<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 June 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 June 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
$5,674 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..............................29
Item 3. Quantitative and Qualitative Disclosures About Market Risk.........................................................40
PART II OTHER INFORMATION.......................................................................................................41
Item 1. Legal Proceedings..................................................................................................41
Item 2. Changes in Securities..............................................................................................41
Item 3. Defaults Upon Senior Securities....................................................................................41
Item 4. Submission of Matters to a Vote of Security-Holders................................................................41
Item 5. Other Information..................................................................................................41
Item 6. Exhibits and Reports on Form 8-K...................................................................................44
SIGNATURES......................................................................................................................45
</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, JUNE 30,
------------------------------------------
1998 1999
------------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 90,021 $ 151,501
Trade accounts receivable, net 46,974 54,094
Other receivables 20,110 22,933
Prepaid expenses 1,994 1,989
------------------ ------------------
Total current assets 159,099 230,517
------------------ ------------------
PROPERTY, PLANT AND EQUIPMENT, Net 330,726 346,894
------------------ ------------------
NON-CURRENT ASSETS:
Trade account receivables, net 5,143 5,143
Investment 10,708 10,402
Deferred financing costs, net 10,329 9,733
Deferred income taxes, net 3,248
Intangible assets, net 7,920 21,613
Other non-current assets 3,293 4,473
------------------ ------------------
Total non-current assets 37,393 54,612
------------------ ------------------
TOTAL $ 527,218 $ 632,023
================== ==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable - trade $ 32,416 $ 33,546
Short-term debt 19,262 21,007
Current portion of long-term debt 21,138 16,957
Accrued liabilities 12,628 10,901
Deferred income taxes, net 120
Other liabilities 12,346 14,170
------------------ ------------------
Total current liabilities 97,910 96,581
------------------ ------------------
LONG-TERM DEBT, Net 379,292 388,784
------------------ ------------------
OTHER LONG-TERM LIABILITIES 3,446 13,300
------------------ ------------------
COMMITMENTS AND CONTINGENCIES (Note 13)
MINORITY INTEREST 13,071 12,925
------------------ ------------------
REDEEMABLE PREFERRED STOCK, Convertible, Series A,
10%, cumulative dividend; 25,000 shares authorized,
issued and outstanding; liquidation preference
$5,674 per share 135,018 141,853
------------------ ------------------
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 June 30, 1999,
respectively 100,793 120,951
Additional paid in capital 100,778
Accumulated deficit (71,391) (109,339)
Treasury stock, 25,198,160 shares, at cost (125,000) (125,000)
Amount paid in excess of carrying value of assets
acquired from related party (5,395) (5,111)
Accumulated other comprehensive loss (526) (3,699)
------------------ ------------------
Total stockholders' deficit (101,519) (21,420)
------------------ ------------------
TOTAL $ 527,218 $ 632,023
================== ==================
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES FROM SERVICES $ 48,498 $ 57,658 $ 93,651 $ 111,218
---------- ---------- ---------- ----------
COST AND EXPENSES:
Variable cost of services 6,548 9,425 13,747 20,341
Leased telecommunications links 7,741 12,095 14,382 20,908
Salaries, wages and benefits 9,191 11,377 16,962 22,192
Selling, general and administrative 12,288 12,305 20,798 22,781
Depreciation and amortization 8,568 12,414 16,629 23,329
---------- ---------- ---------- ----------
Total cost and expenses 44,336 57,616 82,518 109,551
---------- ---------- ---------- ----------
Operating income 4,162 42 11,133 1,667
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSES):
Interest expense, net (9,406) (13,746) (17,191) (28,106)
Net loss on foreign exchange (181) (1,774) (158) (7,986)
Other income (expense), net 166 (83) 498 (564)
---------- ---------- ---------- ----------
Total other expenses (9,421) (15,603) (16,851) (36,656)
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES, CUMULATIVE
EFFECT AND MINORITY INTEREST (5,259) (15,561) (5,718) (34,989)
(PROVISION FOR) BENEFIT FROM INCOME TAXES (616) 1,874 (2,251) 4,017
---------- ---------- ---------- ----------
LOSS BEFORE CUMULATIVE EFFECT
AND MINORITY INTEREST (5,875) (13,687) (7,969) (30,972)
CUMULATIVE EFFECT OF A CHANGE IN
