<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE TRANSITION PERIOD FROM _________ TO ____________
COMMISSION FILE NUMBER: 333-12977
IMPSAT CORPORATION
IMPSAT S.A.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
Delaware 52-1910372
Argentina Not Applicable
(STATE OR OTHER JURISDICTION INCORPORATION OR ORGANIZATION) (IRS EMPLOYER IDENTIFICATION NUMBER)
</TABLE>
Alferez Pareja 256 (1107)
Buenos Aires, Argentina
(541) 300-4007
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANTS' PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the Registrants (1) have filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. YES [X] NO [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
INDICATE BY CHECK MARK WHETHER THE COMPANY HAS FILED ALL DOCUMENTS AND REPORTS
REQUIRED TO BE FILED BY SECTION 12, 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 SUBSEQUENT TO THE DISTRIBUTION OF SECURITIES UNDER A PLAN CONFIRMED BY A
COURT. YES n/a NO n/a
APPLICABLE ONLY TO CORPORATE ISSUERS
INDICATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF
COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE: As of September 30, 1998 the
Company had outstanding 100,792,640 shares of Common Stock, $1.00 par value, and
25,000 shares of Series A Convertible Preferred Stock, liquidation preference
$5,269 per share, outstanding.
<PAGE> 2
---------------
IMPSAT CORPORATION
IMPSAT S.A.
---------------
INDEX
<TABLE>
<S> <C>
PART I FINANCIAL INFORMATION...............................................................................3
ITEM 1. FINANCIAL STATEMENTS............................................................................3
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.....................................29
PART II OTHER INFORMATION.................................................................................29
ITEM 1. LEGAL PROCEEDINGS..............................................................................29
ITEM 2. CHANGES IN SECURITIES..........................................................................29
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................29
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS............................................30
ITEM 5. OTHER INFORMATION..............................................................................30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............................................................30
SIGNATURES................................................................................................31
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
-------------- ---------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 10,439 $ 139,903
Trade accounts receivable, net.............................................. 36,596 39,356
Other receivables........................................................... 15,583 20,222
Prepaid expenses............................................................ 2,397 3,295
------------ --------------
Total current assets................................................ 65,015 202,776
------------ --------------
PROPERTY, PLANT & EQUIPMENT, NET............................................... 255,422 315,342
------------ --------------
NON-CURRENT ASSETS:
Trade accounts receivable, net.............................................. 5,143 5,143
Intangible assets, net...................................................... 2,003 8,002
Investment at cost.......................................................... 4,178 10,018
Deferred financing costs, net............................................... 4,044 10,436
Deferred income taxes, net.................................................. 518
Other non-current assets.................................................... 4,111 2,079
------------ --------------
Total non-current assets............................................. 19,479 36,196
------------ --------------
TOTAL $ 339,916 $ 554,314
============ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Account payable - trade..................................................... $ 25,289 $ 33,820
Short-term debt............................................................. 50,189 34,367
Current portion of long-term debt........................................... 10,186 16,069
Accrued liabilities......................................................... 8,878 15,802
Deferred income taxes, net.................................................. 247
Other liabilities........................................................... 8,649 13,510
------------ --------------
Total current liabilities.......................................... 103,438 113,568
------------ --------------
LONG-TERM DEBT, NET............................................................ 159,677 381,486
------------ --------------
OTHER LONG-TERM LIABILITIES.................................................... 3,014 4,200
------------ --------------
COMMITMENTS AND CONTINGENCIES (Note 11)
MINORITY INTEREST.............................................................. 10,398 12,684
------------ --------------
REDEEMABLE PREFERRED STOCK, Convertible, Series A,
10%, cumulative dividend, 25,000 shares authorized, issued
and outstanding liquidation preference $5,269 per share................... 131,720
--------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $1 par value; 100,792,640 shares issued and
outstanding at December 31, 1997 and September 30, 1998,
respectively.............................................................. 100,793 100,793
Treasury stock, 25,198,160 shares, at cost.................................. (125,000)
Amount paid in excess of carrying value of assets acquired from
related party............................................................. (5,537)
Cumulative translation adjustment............................................. (132)
Accumulated deficit......................................................... (37,404) (59,468)
------------ --------------
Total stockholders' equity (deficit)................................. 63,389 (89,344)
------------ --------------
TOTAL.......................................................................... $ 339,916 $ 554,314
============ ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- ---------------------------------
1997 1998 1997 1998
-------------- --------------- ------------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES FROM SERVICES...................... $ 41,589 $ 56,237 $ 117,310 $ 149,888
---------- ---------- ----------- -----------
COSTS AND EXPENSES:
Variable cost of services.................... 7,198 11,343 19,424 26,323
Salaries, wages and benefits................. 7,237 9,581 20,899 26,543
Satellite capacity cost...................... 4,843 5,591 13,684 18,432
Selling, general and administrative.......... 9,479 13,271 23,510 34,377
Depreciation and amortization................ 7,266 9,908 21,042 26,537
---------- ---------- ----------- -----------
Total costs and expenses..................... 36,023 49,694 98,559 132,212
---------- ---------- ----------- -----------
Operating income.......................... 5,566 6,543 18,751 17,676
---------- ---------- ----------- -----------
OTHER INCOME (EXPENSES):
Interest expense, net........................ (6,074) (13,052) (18,345) (30,243)
Net (loss) gain on foreign exchange.......... (50) 971 (246) 813
Other income (expense), net.................. 257 (13) (3) 485
---------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES
AND MINORITY INTEREST........................... (301) (5,551) 157 (11,269)
PROVISION FOR INCOME TAXES...................... (1,209) (107) (3,938) (2,358)
---------- ---------- ----------- -----------
LOSS BEFORE MINORITY INTEREST................... (1,510) (5,658) (3,781) (13,627)
INCOME ATTRIBUTABLE TO MINORITY
INTEREST........................................ (401) (1,121) (982) (1,717)
---------- ---------- ----------- -----------
NET LOSS........................................ (1,911) (6,779) (4,763) (15,344)
Dividends on redeemable preferred stock...... (3,213) (6,720)
---------- ---------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS.................................. $ (1,911) $ (9,992) $ (4,763) $ (22,064)
========== ========== =========== ===========
</TABLE>
See notes to consolidated financial statements
4
<PAGE> 5
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
AMOUNT PAID IN
EXCESS OF
COMMON STOCK CARRYING VALUE
--------------------------------- OF NET ASSETS
TREASURY ACQUIRED FROM
SHARES STOCK AMOUNT RELATED PARTY
-------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.................. 100,792,640 $ 100,793
Change in minority interest in
IMPSAT Argentina..............................
Acquisition of Treasury stock................. (25,198,160) $ (125,000)
Amount paid in excess of carrying value of net
assets acquired from related party............ $ (5,679)
Change in minority interest related to the
acquisition of Mandic S.A.....................
Dividends on redeemable preferred
stock.........................................
Amortization of amount paid in excess of
carrying value of net assets
acquired from related party................... 142
Translation adjustment........................
Net loss for the nine months ended
September 30, 1998..........................
------------- ------------ ------------- ----------
BALANCE AT SEPTEMBER 30, 1998................. 75,594,480 $ 100,793 $ (125,000) $ (5,537)
============= ============ ============= ==========
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE
TRANSLATION ACCUMULATED MINORITY
ADJUSTMENT DEFICIT TOTAL INTEREST
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.................. $ (37,404) $ 63,389 $ 10,398
Change in minority interest in
IMPSAT Argentina.............................. (354)
Acquisition of Treasury stock................. (125,000)
Amount paid in excess of carrying value of net
assets acquired from related party............ (5,679)
Change in minority interest related to the
acquisition of Mandic S.A..................... 923
Dividends on redeemable preferred
stock......................................... (6,720) (6,720)
Amortization of amount paid in excess of
carrying value of net assets
acquired from related party................... 142
Translation adjustment........................ $ (132) (132)
Net loss for the nine months ended
September 30, 1998.......................... (15,344) (15,344) 1,717
---------- ---------- ---------- ----------
BALANCE AT SEPTEMBER 30, 1998................. $ (132) $ (59,468)(*) $ (89,344) $ 12,684
========== ========== ========== ==========
</TABLE>
(*) Includes an appropriation of retained earnings amounting to $1,622 to comply
with legal reserve requirements in Argentina.
See notes to consolidated financial statements
5
<PAGE> 6
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------
1997 1998
------- --------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................... $ (4,763) $ (15,344)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Amortization and depreciation............................................ 21,042 26,537
Deferred income tax provision (benefit).................................. 3,213 (765)
Income attributable to minority interest................................. 982 1,363
Changes in assets and liabilities:
Increase in trade accounts receivable, net............................... (5,850) (2,510)
Decrease (increase) in prepaid expenses.................................. 587 (700)
Increase in other receivables and other non-current assets............... (2,107) (1,474)
Increase in accounts payable-trade....................................... 2,452 2,716
(Decrease) increase in accrued and other liabilities..................... (3,054) 11,317
(Decrease) increase in other long-term liabilities....................... (969) 1,186
-------- ---------
Net cash provided by operating activities.................................. 11,533 22,326
-------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment................................. (36,918) (79,368)
Cash paid in Mandic S.A. acquisition, net.................................. (6,307)
Cash paid in IMPSAT Brazil merger.......................................... (5,100)
Increase in investment..................................................... (3,052) (5,840)
-------- ---------
Net cash used by investing activities...................................... (39,970) (96,615)
-------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments of) short-term debt........................ 14,908 (16,253)
Acquisition of treasury stock.............................................. (125,000)
Proceed of issuance of redeemable preferred stock.......................... 125,000
Proceeds from long-term debt, net.......................................... 13,471 247,184
Repayments of long-term debt............................................... (8,332) (27,178)
-------- ---------
Net cash provided by financing activities.................................. 20,047 203,753
-------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS......................... (8,390) 129,464
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................. 28,895 10,439
-------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................... $ 20,505 $ 139,903
======== =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.............................................................. $ 22,391 $ 30,078
======== =========
Foreign taxes paid......................................................... $ 507
========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES
Equipment in transit....................................................... $ 4,575 $ 5,365
======== =========
Common stock issued in exchange for an additional 44% of
IMPSAT Argentina......................................................... $ 23,043
========
Accrued dividends on redeemable preferred stock............................ $ 6,720
=========
Mandic S.A. Acquisition:
Fair Value of net assets acquired........................................ $ 1,300
=========
</TABLE>
See notes to consolidated financial statements
6
<PAGE> 7
IMPSAT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS)
1. GENERAL
IMPSAT Corporation, a Delaware holding company (the "Company"), is a
privately-held corporation which provides and operates private networks of
integrated data and voice telecommunications systems in a number of countries in
Latin America. The Company's principal line of business comprises the provision
of data transmission services for large national and multinational companies,
financial institutions, and governmental agencies and other business customers
in Latin America. The Company provides its services through its advanced
telecommunications networks comprised of owned teleports, earth stations, fiber
optic and microwave links and leased satellite and fiber optic links.
