The amount of OID on a Note would be the excess of its "stated redemption
price at maturity" over the Note's "issue price." In the event of a reallocation
of purchase price, a Note's "issue price" would be the portion of the purchase
price allocated to such Note and its "stated redemption price at maturity" would
generally be its stated principal amount. 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 rendered
its opinion to 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.
Based upon that opinion, 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
103
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.
REGISTRATION AND EXCHANGE OF NOTES. Neither the Exchange Offer nor the
filing of a Notes Shelf Registration Statement as described under "Exchange
Offer; Notes Registration Rights" would result in a taxable event to the Company
or any U.S. Holder since there would be no material alteration in the terms of
the Notes.
Under certain circumstances, Additional Interest shall become payable in
cash with respect to the applicable Notes. See "Exchange Offer; Notes
Registration Rights." This rate increase should not result in a deemed taxable
exchange of the Notes for Exchange Notes.
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 1997 unless the Note is redeemed prior to June 6, 2005. After
1997 such payments may be subject to Brazilian withholding tax at a rate of 15%.
See "Tax Considerations--Brazil." 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.
104
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account in connection
with the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes if such
Old Notes were acquired as a result of market-making activities or other trading
activities. The Company has agreed that for a period of 180 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer that requests such documents in the Letter of
Transmittal, for use in connection with any such resale. In addition, until
December 24, 1997 (90 days after the effective date of the Registration
Statement that includes this Prospectus), all dealers effecting transactions in
the New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account in
connection with the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers on any such New Notes. Any broker-dealer
that resells New Notes that were received by it for its own account in
connection with the Exchange Offer and any broker or dealer that participates in
a distribution of such New Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act, and any profit on any such resale of New Notes
and any commissions or concessions received by any such persons may be deemed to
be underwriting compensation under the Securities Act. The Letter of Transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
105
EXPERTS
The financial statements of the Company at December 31, 1996 and for the
period then ended appearing in this Prospectus have been audited by Ernst &
Young, Auditores Independentes S.C., independent accountants, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given on the authority of said firm as experts in accounting
and auditing.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
New Notes being offered hereby will be passed upon for the Company by Xavier,
Bernardes, Braganca, Sociedade de Advogados with respect to matters of Brazilian
law, and by Willkie Farr & Gallagher, New York, with respect to matters of
United States law. Maria Regina Mangabeira Albernaz Lynch, Horacio Bernardes
Neto and Helena de Araujo Lopes Xavier, are directors of the Company, and are
partners in the law firm of Xavier, Bernardes, Braganca, Sociedade de Advogados.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
F-4 under the Securities Act, with respect to the New Notes offered hereby (the
"Registration Statement"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of this information set forth in
the Registration Statement, certain parts of which have been omitted from the
Prospectus in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement, including the exhibits
and schedules filed therewith, and the financial statements and notes filed as a
part thereof. Statements made in the Prospectus concerning the contents of any
document referred to herein are not necessarily complete. With respect to each
such document filed with the Commission as an exhibit to the Registration
Statement, reference is made to the exhibit for a more complete description of
the matter involved, and each such statement shall be deemed qualified in its
entirety by such reference.
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith is required to file reports with the
Commission. All reports and other information filed by the Company, and the
Registration Statement, including the exhibits and schedules thereto, may be
inspected and copied at the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington D.C. 20549, and at the
regional offices of the Commission located at Seven World Trade Center, New
York, New York 10048, and Northwestern Atrium Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained
from the Public Reference Section of the Commission, Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and its public reference
facilities in New York, New York, and Chicago, Illinois, at the prescribed
rates.
The Indenture provides that, whether or not the Company has a class of
securities registered under the Exchange Act, the Company shall furnish without
cost to each holder of Notes and file with the Commission (whether or not the
Company is a public reporting company at the time), the Trustee and the Initial
Purchasers: (i) within 140 days after the end of each fiscal year of the
Company, annual reports on Form 20-F (or any successor form) containing the
information required to be contained therein (or required in such successor
form); (ii) with 60 days after the end of each of the first three fiscal
quarters of each fiscal year, reports on Form 6-K (or any successor form)
containing substantially the same information required to be contained in Form
10-Q (or required in any successor form); and (iii) promptly from time to time
after the occurrence of an event required to be therein reported, such other
reports on Form 6-K (or any successor form) containing substantially the same
information required to be contained in Form 8-K (or required in any successor
form). Each of the reports will be prepared in accordance with US GAAP
consistently applied and will be prepared in accordance with the applicable
rules and regulations of the Commission.
