<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, 1999 OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _________ TO ____________
COMMISSION FILE NUMBER: 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
(5411) 4300-4007
(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, 1999, the
Company had outstanding 120,951,168 shares of Common Stock, $1.00 par value, and
25,000 shares of Series A Convertible Preferred Stock, liquidation preference
$5,816 per share, outstanding.
<PAGE> 2
-------------------------
IMPSAT CORPORATION
IMPSAT S.A.
-------------------------
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION.........................................................................................1
Item 1. Financial Statements...................................................................................1
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................30
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................................42
PART II OTHER INFORMATION...........................................................................................43
Item 1. Legal Proceedings.....................................................................................43
Item 2. Changes in Securities.................................................................................43
Item 3. Defaults Upon Senior Securities.......................................................................43
Item 4. Submission of Matters to a Vote of Security-Holders...................................................43
Item 5. Other Information.....................................................................................43
Item 6. Exhibits and Reports on Form 8-K......................................................................43
SIGNATURES..........................................................................................................44
</TABLE>
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
-1-
<PAGE> 4
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------
1998 1999
------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 90,021 $ 146,078
Trade accounts receivable, net 46,974 46,949
Other receivables 20,110 20,120
Prepaid expenses 1,994 1,252
-------------- ----------------
Total current assets 159,099 214,399
-------------- ----------------
PROPERTY, PLANT AND EQUIPMENT, Net 330,726 317,219
-------------- ----------------
NON-CURRENT ASSETS:
Trade account receivables, net 5,143
Investment 10,708 10,287
Deferred financing costs, net 10,329 9,359
Deferred income taxes, net 17,875
Intangible assets, net 7,920 22,992
Other non-current assets 3,293 7,061
-------------- ----------------
Total non-current assets 37,393 67,574
-------------- ----------------
TOTAL $ 527,218 $ 599,192
============== ================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable - trade $ 32,416 $ 40,061
Short-term debt 19,262 15,975
Current portion of long-term debt 21,138 23,110
Accrued liabilities 12,628 13,288
Deferred income taxes, net 120
Customer advances on construction project, net of taxes 22,736
Other liabilities 12,346 18,732
-------------- ----------------
Total current liabilities 97,910 133,902
-------------- ----------------
LONG-TERM DEBT, Net 379,292 384,113
-------------- ----------------
OTHER LONG-TERM LIABILITIES 3,446 13,844
-------------- ----------------
COMMITMENTS AND CONTINGENCIES (Note 13)
MINORITY INTEREST 13,071 6,624
-------------- ----------------
REDEEMABLE PREFERRED STOCK, Convertible, Series A,
10%, cumulative dividend; 25,000 shares authorized, issued
and outstanding; liquidation preference $5,816 per share 135,018 145,389
-------------- ----------------
STOCKHOLDERS' DEFICIT:
Common stock, $1 par value; 175,400,000 shares authorized; 100,792,640
shares issued and outstanding at December 31, 1998 and 120,951,168
shares issued and outstanding at September 30, 1999,
respectively 100,793 120,951
Additional paid in capital 100,778
Accumulated deficit (71,391) (72,368)
Treasury stock, 25,198,160 shares, at cost (125,000) (25,000)
Amount paid in excess of carrying value of assets acquired from
related party (5,395) (4,969)
Accumulated other comprehensive loss (526) (4,072)
-------------- ----------------
Total stockholders' deficit (101,519) (84,680)
-------------- ----------------
TOTAL $ 527,218 $599,192
============== ================
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE> 5
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,
-------------------------------------------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES FROM SERVICES $ 56,237 $ 55,911 $ 149,888 $ 167,129
----------- ----------- ----------- ------------
COST AND EXPENSES:
Variable cost of services 10,518 9,634 24,274 29,975
Leased telecommunications links 6,394 11,385 20,343 31,248
Salaries, wages and benefits 9,581 12,030 26,543 34,222
Selling, general and administrative 13,293 22,738 34,515 46,564
Depreciation and amortization 9,908 64,761 26,537 88,090
----------- ----------- ----------- ------------
Total cost and expenses 49,694 120,548 132,212 230,099
----------- ----------- ----------- ------------
Operating income (loss) 6,543 (64,637) 17,676 (62,970)
----------- ----------- ----------- ------------
OTHER INCOME (EXPENSES):
Interest expense, net (13,052) (13,870) (30,243) (41,976)
Net income (loss) on foreign exchange 971 (1,514) 813 (9,500)
Other income (expense), net (13) (151) 485 (715)
----------- ----------- ----------- ------------
Total other expenses (12,094) (15,535) (28,945) (52,191)
----------- ----------- ----------- ------------
LOSS BEFORE INCOME TAXES, CUMULATIVE
EFFECT AND MINORITY INTEREST (5,551) (80,172) (11,269) (115,161)
(PROVISION FOR) BENEFIT FROM INCOME TAXES (107) 14,935 (2,358) 18,952
----------- ----------- ----------- ------------
LOSS BEFORE CUMULATIVE EFFECT
AND MINORITY INTEREST (5,658) (65,237) (13,627) (96,209)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX (1,269)
(INCOME) LOSS ATTRIBUTABLE TO MINORITY INTEREST (1,121) 5,744 (1,717) 5,603
----------- ----------- ----------- ------------
NET LOSS BEFORE DIVIDENDS ON
REDEEMABLE PREFERRED STOCK (6,779) (59,493) (16,613) (90,606)
DIVIDENDS ON REDEEMABLE PREFERRED STOCK (3,213) (3,536) (6,720) (10,371)
----------- ----------- ----------- ------------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (9,992) $ (63,029) $ (23,333) $ (100,977)
=========== =========== =========== ============
</TABLE>
See notes to consolidated financial statements.
- 3 -
<PAGE> 6
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(IN THOUSANDS OF U.S. DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (9,992) $ (63,029) $ (23,333) $ (100,977)
OTHER COMPREHENSIVE LOSS, NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT (373) (3,546)
------------- ------------- ------------- --------------
COMPREHENSIVE LOSS $ (9,992) $ (63,402) $ (23,333) $ (104,523)
============= ============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 7
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(IN THOUSANDS OF U.S. DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------------------- PAID IN ACCUMULATED
SHARES STOCK CAPITAL DEFICIT(*)
------ ----- ------- ----------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 75,594,480 $ 100,793 $ (71,391)
Dividends on redeemable preferred stock (10,371)
Common stock issuance 20,158,528 20,158 $ 100,778
Amortization of amount paid in excess
of carrying value of net assets acquired
from related party
Foreign currency translation adjustment
Acquisition of 24.9% of Mandic S.A.
Net loss for the period (90,606)
------------ ----------- -------------- ----------------
BALANCE AT SEPTEMBER 30, 1999 (unaudited) 95,753,008 $ 120,951 $ 100,778 $ (172,368)
============ =========== ============== ================
<CAPTION>
AMOUNT PAID
IN EXCESS OF
CARRYING
VALUE
OF NET ASSETS ACCUMULATED
ACQUIRED OTHER
TREASURY FROM COMPREHENSIVE
STOCK RELATED PARTY LOSS TOTAL
----- ------------- ---- -----
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ (125,000) $(5,395) $ (526) $(101,519)
Dividends on redeemable preferred stock (10,371)
Common stock issuance 120,936
Amortization of amount paid in excess
of carrying value of net assets acquired
from related party 426 426
Foreign currency translation adjustment (3,546) (3,546)
Acquisition of 24.9% of Mandic S.A.
Net loss for the period (90,606)
----------------- --------- -------- ----------
BALANCE AT SEPTEMBER 30, 1999 (unaudited) $ (125,000) $(4,969) $(4,072) $ (84,680)
================= ========= ======== ==========
<CAPTION>
MINORITY
INTEREST
--------
<S> <C>
BALANCE AT DECEMBER 31, 1998 $ 13,071
Dividends on redeemable preferred stock
Common stock issuance
Amortization of amount paid in excess
of carrying value of net assets acquired
from related party
Foreign currency translation adjustment
Acquisition of 24.9% of Mandic S.A. (844)
Net loss for the period (5,603)
------------
BALANCE AT SEPTEMBER 30, 1999 (unaudited) $ 6,624
============
</TABLE>
(*) Includes an appropriation of retained earnings in IMPSAT Argentina
amounting to $1,890 to comply with legal reserve requirements in Argentina.
See notes to consolidated financial statements.
-5-
<PAGE> 8
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------
1998 1999
------------------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (16,613) $ (90,606)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities, net of acquisition:
Cumulative effect of a change in accounting principle 1,269
Amortization and depreciation 26,537 88,090
Deferred income tax benefit (765) (17,995)
Change in minority interest 1,363 (6,447)
Changes in assets and liabilities:
Increase in trade accounts receivable, net (2,510) 25
(Increase) decrease in prepaid expenses (700) 742
(Decrease) increase in other receivables and other
non-current assets (1,474) 1,856
Increase in accounts payable - trade 2,716 9,475
Increase in customer advances on construction project 22,736
Increase in accrued and other liabilities 11,317 7,046
Increase (decrease) in other long-term liabilities 1,186 (598)
----------- -----------
Net cash provided by (used in) operating activities 22,326 14,324
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (79,368) (74,262)
Cash paid in Mandic S.A. acquisition, net (6,307) (3,700)
Cash paid in IMPSAT Brazil merger (5,100)
(Increase) decrease in investment (5,840) 421
----------- -----------
Net cash used in investing activities (96,615) (77,541)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayment of) borrowings from short-term debt (16,253) (3,287)
Acquisition of treasury stock (125,000)
Proceed of issuance of redeemable preferred stock 125,000
Proceed of issuance of common stock, net 120,936
Proceeds from long-term debt 247,184 26,924
Repayments of long-term debt (27,178) (21,753)
----------- -----------
Net cash provided by financing activities 203,753 122,820
----------- -----------
EFFECT OF EXCHANGE RATE CHANGE
ON CASH AND CASH EQUIVALENTS (3,546)
----------- -----------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 129,464 56,057
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 10,439 90,021
----------- -----------
CASH AND CASH EQUIVALENTS AT END
OF THE PERIOD $ 139,903 $ 146,078
=========== ===========
(Continued)
</TABLE>
-6-
<PAGE> 9
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------------------------
1998 1999
--------------------------------------------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 30,078 $ 44,787
=============== =============
Foreign income taxes paid 1,155
=============
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
(Increase) decrease in equipment in transit $ (5,365) $ 1,830
=============== =============
Accrued dividends on redeemable preferred stock $ 6,720 $ 10,371
=============== =============
Mandic S.A. Acquisition:
Fair Value of net assets acquired $ 1,300
===============
Capitalized rights-of-way agreements $ 12,618
=============
(Concluded)
</TABLE>
See notes to consolidated financial statements.