The Company was formed in August 1994 for the purpose of combining operating
entities in Argentina, Colombia and Venezuela, which were previously controlled
by common ownership. The original operating entity was established in Argentina
in 1990 under the name of IMPSAT S.A. ("IMPSAT Argentina"). Thereafter,
operating entities were established in Colombia in 1992 ("IMPSAT Colombia") and
in Venezuela in 1993 ("IMPSAT Venezuela"). Other operating subsidiaries have
been created or acquired in Mexico, Ecuador, Peru (inactive), the United States
and Brazil. Accordingly, the Company's operating subsidiaries at September 30,
1998 are as follows:
<TABLE>
<CAPTION>
NET
REVENUES OPERATING
OWNERSHIP TOTAL FROM INCOME
COUNTRY OPERATING SUBSIDIARIES PERCENTAGE ASSETS SERVICES (LOSS)
- --------- ------------------------------ ---------- --------- -------- --------
<S> <C> <C> <C> <C> <C>
Argentina Impsat S.A. 95.2% $ 221,033 $72,019 $14,022
Colombia Impsat S.A. 74.2 100,069 45,086 18,562
Venezuela Telecomunicaciones Impsat S.A. 75.0 34,230 10,275 1,334
Mexico Impsat S.A. de C.V. 99.9 10,244 3,339 (1,194)
Ecuador Impsatel del Ecuador S.A 100.0 20,573 6,773 2,225
USA Impsat USA, Inc. 100.0 12,812 6,647 698
Brazil Impsat Comunicacoes Ltda. 99.9 16,731 1,214 (4,297)
Brazil Mandic BBS Planejamento e
Informatica S.A. 58.5 4,492 4,535 795
--------- -------- --------
Subtotal for operating
subsidiaries 420,184 149,888 2,145
Parent company, others and
eliminations 134,130 (14,469)
--------- -------- -------
Consolidated total $554,314 $149,888 $17,676
========== ======== ========
</TABLE>
In addition, the Company owns other subsidiaries which serve as intermediaries
or provide support functions to the Company and its operating subsidiaries. They
are Resis Ingenieria, S.A. (Argentina) and International Satellite Capacity
Holding, NG (Liechtenstein).
2. MERGERS AND ACQUISITIONS
On June 1, 1998, the Company acquired from Nevasa Holdings Limited ("Nevasa"),
the Company's parent, 99.9% of the capital stock of IMPSAT Comunicacoes Ltda.
("IMPSAT Brazil"), a Brazilian company, for approximately $5.1 million. The
purchase price for IMPSAT Brazil represented the total amount of pre-operating
and development costs and expenses incurred for IMPSAT Brazil by Nevasa. IMPSAT
Brazil was established by Nevasa and operates under a value added
telecommunications license permitting IMPSAT Brazil to lease satellite capacity
directly from EMBRATEL, Brazil's long-distance carrier and sell corporate
private telecommunications network services (data, voice and video) using
terrestrial and satellite links to third parties. The acquisition, as is
generally the case for transactions among companies under common control, has
been accounted for in a manner similar to the pooling of interests method of
accounting, whereby all assets and liabilities have been recorded at their
historical carrying amounts and the acquisition was recorded as if the
transaction occurred on January 1, 1998. IMPSAT Brazil did not have material
operations in 1997 as it was in the pre-operating phase. Amounts paid in excess
of carrying value of the underlying net assets acquired were recorded as a
reduction of stockholders' equity (deficit) and are being amortized on a
straight-line basis over a period of 10 years.
7
<PAGE> 8
On April 20, 1998, the Company signed a definitive agreement to purchase a
75.1% interest in Mandic BBS Planejamento e Informatica S.A. ("Mandic S.A."), a
Brazilian internet access provider, for approximately $9.8 million. The
remaining 24.9% will be owned by Mr. Aleksander Mandic, the founder and current
president of Mandic S.A. The initial stage of the acquisition of Mandic S.A.,
pursuant to which the Company acquired a 58.5% interest, was consummated on May
29, 1998, and the remaining 16.6% interest was acquired on November 5, 1998 for
approximately $2.2 million. The acquisition was accounted for as a purchase.
The purchase price for the initial 58% interest acquired was allocated as
follows:
<TABLE>
<S> <C>
Estimated fair value of
net assets acquired: $ 1,300
Goodwill 6,307
-------
Purchase price for 58.5% interest: $ 7,607
=======
</TABLE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- The financial statements are presented on a
consolidated basis and include the accounts of the Company and its subsidiaries.
Effective December 31, 1997, IMPSAT Argentina changed its fiscal year to
December 31. All significant intercompany transactions and balances have been
eliminated.
INTERIM FINANCIAL INFORMATION -- The unaudited consolidated statements as of
September 30, 1998 and for the nine months ended September 30, 1998 and 1997
have been prepared on the same basis as the audited consolidated financial
statements. In the opinion of management, such unaudited consolidated financial
statements include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the results for such period. The
operating results for the nine months period ended September 30, 1998 and 1997
are not necessarily indicative of the operating results to be expected for the
full fiscal year or for any future period.
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 and
disclosure of contingent 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.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents are highly liquid
investments, including short-term investments and time deposits with maturities
of three months or less at the time of purchase. Cash equivalents and short-term
investments are stated at cost, which approximates market value.
REVENUE RECOGNITION -- The Company provides services to its customers pursuant
to contracts which range from nine months to five years but generally are for
three years. The customer generally pays an installation charge at the beginning
of the contract and a monthly fee based on the number of microsystem
installations. The fees stipulated in the contracts are generally denominated in
U.S. dollars equivalents. Services are billed on a monthly, predetermined basis,
which coincides with when the services are rendered. No single customer
accounted for greater than 10% of total revenue from services for the nine
months ended September 30, 1998 and 1997.
PROPERTY, PLANT AND EQUIPMENT COSTS -- Property, plant and equipment are
recorded at cost and depreciated using the straight-line method over the
following estimated useful lives:
<TABLE>
<S> <C>
Buildings and improvements 10-25 years
Operating communications equipment 5-10 years
Furniture, fixtures and other equipment 2-10 years
</TABLE>
INTANGIBLE ASSETS - Intangible assets include license and permit costs and
goodwill. License and permit costs, such as legal costs, regulatory fees and
application costs incurred to obtain and make functional the operating licenses
in each respective country in the amount of approximately $3,700, were
capitalized and are being amortized on the straight-line basis over periods not
to exceed ten years. Goodwill, representing the excess of the purchase price
over the estimated fair value of the net assets acquired of Mandic S.A.
8
<PAGE> 9
(see note 2), of approximately $6,307 is being amortized on a straight-line
basis of over a period of 15 years. The Company reviews the carrying value of
its intangible assets on an ongoing basis. If such review indicates that these
values may not be recoverable, the Company's carrying value will be reduced to
its estimated fair value.
INCOME TAXES -- Deferred income taxes result from temporary differences in the
recognition of expenses for tax and financial reporting purposes and are
accounted for in accordance with Statement of Financial Accounting Standards
("SFAS") No. 109, Accounting for Income Taxes, which requires the liability
method of computing deferred income taxes. Under the liability method, deferred
taxes are adjusted for tax rate changes as they occur.
DEFERRED FINANCING COSTS -- Debt issuance costs and transaction fees, which are
associated with the issuance of the Company's 12 1/8 % Senior Guaranteed Notes
due 2003 (the "Senior Guaranteed Notes") and the 12 3/8 % Senior Notes due 2008
(the "Senior Notes") (see Note 8) are being amortized (and charged to interest
expense) over the term of the related notes on a method which approximates the
level yield method.
INVESTMENT - Investment represents a less than 1.0% ownership interest by the
Company in an unaffiliated cooperative established for the purchase and leasing
of satellite capacity time and is accounted for under the cost method.
FOREIGN CURRENCY TRANSLATION -- The Company's subsidiaries generally use the
U.S. dollar as the functional currency. Accordingly, the financial statements of
the subsidiaries were remeasured. The effects of foreign currency transactions
and of remeasuring the financial position and results of operations into the
functional currency are included as net gain or loss on foreign exchange, except
for those which use the local currency as functional currency that are included
in the stockholders' equity.
LONG LIVED ASSETS -- Long lived assets are reviewed on an ongoing basis for
impairment based on comparison of carrying value against undiscounted future
cash flows. If an impairment is identified, the assets carrying amount is
adjusted to fair value. No such adjustments were recorded during the nine months
ended September 30, 1998 and 1997.
RECLASSIFICATIONS -- Certain amounts in the period for the nine months ended
September 30, 1997 consolidated financial statements have been reclassified to
conform with the nine months ended September 30, 1998 presentation.
NEW ACCOUNTING PRONOUNCEMENTS -- In September 1997, the FASB issued SFAS No.
130, Reporting Comprehensive Income. SFAS No. 130 requires that all components
of comprehensive income be reported on one of the following: (1) the statement
of income; (2) the statement of changes in stockholders' equity; or (3) a
separate statement of comprehensive income. Comprehensive income is comprised of
net income and all changes to stockholders' equity, except those due to
investments by owners (changes in paid-in capital) and distributions to owners
(dividends). SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 130 during the first quarter of 1998 did not
have a material impact on the Company's consolidated financial statements
presentation.