As a foreign private issuer, the Company is exempt from certain provisions
of the Exchange Act prescribing the furnishing and content of proxy statements.
106
INDEX TO FINANCIAL STATEMENTS
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
Report of Independent Auditors....................................................... F-2
Balance Sheet at December 31, 1996................................................... F-3
Statement of Operations for the period ended December 31, 1996....................... F-4
Statement of Shareholders' Equity (Deficit) for the period ended December 31, 1996... F-5
Statement of Cash Flows for the period ended December 31, 1996....................... F-6
Notes to Financial Statements........................................................ F-7
Balance Sheet at June 30, 1997 (Unaudited)........................................... F-11
Statement of Operations for the three and six months ended June 30, 1997
(Unaudited)........................................................................ F-12
Statement of Shareholders' Equity (Deficit) for the six months ended June 30, 1997
(Unaudited)........................................................................ F-13
Statement of Cash Flows for the six months ended June 30, 1997 (Unaudited)........... F-14
Note to Financial Statements (Unaudited)............................................. F-15
F-1
REPORT OF INDEPENDENT AUDITORS
To the Shareholders
PAGING NETWORK DO BRASIL S.A.
Sao Paulo, Brazil
We have audited the accompanying balance sheet of Paging Network do Brasil
S.A. (a development stage company) (formerly Warburg Paging do Brasil Ltda.) as
of December 31, 1996, and related statements of operations, shareholders' equity
(deficit) and cash flows for the period April 17, 1996 (inception) through
December 31, 1996. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards 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 disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well evaluating the overall financial statement
presentation. We believe that our audit provides 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. (a development stage company) as of December 31, 1996 and the results of
its operations and its cash flow for the period April 17, 1996 (inception)
through December 31, 1996, in conformity with generally accepted accounting
principles in the United States.
ERNST & YOUNG
Auditores Independentes S.C.
Sao Paulo, Brazil
February 24, 1997
F-2
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
DECEMBER 31, 1996
(AMOUNTS IN U.S. DOLLARS)
ASSETS
Current assets:
Cash and cash equivalents.................................................... $12,444,689
Refundable taxes............................................................. 839,859
Pager inventories............................................................ 2,105,955
Prepaid expenses............................................................. 635,109
----------
Total current assets........................................................... 16,025,612
Fixed assets, net.............................................................. 4,513,421
----------
Total assets................................................................... $20,539,033
----------
----------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable............................................................. $2,532,676
Accrued expenses............................................................. 576,374
Payable to related parties................................................... 1,854,492
----------
Total current liabilities...................................................... 4,963,542
Redeemable preferred stock, without par value
Authorized shares--63,000 shares
Issued and outstanding, 21,300 shares........................................ 20,451,427
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, without par value
Authorized shares--50,000 shares
Issued and outstanding 30,760 shares......................................... 28,672
Deficit accumulated during the development stage............................... (4,904,608)
----------
(4,875,936)
----------
Total liabilities and shareholders' equity (deficit)........................... $20,539,033
----------
----------
See accompanying notes to financial statements.
F-3
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
FOR THE PERIOD APRIL 17, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
(AMOUNTS IN U.S. DOLLARS)
Selling, general and administrative expenses.................................... $(4,961,639)
Other income and expenses
Interest income............................................................... 117,210
Loss on translation........................................................... (60,179)
----------
57,031
----------
Net loss........................................................................ $(4,904,608)
----------
----------
See accompanying notes to financial statements.
F-4
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD APRIL 17, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
(AMOUNTS IN U.S. DOLLARS)
DEFICIT
ACCUMULATED
DURING THE
COMMON DEVELOPMENT
STOCK STAGE TOTAL
------------ ------------- -------------
Issuance of common stock of predecessor............................... $ 5,950,100 $ 5,950,100
Exchange of common stock of predecessor for redeemable preferred
stock............................................................... (5,940,000) (5,940,000)
Issuance of common stock.............................................. 18,572 18,572
Net loss for the period............................................... $ (4,904,608) (4,904,608)
------------ ------------- -------------
$ 28,672 $ (4,904,608) $ (4,875,936)
------------ ------------- -------------
------------ ------------- -------------
See accompanying notes to financial statements.