-7-
<PAGE> 10
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
leading provider of private telecommunications network services in Latin
America. The Company offers tailor-made, integrated telecommunications
solutions, with an emphasis on data transmission, for national and
multinational companies, financial institutions, governmental agencies and
other business customers. In addition, the Company is building an extensive
pan-Latin American high capacity fiber optic network (the "Broadband
Network"). The Company expects that the first phase of the Broadband
Network, which will connect points across Argentina and Brazil, will be
completed by November 2000.
The Company currently provides telecommunications and data services through
its advanced fiber optic, satellite and microwave telecommunications
networks. These networks consist of owned teleports, earth stations, fiber
optic and microwave links, and leased satellite and fiber optic links. The
Company operates 12 metropolitan area networks in some of the largest
cities in Latin America, including: Buenos Aires, Sao Paulo, Bogota and
Caracas.
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), United States, Brazil and Chile.
The Company's operating subsidiaries at September 30, 1999 are as follows:
<TABLE>
<CAPTION>
COUNTRY OPERATING SUBSIDIARIES PERCENTAGE
<S> <C> <C>
Argentina Impsat S.A. 95.2%
Argentina Red Alternativa S.A. 67.0
Colombia Impsat S.A. 74.2
Venezuela Telecomunicaciones Impsat S.A. 75.0
Mexico Impsat S.A. de C.V. 99.9
Ecuador Impsatel del Ecuador S.A. 100.0
USA Impsat USA, Inc. 100.0
Brazil Impsat Comunicacoes Ltda. 99.9
Chile Impsat Chile S.A. 100.0
</TABLE>
In addition, the Company owns International Satellite Capacity Holdings, NG
(Liechtenstein) and Filcrown International Corporation (BVI), which serve
intermediary functions to the Company and its operating subsidiaries.
2. MERGERS AND ACQUISITIONS
IMPSAT BRAZIL - 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 $5.7 million. The purchase price for
-8-
<PAGE> 11
IMPSAT Brazil represented the total amount of preoperating 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
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. Amounts paid in excess of carrying
value of the underlying net assets acquired were recorded as a reduction of
stockholders' deficit and are being amortized on a straight-line basis over
a period of 10 years.
MANDIC S.A. - 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% is 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 during November 1998. The acquisition was accounted for as a
purchase. On July 28, 1999 the Company acquired the remaining 24.9%
interest in Mandic S.A. for $3.7 million.
FRAMEWORK AGREEMENT WITH EL SITIO - On August 4, 1999, the Company entered
into a Framework Agreement with El Sitio, Inc. for the sale of the
Company's retail Internet businesses in Argentina, Brazil and Colombia for
approximately $21.5 million and the purchase of shares of El Sitio's 8%
convertible redeemable preferred stock for $21.5 million. Such shares will
represent approximately a 19% interest in El Sitio's fully diluted capital
stock as of the date of the Framework Agreement. In connection with these
transactions, El Sitio will enter into telecommunications services
agreements with IMPSAT Argentina, IMPSAT Brazil and IMPSAT Colombia under
which these entities will provide El Sitio with telecommunication networks
to access the Internet backbone. El Sitio, a British Virgin islands
corporation, is an Internet content and Internet service provider
headquartered in Argentina that has other offices in Brazil, Mexico,
Uruguay and the United States.
In anticipation of the Brazil transaction contemplated by the El Sitio
Framework Agreement, the Company merged Mandic S.A. into IMPSAT Brazil on
October 5, 1999 and Mandic S.A. ceased operations. On October 6, 1999,
IMPSAT Brazil sold the retail internet business acquired in the Mandic S.A.
merger for $12.3 million to O Site Entretenimentos Ltda., a subsidiary of
El Sitio. In addition, on the same date, the Company acquired 1,756,677
shares of El Sitio's 8% convertible redeemable preferred stock for $12,300.
On November 5, 1999, IMPSAT Argentina consummated the sale of its retail
Internet business to El Sitio Argentina S.A. for $6.2 million, of which
$5.3 million was received on that date with the remainder due in 24 equal
monthly installments. Simultaneously, the Company purchased 885,480 shares
of El Sitio's 8% convertible redeemable preferred stock for $6.2 million.
On November 12, 1999, The Company acquired an additional 428,458 shares of
El Sitio's 8% convertible redeemable preferred stock for $3.0 million. The
Company and El Sitio expect to consummate the sale of the Company's retail
internet business in Colombia to El Sitio by the end of 1999.
3. 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. All significant intercompany transactions and balances have
been eliminated.
-9-
<PAGE> 12
INTERIM FINANCIAL INFORMATION - The unaudited consolidated statements as of
September 30, 1999 and for the nine months ended September 30, 1999 and
1998 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-month periods ended
September 30, 1999 and 1998 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 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 quantity and
type of equipment installed. 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 net
revenue from services for the nine months ended September 30, 1999 and
1998.
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:
Buildings and improvements 10-25 years
Operating communications equipment 5-10 years
Furniture, fixtures and other equipment 2-10 years
The operating communications equipment owned by the Company is subject to
rapid technological obsolescence. In view of these developments, the
Company decided to change the depreciable life of certain customer premises
telecommunications equipment from 10 years to 5 years at September 30,
1999. The effect of this change totaled $52.1 million.
INVESTMENT - Investment represents a less than 1.0% ownership interest (at
September 30, 1999 and December 31, 1998) by the Company in unaffiliated
entities established for the purchase and leasing of satellite capacity
time and is accounted for under the cost method.
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.
INTANGIBLE ASSETS - Intangible assets include goodwill and capitalized
rights-of-way agreements. Goodwill, representing the excess of the purchase
price over the estimated fair value of the net assets acquired of Mandic
S.A. (see Note 2) of approximately $12.0 million and other acquisitions of
approximately $0.9 million, are being amortized on a straight-line basis of
over a period of 15 years. Capitalized rights-of-way agreements represent
the fees paid and the net present value of fees to be paid per signed
agreements entered into for obtaining rights-of-way and other permits for
-10-
<PAGE> 13
the planned broadband network. These capitalized agreements are being
amortized over the term of the rights-of-way, which range from 5 to 20
years. The Company reviews the carrying value of intangibles 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.
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, 1999 and 1998.
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 Financial Accounting Standards Board
("FASB") Statement of Financial Accounting Standards No. 109 ("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.
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, which is included in stockholders' equity or in net
loss on foreign exchange, respectively. The exceptions to this practice are
IMPSAT Brazil and Mandic S.A. which use the local currency as functional
currency.
STOCK-BASED COMPENSATION - SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to record
compensation cost for stock-based employee and non-employee members of the
Board compensation plans at fair value. The Company has chosen to continue
to account for stock-based compensation to employees and non-employee
members of the Board using the intrinsic value method as prescribed by
Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock
Issued to Employees, and related interpretations. Accordingly, compensation
cost for stock options issued to employees and non-employee of the Board
are measured as the excess, if any, of the fair value of the Company's
stock at the date of grant over the amount an employee or non-employee
member of the Board must pay for the stock.
RECLASSIFICATIONS - Certain amounts in the 1998 consolidated financial
statements have been reclassified to conform with the 1999 presentation.
4. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable, by operating subsidiaries, are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
--------------------------------
(UNAUDITED)
<S> <C> <C>
IMPSAT Argentina $ 36,378 $ 44,441
IMPSAT Colombia 8,480 7,917
IMPSAT Venezuela 4,293 6,055
IMPSAT Ecuador 1,559 2,154
IMPSAT USA 2,836 1,460
IMPSAT Brazil and Mandic S.A 2,963 1,602
Others 574 1,370
-------- --------
Total 57,083 64,999
</TABLE>
-11-
<PAGE> 14
<TABLE>
<S> <C> <C>
Less: allowance for doubtful accounts (10,109) (18,050)
-------- --------
Trade accounts receivable, net $ 46,974 $ 46,949
======== ========
</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,
1998 1999
------------------------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $ 5,933 $ 10,109
Provision for doubtful accounts 5,312 14,660
Write-offs, net of recoveries (1,136) (6,719)
-------- --------
Ending balance $ 10,109 $ 18,050
======== ========
</TABLE>
5. OTHER RECEIVABLES
Other receivables consist primarily of refunds or credits pending from
local governments for taxes other than income, advances to suppliers, and
other miscellaneous amounts due to the Company and its operating
subsidiaries as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------------------------------------------
(UNAUDITED)
<S> <C> <C>
IMPSAT Argentina $ 6,439 $ 6,528
IMPSAT Colombia 5,064 4,733
IMPSAT Venezuela 2,527 1,523
IMPSAT Ecuador 835 485
IMPSAT Mexico 1,078 2,437
IMPSAT Brazil and Mandic S.A. 1,124 2,708
Others 3,043 1,706
--------------------- ------------------
Total $ 20,110 $ 20,120
===================== ==================
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
---------------------------------
(UNAUDITED)
<S> <C> <C>
Land $ 1,750 $ 3,819
Building and improvements 27,957 28,145
Operating communications equipment 400,380 467,207
Furniture, fixtures and other equipment 20,271 19,185
--------- ---------
</TABLE>
-12-
<PAGE> 15
<TABLE>
<S> <C> <C>
Total 450,358 518,356
Less: accumulated depreciation (126,728) (211,430)
--------- ---------
Total 323,630 306,926
Equipment in transit 4,289 2,459
Projects in process 2,807 7,834
--------- ---------
Property, plant and equipment, net $ 330,726 $ 317,219
========= =========
</TABLE>
The recap of accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------------------------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $ 92,255 $ 126,728
Depreciation expense 36,027 85,939
Disposals and retirements (1,554) (1,237)
--------- ---------
Ending balance $ 126,728 $ 211,430
========= =========
</TABLE>
7. SHORT-TERM DEBT
The Company's short-term debt is detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
----------------------------
(UNAUDITED)
<S> <C> <C>
Short-term credit facilities, denominated in U.S. dollars;
interest rates ranging from 5.8% to 16%;
IMPSAT Argentina $11,000 $10,240
IMPSAT Colombia 5,859 422
IMPSAT Ecuador 186
Others 203 719
Short-term credit facilities, denominated in local currencies; local
interest rates ranging from 12.0% to 25.0%;
IMPSAT Argentina 2,000
IMPSAT Colombia 4,408
IMPSAT Ecuador 200
------- -------
Total short-term debt $19,262 $15,975
======= =======
</TABLE>
The Company has historically refinanced its 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,
1998 1999
-----------------------------
(UNAUDITED)
<S> <C> <C>
12.125% Senior Guaranteed Notes due 2003 $125,000 $125,000
12.375% Senior Notes due 2008 225,000 225,000
Term notes payable:
</TABLE>
-13-
<PAGE> 16
================================================================================
<TABLE>
<S> <C> <C>
IMPSAT Colombia; with maturities 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 8.13% - 13.13%) 32,204 25,435
Local currency (interest rates 19.92% - 40.75%) 6,156 12,533
IMPSAT Argentina (6.25% - 6.75%), maturing semiannually
through 2003, collateralized by certain assets 4,802 4,184
IMPSAT USA (8.25% - 8.75%), mortgage and other
collateralized debts 2,066 1,811
IMPSAT Venezuela (9.00% - 10.75%), maturing during 2001 3,508 1,683
IMPSAT Brazil (12.69%), maturing during 2004 3,854
Eximbank notes payable (7.00%), maturing semiannually
through 1999 1,694 847
Eximbank notes payable (7.00%), maturing semiannually
through 2003 and 2004 6,876
--------- ---------
Total long-term debt 400,430 407,223
Less: current portion (21,138) (23,110)
--------- ---------
Long-term debt, net $ 379,292 $ 384,113
========= =========
</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.