In September 1997, the FASB issued SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information. SFAS No. 131 changes the way public
companies report information about segments of their business in their annual
financial statements and requires them to report selected segment information in
their quarterly reports issued to shareholders. SFAS No. 131 also requires
entity-wide disclosures about the products and services an entity provides, the
foreign countries in which it holds assets and reports revenues, and its major
customers. SFAS No. 131 is effective for fiscal years beginning after December
15, 1997. The adoption of SFAS No. 131 during the first quarter of 1998 did not
have a material impact on the Company's consolidated financial statement
presentation.
9
<PAGE> 10
4. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable, by operating subsidiaries are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
IMPSAT Argentina $27,531 $30,847
IMPSAT Colombia 10,102 9,681
IMPSAT Venezuela 2,202 3,181
IMPSAT USA 1,359 3,484
Others 1,335 3,375
------- -------
Total 42,529 50,568
Less: allowance for doubtful accounts (5,933) (11,212)
------- -------
Trade accounts receivable, net $36,596 $39,356
======= =======
</TABLE>
The Company's subsidiaries provide trade credit to their customers in the normal
course of business. The collection of a substantial portion of the trade
receivables are susceptible to changes in the Latin American economies and
political climates. Prior to extending credit, the customers' financial history
is analyzed.
The activity for the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $2,803 $5,933
Provision for doubtful accounts 3,269 6,257
Write-offs (139) (978)
----- ------
Ending balance $5,933 $11,212
====== =======
</TABLE>
See note 11.
5. OTHER RECEIVABLES
Other receivables consist primarily of refunds or credits pending from local
governments for taxes other than income and other miscellaneous amounts due to
the Company and its operating subsidiaries as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
IMPSAT Argentina $4,753 $ 5,346
IMPSAT Colombia 4,460 4,960
IMPSAT Venezuela 2,133 2,235
IMPSAT Ecuador 548 958
Others 3,689 6,723
------ --------
Total $15,583 $ 20,222
======= ========
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following at:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Land $ 1,478 $ 1,719
Building and improvements 23,312 26,576
Operating communications equipment 310,321 378,680
Furniture, fixtures and other equipment 14,503 20,194
-------- --------
Total 349,614 427,169
Less: accumulated depreciation (101,051) (126,104)
-------- --------
Total 248,563 301,065
Deposit on purchase of equipment and in transit 6,532 11,897
</TABLE>
10
<PAGE> 11
<TABLE>
<S> <C> <C>
Work in process 327 2,380
-------- --------
Property, plant and equipment, net $255,422 $315,342
======== ========
</TABLE>
The recap of accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $73,046 $101,051
Depreciation expense 29,665 25,988
Retirements and disposals (1,660) (935)
-------- -------
Ending balance $101,051 $126,104
======== ========
</TABLE>
7. SHORT-TERM DEBT
The Company's short-term debt is detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Commercial paper (7.55% to 11%) $25,000 $25,000
Short-term credit facilities, denominated in
US dollars; interest rates ranging from 6.26% to 15%;
IMPSAT Argentina 15,850 732
IMPSAT Colombia 5,414 6,340
IMPSAT Venezuela 1,714 283
IMPSAT Ecuador 992 265
Mandic S.A. 325
Short-term credit facilities, denominated in
local currencies; local interest rates;
IMPSAT Colombia (47.15%) 1,422
IMPSAT Venezuela (32%) 1,219
------- -------
Total short-term debt $50,189 $34,367
======= =======
</TABLE>
The Company has historically refinanced these short-term credit facilities on an
annual basis.
8. LONG-TERM DEBT
The Company's long-term debt is detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
12-1/8% Senior Guaranteed Notes due 2003 $125,000 $125,000
12-3/8% Senior Notes due 2008 225,000
Term notes payable:
IMPSAT Colombia maturing through 2002
collateralized by equipment with a carrying value of
approximately $14,000 and the assignment of customer
contracts totaling approximately $12,000 denominated in:
U.S. dollars (Interest rates 8.5% - 13%) 27,111 23,454
Local currency (24.93% - 34%) 6,380 11,472
IMPSAT Argentina (6.56% - 7%), maturing semiannually
through 2001, collateralized by certain assets 2,435 5,462
IMPSAT Venezuela (9% - 10.75%), maturing through 2000 5,550 3,094
IMPSAT USA mortgage payable (8.75%), maturing through 2003 1,533
Eximbank notes payable (7%), maturing
semiannually through 1999 3,387 2,540
-------- --------
Total long-term debt 169,863 397,555
Less: current portion (10,186) (16,069)
-------- --------
Long-term debt, net $159,677 $381,486
======== ========
</TABLE>
The Senior Guaranteed Notes, Senior Notes and some of the term notes payable for
IMPSAT Colombia and IMPSAT Venezuela contain certain covenants requiring certain
financial ratios, limiting the incurrence of additional indebtedness and capital
expenditures, and restricting the ability to pay dividends.
11
<PAGE> 12
9. INCOME TAXES
For the nine months ended September 30, 1998 and 1997, the provision for income
taxes, all of which are for foreign taxes, consist of a current provision of
$3,123 and $725, respectively, and a deferred (benefit) provision of $(765) and
$3,213, respectively. The foreign statutory tax rates range from 20% to 35%
depending on the particular country. Deferred taxes result from temporary
differences in the capitalization policies of preoperating costs and net
operating loss carryforwards.
10. REDEEMABLE PREFERRED STOCK
On March 19, 1998, the Company redeemed 25% of its outstanding common stock
previously held by STET International Netherlands NV (the "STET Shares") with
the proceeds of a substantially concurrent issuance and sale of $125,000 of the
Company's Series A Convertible Preferred Stock (the "Series A Preferred Stock").
The Series A Preferred Stock were offered and sold to Princes Gate Investors II,
L.P. ("Princes Gate") and Morgan Stanley Global Emerging Markets Private
Investment Fund, L.P. ("MSGEM"), two private equity funds that are affiliates of
Morgan Stanley Dean Witter & Co., and to certain other investors affiliated with
Princes Gate and MSGEM (such investors along with Princes Gate and MSGEM, the
"Purchasers"). The Series A Preferred Stock was convertible at the date of
issuance into 25% of the common stock of the Company and at September 30, 1998
was convertible into approximately 26% of the Common Stock of the Company.
The following are some of the principal features of the Series A Preferred
Stock: (a) cumulative dividends at the rate of 10% per annum, compounded
quarterly and, with certain exceptions, payable in kind; (b) mandatorily
redeemable in cash by the Company at maturity (ten years after issuance) plus
accrued and unpaid dividends; (c) callable under certain circumstances by the
Company, in whole, at 100% of the principal amount, plus accrued and unpaid
dividends; (d) convertible into common stock of the Company at any time at the
option of the Purchasers (including upon a call by the Company), at a specified
conversion rate subject to certain antidilution rights; (e) the right by
Purchasers holding a certain minimum number of outstanding Series A Preferred
Stock to appoint two directors to the Company's Board of Directors as well as to
immediately appoint half of the members of the Company's Board of Directors upon
the occurrence of certain specified events; and (f) the right by Directors
appointed by the Purchasers holding a certain minimum number of outstanding
Series A Preferred Stock, to a veto over certain major corporate actions.
11. COMMITMENTS AND CONTINGENCIES
The Company leases satellite capacity with annual rental commitments of
approximately $28,000. In addition, the Company has commitments to purchase
communications equipment amounting to approximately $11,747 and was obligated
under letter of credits amounting to approximately $559 at September 30, 1998.
The Company is a third party guarantor of up to 75% of a $6,000 credit facility
provided to IMPSAT Venezuela by a regional development fund. At September 30,
1998, the balance outstanding on this credit facility amounted to approximately
$3,000.
During May, 1997, the Company and IMPSAT Argentina entered into a three party
arrangement with a financial institution whereby $60 million was borrowed by the
subsidiary and concurrently a like amount certificate of deposit was placed at
the financial institution by the Company. The arrangements establish a right of
setoff and, accordingly, the amounts have been netted for purposes of the
consolidated financial statement presentation. The arrangements expire in July
1999.
The Company is involved in or subject to various litigation and legal
proceedings incidental to the normal conduct of its business. Whenever
justified, the Company expects to vigorously prosecute or defend such claims,
although there can be no assurance that the Company will ultimately prevail with
respect to any such matters.
In November 1996, IMPSAT Argentina filed suit against one of its customers,
ENCOTESA for amounts due and arising under IMPSAT Argentina's contracts with
ENCOTESA, the Argentine national postal service. On December 27, 1996, ENCOTESA
filed its reply to IMPSAT Argentina's claim. The court has not yet ruled upon
IMPSAT Argentina's claim against ENCOTESA. In September 1997, ENCOTESA was
privatized and emerged as Correo Argentino S.A. In connection therewith, the
claim by IMPSAT Argentina remained with ENCOTESA and the operating contract was
transferred to Correo Argentino. Based on these developments, the Company has
reclassified the trade account receivables from ENCOTESA to non-current assets
at the estimated net realizable value of $5,143 as determined by the Company's
management based on the advice of local legal counsel. IMPSAT Argentina and
12
<PAGE> 13
ENCOTESA have held discussions in an effort to settle IMPSAT Argentina's claims
against ENCOTESA, and during the pendency of such discussions the parties have
deferred further court proceedings. To date, the parties have been unable to
reach any settlement of the matter. The Company will continue to assess the
effect that the ENCOTESA receivables situation and its contract negotiation with
Correo Argentino will have on its results of operations, liquidity or capital
resources.
******
13
<PAGE> 14
<TABLE>
<CAPTION>
IMPSAT S.A.
BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
- ----------------------------------------------------------------------------------------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
1997 1998
--------------- ----------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 6,065 $ 16,261
Trade accounts receivable, net................................ 22,034 21,505
Receivables from affiliated companies......................... 734 1,009
Other receivables............................................. 4,753 5,346
Prepaid expenses.............................................. 789 967
--------- ----------
Total current assets......................................... 34,375 45,088
--------- ----------
PROPERTY, PLANT AND EQUIPMENT, NET............................. 146,940 166,132
--------- ----------
NON-CURRENT ASSETS:
Trade accounts receivable, net................................ 5,143 5,143
Investment, at cost........................................... 4,178 10,018
Other non-current assets...................................... 393 388
--------- ----------
Total non-current assets..................................... 9,714 15,549
--------- ----------
TOTAL.......................................................... $ 191,029 $ 226,769
========= ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payables - trade..................................... $ 13,521 $ 21,298
Short-term debt............................................... 40,850 25,732
Advances from affiliated companies............................ 5,194 44,301
Current portion of long-term debt............................. 2,794 64,694
Accrued liabilities........................................... 432 99
Deferred income taxes......................................... 4,301 5,735
Other liabilities............................................. 4,569 3,449
--------- ----------
Total current liabilities.................................... 71,661 165,308
--------- ----------
LONG-TERM DEBT, NET............................................ 63,029 3,308
--------- ----------
OTHER LONG-TERM LIABILITIES.................................... 1,383 1,789
--------- ----------
COMMITMENTS AND CONTINGENCIES (Note 10)
STOCKHOLDERS' EQUITY
Common Stock; 5,123 shares authorized,
issued, and outstanding...................................... 3 3
Paid-in capital............................................... 26,191 26,191
Retained earnings............................................. 28,762 30,170
--------- ----------
Total stockholders' equity................................... 54,956 56,364
--------- ----------
TOTAL.......................................................... $ 191,029 $ 226,769
========= ==========
</TABLE>
See notes to financial statements
14
<PAGE> 15
<TABLE>
<CAPTION>
IMPSAT S.A.
STATEMENTS OF INCOME
(IN THOUSANDS OF U.S. DOLLARS)
- -----------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- --------------------------------
1997 1998 1997 1998
--------------- ----------------- -------------- -----------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES FROM SERVICES.................... $ 22,810 $ 24,602 $ 66,763 $ 72,672
-------- -------- --------- ---------
COSTS AND EXPENSES:
Variable cost of services.................. 4,128 5,205 11,079 13,672
Salaries, wages and benefits............... 3,059 3,458 8,990 9,641
Satellite capacity cost.................... 2,601 2,114 7,118 8,017
Selling, general and administrative........ 3,620 4,545 11,693 13,547
Depreciation and amortization.............. 4,571 5,177 13,287 14,786
-------- -------- --------- ---------
Total costs and expenses................ 17,979 20,499 52,167 59,663
-------- -------- --------- ---------
Operating income......................... 4,831 4,103 14,596 13,009
-------- -------- --------- ---------
OTHER EXPENSES
Interest expense, net...................... (2,764) (3,700) (9,570) (10,311)
Other expenses, net........................ 10 106 (81) 144
-------- -------- --------- ---------
Total other expenses..................... (2,754) (3,594) (9,651) (10,167)
-------- -------- --------- ---------
INCOME BEFORE INCOME TAXES.................... 2,077 509 4,945 2,842
PROVISION FOR INCOME TAX...................... (686) (2,591) (1,434)
-------- -------- --------- ---------
NET INCOME.................................... $ 1,391 $ 509 $ 2,354 $ 1,408
======== ======== ========= =========
</TABLE>
See notes to financial statements
15
<PAGE> 16
<TABLE>
<CAPTION>
IMPST S.A.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS)
- ---------------------------------------------------------------------------------------------------------------------------------
COMMON STOCKHOLDERS'
--------------------
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------ ------- -------- -----
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1997.............................. $ 3 $ 26,191 $ 28,762 $ 54,956
Net income for the nine months ended (unaudited).......... 1,408 1,408
------ -------- --------- -------
BALANCE AT SEPTEMBER 30, 1998............................. $ 3 $ 26,191 $ 30,170(*) $ 56,364
====== ======== ========= =======
</TABLE>
(*) Includes an appropriation of retained earnings amounting to $1,622 in 1998
to comply with legal reserve requirements in Argentina.
See notes to financial statements
16
<PAGE> 17
<TABLE>
<CAPTION>
IMPSAT S.A.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
- ---------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1998
--------------- ---------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................................... $ 2,354 $ 1,408
Adjustment to reconcile net income to net cash provided by
operating activities:
Amortization and depreciation........................................ 13,287 14,786
Deferred income tax provision........................................ 2,791 1,434
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable, net................ (2,202) 529
Increase in prepaid expenses......................................... (543) (178)
Increase in other receivable assets and other
non-current assets.............................................. (572) (588)
Increase in accounts payable trade................................... 739 1,854
Increase (decrease) accrued and other liabilities.................... 104 (1,453)
(Decrease) increase in other long-term liabilities................... (2,022) 406
--------- ---------
Net cash provided by operating activities................................ 13,936 18,198
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment........................... (11,718) (28,055)
Increase in investment............................................... (3,052) (5,840)
--------- ---------
Net cash used by investing activities................................ (14,770) (33,895)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from (repayments of) short-term debt.................. 20,876 (15,118)
(Decrease) increase in advances from/to affiliates and parent........ (69,719) 38,832
Repayments of long-term debt......................................... 5,195 (3,007)
Proceeds from long-term debt......................................... 63,098 5,186
--------- ---------
Net cash provided by financing activities................................. 9,060 25,893
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS................................. 8,226 10,196
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD.......................... 1,002 6,065
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................ $ 9,228 $ 16,261
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid........................................................ $ 9,700 $ 5,869
========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING ACTIVITIES:
Equipment in transit................................................. $ 2,233 $ 5,923
========= =========
</TABLE>
See notes to financial statements
17
<PAGE> 18
IMPSAT S.A.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS)
- --------------------------------------------------------------------------------
1. BACKGROUND
IMPSAT S.A. provides and operates private networks of integrated data and
voice telecommunications systems in Argentina. IMPSAT S.A.'s principal line
of business comprises the provision of data transmission services for large
national and multinational companies, financial institutions, governmental
agencies and other business customers in Argentina. It provides its services
through its advanced telecommunications networks comprised of owned
teleports, earth stations, fiber optic and microwave links and leased
satellite capacity. IMPSAT S.A. is a 95.2% owned subsidiary of IMPSAT
Corporation, a Delaware holding company (the "Parent Company").
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INTERIM FINANCIAL INFORMATION -- The unaudited statements as of September 30,
1998 and 1997 have been prepared on the same basis as the audited financial
statements. In the opinion of management, such unaudited financial statements
include all adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the results for such period. The operating
results for the nine months period ended September 30, 1998 and 1997 are not
necessarily indicative of the operating results to be expected for the full
fiscal year or for any future period.
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 and disclosure of contingent 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.
CASH AND CASH EQUIVALENTS -- Cash and cash equivalents are highly liquid
investments, including short-term investments and time deposits with
maturities of three months or less at the time of purchase. Cash equivalents
and short-term investments are stated at cost, which approximates market
value.
REVENUE RECOGNITION -- IMPSAT S.A. provides services to its customers
pursuant to contracts which range from six months to five years but generally
are for three years. The customer generally pays an engineering fee, an
installation charge and a monthly fee based on the number of microsystem
installations. The fees stipulated in the contracts are generally denominated
in U.S. dollars. Services are billed on a monthly, predetermined basis, which
coincides with when the services are rendered. For the nine months ended
September 30, 1998 and 1997, no single customer accounted for greater than
10% of total revenue from services.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are recorded
at cost and depreciated using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Building and improvement 10-25 years
Operating communications equipment 10 years
Furniture, fixtures and other equipment 5-10 years
</TABLE>
INVESTMENT - Investment represents a less than 1% ownership interest by the
IMPSAT S.A. in an unaffiliated cooperative established for the purchase and
leasing of satellite capacity time and is accounted for under the cost
method.
INCOME TAXES -- Deferred income taxes result from timing differences in the
recognition of expenses for tax and financial reporting purposes and are
accounted for in accordance with Financial Accounting Standards Board (the
"FASB") Statements of Financial Accounting Standards ("SFAS") No. 109,
Accounting for Income Taxes, which required the liability method of computing
deferred income taxes. Under the liability method, deferred taxes are
adjusted for tax rate changes as they occur.
18
<PAGE> 19
FOREIGN CURRENCIES TRANSLATION -- The translation of these financial
statements into U.S. dollars has been made following the guidelines of SFAS
No. 52, Foreign Currency Translation. Major operations of IMPSAT S.A. are
stated in U.S. dollars. Accordingly, the U.S. dollar has been designated as
the functional currency. Local currency denominated transactions are
remeasured into the functional currency. Accordingly, fixed assets and
stockholders account have been translated into U.S. dollars taking into
account the exchange rate prevailing at each transaction date. Monetary
assets and liabilities are translated using the period-end exchange rate.
Profit and loss accounts were translated using average exchange rates for
periods in which they were accrued, except for the consumption of
non-monetary assets for which their respective dollar translated costs were
considered.
LONG LIVED ASSETS -- Long-lived assets are reviewed on an ongoing basis for
impairment. Estimated fair value is calculated using the present value of the
undiscounted cash flow of the assets.
RECLASSIFICATIONS -- Certain amounts in the 1997 financial statements have
been reclassified to conform with the 1998 presentation.
3. TRADE ACCOUNTS RECEIVABLE
The detail of trade accounts receivable is the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Trade accounts receivable $27,531 $30,847
Less: allowance for doubtful accounts (5,497) (9,342)
-------- --------
Trade accounts receivable, net $22,034 $21,505
======== ========
</TABLE>
IMPSAT S.A. provides trade credit to its customers in the normal course of
business. Prior to extending credit, the customers' financial history is
analyzed.