F-5
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
FOR THE PERIOD APRIL 17, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
(AMOUNTS IN U.S. DOLLARS)
Operating activities
Net loss during the development stage......................... $(4,904,608)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation................................................ 55,582
Changes in operating assets and liabilities
Refundable taxes............................................ (839,859)
Pager inventories........................................... (2,105,955)
Prepaid expenses............................................ (635,109)
Accounts payable............................................ 2,532,676
Accrued expenses............................................ 576,374
Payable to related parties.................................. 1,854,492
----------
Net cash used by operating activities........................... (3,466,407)
Investing activities
Purchase of fixed assets........................................ (4,569,003)
----------
Net cash used by investing activities........................... (4,569,003)
Financing activities
Issuance of common stock of predecessor......................... 5,950,100
Issuance of common stock........................................ 18,572
Issuance of redeemable preferred stock.......................... 14,511,427
----------
Net cash provided by financing activities....................... 20,480,099
----------
Net increase in cash 12,444,689
Cash and cash equivalents at April 17, 1996 (inception)......... -0-
----------
Cash and cash equivalents at December 31, 1996.................. $12,444,689
----------
----------
See accompanying notes to financial statements.
F-6
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
(AMOUNTS IN U.S. DOLLARS)
1. ORGANIZATION
Paging Network do Brasil S.A. (formerly Warburg Paging do Brasil Ltda., the
"Company") is a start-up operation that was formed on April 7, 1996 through an
investment by Warburg, Pincus Ventures, L.P. During 1997, the Company plans to
initially provide paging services in Sao Paulo, where it has begun building
transmission stations, and simultaneously plans for expansion into additional
Brazilian markets.
In October 1996, the Company increased its capital to approximately
$5,500,000 and in December 1996, through the incorporation 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States in U.S. dollars.
The Company's significant accounting policies are as follows:
FOREIGN CURRENCY TRANSLATION
The financial statements were translated from Brazilian reais to U.S.
dollars in accordance with the provisions of Statement of Financial Accounting
Standards No 52 as it applies to entities operating in highly inflationary
economies.
Pager inventories, fixed assets and intangibles and the related income
statement accounts are remeasured at exchange rates in effect when the assets
were acquired or the liabilities were incurred. All other assets and liabilities
are remeasured at period end exchange rates, and all other income and expense
items are remeasured at average exchange rates prevailing during the period.
Remeasurement adjustments are included in exchange and translation gains
(losses).
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 reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
REVENUE RECOGNITION
The Company recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Advance
billings for services are deferred and recognized as revenue when earned. Sales
of pagers are recognized upon delivery. The Company will lease certain pagers
under operating leases. Substantially all of these leases will be on a
month-to-month basis.
F-7
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --(CONTINUED)
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
INVENTORIES
Inventories are valued at the lower of average cost, or market.
FIXED ASSETS
Fixed assets are stated at cost. Depreciation is computed by the
straight-line method. Amortization of leasehold improvements is based on the
shorter of the useful life or lease term.
INCOME TAXES
The Company adopted the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards No 109. Under this
method, deferred income taxes are recorded to reflect the tax consequences in
future years of temporary differences between the tax bases of the assets and
liabilities and the financial amounts for reporting purposes. The Company has
provided a valuation allowance to reduce deferred tax assets to their net
realizable value of zero. The Company's deferred tax assets arise principally
from start-up costs which for financial reporting purposes are expensed as
incurred; for tax and local statutory purposes they are capitalized and will be
amortized over five years when operations commence.
3. FIXED ASSETS
Fixed assets at December 31, 1996 are comprised of the following:
DEPRECIATION ACCUMULATED
PERIOD COST DEPRECIATION NET
-------------- ------------ ------------ ------------
Furniture and fixtures.................................. 10 years $ 138,470 $ (728) $ 137,742
Equipment............................................... 5-10 years 4,280,449 (48,101) 4,232,348
Leasehold improvements.................................. 5 years 150,084 (6,753) 143,331
------------ ------------ ------------
$ 4,569,003 $ (55,582) $ 4,513,421
------------ ------------ ------------
------------ ------------ ------------
Leased pagers will be depreciated over 2.5 years when placed in service.