9. INCOME TAXES
The components of the provision for (benefit from) income taxes, all of
which are for foreign taxes consist of the following for the nine months
ended September 30, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Current income taxes $ 3,123 $ 974
Deferred income taxes (765) (19,926)
-------- --------
Provision for (benefit from) income taxes $ 2,358 $(18,952)
======== ========
</TABLE>
The foreign statutory tax rates range from 20% to 35% depending on the
particular country. There is no provision or benefit for U.S. income taxes,
as the Company has net operating loss carryforwards in the amount of $24.2
million at December 31, 1998, which begin to expire in the year 2010.
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
million of the Company's Series A Convertible Preferred Stock (the "Series
A Preferred Stock"). The Series A Preferred Stock was 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 September 30, 1999 into approximately
20.6% of the Common Stock of the Company.
-14-
<PAGE> 17
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 (10 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. STOCK OPTION PLAN
In December 1998, the Company adopted the 1998 Stock Option Plan (the "1998
Plan"), pursuant to which 8,067,268 shares of Company's Common Stock were
reserved for issuance upon exercise of options. The 1998 Plan is designed
as a means to retain and motivate key employees and directors. The
Company's Stock Option Committee, or in the absence thereof, the Board,
administers and interprets the 1998 Plan and is authorized to grant options
thereunder to all eligible employees of the Company, including executive
officers and directors (whether or not they are employees) of the Company
or affiliated companies. Options granted under the 1998 Plan are on such
terms and at such prices as determined by the Stock Option Committee,
except that the per share exercise price of incentive stock options cannot
be less than the fair market value of the Common Stock on the date of
grant. The 1998 Plan will terminate on December 1, 2008, unless sooner
terminated by the Company's Board.
The Company granted options for 746,000 shares at an exercise price of
$4.96 during the year ended December 31, 1998 and options for 654,400
shares at an exercise price of $6.20 during the nine months ended September
30, 1999. These options vest on each of the first, second and third
anniversaries of the date of grant, as to 10%, 30%, and 30%, respectively,
of the granted shares. On the fourth anniversary of the date of grant, the
option vests as to the remainder of the granted shares.
The Company applies APB No. 25 and related interpretations in accounting
for its stock options plan to employees and non-employee members of the
Board as described in Note 1. Accordingly, no compensation expense has been
recognized in the nine months ended September 30, 1999 related to this
plan.
For purposes of the following pro forma disclosures, the fair value of the
options granted in 1998 and 1999 was estimated using the minimum value
method prescribed by SFAS No. 123 for nonpublic entities with the following
assumptions: no dividend yields; no volatility; risk-free interest rate of
7.0%; and an expected term of four years. Had compensation cost been
determined based on the fair value at the date of grant consistent with the
requirement of SFAS 123, the Company's net loss and comprehensive loss
would have increased by approximately $231 during the nine months ended
September 30, 1999.
12. OPERATING SEGMENT INFORMATION
The Company's operating segment information, by subsidiary (eliminating
intercompany transactions), as of and for the nine months ended September
30, 1998 and 1999, is as follows:
-15-
<PAGE> 18
<TABLE>
<CAPTION>
September 30,
--------------------------------
1998 1999
---- ----
<S> <C> <C>
TOTAL ASSETS
Argentina $ 221,033 $ 226,743
Colombia 100,069 92,733
Venezuela 34,230 38,426
Mexico 10,244 10,424
Ecuador 20,573 21,839
USA 12,812 16,750
Brazil 16,731 55,473
Parent Company and Others 138,622 136,804
--------- ---------
CONSOLIDATED TOTAL $ 554,314 $ 599,192
========= =========
NET REVENUES FROM SERVICES:
SATELLITE BASED:
VSAT TECHNOLOGY
Argentina $ 29,101 $ 31,361
Colombia 12,386 9,221
Venezuela 3,235 6,958
Mexico 121 204
Ecuador 1,223 1,310
USA 0 32
Brazil 244 1,399
Parent Company and Others 0 0
--------- ---------
CONSOLIDATED TOTAL $ 46,310 $ 50,485
========= =========
SCPC TECHNOLOGY
Argentina $ 18,918 $ 19,119
Colombia 15,842 19,429
Venezuela 4,826 5,988
Mexico 2,094 1,678
Ecuador 3,674 4,932
USA 5,427 4,385
Brazil 482 1,500
Parent Company and Others 0 0
--------- ---------
CONSOLIDATED TOTAL $ 51,263 $ 57,031
========= =========
TERRESTRIAL BASED
Argentina $ 12,009 $ 13,714
Colombia 11,555 8,910
Venezuela 530 1,041
Mexico 47 92
Ecuador 422 919
USA 0 0
Brazil 26 134
Parent Company and Others 0 0
--------- ---------
CONSOLIDATED TOTAL $ 24,589 $ 24,810
========= =========
- -------------------------------------------------------------------------------------------------
</TABLE>
-16-
<PAGE> 19
<TABLE>
<CAPTION>
September 30,
-------------------------------
1998 1999
---- ----
<S> <C> <C>
VALUE ADDED
Argentina $ 11,991 $ 12,717
Colombia 5,303 7,234
Venezuela 1,684 2,130
Mexico 1,077 195
Ecuador 1,454 2,320
USA 1,220 2,410
Brazil 462 1,278
Parent Company and Others 4,535 6,519
--------- ---------
CONSOLIDATED TOTAL $ 27,726 $ 34,803
========= =========
TOTAL
Argentina $ 72,019 $ 76,911
Colombia 45,086 44,794
Venezuela 10,275 16,117
Mexico 3,339 2,169
Ecuador 6,773 9,481
USA 6,647 6,827
Brazil 1,214 4,311
Parent Company and Others 4,535 6,519
--------- ---------
CONSOLIDATED TOTAL $ 149,888 $ 167,129
========= =========
OPERATING INCOME (LOSS)
Argentina $ 14,022 $ (32,164)
Colombia 18,562 (3,434)
Venezuela 1,334 (1,662)
Mexico (1,194) (3,017)
Ecuador 2,225 256
USA 698 (293)
Brazil (4,297) (11,887)
Parent Company and Others (13,674) (10,769)
--------- ---------
CONSOLIDATED TOTAL $ 17,676 $ (62,970)
========= =========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Company leases telecommunications links with average annual rental
commitments of approximately $26.0 million through the year 2003. In
addition, the Company has commitments to purchase communications equipment
amounting to approximately $14.6 million.
The Company is a third-party guarantor of up to 75% of a $6.0 million
credit facility provided to IMPSAT Venezuela by a regional development
fund. At September 30, 1999, the balance outstanding on the credit facility
amounted to approximately $1.7 million.
Impsat Brazil has entered into a $3.9 million term note with El Camino
Resources, which is guaranteed by the Company and IMPSAT Argentina.
During May 1997, the Company and IMPSAT Argentina entered into a
three-party arrangement with a financial institution whereby $60.0 million
was borrowed by the subsidiary and concurrently
-17-
<PAGE> 20
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 expired in
October 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 former Argentine national postal service for $7.3
million. The Company had reclassified the trade account receivables from
ENCOTESA to non-current assets at the estimated net realizable value of
$5.1 million as determined by the Company's management based on the advice
of local legal counsel. At September 30, 1999, the Company had reserved
100% of the amounts due from ENCOTESA.
14. BROADBAND NETWORK AGREEMENTS
NORTEL NETWORKS AGREEMENTS - On September 6, 1999, the Company executed two
turnkey agreements with Nortel Networks Inc. ("Nortel") relating to
Nortel's design and construction of segments of the Broadband Network in
Argentina and Brazil for approximately $265 million. Pursuant to these
agreements, Nortel will construct:
- long-haul, high capacity fiber optic backbones linking major
cities in Argentina and Brazil
- fiber optic and wireless radio local rings and access points
within major cities in Argentina and Brazil
- connections in Argentina and Brazil that will integrate the
Company's networks with other providers' facilities, including
submarine cable systems, and provide the Company with access to
global telecommunications links
In addition, Nortel will provide, as part of the turnkey agreements:
- required equipment and components
- civil infrastructure design and engineering
- civil works supervision
- network infrastructure and configuration planning and
engineering
- formulation of network quality and performance specifications
- compilation of network testing procedures and protocols
- preparation of network maintenance and operations plans and
procedures
On October 25, 1999, each of IMPSAT Argentina and IMPSAT Brazil signed
definitive agreements with affiliates of Nortel Networks to borrow an
aggregate of up to approximately $149.1 million and $148.3 million,
respectively, of long term vendor financing. The financing, which will be
disbursed over a two year period with final maturity in 2006, will be used
to finance Nortel's construction of the segments of the Broadband Network
in each of Argentina and Brazil. The Company has agreed to guarantee the
obligations of each of IMPSAT Argentina and IMPSAT Brazil under the Nortel
financing agreements.