The activity for the allowance for doubtful account is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $5,282 $ 5,497
Provision for doubtful accounts 215 3,845
------ ----------
Ending balance $5,497 $ 9,342
====== ==========
</TABLE>
4. OTHER RECEIVABLES
Other receivables consist primarily of refunds or credits pending from local
government for taxes other than income, advances to suppliers other than for
fixed assets, related parties receivables and other miscellaneous amounts due
to IMPSAT S.A.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Building installations and improvements $ 15,993 $ 16,021
Operating communications equipment 200,019 225,901
Furniture, fixtures and other equipment 6,517 7,264
-------- ---------
Total 222,529 249,186
Less: accumulated depreciation (76,976) (90,831)
-------- ---------
Total 145,553 158,355
Deposit on purchase of equipment and in transit 1,387 7,310
Work in process 467
-------- ---------
Property, plant and equipment, net $146,940 $ 166,132
======== =========
</TABLE>
19
<PAGE> 20
The recap of accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- --------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $61,063 $76,976
Depreciation expense 17,951 14,786
Retirements and (2,038) (931)
Disposals ------- -------
Ending balance $76,976 $90,831
======= =======
</TABLE>
6. SHORT-TERM DEBT
IMPSAT S.A.'s short-term debt is detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(UNAUDITED)
<S> <C> <C>
Commercial paper (7.55% to 11%) $25,000 $25,000
Short-term credit facilities, denominated in
U.S. dollars, interests rates ranges from 9.5% to 12% 15,850
Short-term credit facilities, denominated in
local currency 732
------- -------
Total short-term debt $40,850 $25,732
======= =======
</TABLE>
IMPSAT S.A. has historically refinanced its short-term credit facilities on
an annual basis.
7. LONG-TERM DEBT
IMPSAT S.A.'s long-term debt is detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------- -------------
(UNAUDITED)
<S> <C> <C>
Term notes payable (6.69% - 12.63%) maturing
semiannually through 1999, collateralized by
certain assets $62,435 $65,462
Eximbank notes payable (7%) maturing semiannually
through 1999 3,388 2,540
------- -------
Total long-term debt 65,823 68,002
Less: current portion (2,794) (64,694)
------- -------
Long-term debt, net $63,029 $3,308
======= =======
</TABLE>
8. ADVANCES FROM AFFILIATED COMPANY
Included in advances from affiliated company are advances totaling $40,000
from IMPSAT S.A.'s Parent Company. These advances bear interest at 7.15% and
are due September 30, 1999.
9. INCOME TAXES
The provision for income taxes for the nine months ended September 30, 1998
and 1997 consists of $1,434 and $2,591 in deferred taxes. The statutory tax
rate in Argentina is 33%.
10. COMMITMENTS AND CONTINGENCIES
IMPSAT S.A. leases satellite capacity with annual rental commitments of
approximately $11,000 through the year 2001. In addition, IMPSAT S.A. has
commitments to purchase communications equipment amounting to approximately
$8,616 at September 30, 1998.
IMPSAT S.A. is guarantor on the $125,000,000, 12 1/8% Senior Guaranteed
Notes Due 2003 issued on July 30, 1996 by the Parent Company.
20
<PAGE> 21
During May, 1997, the Parent Company and IMPSAT S.A. entered into a three
party arrangement with a financial institution whereby $ 60 million was
borrowed by IMPSAT S.A. and concurrently a like amount Certificate of
Deposit was placed at the financial institution by the Parent Company. The
arrangement expires in July 1999.
IMPSAT S.A. is involved in or subject to various litigation and legal
proceedings incidental to the normal conduct of its business. Whenever
justified, IMPSAT S.A. expects to vigorously prosecute or defend such
claims, although there can be no assurance that IMPSAT S.A. will ultimately
prevail with respect to any such matters.
In November 1996, IMPSAT S.A. filed suit against one of its customers,
ENCOTESA for amounts due and arising under IMPSAT S.A.'s contracts with
ENCOTESA, the Argentine national postal service. On December 27, 1996,
ENCOTESA filed its reply to IMPSAT S.A.'s claim. The court has not yet ruled
upon IMPSAT S.A.'s claim against ENCOTESA. In September 1997, ENCOTESA was
privatized and emerged as Correo Argentino S.A. In connection therewith, the
claim by IMPSAT Argentina remained with ENCOTESA and the operating contract
was transferred to Correo Argentino. Based on these developments, the IMPSAT
S.A. has reclassified the trade account receivables from ENCOTESA to
non-current assets at the estimated net realizable value of $5,143 as
determined by the IMPSAT S.A.'s management based on the advice of local
legal counsel. IMPSAT Argentina and ENCOTESA have held discussions in an
effort to settle IMPSAT Argentina's claims against ENCOTESA, and during the
pendency of such discussions the parties have deferred further court
proceedings. To date, the parties have been unable to reach any settlement
of the matter. IMPSAT S.A. will continue to assess the effect that the
ENCOTESA receivables situation and its contract negotiations with Correo
Argentino will have on its results of operations, liquidity or capital
resources.
21
<PAGE> 22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Forward Looking Statements. This Management's Discussion and Analysis of
Financial Condition and Results of Operations contains forward-looking
statements that involve risks and uncertainties. Such forward looking statements
are based upon current expectations and actual results may differ significantly
from the results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, the effect of changing
economic conditions in the countries in which the Company operates, business
conditions and growth in the telecommunications industry in Latin America, the
Company's ability to maintain its lending arrangements, or if necessary, access
additional sources of capital and accurately forecast capital expenditures.
Assumptions relating to budgeting, marketing, product development and other
management decisions are subjective in many respects and thus susceptible to
interpretations and periodic revisions based on actual experience and business
developments, the impact of which may cause the Company to alter its marketing,
capital expenditure or other budgets, which may in turn affect the Company's
financial position and results of operations. The Company does not undertake to
publicly update or revise its forward looking statements even if experience or
future changes make it clear that any projected results (expressed or implied)
will not be realized. Potential risks and uncertainties include, among others,
those set forth under "Overview," "Recent Development" and "Liquidity and
Capital Resources" included in this Management's Discussion and Analysis of
Financial Condition and Results of Operations and in the "Risk Factors" section
of the Company's final prospectus dated September 28, 1998, as filed with the
U.S. Securities and Exchange Commission.
Revenues. The Company provides services to its customers pursuant to contracts
which typically range from six months to five years but generally are for three
years. The customer generally pays an installation charge at the beginning of
the contract and a monthly fee based on the quantity and type of equipment
installed. The fees stipulated in the contracts are generally denominated in
U.S. dollar equivalents. Services (other than installation fees) are billed on a
monthly, predetermined basis, which coincide with the rendering of the services.
The Company reports net revenues which are after deductions for sales taxes.
The Company recently has experienced, and anticipates that it will
continue to experience, downward pressure on its prices as it continues to
expand its customer base and as competition for private telecommunications
network services grows. In addition, as the Company's business in a particular
country matures, its rate of growth in that country tends to slow. In
particular, this has occurred in Argentina. To compensate for slower growth in
maturing markets, the Company seeks to expand into new countries and to provide
new services.
The Company anticipates that its geographic diversification provides
some protection against economic downturns in any particular country, although
there can be no assurance in this regard. However, a substantial majority of the
Company's revenues are derived from Argentina and Colombia. Many of the
countries in which the Company operates have experienced political and economic
volatility in recent years. Also, presidential elections were recently held in
Brazil, Colombia and Ecuador and are scheduled to be held later in 1998 for
Venezuela, and post-election changes in economic or telecommunications policies
could adversely affect the Company's operations in these countries. It is
impossible to predict whether such events, circumstances or conditions will
occur, recur or worsen, or what effect any such events, circumstances or
conditions, which are entirely outside the control of the Company, will have on
the countries in which the Company operates or upon the Company. Such conditions
and events may have adverse effects on the business, results of operations and
financial condition of the Company.
Costs and Expenses. The Company's costs and expenses include principally
(i) variable costs of services, (ii) lease payments for satellite transponder
capacity, (iii) salaries, wages and benefits, (iv) selling, general and
administrative expenses and (v) depreciation and amortization. The principal
items comprising variable cost of services are installation (and
de-installation) costs, sales commissions paid to third-party sales
representatives and maintenance costs. Selling, general and administrative
("SG&A") expenses for the Company consist principally of publicity and promotion
costs; provisions for doubtful accounts; fees and other remunerations; travel
and entertainment; rent; and plant services and telephone and energy expenses.
Currency Risks. The Company's contracts with its customers generally
provide for payment in U.S. dollars or for payment in
22
<PAGE> 23
local currency linked to the exchange rate at the time of invoicing between the
local currency and the U.S. dollar. Accordingly, inflationary pressures
experienced in the Company's countries of operations did not have a direct
effect on the Company's revenues during the first nine months of 1998. Inflation
has in the past, and could in the future, adversely affect the economies of the
Company's countries of operations by, among other things, increasing the cost of
local capital and capital inflows from the United States and elsewhere.
Moreover, given that the exchange rate is generally set at the date of invoicing
and that the Company in some cases experiences substantial delays in collecting
receivables, it is exposed to exchange rate risk. Furthermore, pursuant to
Brazilian law, the Company's contracts with customers in Brazil may not be
linked to the exchange rate between the Brazilian real and the U.S. dollar. The
Company's expansion in Brazil therefore will increase the Company's exposure to
exchange rate risks.
The continued Asian and Russian economic crises have had an adverse
effect on the foreign exchange markets of a number of Latin American countries,
including Brazil, Colombia, Mexico and Venezuela. Such effects in turn have led
to pressures on local interest rates as the countries have adopted monetary
policies to attempt to bolster their currencies. Continued pressures on the
local currencies in the countries in which the Company operates are likely to
have an adverse effect on many of the Company's customers, which could adversely
affect the Company. Such events also have had an adverse effect on the ability
of the Company and many other entities located in the countries in which the
Company currently operates, including certain of its customers, to gain access
to the international capital markets for necessary financing and refinancing.
Continued closure of international capital sources to emerging market borrowers
could have an adverse effect on the Company and many of its customers.