4. SHAREHOLDERS' EQUITY (DEFICIT)
In December 1996, the Company entered into a technical services agreement
with Paging Network, Inc. ("PageNet") pursuant to which PageNet will provide
technical services and support. In consideration therefore, the Company has
granted to a subsidiary of PageNet the right (in the form of a subscription
bond) to buy 8,000 shares of Common Stock at an exercise price of $1.00.
F-8
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN U.S. DOLLARS)
4. SHAREHOLDERS' EQUITY (DEFICIT) (CONTINUED)
In December 1996, the Company entered into operating agreements with each of
TVA Sistema de Televisao S.A.("TVA"), Multiponto Telecomunicacoes Ltda.
("Multiponto") and San Francisco Comunicacoes Ltda. ("San Francisco" and
collectively with TVA and Multiponto, 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 Licenseholders have agreed to transfer the Licenses to the
Company following the three year waiting period mandated by Brazilian law. In
consideration therefore, the Company has (i) issued and sold to an affiliate of
San Francisco 8,000 shares of Common Stock for a purchase price of $1.00 per
share, (ii) issued and sold to Multiponto 2,000 shared of Common Stock for a
purchase price of $1.00 each and granted Multiponto the right (in the form of
subscription bonds) to purchase up to 1,000 shares of Common Stock at a price of
$1.00 per share and (iii) has granted TVA the right (in the form of subscription
bonds) to purchase up to 1,000 shares of Common Stock at a price of $1.00 per
share.
The holders of the redeemable preferred stock are entitled to voting rights
limited to specific matters included in the Company's by-laws.
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 the fifth anniversary of its issuance, the dividend increases to an
effective rate of 14% compounding quarterly. On the sixth anniversary all
previously accrued dividends will be paid in kind. The annual dividend rate will
increase to 16% in the seventh year, 18% in the eighth year, and 20% in the
ninth and tenth years. After the sixth anniversary, subject to the terms of the
Indenture, all dividends will be payable in cash. The Company is required to
redeem the redeemable preferred stock at $1,000 per share plus accrued and
unpaid dividends on the tenth anniversary of its issuance.
Redeemable preferred stock and common stock have been presented on the
balance sheet net of receivables for the sale of stock of $849,000 and $2,000,
respectively.
5. ACCRUED EXPENSES
Accrued expenses at December 31, 1996 are comprised of the following:
Withholding taxes payable......................................................... $ 263,634
Payroll and other benefits payable................................................ 259,586
Other............................................................................. 53,154
----------
$ 576,374
----------
----------
F-9
PAGING NETWORK DO BRASIL S.A.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
(AMOUNTS IN U.S. DOLLARS)
6. 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, 1996 are as follows:
1997............................................................................ $ 1,510,000
1998............................................................................ 1,510,000
1999............................................................................ 1,504,000
2000............................................................................ 1,412,000
2001............................................................................ 1,322,000
The Company incurred rental expense of $124,000 in the period ended December
31, 1996.
F-10
PAGING NETWORK DO BRASIL S.A.
BALANCE SHEET
(AMOUNTS IN U.S. DOLLARS)
(UNAUDITED)
JUNE 30,
1997
--------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents....................................................................... $ 12,686,424
Short-term investments.......................................................................... 69,486,408
Accounts receivable, net........................................................................ 298,349
Refundable taxes................................................................................ 735,990
Pager inventories............................................................................... 3,168,710
Prepaid expenses and other current assets....................................................... 867,058
Pledged securities--current..................................................................... 17,026,288
--------------
Total current assets........................................................................ 104,269,227
Fixed assets, net................................................................................. 8,567,786
Pledged securities................................................................................ 28,748,287
Debt issuance costs, net.......................................................................... 8,014,225
Other assets...................................................................................... 288,694
--------------
Total assets................................................................................ $ 149,888,219
--------------
--------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable................................................................................ $ 3,345,122
Accrued expenses................................................................................ 3,459,761
Payable to related parties...................................................................... 1,293,140
--------------
Total current liabilities................................................................... 8,098,023
Senior notes...................................................................................... 125,000,000
Redeemable preferred stock, without par value
Authorized shares--63,000 shares
Issued and outstanding, 30,000 shares........................................................... 31,710,837
SHAREHOLDERS' EQUITY (DEFICIT)
Common stock, without par value
Authorized shares--2,073,387 shares
Issued and outstanding 1,378,401 shares......................................................... 30,760
Accumulated deficit............................................................................... (14,951,401)
--------------
Total shareholders' equity (deficit)............................................................ (14,920,641)
--------------
Total liabilities and shareholders' equity (deficit)............................................ $ 149,888,219
--------------
--------------
See accompanying note to financial statements.