FRAMEWORK AGREEMENT WITH GLOBAL CROSSING - On July 27, 1999, the Company
entered into an agreement with Global Crossing Development Co., a
subsidiary of Global Crossings Ltd. ("Global Crossing") that contemplates
the Company entering into a series of definitive agreements. As part of
these arrangements, the Company will purchase from Global Crossing
indefeasible rights of use
-18-
<PAGE> 21
of capacity valued at not less than $46 million on any of Global Crossing's
fiber optic cable networks worldwide. These rights should enable the
Company to interconnect the Company's networks in Argentina and Brazil and
give the Company global international access.
On September 22, 1999, the Company entered into a definitive agreement with
Global Crossing to construct the terrestrial portion of the Global
Crossing's South American network between Las Toninas, Argentina on the
Atlantic Ocean and Valparaiso, Chile on the Pacific Ocean (the
"Trans-Andean Crossing System"). The Company commenced construction of the
Trans-Andean Crossing System in September 1999. Global Crossing will pay
the Company $64 million for the Company's turnkey construction of the
Trans-Andean Crossing System, which includes:
- construction of three ducts and related facilities over 230
route miles between Las Toninas and Buenos Aires, Argentina
and over 290 route miles between Mendoza, Argentina and
Valparaiso, Chile
- licensing to Global Crossing of one duct on our Broadband
Network between the cities of Buenos Aires and Mendoza in
Argentina
During September 1999, Global Crossing paid the Company $23.2 million in
respect of the ongoing construction of the Trans-Andean Crossing System.
In addition to the Trans-Andean Crossing System, the Company will:
- construct fiber optic terrestrial backhauls that will
connect Global Crossing's submarine cable landing points in
Brazil, Colombia, Peru and Venezuela to major cities in
these countries
- sell co-location space in our telehouses in Rio de Janeiro
and Sao Paulo, Brazil; Bogota, Colombia; Lima, Peru; and
Caracas, Venezuela
The Company's telehouses will contain switching, routing and other network
co-location equipment owned by the Company or lessees of space in the
telehouses. The Company will lease space in the telehouses in Buenos Aires,
Argentina and Santiago, Chile to Global Crossing for its network
operations. The Company will also expect to enter into agreements with
Global Crossing to provide maintenance of the Global Crossing's
Trans-Andean Crossing System.
* * * * *
-19-
<PAGE> 22
IMPSAT S.A.
BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
---------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,849 $ 12,050
Trade accounts receivable, net 28,068 30,491
Receivable from affiliated companies 2,092 3,172
Other receivables 6,439 6,529
Prepaid expenses 362 286
-------- --------
Total current assets 50,810 52,528
-------- --------
PROPERTY, PLANT AND EQUIPMENT, Net 167,653 153,345
-------- --------
NON-CURRENT ASSETS:
Trade account receivables, net 5,143
Investment 10,708 10,287
Deferred income taxes, net 7,911
Other non-current assets 530 2,672
-------- --------
Total non-current assets 16,381 20,870
-------- --------
TOTAL $234,844 $226,743
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 18,242 $ 21,491
Short-term debt 13,000 10,238
Advances from affiliated companies 62,721 58,670
Current portion of long-term debt 64,694 65,088
Accrued liabilities 655 510
Deferred income taxes, net 4,301
Customer advances on construction project, net of taxes 22,736
Other liabilities 4,402 11,697
-------- --------
Total current liabilities 168,015 190,430
-------- --------
LONG-TERM DEBT, Net 1,802 6,819
-------- --------
OTHER LONG-TERM LIABILITIES 1,485 718
-------- --------
COMMITMENTS AND CONTINGENCIES (Note 9)
STOCKHOLDERS' EQUITY:
Common stock, 5,123 shares issued and outstanding at December 31, 1998;
and 5,148 shares issued and outstanding at September 30, 1999 3 3
Paid in capital 26,442 26,442
Retained earnings 37,097 2,331
-------- --------
Total stockholders' equity 63,542 28,776
-------- --------
TOTAL $234,844 $226,743
======== ========
See notes to financial statements.
</TABLE>
-20-
<PAGE> 23
IMPSAT S.A.
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------
1998 1999 1998 1999
(UNAUDITED) UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES FROM SERVICES $ 24,632 $ 25,380 $ 72,868 $ 79,767
-------- -------- -------- --------
COST AND EXPENSES:
Variable cost of services 5,215 4,848 13,682 16,444
Leased telecommunications links 2,114 4,169 8,017 12,440
Salaries, wages and benefits 4,106 5,195 12,079 14,455
Selling, general and administrative 5,915 14,752 17,236 24,360
Depreciation and amortization 5,261 36,951 15,016 49,191
-------- -------- -------- --------
Total cost and expenses 22,611 65,915 66,030 116,890
-------- -------- -------- --------
Operating income (loss) 2,021 (40,535) 6,838 (37,123)
-------- -------- -------- --------
OTHER INCOME (EXPENSES):
Interest expense, net (3,669) (3,701) (10,251) (9,861)
Other income, net 106 144 6
-------- -------- -------- --------
Total other expense (3,563) (3,701) (10,107) (9,855)
-------- -------- -------- --------
(LOSS) INCOME BEFORE INCOME TAXES (1,542) (44,236) (3,269) (46,978)
BENEFIT FROM (PROVISION FOR) INCOME TAXES 12,252 (1,434) 12,212
-------- -------- -------- --------
NET LOSS $ (1,542) $(31,984) $ (4,703) $(34,766)
======== ======== ======== ========
</TABLE>
See notes to financial statements.
-21-
<PAGE> 24
IMPSAT S.A.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS(*) TOTAL
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ 3 $ 26,442 $ 37,097 $ 63,542
Net loss (34,766) (34,766)
------- -------- -------- --------
BALANCE AT SEPTEMBER 30, 1999 $ 3 $ 26,442 $ 2,331 $ 28,776
======= ======== ======== ========
</TABLE>
(*) Includes an appropriation of retained earnings amounting to $1,890 to comply
with legal reserve requirements in Argentina.
See notes to financial statements.
-22-
<PAGE> 25
IMPSAT S.A.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1998 1999
-------------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,703) $(34,766)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization and depreciation 15,016 49,191
Deferred income tax provision (benefit) 1,434
Changes in assets and liabilities: (12,212)
Decrease (increase) in trade accounts receivable, net 529 (2,423)
(Increase) decrease in prepaid expenses (178) 76
Decrease in other receivables and other non-current assets 5,293 1,831
Increase in accounts payable - trade 1,854 3,065
(Decrease) increase in accrued and other liabilities (1,453) 7,150
Increase in customer advances on construction project 22,736
Increase (decrease) in other long-term liabilities 406 (767)
--------- ---------
Net cash provided by operating activities 18,198 33,881
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (28,055) (34,699)
(Increase) decrease in investment (5,840) 421
--------- ---------
Net cash used in investing activities (33,895) (34,278)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments of short-term debt (15,118) (2,762)
Changes in advances from \ to affiliates 38,832 (4,051)
Proceeds from long-term debt 5,186 10,126
Repayments of long-term debt (3,007) (4,715)
--------- ---------
Net cash provided by (used in) financing activities 25,893 (1,402)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 10,196 (1,799)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 6,065 13,849
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 16,261 $ 12,050
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 5,869 $ 4,561
========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Equipment in transit $ 5,923 $ 184
========= =========
</TABLE>
See notes to financial statements.
-23-
<PAGE> 26
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 composed 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").
On October 20, 1998, IMPSAT S.A. and Resis Ingenieria S.A., a wholly owned
subsidiary of the Parent Company, merged and Resis Ingenieria S.A. ceased
operations. The merger as is 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
merger was recorded as if the transaction occurred on January 1, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information - The unaudited statements as of September
30, 1999 and for the nine months ended September 30, 1999 and 1998 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 ended September 30, 1999 and 1998 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
microsystems 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.
No single customer accounted for greater than 10% of total revenue from
services for the nine months ended September 30, 1999 and 1998.
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:
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<PAGE> 27
Building and improvement 10-25 years
Operating communications equipment 10 years
Furniture, fixtures and other equipment 5-10 years
The operating communications equipment owned by IMPSAT S.A. is subject to
rapid technological obsolescence. In view of these developments, IMPSAT
S.A. decided to change the depreciable life of certain customer premises
telecommunications equipment from 10 years to 5 years. The effect of this
change totaled $30.0 million.
Investment - Investment represents a less than 1.0% ownership interest (at
September 30, 1999 and December 31, 1998) by IMPSAT S.A. in unaffiliated
entities 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.
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 year-end exchange. Profit
and loss accounts were translated using average exchange rates for the
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 undiscounted cash flow
methods and other valuation
Reclassifications - Certain amounts in the 1998 financial statements have
been reclassified to conform with the 1999 presentation.
3. TRADE ACCOUNTS RECEIVABLE
The detail of trade accounts receivable is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------------------------
(UNAUDITED)
<S> <C> <C>
Trade accounts receivable $ 36,378 $ 44,441
Less: allowance for doubtful accounts (8,310) (13,950)
-------- --------
Trade accounts receivable, net $ 28,068 $ 30,491
======== ========
</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.