ACCOUNTING PRINCIPLE, NET OF TAX (1,269)
INCOME ATTRIBUTABLE TO MINORITY INTEREST (327) (305) (596) (141)
---------- ---------- ---------- ----------
NET LOSS BEFORE DIVIDENDS ON
REDEEMABLE PREFERRED STOCK (6,202) (13,992) (9,834) (31,113)
DIVIDENDS ON REDEEMABLE PREFERRED STOCK (3,507) (3,460) (3,507) (6,835)
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (9,709) $ (17,452) $ (13,341) $ (37,948)
========== ========== ========== ==========
</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 SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------------------------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (9,709) $ (17,452) $ (13,341) $ (37,948)
OTHER COMPREHENSIVE LOSS, NET OF TAX:
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 36 (3,173)
---------- ---------- ---------- ----------
COMPREHENSIVE LOSS $ (9,709) $ (17,416) $ (13,341) $ (41,121)
========== ========== ========== ==========
</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 TREASURY
SHARES STOCK CAPITAL DEFICIT(*) STOCK
--------------- --------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 75,594,480 $ 100,793 $ (71,391) $(125,000)
Dividends on redeemable preferred stock (6,835)
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
Net loss for the period (31,113)
--------------- --------------- --------------- --------------- ----------
BALANCE AT JUNE 30, 1999 (unaudited) 95,753,008 $ 120,951 $ 100,778 $ (109,339) $ (125,000)
=============== =============== =============== =============== ==========
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
AMOUNT PAID
IN EXCESS OF
CARRYING
VALUE
OF NET ASSETS ACCUMULATED
ACQUIRED OTHER
FROM COMPREHENSIVE MINORITY
RELATED PARTY LOSS TOTAL INTEREST
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1998 $ (5,395) $ (526) $ (101,519) $ 13,071
Dividends on redeemable preferred stock (6,835)
Common stock issuance 120,936
Amortization of amount paid in excess
of carrying value of net assets acquired
from related party 284 284
Foreign currency translation adjustment (3,173) (3,173) (287)
Net loss for the period (31,113) 141
--------------- --------------- --------------- ---------------
BALANCE AT JUNE 30, 1999 (unaudited) $ (5,111) $ (3,699) $ (21,420) $ 12,925
=============== =============== =============== ===============
</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>
- -------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------------------
1998 1999
------------------------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (9,834) $ (31,113)
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 16,629 23,329
Deferred income tax benefit (1,592) (3,368)
Change in minority interest 242 (146)
Changes in assets and liabilities:
Increase in trade accounts receivable, net (6,121) (7,120)
(Increase) decrease in prepaid expenses (723) 5
Increase in other receivables and other
non-current assets (436) (5,231)
Increase in accounts payable - trade 7,497 3,004
Increase in accrued and other liabilities 10,711 97
Increase (decrease) in other long-term liabilities 696 (1,392)
------------ ------------
Net cash provided by (used in) operating activities 18,338 (21,935)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (48,226) (40,338)
Cash paid in Mandic S.A. acquisition, net (6,307)
Cash paid in IMPSAT Brazil merger (5,100)
(Increase) decrease in investment (5,001) 306
------------ ------------
Net cash used in investing activities (64,634) (40,032)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from short-term debt 15,036 1,745
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 228,097 16,681
Repayments of long-term debt (6,638) (12,742)
------------ ------------
Net cash provided by financing activities 236,495 126,620
------------ ------------
EFFECT OF EXCHANGE RATE CHANGE
ON CASH AND CASH EQUIVALENTS (3,173)
------------ ------------
NET INCREASE IN CASH AND
CASH EQUIVALENTS 190,199 61,480
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 10,439 90,021
------------ ------------
CASH AND CASH EQUIVALENTS AT END
OF THE PERIOD $ 200,638 $ 151,501
============ ============
(Continued)
</TABLE>
- 6 -
<PAGE> 9
IMPSAT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
----------------------------------
1998 1999
----------------------------------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $20,317 $ 32,314
============ ================
Foreign income taxes paid 1,225
================
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
(Increase) decrease in equipment in transit $ (113) $ 1,874
============ ================
Accrued dividends on redeemable preferred stock $ 3,507 $ 6,835
============ ================
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 and Brazil.
The Company's operating subsidiaries at June 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
Brazil Mandic BBS Planejamento e Informatica S.A. 75.1
</TABLE>
In addition, the Company owns International Satellite Capacity Holdings, NG
(Liechtenstein) which serves an intermediary function to the Company and
its operating subsidiaries.