F-11
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(AMOUNTS IN U.S. DOLLARS)
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
1996 1997 1996 1997
---------- ------------- ---------- -------------
Revenues:
Services, rent and maintenance revenue.................... $ -- $ 215,944 $ -- $ 257,567
Product sales............................................. -- 273,899 -- 302,780
---------- ------------- ---------- -------------
-- 489,843 -- 560,347
Taxes..................................................... -- (149,799) -- (178,197)
---------- ------------- ---------- -------------
Total revenue............................................... -- 340,044 -- 382,150
Cost of product sold...................................... -- (246,065) -- (264,193)
---------- ------------- ---------- -------------
-- 93,979 -- 117,957
Operating costs and expenses:
Services rent and maintenance............................. -- 865,350 -- 1,699,237
Selling, general and administrative....................... 70,183 3,416,192 70,183 5,890,942
Depreciation and amortization............................. 512 258,227 512 410,400
---------- ------------- ---------- -------------
Total operating costs and expenses...................... 70,695 4,539,769 70,695 8,000,579
---------- ------------- ---------- -------------
Operating loss.......................................... (70,695) (4,445,790) (70,695) (7,882,622)
Other income (expense):
Interest expense.......................................... -- (1,065,607) -- (1,110,775)
Interest income........................................... -- 1,115,455 -- 1,365,766
Exchange and translation loss............................. (11,011) (474,691) (11,011) (708,325)
---------- ------------- ---------- -------------
Total other income (expense).............................. (11,011) (424,843) (11,011) (453,334)
---------- ------------- ---------- -------------
Net loss.................................................... $ (81,706) $ (4,870,633) $ (81,706) $ (8,335,956)
---------- ------------- ---------- -------------
---------- ------------- ---------- -------------
See accompanying notes to financial statements.
F-12
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1997
(AMOUNTS IN U.S. DOLLARS)
(UNAUDITED)
COMMON ACCUMULATED
STOCK DEFICIT TOTAL
--------- -------------- --------------
Balance at December 31, 1996.......................................... $ 28,672 $ (4,904,608) $ (4,875,936)
Proceeds of receivables for the sale of common stock.................. 2,088 2,088
Accrued dividends on redeemable preferred stock....................... 1,710,837 1,710,837
Net loss for the period............................................... 8,335,956 (8,335,956)
--------- -------------- --------------
Balance at June 30, 1997.............................................. $ 30,760 $ (14,951,401) $ (14,920,641)
--------- -------------- --------------
--------- -------------- --------------
See accompanying notes to financial statements.
F-13
PAGING NETWORK DO BRASIL S.A.
STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997
(AMOUNTS IN U.S. DOLLARS)
(UNAUDITED)
SIX MONTHS ENDED
JUNE 30,
----------------------------
1996 1997
------------ --------------
Operating activities:
Net loss......................................................................... $ (81,706) $ (8,335,956)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization.................................................. 512 410,400
Provision for losses on accounts receivable.................................... -- 25,000
Interest income on pledged securities.......................................... -- (171,232)
Amortization of debt issuance costs............................................ -- (14,225)
Changes in operating assets and liabilities:...................................