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<PAGE> 28
The activity for the allowance for doubtful account is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------------------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $ 5,497 $ 8,310
Provision for doubtful accounts 3,453 6,208
Write-offs, net of recoveries (640) (568)
-------- --------
Ending balance $ 8,310 $ 13,950
======== ========
</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 at consists of:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------------------------
(UNAUDITED)
<S> <C> <C>
Land $ 1,190
Building, installations and improvements $ 16,671 17,058
Operating communications equipment 226,480 254,938
Furniture, fixtures and other equipment 8,399 9,778
--------- ---------
Total 251,550 282,964
Less: accumulated depreciation (87,641) (136,141)
--------- ---------
Total 163,909 146,823
Equipment in transit 1,825 2,009
Projects in process 1,919 4,513
--------- ---------
Property, plant and equipment, net $ 167,653 $ 153,345
========= =========
</TABLE>
The recap of accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-------------------------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $ 68,654 $ 87,641
Depreciation expense 20,515 49,191
Disposals and retirements (1,528) (691)
--------- ---------
Ending balance $ 87,641 $ 136,141
========= =========
</TABLE>
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<PAGE> 29
6. SHORT-TERM DEBT
IMPSAT S.A.'s short-term debt is detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
-----------------------------
(UNAUDITED)
<S> <C> <C>
Short-term credit facilities, denominated in
U.S. dollars, interest rates ranging from 8% to 12.75% $11,000 $10,238
Pesos, interest rate from 12 to 12.75% 2,000
------- -------
Total short-term debt $13,000 $10,238
======= =======
</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,
1998 1999
--------------------------------
(UNAUDITED)
<S> <C> <C>
Term notes payable and (6.63% - 12.63%) maturing
semiannually though 1999, collateralized by
certain assets $ 64,802 $ 64,184
Eximbank notes payable (7%), maturing semiannually
through 1999 1,694 847
Eximbank notes payable (8%), maturing
semiannually through 2003 and 2004 6,876
-------- --------
Total long-term debt 66,496 71,907
Less: current portion (64,694) (65,088)
-------- --------
Long-term debt, net $ 1,802 $ 6,819
======== ========
</TABLE>
8. INCOME TAXES
The benefit from (provision for) income taxes for the nine months ended
September 30, 1999 and 1998 consists of $12.2 million and $(1.4) million
respectively in deferred taxes. The statutory tax rate in Argentina is 35%.
9. EL SITIO FRAMEWORK AGREEMENT AND BROADBAND NETWORK AGREEMENTS
FRAMEWORK AGREEMENT WITH EL SITIO - On August 4, 1999, the Parent Company
entered into a Framework Agreement with El Sitio, Inc. for, among other
things, the sale of IMPSAT S.A.'s retail Internet business for
approximately $6.2 million and the Parent Company's purchase of shares of
El Sitio's 8% convertible redeemable preferred stock for $6.2 million. In
connection with these transactions, El Sitio will enter into
telecommunications services agreements with the IMPSAT S.A. under which the
IMPSAT S.A. will provide El Sitio with telecommunication networks to access
the Internet backbone. El Sitio, a British Virgin islands corporation, is
an Internet content and Internet service provider headquartered in
Argentina that has other offices in Brazil, Mexico, Uruguay and the United
States. These transactions were consummated on November 5, 1999.
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<PAGE> 30
NORTEL NETWORKS AGREEMENTS - On September 6, 1999, IMPSAT S.A. executed a
turnkey agreement with Nortel Networks Inc. ("Nortel") relating to Nortel's
design and construction of segments of the Broadband Network in Argentina
for approximately $133.1 million. Pursuant to this agreement, Nortel will
construct:
- long-haul, high capacity fiber optic backbones linking major
cities in Argentina
- fiber optic and wireless radio local rings and access points
within major cities in Argentina
- connections in Argentina that will integrate IMPSAT S.A.'s
networks with other providers' facilities, including submarine
cable systems, and provide IMPSAT S.A. with access to global
telecommunications links
In addition, Nortel will provide, as part of the turnkey agreement:
- required equipment and components
- civil infrastructure design and engineering
- civil works supervision
- network infrastructure and configuration planning and engineering
- formulation of network quality and performance specifications
- compilation of network testing procedures and protocols
- preparation of network maintenance and operations plans and
procedures
On October 25, 1999, IMPSAT S.A. signed a definitive agreement with an
affiliate of Nortel Networks to borrow an aggregate of up to approximately
$149.1 million of long term vendor financing. The financing, which will be
disbursed over a two year period with final maturity in 2006, will be used
to finance Nortel's construction of the segments of the Broadband Network
in Argentina and the purchase of additional equipment to be used by IMPSAT
S.A. in connection with the operation of the Broadband Network. The Parent
Company has agreed to guarantee the obligations of IMPSAT S.A. under the
Nortel financing agreements.
FRAMEWORK AGREEMENT WITH GLOBAL CROSSING - On July 27, 1999, the Parent
Company entered into an agreement with Global Crossing Development Co., a
subsidiary of Global Crossings Ltd. ("Global Crossing") that contemplates
the Parent Company or its affiliates entering into a series of definitive
agreements. As part of these arrangements, Parent Company or its affiliates
will purchase from Global Crossing indefeasible rights of use of capacity
valued at not less than $46 million on any of Global Crossing's fiber optic
cable networks worldwide.
On September 22, 1999, IMPSAT S.A. and an affiliate entered into a
definitive agreement with Global Crossing to construct the terrestrial
portion of the Global Crossing's South American network between Las
Toninas, Argentina on the Atlantic Ocean and Valparaiso, Chile on the
Pacific Ocean (the "Trans-Andean Crossing System"). Construction of the
Trans-Andean Crossing System commenced in September 1999. Global Crossing
will pay the IMPSAT S.A. $50.7 million as part of the total $64 million
consideration for the turnkey construction of the Trans-Andean Crossing
System, which includes:
- construction of three ducts and related facilities over 230 route
miles between Las Toninas and Buenos Aires, Argentina and over
290 route miles between Mendoza, Argentina and Valparaiso, Chile
- licensing to Global Crossing of one duct on our Broadband Network
between the cities of Buenos Aires and Mendoza in Argentina
During September 1999, Global Crossing paid IMPSAT S.A. $23.2 million in
respect of the ongoing construction of the Trans-Andean Crossing System.
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<PAGE> 31
10. COMMITMENTS AND CONTINGENCIES
IMPSAT S.A. leases leased telecommunications link with annual rental
commitments of approximately $10.1 million through the year 2001. In
addition, IMPSAT S.A. has commitments to purchase communications equipment
amounting to approximately $6.1 million at September 30, 1999.
IMPSAT S.A. is guarantor on the $125 million 12 1/8% Senior Guaranteed
Notes Due 2003 issued on July 30, 1996 by the Parent Company and on the
$3.9 million term note signed by IMPSAT Brazil with El Camino Resources.
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 expired in October 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 former Argentine national postal service for $7.3 million.
IMPSAT S.A. had reclassified the trade account receivables from ENCOTESA to
non-current assets at the estimated net realizable value of $5.1 million as
determined by IMPSAT S.A. based on the advice of local legal counsel. At
September 30, 1999, IMPSAT S.A. had reserved 100% of the amounts due from
ENCOTESA.
In the normal course of business, IMPSAT S.A. faces challenges to its
various licenses and rights to operate on an exclusive basis, which it
vigorously defends. There can be no assurance it will ultimately prevail on
these challenges.
-29-
<PAGE> 32
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading provider of private telecommunications network and
Internet services in Latin America. We offer tailor-made, integrated data, voice
and Internet solutions, with an increasing emphasis on broadband transmission,
for national and multinational companies, financial institutions, governmental
agencies and other business customers. We also offer dedicated Internet services
to Internet service and content providers.
We have operations in Argentina, Colombia, Venezuela, Ecuador, Mexico,
Brazil and the United States and also provide our services in other countries in
Latin America. We currently provide telecommunications and Internet services
through our networks, which consist of owned fiber optic and wireless links,
teleports, earth stations and leased fiber optic and satellite links. We own and
operate 12 metropolitan area networks in some of the largest cities in Latin
America, including Buenos Aires, Bogota, Caracas and Sao Paulo.
We are building an extensive pan-Latin American broadband fiber optic
network (the "Broadband Network") to enhance the services we presently provide
and significantly increase our transmission speed and capacity. This network
will consist of long-haul, high capacity fiber optic backbones and metropolitan
area fiber optic and wireless links and will use advanced transmission
technologies, including DWDM, ATM and IP. We already own and operate a
long-haul, fiber optic network connecting the cities of Cali, Medellin and
Bogota in Colombia over a 422 mile route. By November 2000, we expect to have
built out our Broadband Network to connect major cities across Argentina and
Brazil.
Revenues. We provide services to our customers under 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. Except in Brazil, 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. We report our revenues net of deductions for sales taxes.
Recently we have experienced, and anticipate that we will continue to
experience, downward pressure on our prices as we continue to expand our
customer base and as competition for private telecommunications network services
grows. When we have renewed and/or expanded our contracts with existing
customers, the prices we charge those customers have generally declined. As a
result, our revenues per unit of satellite capacity used have been decreasing.
In addition, as our business in a particular country matures, our rate of growth
in that country tends to slow. In particular, this has occurred in Argentina and
in Colombia. To compensate for slower growth in maturing markets, we will seek
to expand into new countries and to provide new services through our Broadband
Network.
Although we believe that our geographic diversification provides some
protection against economic downturns in any particular country, our results of
operations and business prospects are influenced by the overall financial and
economic conditions in Latin America. Many of the countries in which we operate
have experienced political and economic volatility in recent years. With the
exception of the United States and Mexico (which account for only a small
portion of our consolidated revenues), each of the countries in which we operate
has experienced economic
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<PAGE> 33
contraction and financial difficulties during 1999. In particular, Argentina and
Colombia, our two largest markets, are currently experiencing significant
recessions. We cannot predict whether prevailing economic conditions in Latin
America will improve or worsen, or what effect these conditions will have on the
countries in which we operate or upon our business. These conditions may have
material adverse effects on our business, results of operation and financial
condition.
We could experience significant fluctuations in our future revenues
due to a variety of factors, many of which are outside of our control,
including:
- demand for and market acceptance of our products and services
- introduction of technological advances in services or
enhancements by us and our competitors
- competitive factors that affect our pricing
- the timing and magnitude of capital expenditures, including costs
relating to the Broadband Network
- the retention of key personnel
- conditions specific to the private telecommunications network and
Internet industries in Latin America, as well as general economic
factors
- new government legislation or regulation
We expect to experience substantial operating losses and negative free
cash flows for at least the next several years due to the large investments
required for the Broadband Network, including increased depreciation, interest
expense and selling, general and administrative expenses. We cannot assure you
that we will ever be able to generate operating income or positive cash flows in
the future or that our negative cash flows will not increase. As a result, we
believe that our operating results in past periods cannot be relied upon as
indicators of future performance. If we fail to generate operating income or
positive cash flows there could be a material adverse effect on our business,
results of operation and financial condition.
Costs and Expenses. Our costs and expenses principally include:
- variable cost of services
- lease telecommunications links (payments for leased satellite
transponder and fiber optic capacity)
- salaries, wages and benefits
- selling, general and administrative expenses
- 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 for our network infrastructure.