2. MERGERS AND ACQUISITIONS
On June 1, 1998, the Company acquired from Nevasa Holdings Limited
("Nevasa"), the Company's parent, 99.9% of the capital stock of IMPSAT
Comunicacoes Ltda. ("IMPSAT Brazil"), a Brazilian company, for
approximately $5.7 million. The purchase price for 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
- 8 -
<PAGE> 11
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.
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.
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
<S> <C>
Estimated fair value of net assets acquired $1,794
Goodwill 7,991
-----
Purchase price $9,785
======
</TABLE>
On July 28, 1999 the Company acquired the remaining 24.9% interest in
Mandic S.A. for $3.7 million.
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.
INTERIM FINANCIAL INFORMATION - The unaudited consolidated statements as of
June 30, 1999 and for the six months ended June 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 six-month periods ended June 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
- 9 -
<PAGE> 12
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 six months ended June 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
INVESTMENT - Investment represents a less than 1.0% ownership interest (at
June 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 $8.0 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
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 six months ended June 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.
DEVALUATION - The Brazilian Central Bank introduced changes in the exchange
policies by the end of the second week of January 1999. These changes
eliminated the exchange range whereby the fluctuation margin of the
Brazilian real in relation to the United States dollar was managed,
allowing the market to freely negotiate the rate of exchange. The Brazilian
real has experienced a significant
- 10 -
<PAGE> 13
decline in value in relation to the United States dollar as compared with
the prevailing exchange rates of December 31, 1998. As a result of this
devaluation, the Company has recorded approximately $8.3 million in foreign
exchange losses during the six-month period ended June 30, 1999, which are
reflected in net gain (loss) on foreign exchange in the accompanying
financial statements. The Company continues to operate in Brazil and
therefore has exposure to further currency exchange risk.
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, JUNE 30,
1998 1999
------------------------------
(UNAUDITED)
<S> <C> <C>
IMPSAT Argentina $ 36,378 $ 45,673
IMPSAT Colombia 8,480 9,062
IMPSAT Venezuela 4,293 5,114
IMPSAT Ecuador 1,559 1,925
IMPSAT USA 2,836 1,571
IMPSAT Brasil and Mandic S.A. 2,963 1,769
Others 574 915
------------- --------------
Total 57,083 66,029
Less: allowance for doubtful accounts (10,109) (11,935)
------------- --------------
Trade accounts receivable, net $ 46,974 $ 54,094
============= ==============
</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.
- 11 -
<PAGE> 14
The activity for the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
---------------------------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $ 5,933 $ 10,109
Provision for doubtful accounts 5,312 3,055
Write-offs, net of recoveries (1,136) (1,229)
------------- -------------
Ending balance $ 10,109 $ 11,935
============= =============
</TABLE>
As part of the allowance for doubtful accounts described in the preceding
tables, at June 30, 1999, the Company had reserved approximately 51.8% (or
$1.2 million) of the total amount due to IMPSAT Argentina with respect to a
receivable totaling $2.2 million relating to IBM de Argentina S.A. ("IBM").
The past due receivable (the "IBM Receivable") was recorded for services
provided under a subcontract between IMPSAT Argentina and IBM relating to
Banco de la Nacion Argentina ("BNA"). BNA, a state owned bank and the
largest bank in Argentina, is and has been one of the Company's ten largest
customers. IBM has filed suit against BNA for amounts due and owing under
its direct contract with BNA. IMPSAT Argentina currently has a direct
contract with BNA for the provision of private network telecommunications
services as to which BNA is generally current.
The payment of the receivable by BNA to IBM is subject to the approval of
the General Auditor of Argentina, which office is conducting an audit of
the procedures used by BNA in awarding the contract. During 1997, IMPSAT
Argentina conducted negotiations with IBM that resulted in the execution of
an agreement between IMPSAT Argentina and IBM contemplating the possible
cancellation of the amounts due to IMPSAT Argentina in respect of the IBM
receivable in exchange for a payment to IMPSAT Argentina of approximately
$1.5 million plus VAT in the event that the judge overseeing IBM's suit
against BNA authorized IBM's settlement of the amount due to IMPSAT
Argentina as not affecting IBM's claims against BNA. The contemplated
judicial approval was not received prior to the date established for such
authorization in IMPSAT Argentina's agreement with IBM (April 30, 1998),
and IBM therefore declined to make the contemplated payment. On December
14, 1998, IMPSAT Argentina filed suit against IBM for amounts due and
arising under the IBM Receivable totaling $2.2 million, plus interest on
such amounts.