Increase in accounts payable................................................... -- (323,349)
Decrease in refundable taxes................................................... -- 103,869
Increase in pager inventories.................................................. -- (1,062,755)
Increase in prepaid expenses and other current assets.......................... (108,420) (231,949)
Increase in other assets....................................................... -- (288,694)
Increase in accounts payable................................................... 3,553 812,446
Increase in accrued expenses................................................... -- 2,883,387
Decrease in payable to related parties......................................... -- (561,352)
------------ --------------
Net cash used by operating activities.............................................. (186,061) (6,754,410)
Investing activities:
Purchase of fixed assets......................................................... (29,319) (4,464,765)
------------ --------------
Net cash used by investing activities............................................ (29,319) (4,464,765)
Financing activities:
Proceeds from the sale of common and redeemable preferred stock.................. 1,200,000 9,550,660
Proceeds of senior notes, net of debt issuance cost.............................. -- 117,000,000
Pledged securities............................................................... -- (45,603,342)
------------ --------------
Net cash provided by financing activities........................................ 1,200,000 80,947,318
------------ --------------
Net increase in cash............................................................... 984,620 69,728,143
Cash and cash equivalents at beginning of period................................... -- 12,444,689
------------ --------------
Cash and cash equivalents at end of period......................................... $ 984,620 $ 82,172,832
------------ --------------
------------ --------------
See accompanying note to financial statements.
F-14
PAGING NETWORK DO BRASIL S.A.
NOTE TO FINANCIAL STATEMENTS
JUNE 30, 1997
(AMOUNTS IN U.S. DOLLARS)
1. ORGANIZATION
Paging Network do Brasil S. A. (formerly Warburg Paging do Brasil Ltda., the
'Company') is a startup operation that was formed on April 7, 1996 through an
investment by Warburg, Pincus Ventures, L.P. The three month and six month
periods ended June 30, 1996 reflect operations from the date of inception.
During 1997, the Company has started to provide paging services in Sao Paulo and
simultaneously plans for expansion into additional Brazilian markets.
In October 1996, the Company increased its capital to approximately
$5,500,000 and in December 1996, through the incorporation 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, 1996, 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 1 of issued and
outstanding shares of common stock.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The financial statements have been prepared in accordance with generally
accepted accounting principles in the United States ('U.S. GAAP') in U.S.
dollars.
The Company's significant accounting policies are as follows:
FOREIGN CURRENCY TRANSLATION
The financial statements were translated from Brazilian reais to U.S.
dollars in accordance with the provisions of Statement of Financial Accounting
Standards No 52 as it applies to entities operating in highly inflationary
economies.
Pager inventories, fixed assets and intangibles and related income statement
accounts are remeasured at exchange rates in effect when the assets were
acquired or the liabilities were incurred. All other assets and liabilities are
remeasured at period end exchange rates, and all other income and expense items
are remeasured at average exchange rates prevailing during the period.
Remeasurement adjustments are included in exchange and translation gains
(losses).
REVENUE RECOGNITION
The Company recognizes revenue under service, rental and maintenance
agreements with customers as the related services are performed. Advance
billings for services are deferred and recognized as revenue when earned. Sales
of pagers are recognized upon delivery. The Company will lease certain pagers
under operating leases. Substantially all of these leases will be on a
month-to-month basis.
F-15
PAGING NETWORK DO BRASIL S.A.
NOTE TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1997
(AMOUNTS IN U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Short-term investments are
liquid investments with a maturity of greater than three months.
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
note offering consummated on June 6, 1997. As of June 30, 1997, the Company had
a payable of approximately $893,000 to Warburg, Pincus and approximately
$400,000 to Paging Network, Inc.
4. LONG TERM DEBT
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, commencing on December 6, 1997.
Of the $125,000,000 proceeds approximately $45,600,000 was used to purchase U.S.
government securities, scheduled interest and principal payments on which is in
an amount sufficient to provide for payment in full when due of the first six
scheduled interest payments on the Senior Notes. Debt issuance costs are
capitalized and amortized over the term of the debt under the effective yield
method.
The Senior Notes are redeemable on or after June 6, 2001 at the option of
the Company, in whole or in part from time to time, at specified redemption
prices declining annually to 100% of the principal amount on or after June 6,
2004, plus accrued interest. The Senior Notes contain certain covenants that,
among other things, limit the ability of the Company to incur additional
indebtedness or issue preferred stock, pay dividends or make certain other
restricted payments. Upon a change of control, the Company is required to make
an offer to 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, 1997 it is unable to make any dividend payments.
The Company believes that the recorded value of the Senior Notes approximates
the fair value at
June 30, 1997.