Installation and de-installation costs are the costs we incur when we install or
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<PAGE> 34
remove earth stations, microstations and other equipment on or from customer
premises. Installation and maintenance costs include services contracted from
outside providers. Our selling, general and administrative expenses consist
principally of:
- publicity and promotion costs
- provisions for doubtful accounts
- fees and other remuneration
- travel and entertainment
- rent
- plant services and corporate telecommunication and energy
expenses
Capacity Transactions. We recently sold indefeasible rights of use of
telecommunications capacity to Global Crossing Development Co., a subsidiary of
Global Crossing Ltd., for approximately $25 million. We expect to have other
similar transactions in the future.
Sale of Retail Internet Business. In August 1999, we entered into an
agreement in principle to sell our retail Internet businesses in Argentina,
Brazil and Colombia to El Sitio, Inc., an Internet content provider, for
approximately $21.5 million. El Sitio provides Internet content in Latin
America. We also agreed to subscribe for $21.5 million in convertible preferred
stock of El Sitio and El Sitio has agreed to enter into a telecommunications
services agreement with us to provide services to El Sitio, including access to
the U.S. Internet backbone. We determined that retail Internet access was not
one of our top priorities and was inconsistent with our emphasis on providing
telecommunications services to businesses and governmental customers,
telecommunications carriers and ISPs. The Brazil transaction contemplated by the
El Sitio Framework Agreement was consummated on October 6, 1999 and the
Argentina transaction was concluded on November 5, 1999. The Colombia
transaction is expected to be consummated by the end of 1999. See note 2 to our
consolidated financial statements and Item 5 of this Report.
The revenues and expenses associated with the retail Internet
businesses that we are selling to El Sitio were as follows for the periods
indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues
(retail Internet)
Argentina $ 520 $ 934 $ 2,298 $ 2,710
Colombia 589 459 1,741 1,371
Brazil 3,536 2,021 4,535 5,766
------- ------- ------- -------
Total $ 4,645 $ 3,414 $ 8,574 $ 9,847
======= ======= ======= =======
Total costs (retail Internet)
Argentina $ (730) $ (824) $(1,767) $(1,911)
Colombia (580) (499) (1,506) (1,449)
</TABLE>
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<PAGE> 35
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Brazil (2,889) (1,716) (3,713) (5,276)
------- ------- ------- -------
Total $(4,199) $(3,039) $(6,986) $(8,636)
======= ======= ======= =======
</TABLE>
The following financial table summarizes our results of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------- ------------------------------------------
1998 1999 1998 1999
--------------------- --------------------- -------------------- -------------------
(IN THOUSANDS AND AS A PERCENTAGE OF CONSOLIDATED REVENUES)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues from services......... $56,237 100.0% $55,911 100.0% $149,888 100.0% $167,129 100.0%
Variable cost of services.......... 10,518 18.7 9,634 17.2 24,274 16.2 29,975 17.9
Leased telecommunications links.... 6,394 11.4 11,385 20.4 20,343 13.6 31,248 18.7
Salaries, wages and benefits....... 9,581 17.0 12,030 21.5 26,543 17.7 34,222 20.5
Selling, general and
administrative expenses............ 13,293 23.6 22,738 40.7 34,515 23.0 46,564 27.9
Depreciation and amortization...... 9,908 17.6 64,761 115.8 26,537 17.7 88,090 52.7
Interest expense, net.............. 13,052 23.2 13,870 24.8 30,243 20.2 41,976 25.1
Net income (loss) on foreign
exchange........................... 971 1.7 (1,514) (2.7) 813 0.5 (9,500) (5.7)
(Provision for) benefit from
foreign income taxes............... (107) (0.2) 14,935 26.7 (2,358) (1.6) 18,952 11.3
Comprehensive loss................. (9,992) (17.8) (63,402) (113.4) (23,333) (15.6) (104,523) (62.5)
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
General. Our results of operations for the first nine months of 1999
were not as positive as prior periods for four principal reasons:
- recessions facing our markets in Latin America, which
significantly lowered our rate of revenue growth and caused our
revenues to decrease in the third quarter of 1999 by $1.7 million
compared to the second quarter of 1999
- the fact that we purchased too much satellite capacity because we
did not anticipate the breadth of the recession in Latin America
- competitive pricing pressures in our more mature markets
(especially in Argentina and Colombia)
- expenses of developing the Broadband Network and our Brazilian
operations (which are in a relatively early stage of development)
- an increase in our provision for doubtful accounts as a result of
certain changes in our provisioning policy, which we discuss
further below
- a one-time change in our policy regarding depreciation of certain
of our customer premises telecommunications equipment in view of
technological advances in our industry
Revenues. Our net revenues for the three and nine months ended
September 30, 1999 totaled $55.9 million and $167.1 million, a decrease of
$0.3 million (or 0.6%) and an increase of $17.2 million (or 11.5%) from net
revenues for the same periods in 1998. Recessions in most of the
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<PAGE> 36
countries in which we operate, and competitive pressures in Argentina and
Colombia, contributed to our lower rate of revenue growth during the third
quarter of 1999 compared to prior periods. These conditions could also
affect future periods.
The following table shows our revenues by operating subsidiary
(including intercompany transactions) for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C>
IMPSAT Argentina............ $24,632 $25,380 $72,868 $79,911
IMPSAT Colombia............. 17,085 15,093 45,457 45,980
IMPSAT Venezuela............ 4,026 6,176 10,687 16,777
IMPSAT Ecuador.............. 2,726 3,379 7,312 9,749
IMPSAT Mexico............... 1,734 804 3,439 2,528
IMPSAT Brazil............... 886 1,970 1,390 4,607
Mandic S.A.................. 3,537 2,099 4,535 6,519
IMPSAT USA.................. 3,971 4,369 10,453 12,633
</TABLE>
Our revenue growth for the first nine months of 1999 was attributable
to an overall increase in the number of customers and services we provided
to them, offset, in part, by decreasing prices. Excluding Internet and
Global Fax customers, we had a total of 1,707 customers at September 30,
1999, compared to 1,412 customers at September 30, 1998.
The recessions in Argentina and Colombia and, to a lesser extent,
increased competition resulted in some of our customers canceling their
contracts or reducing the services we provide to them. For example, our
contracts in Colombia with Telemando E.U. and Registraduria Nacional (the
government election commission) were terminated during the third quarter of
1999. We recorded $2.1 million in net revenues from Telemando and $0.6
million in net revenues from Registraduria Nacional during 1998. Also, in
Colombia, our contracts with six customers within the Suramericana group
were renegotiated during the first quarter of 1999. This renegotiation
resulted in an approximately 24% decrease in our prices under these
contracts. Our net revenues from these six companies totaled $2.0 million
during 1998. The Suramericana group includes some of our largest customers
in Colombia. IMPSAT Mexico's revenues in the third quarter of 1999 were
approximately 53.6% lower than its revenues in the corresponding period of
1998. This decrease is principally caused by a nonrecurring equipment sale
of $750,000 made by IMPSAT Mexico in the third quarter of 1998 and the
effects of intense competition in that country's telecommunications
industry. Revenues for the third quarter of 1999 recorded by Mandic S.A. as
compared to the prior period in 1998 were negatively affected by the
devaluation of the Brazilian real against the U.S. dollar during 1999. In
addition, revenue growth at IMPSAT Ecuador could decline during the
remainder of 1999 due to the effects of the economic crisis there. Although
IMPSAT Ecuador's revenues and revenue growth have not yet been adversely
affected by the recession in Ecuador, we cannot predict the recession's
effect on our results for the remainder of 1999 or for future periods.
Variable Cost of Services. Our variable cost of services for the three
and nine months ended September 30, 1999 totaled $9.6 million and 30.0
million, respectively. This represents a decrease of $0.9 million (or 8.4%)
and an increase of $5.7 million (or 23.5%), respectively, compared to the
same periods in 1998. IMPSAT Argentina recorded variable cost of services
totaling $4.9 million and $16.4 million for the three and nine months
ending September 30, 1999. This compares to $5.2 million and $13.7 million
for the three and nine months ended September 30, 1998. As discussed below,
the overall increase in our variable costs for the nine months ended
September 30,
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<PAGE> 37
1999 compared to the prior period was principally due to increases in our
maintenance and installation (including de-installation) costs.
Of our total variable costs for the three and nine months ending
September 30, 1999, $2.7 million and $8.8 million, respectively, related to
the operations of IMPSAT Colombia. This compares to $3.7 million and $7.9
million at IMPSAT Colombia for the three and nine months ended September
30, 1998. Variable costs of services for Mandic and IMPSAT Brazil, both of
which commenced operations towards the end of the second quarter of 1998,
totaled $0.5 million and $0.7 million, respectively, for the three months
ended September 30, 1999. Mandic and IMPSAT Brazil each incurred variable
costs of $1.5 million during the nine months ended September 30, 1999.
Variable costs for the three and nine months ended September 30, 1998
totaled $0.6 million and $0.7 million, respectively, for Mandic and $0.3
million and $0.3 million, respectively, for IMPSAT Brazil.
Maintenance costs for our telecommunications network infrastructure
totaled $2.4 million and $8.5 million, respectively, for the three and nine
months ended September 30, 1999. This compared to $2.8 million and $7.3
million for the corresponding periods in 1998.
Installation costs totaled $2.3 million and $6.7 million for the three
and nine months ended September 30, 1999. This compares to installation
costs of $2.1 million and $5.3 million for the corresponding periods in
1998. The overall increase in our installation costs for the nine month
period ending September 30, 1999 was due in part to:
- a higher number of de-installations of VSAT microstations due to
customer cancellations and customer upgrades to SCPC technology
- private telecommunications network installations completed in the
first nine months of 1999 in connection with IMPSAT Argentina's
contracts to provide private telecommunications network services
to the Government of the Province of Buenos Aires and Banco de la
Provincia de Buenos Aires
Installation costs at IMPSAT Argentina totaled $1.2 million and $3.9
million for the three and nine months ended September 30, 1999. This
compares to $1.4 million and $3.2 million for the corresponding periods in
1998. The recession in Colombia resulted in reduced installations in that
country. Our installation costs at IMPSAT Colombia decreased to $0.2
million and $0.8 million for the three and nine months ended September 30,
1999 from $0.3 million and $1.0 million for the same periods in 1998.