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, JUNE 30,
1998 1999
-------------------------------
(UNAUDITED)
<S> <C> <C>
IMPSAT Argentina $ 6,439 $ 6,540
IMPSAT Colombia 5,064 6,631
IMPSAT Venezuela 2,527 1,942
IMPSAT Ecuador 835 775
IMPSAT Mexico 1,078 421
IMPSAT Brazil and Mandic S.A. 1,124 3,611
Others 3,043 3,013
----------- ------------
Total $ 20,110 $ 22,933
=========== ============
</TABLE>
- 12 -
<PAGE> 15
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------------------------
(UNAUDITED)
<S> <C> <C>
Land $ 1,750 $ 2,686
Building and improvements 27,957 27,582
Operating communications equipment 400,380 436,450
Furniture, fixtures and other equipment 20,271 20,052
---------- ----------
Total 450,358 486,770
Less: accumulated depreciation (126,728) (147,862)
---------- -----------
Total 323,630 338,908
Equipment in transit 4,289 2,415
Projects in process 2,807 5,571
---------- ----------
Property, plant and equipment, net $ 330,726 $ 346,894
========== ==========
</TABLE>
The recap of accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------------------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $ 92,255 $ 126,728
Depreciation expense 36,027 22,296
Disposals and retirements (1,554) (1,162)
---------- ----------
Ending balance $ 126,728 $ 147,862
========== ==========
</TABLE>
7. SHORT-TERM DEBT
The Company's short-term debt is detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 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 $ 11,520
IMPSAT Colombia 5,859 2,349
IMPSAT Ecuador 738
Others 203 747
Short-term credit facilities,
denominated in local currencies; local
interest rates ranging from 12.0% to 25.0%;
IMPSAT Argentina 2,000 3,693
IMPSAT Colombia 1,960
IMPSAT Ecuador 200
---------- ----------
Total short-term debt $ 19,262 $ 21,007
========== ==========
</TABLE>
- 13 -
<PAGE> 16
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, JUNE 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:
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 26,673
Local currency (interest rates 19.92% - 40.75%) 6,156 14,715
IMPSAT Argentina (6.25% - 6.75%), maturing semiannually
through 2003, collateralized by investment 4,802 3,538
IMPSAT USA (8.25% - 8.75%), mortgage and other
collateralized debts 2,066 1,898
IMPSAT Venezuela (9.00% - 10.75%), maturing during 2001 3,508 2,652
IMPSAT Brazil (12.69%), maturing during 2004 2,609
Eximbank notes payable (7.00%), maturing semiannually
through 1999 1,694 847
Eximbank notes payable (7.00%), maturing semiannually
through 2003 and 2004 2,809
----------- ------------
Total long-term debt 400,430 405,741
Less: current portion (21,138) (16,957)
----------- ------------
Long-term debt, net $ 379,292 $ 388,784
=========== ============
</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 six months
ended June 30, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
<S> <C> <C>
Current income taxes $ 3,843 $ 788
Deferred income taxes (1,592) (4,805)
---------- ---------
Provision for (benefit from) income taxes $ 2,251 $ (4,017)
========== =========
</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.
- 14 -
<PAGE> 17
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 June 30, 1999 into approximately 22.9%
of the Common Stock of the Company.
The following are some of the principal features of the Series A Preferred
Stock: (a) cumulative dividends at the rate of 10% per annum, compounded
quarterly and, with certain exceptions, payable in kind; (b) mandatorily
redeemable in cash by the Company at maturity (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 six months ended June 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 six months ended June 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
- 15 -
<PAGE> 18
loss and comprehensive loss would have increased by approximately $0.1
million during the six months ended June 30, 1999.