RECENT DEVELOPMENT
In September 1998, the Company announced plans to construct a broadband
network throughout the principal countries in Latin America. The program, which
the Company has designated as "IMPSAT 2000" would be aimed at developing the
Latin American informational highway. Upon its full development and
implementation, IMPSAT 2000 would provide a fiber optic link among the major
urban and surrounding cities in the Latin American countries that the Company
currently serves. Upon completion, the IMPSAT 2000 network could comprise up to
one million kilometers of fiber optic cable for the operation of a broadband
network for voice and data transmission. By constructing Latin America's first
region-wide broadband network, the Company plans to be able to transmit
high-level interactive applications to optimize both project and company
management regardless of volume and with minimal delay. By integrating the
planned IMPSAT 2000 fiber optic network with its existing fiber optic networks
in Argentina and Colombia as well as its current and planned wireless
metropolitan area networks and access to undersea cables, the Company seeks to
connect all major Latin American cities offering transmission services never
before available in the region. IMPSAT 2000 would enable the Company to provide
a greater array of services for its business customers, including switched
international, domestic long distance and local services, upon the deregulation
of the telecommunications markets in the countries in which it operates. At its
full implementation in all possible locations throughout Latin America, the
IMPSAT 2000 network could require an expenditure of up to $2.0 billion, subject
to financing.
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as a percentage
of revenues:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------------------------------------
1997 1998 1997 1998
--------------------- ------------------------ ---------------------- -------------------
(IN THOUSANDS AND AS A PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues from
services.......................$41,589 100.0% 56,237 100.0% 117,310 100.0% 149,888 100.0%
Variable costs of
services....................... 7,198 17.3 11,343 20.2 19,424 16.6 26,323 17.6
Salaries, wages and
benefits....................... 7,237 17.4 9,581 17.0 20,899 17.8 26,543 17.7
Satellite capacity cost........ 4,843 11.6 5,591 9.9 13,684 11.7 18,432 12.3
Selling, general and
administrative expenses........ 9,479 22.8 13,271 23.6 23,510 20.0 34,377 22.9
Depreciation and
amortization................... 7,266 17.5 9,908 17.6 21,042 17.9 26,537 17.7
Interest expense, net.......... 6,074 14.6 13,052 23.2 18,345 15.6 30,243 20.2
Net (loss) gain on
foreign exchange............... (50) (0.1) 971 1.7 (246) (0.2) 813 0.5
Provision for foreign
income taxes................... 1,209 2.9 107 0.2 3,938 3.4 2,358 1.6
Net loss....................... 1,911 4.6 6,779 12.1 4,763 4.1 15,344 10.2
</TABLE>
23
<PAGE> 24
Revenues. Revenues for the three and nine months ended September 30, 1998
totaled $56.2 million and $149.9 million, respectively. This represents an
increase of $14.7 million (or 35.2%) and $32.6 million (or 27.8%),
respectively, from revenues for the three and nine months ended September 30,
1997. Revenues at IMPSAT Argentina for the three and nine months ended
September 30, 1998 totaled $24.6 million and $72.7 million, respectively. This
represents an increase of $1.8 million (or 7.9%) and $5.9 million (or 8.9%),
respectively, from IMPSAT Argentina's revenues for the three and nine months
ended September 30, 1997. This increase was primarily attributable to increased
revenues from Internet services, as described below. IMPSAT Colombia's revenues
for the three and nine months ended September 30, 1998 totaled $17.0 million
and $45.1 million, respectively. This represents an increase of $4.6 million
(or 37.9%) and $9.0 million (or 24.9%), respectively, from IMPSAT Colombia's
revenues for the three and nine months ended September 30, 1997. Revenues at
IMPSAT Venezuela totaled $3.9 million and $10.3 million, respectively, for the
three and nine months ended September 30, 1998 (an increase of $1.6 million (or
66.5%) and $4.1 million (or 65.0%), respectively, over the corresponding
periods in 1997). Revenues at IMPSAT Ecuador totaled $2.6 million and $6.8
million, respectively, for the three and nine months ended September 30, 1998
(an increase of $1.1 million (or 74.4%) and $2.9 million (or 74.8%),
respectively, over the corresponding periods in 1997). The Company's net
revenues for the three months ended September 30, 1998 also include revenues of
$3.5 million recorded by Mandic S.A., and $0.7 million recorded by IMPSAT
Brazil. Excluding Internet and Global Fax customers, the Company had a total of
1,412 customers at September 30, 1998, compared to 1,230 customers at September
30, 1997.
During the third quarter of 1998, the Company continued to develop its
operations in Brazil. At September 30, 1998, IMPSAT Brazil had a total of 36
customers, compared to 21 customers at the end of the second quarter of 1998. In
October 1998, IMPSAT Brazil entered into a new five year contract to provide
private telecommunications network services to Confederacao Nacional da
Industria ("CNI"), Brazil's national association of private industrial
companies. The CNI contract contemplates monthly revenues to IMPSAT Brazil of
$0.7 million. Also in that month, IMPSAT Brazil completed the construction of a
teleport located in Curitiba.
The increase in the Company's net revenues for the first nine months of 1998
is derived principally from growth in the Company's services other than its VSAT
based service offerings. The Company anticipates that the percentage, and
absolute amount, of total revenues represented by non-VSAT based service
offerings (i.e., SCPC, value-added and terrestrial services) will continue to
grow at a faster rate than its VSAT based service offerings. Revenues from VSAT
services during the first nine months of 1998 totaled $41.4 million, a decrease
of $2.3 million (or 5.3%) from revenues from VSAT services for the corresponding
period in 1997. As a percentage of the Company's net revenues, revenues from
VSAT services declined to 27.6% for the first nine months of 1998 from 37.2% for
the corresponding period in 1997. Revenues from Dataplus services for the nine
months ended September 30, 1998 totaled $33.3 million, an increase of $5.8
million, (or 21.2%), compared to Dataplus revenues for the corresponding period
in 1997. Many of the Company's customers have supplemented or replaced their
VSAT services with Dataplus services over time as they have increased the amount
of private telecommunications network capacity contracted with the Company, and
the Company expects this trend to continue.
In addition, the Company's revenues from newer service offerings, such as
Internet, recorded significant increases during the first nine months of 1998.
Internet service revenues during the first nine months of 1998 totaled $13.7
million, as compared to $4.7 million for the first nine months of 1997. At
September 30, 1998, the Company had in excess of 77,966 retail dial-up access
Internet customers and 189 corporate dedicated access Internet customers,
compared to 19,057 retail Internet customers and 45 corporate Internet customers
at September 30, 1997. Mandic S.A.'s net revenues from Internet services for the
three months ended September 30, 1998 totaled $3.5 million. IMPSAT Argentina's
net revenues from Internet services for the first nine months of 1998 totaled
$4.6 million, an increase of $1.9 million (or 73.2%) compared to the
corresponding period in 1997.
Competitive pressures, including lower pricing, have resulted in a decline in
IMPSAT Argentina's revenues from non-value added service offerings during the
first nine months of 1998. IMPSAT Argentina's revenues from VSAT and Dataplus
services for the nine months ended September 30, 1998 totaled $26.9 million and
$17.5 million, respectively, an decrease of $0.8 million (or 2.9%) and $0.2
million (or 1.5%) compared to the corresponding periodS in 1997.
As part of net revenues, the Company recorded revenues of $3.0 million and
$4.3 million, respectively, from certain equipment sales during the three and
nine months ended September 30, 1998, as compared to revenues from such sales of
$1.4 million and $2.6 million during the corresponding periods in 1997.
Variable Cost of Services. The Company's variable cost of services for the
three and nine months ended September 30, 1998
24
<PAGE> 25
totaled $11.3 million and $26.3 million, respectively, an increase of $4.1
million (or 57.6%) and $6.9 million (or 35.5%), from the Company's variable cost
of services for the three and nine months ended September 30, 1997. Of total
variable cost of services for the three and nine months ended September 30,
1998, $5.2 million and $13.7 million, respectively, related to the operations of
IMPSAT Argentina, and $3.1 million and $6.3 million, respectively related to the
operations of IMPSAT Colombia (compared to variable cost of services of $4.1
million and $11.1 million, respectively, at IMPSAT Argentina and $1.9 million
and $5.1 million, respectively, at IMPSAT Colombia, for the three and nine
months ended September 30, 1997).
The principal items comprising total variable cost of services are maintenance
and installation (including de-installation) costs, and sales commissions paid
to third-party sales representatives.
Maintenance costs for the Company totaled $2.8 million and $7.5 million,
respectively, during the three and nine months ended September 30, 1998. This
represents an increase of $1.0 million and $1.2 million, respectively, over
maintenance costs incurred by the Company for the three and nine months ended
September 30, 1997. Maintenance costs include maintenance services contracted by
the Company from outside providers and interconnection and access charges
incurred by the Company in completing telecommunications through the networks of
other telecommunications carriers.
Installation costs totaled $2.1 million and $5.3 million, respectively, for
the three and nine months ended September 30, 1998. In comparison, installation
costs totaled $1.4 million and $3.6 million for the three and nine months ended
September 30, 1997. The Company contracts equipment installation services from
outside providers.
Sales commissions paid to third party sales representatives totaled $1.9
million and $5.1 million, respectively, for the three and nine months ended
September 30, 1998. In comparison, sales commissions paid to third party sales
representatives totaled $1.6 million and $4.0 million, respectively, for the
three and nine months ended September 30, 1997. Sales commissions paid to
third-party sales representatives in Argentina totaled $1.5 million and $4.1
million, respectively, for the three and nine months ended September 30, 1998,
compared to $1.4 million and $3.5 million, respectively, for the three and nine
months ended September 30, 1997. Sales commissions increased during the first
nine months of 1998 compared to the corresponding period in 1997 as a result of
certain new private telecommunications network services contracts that were
obtained by the Company during the first nine months of 1998 through the use of
third-party sales representatives.
In addition, the Company incurred costs of equipment sold during the three and
nine months ended September 30, 1998 of $2.0 million and $3.2 million,
respectively, as compared with costs of equipment sold during the corresponding
periods in 1997 of $1.5 million and $2.2 million, respectively.
Salaries, Wages and Benefits. Salaries, wages and benefits paid by the Company
for the three and nine months ended September 30, 1998 totaled $9.6 million and
$26.5 million, respectively, an increase of $2.3 million (or 32.4%) and $5.6
million (or 27.0%), over the Company's expenses for salaries, wages and benefits
during the corresponding periods in 1997. The Company increased salaries, wages
and benefits of its personnel to match market rates and increases in cost of
living. The increase in salaries, wages and benefits also reflects the
acquisitions during the second quarter of 1998 of IMPSAT Brazil and Mandic S.A.,
which had 96 and 56 employees, respectively, at September 30, 1998. Salaries,
wages and benefits paid by the Company with respect to IMPSAT Brazil and Mandic
S.A. for the three months ended September 30, 1998 totaled $0.9 million and $0.5
million, respectively. The Company maintained a total of 917 employees at
September 30, 1998, compared to 684 employees at September 30, 1997.