Sales commissions paid to third-party sales representatives totaled
$2.1 million and $5.7 million for the three and nine months ended September
30, 1999, compared to $1.9 million and $5.1 million for the three and nine
months ended September 30, 1998. Most of these commissions related to
customers of IMPSAT Argentina.
In addition, royalties paid in connection with our licenses to
governmental entities increased to $1.5 million from $750,000 for the nine
months ended September 30, 1998. This increase was principally related to
new telecommunications regulations in Colombia that broadened the base of
IMPSAT Colombia's revenues upon which the royalties are levied.
Salaries, Wages and Benefits. Salaries, wages and benefits totaled
$12.0 million and $34.2 million for the three and nine months ended
September 30, 1999. This compares to
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<PAGE> 38
$9.6 million and $26.5 million for the corresponding periods in 1998. The
increase resulted primarily from:
- an increase in the number of employees, from 973 employees at
September 30, 1998 to 1,133 at September 30, 1999, particularly
in connection with the commencement of operations at IMPSAT
Brazil and Mandic and the development of the Broadband Network in
Argentina and Brazil
- increases in the salaries, wages and benefits of our personnel to
match market rates for personnel with the expertise we require
and increases in cost of living
IMPSAT Argentina incurred salaries, wages and benefits for the three
and nine months ended September 30, 1999 of $5.2 million and $14.5 million
compared to $4.1 million and $12.1 million for the same periods in 1998.
Salaries, wages and benefits for the first nine months of 1999 relating to
the Broadband Network totaled $0.5 million. Salaries, wages and benefits
for the nine months ended September 30, 1999 paid with respect to IMPSAT
Brazil and Mandic totaled $3.4 million and $1.5 million, respectively,
compared to $2.0 million and $0.6 million, respectively, for the
corresponding period in 1998.
Leased Telecommunications Links Cost. Our leased telecommunication
links expenses totaled $11.4 million and $31.2 million for the three and
nine months ended September 30, 1999. This compares to $6.4 million and
$20.3 million for the corresponding periods in 1998. We had approximately
769 MHz of leased satellite capacity at September 30, 1999 and 560 MHz at
September 30, 1998.
The expansion of our satellite capacity was primarily attributable to
contractually scheduled increases in satellite capacity to match
anticipated growth in customer demand. A portion of this increase was
related to the growth in our SCPC services compared to our VSAT services.
SCPC earth stations use larger amounts of satellite capacity than do VSAT
microstations. However, we have not needed as much satellite capacity as we
contracted for, due to adverse economic conditions in Latin America. As a
result, our satellite capacity cost as a percentage of revenues has
increased substantially from prior periods.
In addition, to satisfy increasing customer demand for high bandwidth
telecommunications links, during the first nine months of 1999, we
increased our leased dedicated capacity on third-party fiber optic networks
in Argentina, spending $12.4 million compared to $8.0 million for the first
nine months of 1998. Due to this need for greater fiber optic bandwidth, we
expect our leased telecommunication links expense to increase until we
implement the Broadband Network. Leased fiber optic capacity in Argentina
is quite expensive due to the very limited number of providers.
Selling, General and Administrative Expenses. We incurred SG&A
expenses of $22.7 million and $46.6 million for the three and nine months
ended September 30, 1999. This compares to $13.3 million and $34.5 million
for the corresponding periods in 1998. SG&A expenses increased $9.4 million
(or 71.1%) from the three months ended September 30, 1998 and $12.0 million
(or 34.9%) from the nine months ended September 30, 1998. SG&A expenses at
IMPSAT Argentina totaled $14.8 million and $24.4 million, respectively, for
the three and nine months ended September 30, 1999. This represents an
increase of $8.8 million (or 149.4%) and $7.1 million (or 41.3%),
respectively, from SG&A expenses incurred by IMPSAT Argentina for the three
and nine months ended September 30, 1998.
The increase in SG&A expenses reflects:
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<PAGE> 39
- the increase in our provision for doubtful accounts, discussed
below.
- increased SG&A expenses incurred by our two newest subsidiaries,
IMPSAT Brazil and Mandic, both of which commenced operations
around the end of the second quarter of 1998. SG&A expenses
incurred by IMPSAT Brazil totaled $1.7 million and $4.1 million
for the three and nine months ended September 30, 1999, compared
to $1.6 million and $2.8 million in the corresponding periods in
1998. Mandic's SG&A expenses totaled $0.5 million and $1.6
million for the three and nine months ended September 30, 1999,
compared to $1.0 million and $1.3 million in the corresponding
periods in 1998.
- increased maintenance expenses for our various offices, which
totaled $1.1 million and $3.3 million, compared to $0.9 million
and $2.6 million for the corresponding periods in 1998.
The increased SG&A expenses reflect growth in our operations,
including the development and implementation of the Broadband Network.
We recorded a provision for doubtful accounts of $14.7 million for the
nine months ended September 30, 1999, compared to $6.3 million for the same
period in 1998. At September 30, 1999, excluding amounts owed by two large
former customers (ENCOTESA, the former Argentine national postal service
that was privatized in 1997, and IBM de Argentina) that are the subject of
litigation, approximately 14.0% of our gross trade accounts receivable were
past due more than six months but less than one year and approximately
26.0% were past due more than one year.
During the third quarter of 1999, we changed our provisioning policy
to remove the discretion previously granted to the presidents of our
operating subsidiaries to override the provisioning of amounts more than
180 days past due and to reserve 100% of our outstanding receivables due
from IBM de Argentina and ENCOTESA. The effect of this change resulted in a
charge of approximately $6.2 million with respect to receivables due from
IBM de Argentina and ENCOTESA. Excluding amounts owed by these two
entities, the change in our provisioning policy resulted in a charge of
approximately $4.1 million.
In addition, in light of a general slowdown in the collection of
receivables in our countries of operation commencing in the second quarter
of 1999, which we believe is due to economic difficulties experienced in
those countries, we added approximately $2.5 million to our allowance for
doubtful accounts in the third quarter of 1999. In particular, our
collection of receivables in Argentina was adversely affected by the
recession in that country during the first nine months of 1999. IMPSAT
Argentina's average days outstanding for net trade receivables due was 86
days at September 30, 1999. This represents an improvement from IMPSAT
Argentina's average days outstanding for net trade receivables due of 97
days at June 30, 1999, but a decline from 49 days at September 30, 1998.
Depreciation and Amortization. Our depreciation and amortization
expenses for the three and nine months ended September 30, 1999 totaled
$64.8 million and $88.1 million. This represents an increase of $54.9
million (or 553.6%) and $61.6 million (or 232.0%) from the corresponding
periods in 1998. Depreciation and amortization for IMPSAT Argentina for the
three and nine months ended September 30, 1999, totaled $37.0 million and
$49.2 million. This represents an increase of $31.7 million (or 602.4%) and
$34.2 million (or 227.6%), compared to IMPSAT Argentina's depreciation and
amortization for the three and nine months ended September 30, 1998. The
increase primarily reflected accelerated depreciation resulting from our
decision in the third
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<PAGE> 40
quarter of 1999 to change the depreciable life of some of our customer
premises telecommunications equipment from 10 years to 5 years in view of
technological advances in our industry. We expect our depreciation and
amortization expenses to increase in future periods due to our build-out of
the Broadband Network.
Interest Expense, Net. Our net interest expense for three and nine
months ended September 30, 1999 totaled $13.9 million and $42.0 million,
respectively, consisting of interest expense of $16.0 million and interest
income of $2.1 million for the three months ended September 30, 1999 and
interest expense of $47.1 million and interest income of $5.1 million for
the nine months ended September 30, 1999. Our net interest expense
increased $0.8 million (or 6.3%) and $11.7 million (or 38.8%),
respectively, from net interest expense for the three and nine months ended
September 30, 1998. IMPSAT Argentina's net interest expense for the three
and nine months ended September 30, 1999 totaled $3.7 million and $9.9
million, respectively ($1.8 million and $4.4 million, respectively, after
eliminating intercompany items). In comparison, 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). Net interest
expense at IMPSAT Colombia for the three and nine months ended September
30, 1999 totaled $2.4 million and $7.0 million ($2.4 million and $6.6
million after eliminating intercompany items), respectively. In comparison,
IMPSAT Colombia's net interest expense 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. Interest
expense with respect to intercompany loans are eliminated in our
Consolidated Statement of Operations.
The increase in our net interest expense reflects higher average
outstanding indebtedness in the first nine months of 1999 compared to the
first nine months of 1998 as a result of our issuance in June 1998 of $225
million principal amount of 12 3/8% Senior Notes due 2008. For the first
nine months of 1999, the average interest rate on our indebtedness was
11.9%, compared to an average interest rate of 13.6% for the first nine
months of 1998. Our total indebtedness as of September 30, 1999 was $423.8
million, as compared to $431.9 million as of September 30, 1998. We
anticipate that interest expense will increase in the future based on
expected increased levels of borrowing associated with our development of
the Broadband Network, including the two financing agreements that we
recently signed with Nortel Networks Inc. for a total of $297 million to
construct the Broadband Network in Argentina and Brazil. See " -- Liquidity
and Capital Resources."
Net Loss on Foreign Exchange. We recorded a net loss on foreign
exchange of $1.5 million and $9.5 million for the three and nine months
ended September 30, 1999, compared to a net gain of $0.9 million and $0.8
million for the corresponding periods in 1998. The increase net losses on
foreign exchange were principally caused by the devaluation of the
Brazilian real against the U.S. dollar.
Benefit from (Provision for) Income Taxes. We recorded a benefit from
income taxes (all of which are for foreign taxes) for the three and nine
months ended September 30, 1999 of $14.9 million and $19.0 million,
respectively, compared to a provision for income taxes of $0.1 million and
$2.4 million, respectively, for the corresponding periods in 1998. The
increased benefit from income taxes is derived from the expected net loss
carryforwards to be used in future periods as a result of the accelerated
depreciation expenses taken in the third quarter of 1999 with respect to
certain of our customer premises telecommunications equipment.
Comprehensive Loss. For the three and nine months ended September 30,
1999, we incurred a comprehensive loss of $63.4 million and $104.5 million,
compared to a comprehensive loss of $10.0 million and $23.3 million for the
three and nine months ended September 30, 1998. In addition to the items
described in the preceding paragraphs, the principal reasons for the
increase in our comprehensive loss as compared to prior periods related to:
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<PAGE> 41
- accrued dividends of $10.4 million on our preferred stock,
compared to $6.7 million during the first nine months of 1998
- the foreign currency translation adjustment loss of $3.5 million
for the first nine months of 1999 related to the effect of the
devaluation of the real on the stated carrying value of IMPSAT
Brazil's and Mandic's property, plant and equipment.