12. OPERATING SEGMENT INFORMATION
The Company's operating segment information, by subsidiary (eliminating
intercompany transactions), as of and for the six months ended June 30,
1998 and 1999, is as follows:
<TABLE>
<CAPTION>
June 30,
------------------------------------------
1998 1999
---- ----
<S> <C> <C>
TOTAL ASSETS
- ------------
Argentina $ 247,005 $ 230,704
Colombia 102,064 107,864
Venezuela 32,203 40,822
Mexico 9,912 10,217
Ecuador 18,142 23,742
USA 9,355 15,488
Brazil 10,624 49,206
Parent Company and Others 163,926 153,980
---------- ---------
CONSOLIDATED TOTAL $ 593,231 $ 632,023
========== =========
NET REVENUES FROM SERVICES:
- --------------------------
SATELLITE BASED:
---------------
VSAT TECHNOLOGY
---------------
Argentina $ 18,839 $ 20,724
Colombia 7,410 5,996
Venezuela 2,146 2,800
Mexico 52 136
Ecuador 791 897
USA 0 0
Brazil 0 799
Parent Company and Others 0 0
--------- ---------
CONSOLIDATED TOTAL $ 29,238 $ 31,352
========= =========
SCPC TECHNOLOGY
---------------
Argentina $ 12,674 $ 12,858
Colombia 9,842 13,369
Venezuela 2,816 5,546
Mexico 1,300 1,240
Ecuador 2,198 3,271
USA 3,458 3,116
Brazil 181 930
Parent Company and Others 0 0
--------- ---------
CONSOLIDATED TOTAL $ 32,469 $ 40,330
========= =========
TERRESTRIAL BASED
- -----------------
Argentina $ 7,639 $ 8,301
Colombia 7,287 6,216
Venezuela 314 670
Mexico 27 73
Ecuador 257 486
USA 0 0
Brazil 11 64
</TABLE>
- 16 -
<PAGE> 19
<TABLE>
<S> <C> <C>
Parent Company and Others 0 0
--------- ---------
CONSOLIDATED TOTAL $ 15,535 $ 15,810
========= =========
VALUE ADDED
- -----------
Argentina $ 8,382 $ 10,044
Colombia 3,556 4,525
Venezuela 1,111 1,158
Mexico 266 123
Ecuador 893 1,552
USA 890 1,333
Brazil 312 669
Parent Company and Others 999 4,322
--------- ---------
CONSOLIDATED TOTAL $ 16,409 $ 23,726
========= =========
TOTAL
- -----
Argentina $ 47,534 $ 51,927
Colombia 28,095 30,106
Venezuela 6,387 10,174
Mexico 1,645 1,572
Ecuador 4,139 6,206
USA 4,348 4,449
Brazil 504 2,462
Parent Company and Others 999 4,322
--------- ---------
CONSOLIDATED TOTAL $ 93,651 $ 111,218
========= =========
OPERATING INCOME (LOSS)
- -----------------------
Argentina $ 4,817 $ 5,703
Colombia 11,319 7,784
Venezuela 693 957
Mexico (1,055) (1,780)
Ecuador 1,208 1,318
USA 953 (291)
Brazil (5,175) (5,865)
Parent Company and Others (1,627) (6,159)
--------- ---------
CONSOLIDATED TOTAL $ 11,133 $ 1,667
========= =========
</TABLE>
13. COMMITMENTS AND CONTINGENCIES
The Company leases telecommunications links with average annual rental
commitments of approximately $25.0 million through the year 2003. In
addition, the Company has commitments to purchase communications equipment
amounting to approximately $10.6 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 June 30, 1999, the balance outstanding on the credit facility
amounted to approximately $2.7 million.
Impsat Brazil has entered into a $3.3 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 a like amount certificate
of deposit was placed at the financial institution by the Company. The
- 17 -
<PAGE> 20
arrangements establish a right of setoff and, accordingly, the amounts have
been netted for purposes of the consolidated financial statement
presentation. The arrangements expire in September 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. The Company
has 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. The
Company will continue to assess the effect that the ENCOTESA receivables
situation will have on its results of operations, liquidity or capital
resources.
14. SUBSEQUENT EVENTS
Nortel Networks Letter of Intent. Pursuant to a letter of intent dated May
17, 1999 between the Company and Nortel Networks Inc., Nortel Networks has
agreed to design and construct the first phase of the Company's Broadband
Network for what is currently estimated to be up to approximately $250
million. The letter of intent contemplates the Company's negotiation and
execution of a turnkey agreement with Nortel Networks to develop the first
phase of the Broadband Network.
The letter of intent with Nortel Networks also contemplates the Company's
entering into a vendor financing agreement with Nortel Networks. Under this
vendor financing agreement, Nortel Networks is expected to provide the
Company with loans in an aggregate amount of up to approximately $250
million, which will be used by the Company to finance the purchase of
certain telecommunications equipment, software and services pursuant to the
definitive turnkey agreement contemplated by the letter of intent and to
provide the Company with working capital.