Satellite Capacity Cost. The Company's satellite lease payments for the three
and nine months ended September 30, 1998 totaled $5.6 million and $18.4 million,
respectively, an increase of $0.8 million (or 15.4%) and $4.7 million (or
34.7%), respectively, over satellite lease payments for the corresponding
periods in 1997. IMPSAT Argentina's satellite lease payments for the three and
nine months ended September 30, 1998 totaled $2.1 million and $8.0 million,
respectively, a decrease of $0.5 million (or 18.7%) and an increase of $0.9
million (or 12.6%), respectively, over satellite lease payments for the
corresponding periods in 1997. The Company had approximately 560.0 MHz and 404.0
MHz of leased satellite capacity at September 30, 1998 and 1997, respectively.
The expansion of the Company's satellite capacity during the first nine months
of 1998 compared to the corresponding period in 1997 is attributable primarily
to contractually scheduled increases in satellite capacity to match anticipated
growth in the total number of Dataplus earth stations to be installed by the
Company over time which, because of their greater transmission capacity and
bandwidth requirements compared to VSAT, utilize larger amounts of satellite
capacity.
Selling, General and Administrative Expenses. SG&A expenses for the
25
<PAGE> 26
Company consist principally of advertising and promotion costs; provisions for
doubtful accounts; fees and other remuneration; travel and entertainment; rent;
and plant services, telephone and energy expenses.
The Company incurred SG&A expenses of $13.3 million and $34.4 million,
respectively, for the three and nine months ended September 30, 1998, an
increase of $3.8 million (or 40.0%) and $10.9 million (or 46.2%), compared to
the three and nine months ended September 30, 1997. The increase in SG&A
expenses for the three months ended September 30, 1998 relates principally to:
(i) an increase in the Company's provision for doubtful accounts as discussed
below; and (ii) SG&A expenses incurred by the two new subsidiaries of the
Company, IMPSAT Brazil and Mandic S.A.
SG&A expenses at IMPSAT Argentina for the three and nine months ended
September 30, 1998 totaled $4.6 million and $13.6 million, respectively, an
increase of $0.9 million (or 25.6%) and $1.9 million (or 15.9%), respectively,
compared to the three and nine months ended September 30, 1997. SG&A expenses at
IMPSAT Brazil and Mandic S.A. for the three months ended September 30, 1998
totaled $1.6 million and $1.0 million, respectively.
On a Company-wide basis, the Company recorded a provision for doubtful
accounts in the first nine months of 1998 of $6.3 million (compared to a
provision of $4.2 million in the first nine months of 1997) as a result of
certain payment arrears experienced by certain customers in Argentina, Colombia
and Ecuador. Of this amount, IMPSAT Argentina recorded a provision for doubtful
accounts during the first nine months of 1998 of $3.8 million, in comparison to
a provision for the first nine months of 1997 of $4.2 million. Prior to June 30,
1998, the Company's general policy had been to reserve 30% for accounts
receivable in excess of 180 days and less than one year, and 100% of all
accounts receivable in excess of 360 days. The Company's current general policy
is to reserve 100% for all accounts receivable in excess of 180 days. This
policy is not be applied to a receivable if the president of an operating
subsidiary determines that such receivable will be collected within a further 60
days.
At September 30, 1998, the Company had reserved approximately 48% of the total
amount due to IMPSAT Argentina with respect to a receivable totaling $2.2
million from Banco de la Nacion Argentina ("BNA") that was generated during 1996
and 1997 under a subcontract between IMPSAT Argentina and IBM de Argentina, S.A.
that was terminated by BNA in the second quarter of 1997, based on the Company's
assessment of the likely recoverability of such amounts. At September 30, 1998
(excluding (i) the BNA contract discussed above, and (ii) amounts totaling $8.5
million owed to the Company by Empresa Nacional de Correos y Telegrafos S.A.
("ENCOTESA"), the former Argentine national postal service, under IMPSAT
Argentina's contracts with ENCOTESA, see Note 11 to the Company's Consolidated
Financial Statements included in Item 1 hereto) approximately 11% of the
Company's gross current trade accounts receivable were past due more than six
months but less than one year and approximately 20% of gross accounts receivable
were past due more than one year.
The Company's provision for doubtful accounts for the three months ended
September 30, 1998 includes a provision of $1.6 million relating to amounts owed
to IMPSAT Argentina by VideoCable Comunicaciones S.A. ("VCC") under a contract
pursuant to which VCC agreed to market IMPSAT Argentina's Internet access
service to VCC's customers. The VCC agreement was terminated on July 2, 1998.
The increase in the Company's SG&A expenses for the nine months ended
September 30, 1998 also reflects: (a) increased entertainment, advertising and
promotion costs during the period ($5.5 million, representing an increase of
$2.2 million, or 67.2%, compared to the nine months ended September 30, 1997)
relating to: (i) the Company's expansion of its operations into Brazil, (ii)
promotion campaigns for the Company's newer services (Internet, Conexia and
Telecampus), (iii) consultant fees relating to the exploration of a new public
image for the Company, and (iv) related travel and entertainment expenses; and
(b) expenses during the period related to legal, tax and consultancy advice
($6.0 million, compared to $3.9 million for the nine months ended September 30,
1997) with respect to the financing and expansion of the Company's operations,
including the acquisitions of IMPSAT Brazil and Mandic S.A. and the development
of plans for the IMPSAT 2000 network.
Depreciation and Amortization. The Company's depreciation and amortization for
the three and nine months ended September 30, 1998 totaled $9.9 million and
$26.5 million, respectively, representing an increase of $2.6 million (or 36.4%)
and $5.5 million (or 26.1%), compared to depreciation and amortization for the
three and nine months ended September 30, 1997. Depreciation and amortization
for IMPSAT Argentina for the three and nine months ended September 30, 1998,
totaled $5.2 million and $14.8 million, respectively, an increase of $0.6
million (or 13.3%) and $1.5 million (or 11.3%), respectively, compared to the
three and nine months
26
<PAGE> 27
ended September 30, 1997.
Interest Expense, Net. The Company's net interest expense for three and nine
months ended September 30, 1998 totaled $13.1 million and $30.2 million,
respectively, consisting of interest expense of $16.0 million and interest
income of $2.9 million for the three months ended September 30, 1998 and
interest expense of $33.9 million and interest income of $3.7 million for the
nine months ended September 30, 1998. Net interest expense increased $7.0
million (or 114.9%) and $11.9 million (or 64.9%), respectively, from net
interest expense for the three and nine months ended September 30, 1997. IMPSAT
Argentina's net interest expense for the three and nine months ended September
30, 1998 totaled $3.7 million and $10.3 million, respectively ($1.3 million and
$5.0 million, respectively, after eliminating intercompany items). In
comparison, IMPSAT Argentina's net interest expense for the three and nine
months ended September 30, 1997 totaled $2.8 million and $9.6 million,
respectively ($0.6 million and $2.1 million, respectively, after eliminating
intercompany items). Net interest expense at IMPSAT Colombia for the three and
nine months ended September 30, 1998 totaled $2.4 million and $6.6 million ($1.9
million and $5.2 million after eliminating intercompany items), respectively. In
comparison, IMPSAT Colombia's net interest expense for the three and nine months
ended September 30, 1997 totaled $1.9 million and $4.8 million ($1.4 million and
$3.5 million after eliminating intercompany items), respectively. Interest
expense with respect to intercompany loans are eliminated in the Company's
Consolidated Statement of Operations.
The increase in net interest expense is primarily attributable to the
increased indebtedness of the Company, which grew from $217.1 million as of
September 30, 1997 to $431.9 million as of September 30, 1998. Such increased
indebtedness of the Company relates primarily to the issuance by the Company on
June 17, 1998 (the "1998 Note Offering"), of $225 million principal amount of 12
3/8% Senior Notes due 2008.
As of September 30, 1998, total outstanding indebtedness at IMPSAT Argentina
equaled $138.0 million ($33.5 million after eliminating intercompany items),
compared to $107.9 million as of September 30, 1997. Total outstanding
indebtedness at IMPSAT Colombia as of September 30, 1998 equaled $57.3 million
($42.7 million after eliminating intercompany items), compared to $47.6 million
as of September 30, 1997. The average interest rate on the Company's
indebtedness for the first nine months of 1998 was 13.6%, compared to an average
interest rate of 11.9% for the first half of 1997.
Interest expense is expected to increase in future periods as a result of the
1998 Note Offering. Such increased interest expense is likely to produce a
corresponding reduction in the Company's operating results during the
application of the proceeds of the 1998 Note Offering over the next 15 months.
Provision for Income Taxes. The Company recorded a provision for income taxes
for the three and nine months ended September 30, 1998 of $0.1 million and $2.4
million, respectively, compared to $1.2 million and $3.9 million, respectively,
for the corresponding periods in 1997. IMPSAT Argentina recorded no provision
for income taxes for the three and nine months ended September 30, 1998 of zero
and $1.4 million, respectively, compared to $0.7 million and $2.6 million,
respectively, for the corresponding periods in 1997. IMPSAT Colombia recorded a
provision for income taxes for the three and nine months ended September 30,
1998 of $0.5 million and $2.0 million, respectively, compared to $0.5 million
and $1.3 million, respectively, for the corresponding periods in 1997.