5. ACCRUED EXPENSES
Accrued expenses at June 30, 1997 are comprised of the following:
Withholding taxes payable....................................................... $ 620,000
Accrued interest payable........................................................ 1,125,000
Payroll and other benefits payable.............................................. 1,168,709
Other........................................................................... 546,052
---------
$3,459,761
6. REDEEMABLE PREFERRED STOCK
The amount of accrued and unpaid dividends on the redeemable preferred stock
at June 30, 1997 is $1,710,837.
F-16
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
None.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) 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).
**5.1 --Opinion of Xavier, Bernardes, Braganca, Sociedade de Advogados, Brazilian counsel
to the Registrant, as to the legality of the Notes.
**5.2 --Opinion of Willkie Farr & Gallagher, U.S. counsel to the Registrant, as to the
legality of the Notes.
**8.1 --Opinion of Willkie Farr & Gallagher, U.S. counsel to the Registrant, as to
certain U.S. tax matters.
**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.
**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 --Shareholders 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.
II-1
**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 do Brasil S.A. 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.
**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.
*23.1 --Independent Auditors' Consent of Ernst & Young Auditores Independentes.
**23.2 --Consent of Xavier, Bernardes, Braganca, Sociedade de Advogados (included in
Exhibit 5.1).
**23.3 --Consent of Willkie Farr & Gallagher (included in Exhibit 5.2).
**25.1 --Statement of Eligibility and Qualification under Trust Indenture Act of 1939 of
The Chase Manhattan Bank, as Trustee on Form T-1 (bound separately).
**99.1 --Authorization of the Central Bank of Brazil authorizing the issuance of the Notes
(English Translation).
**99.2 --Form of Letter of Transmittal.
**99.3 --Form of Notice of Guaranteed Delivery.
- ------------------------
* Filed herewith.
** Filed previously.
(b) Financial Statement Schedules:
None.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted
II-2
by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in this Registration Statement when it became effective.
The undersigned Registrant hereby undertakes as follows: that prior to any
public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
Registrant undertakes that such reoffering prospectus will contain the
information called for by the applicable registration form with respect to the
reofferings by persons who may be deemed to be underwriters, in addition to the
information called for by the other Items of the applicable form.
The undersigned Registrant hereby undertakes that every prospectus: (i) that
is filed pursuant to the immediately preceding paragraph or (ii) that purports
to meet the requirements of Section 10(a)(3) of the Securities Act of 1933 and
is used in connection with an offering of securities subject to Rule 415, will
be filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) (Section230.424(b) of this
chapter) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-3
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(4) To file a post-effective amendment to the registration statement to
include any financial statements required by Section210.3-19 of this chapter at
the start of any delayed offering or throughout a continuous offering. Financial
statements and information otherwise required by Section 10(a)(3) of the Act
need not be furnished, PROVIDED that the registrant includes in the prospectus,
by means of a post-effective amendment, financial statements required pursuant
to this paragraph (a)(4) and other information necessary to ensure that all
other information in the prospectus is at least as current as the date of those
financial statements.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement or amendment thereto to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of Sao
Paulo, the Federative Republic of Brazil, on this 23rd day of September, 1997.
PAGING NETWORK DO BRASIL S.A.
By: /s/ THOMAS C. TRYNIN
-----------------------------------------
Name: Thomas C. Trynin
Title: Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September 23, 1997.
SIGNATURE TITLE
/s/ THOMAS C. TRYNIN Chief Executive Officer
- ------------------------------ and Director
Thomas C. Trynin (Principal Executive
Officer)
/s/ WILSON OLIVIERI Chief Financial Officer
- ------------------------------ (Principal Financial
Wilson Olivieri Officer and
Principal Accounting
Officer)
/s/ MARIA REGINA MANGABEIRA Director
ALBERNAZ LYNCH
- ------------------------------
Maria Regina Mangabeira
Albernaz Lynch
/s/ HORACIO BERNARDES NETO Director
- ------------------------------
Horacio Bernardes Neto
/s/ RENATO ABUCHAM Director
- ------------------------------
Renato Abucham
/s/ HELENA DE ARAUJO LOPES Director
XAVIER
- ------------------------------
Helena de Araujo Lopes Xavier
II-5