The obligation of Nortel Networks to enter into the turnkey agreement and
to provide the vendor financing is subject to numerous conditions,
including the negotiation, execution and delivery of definitive
documentation relating to the these matters. There can be no assurance that
the Company will be able to reach agreement with Nortel Networks on the
terms of such definitive documentation.
Framework Agreement with Global Crossing. On July 27, 1999, the Company
entered into a framework agreement with Global Crossing Development Co., a
subsidiary of Global Crossing Ltd., that contemplates the Company's
entering into a series of definitive agreements to construct for Global
Crossing, on a turnkey basis before the end of the first quarter of 2001,
certain portions of the network that will connect Global Crossing's South
American submarine cable system's landing points in Argentina, Brazil,
Chile, Colombia, Peru and Venezuela to major cities in these countries.
As part of these arrangements, the Company will construct the terrestrial
portion of Global Crossing's South American network between Las Toninas,
Argentina and Valparaiso, Chile (which portion is called the Trans Andean
Crossing System) through the Company's: (i) construction of three ducts and
related facilities between Las Toninas and Buenos Aires, Argentina; (ii)
licensing to Global Crossing of a duct on the Company's Broadband Network
between the cities of Buenos Aires and Mendoza in Argentina; (iii)
construction of three ducts and related facilities between Mendoza,
Argentina and Santiago, Chile; and (iv) construction of telehouses in
Buenos Aires, Argentina and Santiago, Chile.
The Company will also construct telehouses in major South American cities,
including: Rio de Janeiro and Sao Paulo, Brazil; Bogota, Colombia; Lima,
Peru; and Caracas, Venezuela. The Company will lease space in the
telehouses to Global Crossing for its network operations.
As contemplated by the framework agreement, it is also expected that the
Company will enter into definitive agreements with Global Crossing
providing for the Company's: (i) construction of fiber
- 18 -
<PAGE> 21
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; (ii) purchase from Global Crossing of
indefeasible rights to use ("IRU") capacity valued at not less than $46
million on any of Global Crossing's fiber optic networks worldwide; and
(iii) maintenance of Global Crossing's Trans Andean Crossing System and the
terrestrial backhauls in Brazil, Colombia, Peru and Venezuela.
Assuming that the definitive agreements are executed before August 30,
1999, the Company plans to commence construction of the Trans Andean
Crossing System in September 1999. It is anticipated that Global Crossing
will pay the Company approximately $64 million for the turnkey construction
of the Trans-Andean Crossing System.
The transactions contemplated by the framework agreement are still subject
to negotiation of definitive documentation and various other conditions,
including any required governmental approvals and, accordingly, there can
be no assurance that these transactions will be completed on favorable
terms, if at all.
Lucent Letter of Intent. On July 16, 1999, the Company entered into a
letter of intent with Lucent Technologies S.A. Argentina, with respect to
the negotiation and execution of definitive agreement for the Company's
purchase from Lucent of at least 1,840 km of fiber optic cable and related
equipment and for Lucent to provide certain technical assistance in
connection with the installation of this fiber optic cable in Argentina.
The Company intends to use the fiber optic cable for portions of phase one
of the Broadband Network. Assuming the execution of a definitive purchase
agreement, it is expected that the consideration the Company will pay for
the Lucent fiber optic cable would be approximately $16 million. The letter
of intent also contemplates Lucent entering into a definitive agreement to
provide the Company with vendor financing in connection with the Company's
purchases of the fiber optic cable and related equipment. The proposed
purchase and vendor financing agreements are subject to negotiation of
definitive documentation, which is expected to be completed in October
1999.
Framework Agreement with El Sitio. On August 4, 1999, the Company entered
into a Framework Agreement with El Sitio International Corp. 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. 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.
The transactions contemplated by the El Sitio Framework Agreement are
subject to the negotiation of definitive documentation and various other
conditions, including governmental approvals, and accordingly, there can be
no assurance that these transactions will be completed. Subject to the
satisfaction of these conditions, the transactions are expected to be
consummated by the end of 1999.
* * * * *
- 19 -
<PAGE> 22
IMPSAT S.A.
BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
1998 1999
---------------------------------------
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 13,849 $ 588
Trade accounts receivable, net 28,068 36,207
Receivable from affiliated companies 2,092 2,810
Other receivables 6,439 6,540
Prepaid expenses 362 284
----------- -----------
Total current assets 50,810 46,429
----------- -----------
PROPERTY, PLANT AND EQUIPMENT, Net 167,653 170,746
----------- -----------
NON-CURRENT ASSETS:
Trade account receivables, net 5,143 5,143
Investment 10,708 10,402
Other non-current assets 530 2,325
----------- -----------
Total non-current assets 16,381 17,870
----------- -----------
TOTAL $ 234,844 $ 235,045
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable - trade $ 18,242 $ 16,991
Short-term debt 13,000 15,213
Advances from affiliated companies 62,721 63,140
Current portion of long-term debt 64,694 63,900
Accrued liabilities 655 781
Deferred income taxes, net 4,301 4,341
Other liabilities 4,402 5,823
----------- -----------
Total current liabilities 168,015 170,189
----------- -----------
LONG-TERM DEBT, Net 1,802 3,294
----------- -----------
OTHER LONG-TERM LIABILITIES 1,485 802
----------- -----------
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
June 30, 1999 3 3
Paid in capital 26,442 26,442
Retained earnings 37,097 34,315
----------- -----------
Total stockholders' equity 63,542 60,760
----------- -----------
TOTAL $ 234,844 $ 235,045
=========== ===========
</TABLE>
See notes to financial statements.
- 20 -
<PAGE> 23
IMPSAT S.A.
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------------------------------------------
1998 1999 1998 1999
---- ---- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES FROM SERVICES $ 24,156 $ 27,890 $ 48,236 $ 54,387
---------- ---------- ---------- ----------
COST AND EXPENSES:
Variable cost of services 3,900 5,875 8,467 11,596
Leased telecommunications links 3,072 4,419 5,903 8,271
Salaries, wages and benefits 4,081 4,874 7,973 9,260
Selling, general and administrative 6,776 5,590 11,321 9,608
Depreciation and amortization 4,956 6,494 9,755 12,240
---------- ---------- ---------- ----------
Total cost and expenses 22,785 27,252 43,419 50,975
---------- ---------- ---------- ----------
Operating income 1,371 638 4,817 3,412
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSES):
Interest expense, net (3,486) (3,263) (6,582) (6,160)
Other income (expense), net 43 38 6
---------- ---------- ---------- ----------
Total other expense (3,443) (3,263) (6,544) (6,154)
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (2,072) (2,625) (1,727) (2,742)
PROVISION FOR INCOME TAXES (384) (1,434) (40)
---------- ---------- ---------- ----------
NET LOSS $ (2,456) $ (2,625) $ (3,161) $ (2,782)
========== ========== ========== ==========
</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 (2,782) (2,782)
------ --------- --------- ---------
BALANCE AT JUNE 30, 1999 $ 3 $ 26,442 $ 34,315 $ 60,760
====== ========= ========= =========
</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>
- ----------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
---------------------------------
1998 1999
---------------------------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,161) $ (2,782)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Amortization and depreciation 9,755 12,240
Deferred income tax provision 1,434 40
Changes in assets and liabilities:
Increase in trade accounts receivable, net (865) (8,139)
(Increase) decrease in prepaid expenses (1,024) 78
Increase in other receivables and other non-current assets (2,557) (2,614)
Increase (decrease) in accounts payable - trade 4,888 (1,387)
Increase in accrued and other liabilities 748 1,547
Increase (decrease) in other long-term liabilities 424 (683)
-------- --------
Net cash provided by (used in) operating activities 9,642 (1,700)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (19,253) (15,197)
(Increase) decrease in investment (5,001) 306
-------- --------
Net cash used in investing activities (24,254) (14,891)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from short-term debt 10,307 2,213
Changes in advances from \ to affiliates 24,893 419
Proceeds from long-term debt 5,186 698
Repayments of long-term debt (2,252)
Irrevocable capital contribution 3,500
-------- --------
Net cash provided by (used in) financing activities 41,634 3,330
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 27,022 (13,261)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD 6,065 13,849
-------- --------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD $ 33,087 $ 588
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3,999 $ 5,183
======== ========
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Equipment in transit $ 2,207 $ 136
======== ========
</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 June 30,
1999 and for the six months ended June 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 six
months ended June 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 six months ended June 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:
- 24 -
<PAGE> 27
Building and improvement 10-25 years
Operating communications equipment 10 years
Furniture, fixtures and other equipment 5-10 years
Investment - Investment represents a less than 1% ownership interest by the
IMPSAT S.A. in entities established for the purchase and leasing of leased
telecommunications link 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 techniques.