For the three and nine months ended September 30, 1999, IMPSAT
Argentina recorded net losses of $32.0 million and $34.8 million,
respectively, compared to net losses of $1.5 million and $4.7 million for
the corresponding periods in 1998. IMPSAT Colombia recorded net losses for
the three and nine months ended September 30, 1999 of $12.5 million and
$9.3 million compared to net income of $4.3 million and $7.9 million for
the corresponding periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We will continue to make significant capital expenditures in the next
several years in connection with the Broadband Network, the further
development of our operations in Brazil and new customer accounts (for
which we install our equipment on customer premises). We also have
substantial interest expense.
We anticipate that we will require approximately $115 million for
capital expenditures related to our existing telecommunications business
(including amounts spent to date) during the last quarter of 1999 through
the end of 2000, and significant amounts thereafter. At September 30, 1999,
we had total cash and cash equivalents of $146.1 million. Our cash and cash
equivalents relate principally to:
- unused proceeds from our 12 3/8% note offering in 1998
- unused proceeds of our $125 million equity private placement to
British Telecommunications in April 1999
- advances from Global Crossing totaling approximately $23.2
million in respect of our ongoing construction of the
Trans-Andean Crossing System
Our budget further contemplates that we will need approximately $320
million during the period from September 30, 1999 through the end of 2000
for capital expenditures related to the Broadband Network in Argentina and
Brazil. In October 1999, we executed definitive agreements with Nortel for
long term vendor financing commitments of up to approximately $297 million,
which we will use to pay for Nortel's construction of the segments of our
Broadband Network in Argentina and Brazil. See Item 5 of this Report. In
addition, we are negotiating a vendor financing agreement of approximately
$16 million with Lucent Technologies, Inc. as part of our agreement to
purchase Lucent fiber optic cable for the long-haul portions of the
Broadband Network in Argentina.
On October 4, 1999, we filed a registration statement on Form S-1 with
the Commission covering an initial public offering of up to $150 million of
our common stock. Subject to favorable market conditions, we expect to
consummate this offering under an effective registration statement in the
first quarter of 2000.
We do not have any other commitments regarding financing for the
Broadband Network. As a result, the further expansion and development of
the Broadband Network will depend upon our ability to obtain additional
financing. If we are unable to obtain additional financing, we will not be
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<PAGE> 42
able to maintain our levels of growth and market position in any of the
countries in which we operate, which could have a material adverse effect
on our results of operations.
In the nine months ended September 30, 1999, our operating activities
generated $14.3 million compared with $22.3 million generated during the
nine months ended September 30, 1998. Financing activities, principally our
issuance of common stock to a subsidiary of British Telecommunications in
April 1999, provided $122.8 million in net cash for the nine months ended
September 30, 1999, compared with $203.8 million for the nine months ended
September 30, 1998, principally related to our issuance of 12 3/8% notes in
June 1998. During the nine months ended September 30, 1999, we used $77.5
million (net) for investing activities, compared to $96.6 million for the
nine months ended September 30, 1998. We had a cash balance of $146.1
million as of September 30, 1999.
At September 30, 1999, we had leased satellite capacity with annual
rental commitments of approximately $26.0 million through the year 2003. In
addition, we had commitments to purchase telecommunications equipment
amounting to approximately $14.6 million.
YEAR 2000
The year 2000 problem refers to the failure of installed computerized
systems and software products to recognize or accept four digit date
entries. In this case, systems that have date-sensitive features might, for
example, recognize a date using "00" as the year 1900 rather than the year
2000. This problem could cause malfunctions in certain computer systems,
software and databases with respect to dates on or after January 1, 2000,
unless corrected.
Our 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 our computer systems and services to
continue to function properly in the year 2000. Where necessary, these
plans involve a combination of software modification, upgrades and
replacement. Our year 2000 compliance program includes the following
phases:
- establishment of a task force, which includes our senior
management, to address the year 2000 problem
- inventory and review of operating equipment
- circulation of questionnaires to our suppliers about equipment
readiness
- gathering of information from customers
- implementation of required upgrades or replacements
- testing of equipment in-house or at supplier site
- development of appropriate contingency plans
We have formed a senior management team consisting of a corporate vice
president and a senior management representative from each of our operating
subsidiaries. This team oversees our efforts to assess and resolve the year
2000 problem. Each operating subsidiary representative supervises a local
team composed of consultants and full-time and temporary employees who are
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<PAGE> 43
experts in, for example, engineering and information technology. Each local
team is accountable directly to our senior management team, which in turn
is accountable to our board of directors.
We have completed our inventory and a review of the equipment and
software we use to provide our services. Our inventory and review
determined that although the year 2000 problem might affect certain
technical monitoring, control and reporting functions of our information
technology and non-information technology systems, in most cases the basic
functionality of these systems should not be affected. We then developed
plans for remediation and testing of all equipment found to be
non-compliant. We have completed remediation and testing of approximately
98% of our information technology and non-information technology systems,
including all our critical equipment and systems, and expect to complete
testing and remediation by the end of November 1999.
To develop contingency plans with respect to the year 2000 problem, we
are analyzing potential operational risks that could lead to the
interruption of critical service functions and are formulating and
installing preventive and remedial measures, such as alternative sources of
power generation. We have completed several contingency plans and are in
the process of developing further contingency plans for worst case
scenarios dealing with the year 2000 problem. We expect to finalize all of
our contingency plans after completing final testing of systems and
software involved in our operations. Our contingency plans to date include
procedures designed to mitigate the negative effects of possible failures
of our own systems as well as those of our customers and/or suppliers.
Ensuring that our equipment and operational systems are year 2000
compliant is expected to increase costs in 1999. To date, we have incurred
approximately $2.3 million of costs related to the year 2000 problem. We
estimate that the cost of remediation will total approximately $2.5
million, including amounts spent to date. We estimate that most of these
costs will be incurred with respect to IMPSAT Argentina ($1.0 million) and
IMPSAT Colombia ($1.0 million), our largest operating subsidiaries. Of
these costs, we expect to spend approximately $0.4 million on system
inventory and review. While these cost estimates are not definitive,
management does not expect final costs to have a material adverse effect on
our financial position, results of operations or cash flows.
In addition, we face risks to the extent that the business systems or
products of our suppliers, satellite providers, customers and others with
whom we transact business are not year 2000 compliant. According to U.S.
government reports, some countries in Latin America are at risk of
potential year 2000-related disruptions, particularly in key sectors such
as telecommunications. In providing our services, our systems are required
to communicate electronically with customer-owned systems with respect to a
variety of functions. Failure of our customers' systems to be year 2000
compliant, particularly satellite providers, could impair our ability to
perform these functions. Furthermore, if any of our suppliers cannot
provide us with products, services or systems that meet the year 2000
requirements, our operating results could be materially adversely affected.
We have sent questionnaires to third parties, including suppliers,
satellite service providers and customers, to inquire about their
preparedness for the year 2000. To date, we have received responses to over
90% of these inquiries, including responses from all of our material
suppliers, satellite service providers and customers. Each respondent
indicated that its systems are or would be year 2000 compliant. We plan to
follow up on the few third parties that have yet to respond.
We cannot assure you that the systems of our customers and suppliers
will be year 2000 compliant. We could be adversely affected by the year
2000 problem if our suppliers, customers and other businesses do not
address this issue successfully. We are not yet able to estimate our costs
of addressing the potential impact on our operations of year 2000 failures
of our customers and
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<PAGE> 44
suppliers. However, based on the review we have conducted, we do not expect
that any of these costs will have a material adverse effect on our results
of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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<PAGE> 45
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Nortel Vendor Financing. On October 25, 1999, IMPSAT Argentina and
IMPSAT Brazil signed definitive agreements with Nortel to borrow up to
$149.1 million and $148.3 million, respectively, of long term vendor
financing. The financing will be used for infrastructure development in
connection with the construction by Nortel of the segments of our Broadband
Network that will link major cities in Argentina and Brazil. The
obligations of IMPSAT Argentina and IMPSAT Brazil under the financing,
which will be disbursed over a two year period with final maturity in 2006,
will be guaranteed by IMPSAT Corporation.
Retail Internet Sale to El Sitio. On November 5, 1999, IMPSAT
Argentina consummated the sale of its retail Internet business to El
Sitio for $6.2 million, of which $5.3 million was received on that date
with the remainder due in 24 equal monthly installments. Simultaneously,
the Company purchased 885,480 shares of El Sitio's 8% convertible
redeemable preferred stock for $6.2 million. On November 12, 1999, The
Company acquired an additional 428,458 shares of El Sitio's 8% convertible
redeemable preferred stock for $3.0 million, and the Company and El Sitio
expect to consummate the sale of IMPSAT's retail internet business in
Colombia to El Sitio by the end of 1999.
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. No reports on Form 8-K were filed for the
period covered under this Quarterly Report.
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<PAGE> 46
SIGNATURES
Pursuant to the requirements of the Securities Exchange 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 15, 1999
IMPSAT S.A.
By: /s/ Jose Torres
-------------------------------
Jose Torres
Director and
Chief Accounting Officer
Date: November 15, 1999
-44-
<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 SIX MONTHS ENDED JUNE 30, 1999 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-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 146,078
<SECURITIES> 0
<RECEIVABLES> 46,949
<ALLOWANCES> 18,050
<INVENTORY> 0
<CURRENT-ASSETS> 214,399
<PP&E> 317,219
<DEPRECIATION> 211,430
<TOTAL-ASSETS> 599,192
<CURRENT-LIABILITIES> 133,902
<BONDS> 384,113
145,389
0
<COMMON> 120,951
<OTHER-SE> 100,778
<TOTAL-LIABILITY-AND-EQUITY> 599,192
<SALES> 0
<TOTAL-REVENUES> 167,129
<CGS> 0
<TOTAL-COSTS> 230,099
<OTHER-EXPENSES> 10,215
<LOSS-PROVISION> 14,660
<INTEREST-EXPENSE> 41,976
<INCOME-PRETAX> (115,161)
<INCOME-TAX> 18,952
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (100,977)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