Net Loss. For the three and nine months ended September 30, 1998, the Company
incurred a net loss of $6.8 million and $15.3 million, respectively, an increase
of $4.9 million and $10.6 million, respectively, compared to the Company's net
loss for the three and nine months ended September 30, 1997. The principal
reasons for the increase in the Company's net loss as compared to prior periods
related to the following items: (i) the increase in the Company's provision for
doubtful accounts; (ii) increased interest expense attributable to increased
indebtedness of the Company as a result of the 1998 Note Offering; and (iii) the
incurrence of a net loss of $3.2 million by IMPSAT Brazil during the period. For
the three and nine month periods ended September 30, 1998, IMPSAT Argentina
recorded net income of $0.5 million and $1.4 million, respectively, compared to
net income of $1.4 million and $2.4 million, respectively, for the corresponding
periods in 1997. IMPSAT Colombia recorded net income for the three and nine
months ended September 30, 1998 of $4.3 million and $7.9 million, respectively,
compared to a net income of $2.8 million and $6.8 million, respectively, for the
corresponding periods in 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company anticipates that it will continue to incur significant capital
expenditures in the next several years in connection with the expected growth of
its established commercial operations (Argentina, Colombia, Venezuela, Ecuador,
Mexico and the United
27
<PAGE> 28
States), and the further development of its operations in Brazil. The Company
intends to meet its capital requirements during the remainder of 1998 and for
1999 from proceeds of the 1998 Note Offering. Of total net proceeds of the 1998
Note Offering of $218 million, the Company used $35.2 million to refinance
existing short-term indebtedness and the remainder used for capital
expenditures. The Company currently anticipates that it will require
approximately $350 million during the period 1999 to 2000 for capital
expenditures (including amounts already expended in 1998 to date). The Company's
projected capital expenditure requirements include the establishment of
operations and development of private telecommunications network systems in
Brazil and continued additions to its private telecommunications network
infrastructure in order to maintain the Company's ability to provide high
quality, competitive services. The Company's budget contemplates that the
Company will need approximately $85 million for the period from 1998 to 2000
(including amounts already expended in 1998 to date) for capital expenditures
related to the adequate build-out of its private telecommunications network
system in Brazil.
The Company's currently planned capital expenditures described above are
exclusive of expenditures that would be required for the implementation of the
IMPSAT 2000 project. Although the timing and development of the IMPSAT 2000
project has not been finalized and will be dependent on the availability of
adequate financing, continued deregulation of the Latin American
telecommunications market, and receipt of required licenses and governmental
approvals, among other factors, the Company currently estimates that the initial
implementation of the IMPSAT 2000 project through the end of 1999 could require
up to $200 million in additional financing. The Company does not currently have
any commitments regarding such financing and the development of the IMPSAT 2000
project will be dependent upon the Company's ability to obtain such financing.
Accordingly, the ability of the Company to continue the expansion of its private
telecommunications network systems as is necessary to provide high-quality,
competitive private network services to its customers and to meet its debt
service obligations will be dependent upon the future performance of the
Company, including the ability of the Company to obtain additional debt
financing and potential equity financing. The Company's ability to maintain its
planned program of capital expenditures will be dependent on its ability to
obtain additional sources of financing. If the Company is unable to obtain such
additional sources of financing, it will not be able to maintain its levels of
growth and market position in any of the countries in which it operates, which
could have an adverse effect on the business and prospects of the Company.
As of November 13, 1998, IMPSAT Argentina had outstanding $25 million of
commercial paper (which is scheduled to mature on December 17, 1998) issued
under its $50 million Euro-Commercial Paper Program (the "ECP Program"). The
Company anticipates that the commercial paper will be repaid with available cash
from the 1998 Note Offering. IMPSAT Argentina repaid $25 million of short-term
promissory notes issued under the ECP Program upon maturity on August 10, 1998
using parent company advances from the proceeds of the 1998 Note Offering.
As set forth in its consolidated statements of cash flow, in the nine months
ended September 30, 1998, the Company generated $22.3 million in net cash flow
from operating activities, compared with $11.5 million generated for the nine
months ended September 30, 1997. The increase in cash flow from operating
activities in the first nine of 1998 was primarily attributable to (i) an
increase of $5.5 million in depreciation and amortization (a total of $26.5
million for the first nine months of 1998 compared to $21.0 million for the
corresponding period in 1997); (ii) increases in accrued and other liabilities
of $11.3 million (compared to a decrease of $3.1 million in the first nine
months of 1997); (iii) increases in trade accounts payable of $2.7 million
(compared to an increase of $2.5 million in the first nine months of 1997); and
(iv) an increase in trade accounts receivable of $2.5 million (compared to an
increase of $5.9 million in the first nine months of 1997). Financing activities
provided $203.8 million in net cash flow for the nine months ended September 30,
1998, compared with $20.1 million in net cash flow for the nine months ended
September 30, 1997. Such increase is primarily attributable to the proceeds of
the 1998 Note Offering. The Company's net outstanding indebtedness increased by
$214.8 million during the nine months ended September 30, 1998, compared to the
corresponding period in 1997. On September 30, 1998, the Company had
approximately $34.4 million in outstanding short-term debt, of which $25.7
million was owed by IMPSAT Argentina.
During the nine months ended September 30, 1998, the Company used $96.7
million in net cash flow for investing activities, compared to $40.0 million for
the nine months ended September 30, 1997. The Company had a cash balance of
$139.9 million as of September 30, 1998.
The Company leases satellite capacity with annual rental commitments of
approximately $28.0 million through the year 2001. In addition, the Company has
commitments to purchase communications equipment amounting to approximately
$11.8 million at September 30, 1998.
28
<PAGE> 29
YEAR 2000
The Company's equipment and operational systems are being reviewed and, where
required, detailed plans have been, or are being, developed and implemented on a
schedule intended to permit the Company's computer systems and services to
continue to function properly in the year 2000. Such plans are likely to involve
a combination of software modification, upgrades and replacement. The Company's
plan for Year 2000 compliance includes the following phases: (a) establishment
of a task force, which includes senior management of the Company, to address the
year 2000 issue; (b) compilation of an inventory of equipment currently
involved or anticipated to be involved in operations; (c) circulation of
questionnaires to suppliers of the Company about equipment readiness; (d)
gathering of information from customers; (e) implementation of required upgrades
or replacements; and (f) testing of equipment in-house or at supplier sites.
The Company has completed an initial review of the equipment and software it
currently utilizes in the provision of its services. The Company expects to
complete conversion and initial testing of such equipment and software in the
first quarter of 1999, and to complete final testing and remediation by
mid-1999.
In developing contingency plans with respect to the year 2000 issue, the
Company is analyzing potential operational risks that could lead to the
interruption of critical service functions and has commenced formulating and
installing preventive and remedial measures, such as alternative sources of
power generation. The Company expects to further complete and extend its
contingency plans after completing final testing of equipment and software
involved in its operations.
Ensuring that the Company's equipment and operational systems are year 2000
compliant is expected to increase costs in the final quarter of 1998 and 1999.
Costs incurred by the Company to date have been immaterial. The current estimate
for the cost of remediation for the Company is approximately $3.5 million. The
Company estimates that most of such costs will be incurred with respect to
IMPSAT Argentina ($1.6 million) and IMPSAT Colombia ($1.0 million), the
Company's largest operating subsidiaries. While these cost estimates are not
definitive, Management does not expect final costs to have a material adverse
impact on the Company's financial position, results of operations or cash flows.
In addition, the Company faces risks to the extent that suppliers, customers
and others with whom the Company transacts business do not have business systems
or products that comply with the year 2000 requirements. In providing its
services, the Company's systems may sometimes be required to communicate
electronically with customer-owned systems with respect to a variety of
functions. Failure of the systems of the Company's customers to address the year
2000 issue could impair the Company's ability to perform such functions.
Furthermore, in the event any of the Company's suppliers cannot timely provide
the Company with products, services or systems that meet the year 2000
requirements, the Company's operating results could be materially adversely
affected. The Company is not yet able to estimate the cost for year 2000
compliance with respect to customers and suppliers, however, based on a
preliminary review, Management does not expect that such costs will have a
material adverse effect on the future consolidated results of operations of the
Company. However, the Company could be adversely impacted by the year 2000 date
issue if suppliers, customers and other businesses do not address this issue
successfully.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
29
<PAGE> 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Exchange Offer. On October 26, 1998, the Company completed an Exchange Offer
(the "Exchange Offer") for its 12 3/8% Senior Notes due 2008 (the "New Notes"),
registered under the Securities Act of 1933, as amended, pursuant to an
effective registration statement, for its outstanding, unregistered 12 3/8%
Senior Notes due 2008 (the "Old Notes"). At the expiration of the Exchange
Offer, the Company had accepted Old Notes in principal amount of $224,970,000 in
exchange for a like principal amount of New Notes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Exhibits. 27.1 Financial Data Schedule.
(a)(2) List of Schedules. All schedules for which provision is made in the
applicable accounting regulations of the Commission are omitted because they are
not applicable, or the information is included in the financial statements
included herein.
(b) Reports on Form 8-K. None.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, as amended, the
registrants have duly caused this report to be signed on their behalf by the
undersigned thereunto duly authorized, in the City of Buenos Aires in the
Republic of Argentina, in the capacities and on the dates indicated.
IMPSAT Corporation
By: /s/ Guillermo Jofre
---------------------------
Guillermo Jofre
Vice President, Finance and
Chief Financial Officer
Date: November 13, 1998
IMPSAT S.A.
By: /s/ Jose Torres
---------------------------
Jose Torres
Director and
Chief Accounting Officer
Date: November 13, 1998
31
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED FINANCIAL STATEMENTS OF IMPSAT CORPORATION AND ITS CONSOLIDATED
SUBSIDIARIES AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 139,303
<SECURITIES> 0
<RECEIVABLES> 39,356
<ALLOWANCES> 11,212
<INVENTORY> 0
<CURRENT-ASSETS> 202,776
<PP&E> 315,342
<DEPRECIATION> 126,104
<TOTAL-ASSETS> 554,314
<CURRENT-LIABILITIES> 113,568
<BONDS> 381,486
125,000
0
<COMMON> 100,793
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 554,314
<SALES> 0
<TOTAL-REVENUES> 149,888
<CGS> 0
<TOTAL-COSTS> 132,212
<OTHER-EXPENSES> 30,243
<LOSS-PROVISION> 6,257
<INTEREST-EXPENSE> 30,243
<INCOME-PRETAX> (11,269)
<INCOME-TAX> 2,358
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,344)
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