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, JUNE 30,
1998 1999
------------------------------------
(UNAUDITED)
<S> <C> <C>
Trade accounts receivable $ 36,378 $ 45,673
Less: allowance for doubtful accounts (8,310) (9,466)
----------- -----------
Trade accounts receivable, net $ 28,068 $ 36,207
=========== ===========
</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.
As part of the allowance for doubtful accounts described in the preceding
tables, at June 30, 1999, IMPSAT S.A. had reserved approximately 51.8% (or
$1.2 million) of the total amount due to it with respect to a receivable
totaling $2.2 million relating to IBM de Argentina S.A. ("IBM"). The past
due receivable (the "IBM Receivable") was recorded for services provided
under a subcontract between IMPSAT S.A. and IBM relating to Banco de la
Nacion Argentina ("BNA"). BNA, a state owned bank and the largest bank in
Argentina, is and has been one of IMPSAT S.A.'s 10 largest customers. IBM
has filed suit against BNA for amounts due and owing under its direct
contract
- 25 -
<PAGE> 28
with BNA. IMPSAT Argentina currently has a direct contract with BNA for the
provision of private network telecommunications services as to which BNA is
generally current.
The payment of the receivable by BNA to IBM is subject to the approval of
the General Auditor of Argentina, which office is conducting an audit of
the procedures used by BNA in awarding the contract. During 1997, IMPSAT
S.A. conducted negotiations with IBM that resulted in the execution of an
agreement between IMPSAT S.A. and IBM contemplating the possible
cancellation of the amounts due to IMPSAT S.A. in respect of the IBM
receivable in exchange for a payment to IMPSAT S.A. of approximately $1.5
million plus VAT in the event that the judge overseeing IBM's suit against
BNA authorized IBM's settlement of the amount due to IMPSAT S.A. as not
affecting IBM's claims against BNA. The contemplated judicial approval was
not received prior to the date established for such authorization in IMPSAT
S.A.'s agreement with IBM (April 30, 1998), and IBM therefore declined to
make the contemplated payment. On December 14, 1998, IMPSAT S.A. filed suit
against IBM for amounts due and arising under the IBM Receivable totaling
$2.2 million, plus interest on such amounts.
The activity for the allowance for doubtful account is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------------------------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $ 5,497 $ 8,310
Provision for doubtful accounts 3,453 1,673
Write-offs, net of recoveries (640) (517)
--------- ---------
Ending balance $ 8,310 $ 9,466
========= =========
</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, JUNE 30,
1998 1999
------------------------------------------
(UNAUDITED)
<S> <C> <C>
Building, installations and improvements $ 16,671 $ 16,905
Operating communications equipment 226,480 239,345
Furniture, fixtures and other equipment 8,399 9,072
---------- ---------
Total 251,550 265,322
Less: accumulated depreciation (87,641) (99,625)
---------- ---------
Total 163,909 165,697
Equipment in transit 1,825 1,961
Projects in process 1,919 3,088
---------- ---------
Property, plant and equipment, net $ 167,653 $ 170,746
========== =========
</TABLE>
The recap of accumulated depreciation is as follows:
- 26 -
<PAGE> 29
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
-----------------------------------------------
(UNAUDITED)
<S> <C> <C>
Beginning balance $ 68,654 $ 87,641
Depreciation expense 20,515 12,240
Disposals and retirements (1,528) (256)
----------- -----------
Ending balance $ 87,641 $ 99,625
=========== ===========
</TABLE>
6. SHORT-TERM DEBT
IMPSAT S.A.'s short-term debt is detailed as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------------------------------
(UNAUDITED)
<S> <C> <C>
Short-term credit facilities, denominated in
U.S. dollars, interest rates ranging from 8% to 14.5% $ 11,000 $ 11,520
Pesos, interest rate from 12 to 12.75% 2,000 3,693
------------- -------------
Total short-term debt $ 13,000 $ 15,213
============= =============
</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, JUNE 30,
1998 1999
----------------------------------------
(UNAUDITED)
<S> <C> <C>
Term notes payable (6.63% - 12.63%) maturing
semiannually though 1999, collateralized by certain assets $ 64,802 $ 63,538
Eximbank notes payable (7%), maturing semiannually
through 1999 1,694 847
Eximbank notes payable (8%), maturing
semiannually through 2003 and 2004 - 2,809
------------ ------------
Total long-term debt 66,496 67,194
Less: current portion (64,694) (63,900)
------------ ------------
Long-term debt, net $ 1,802 $ 3,294
============ ============
</TABLE>
8. INCOME TAXES
The provision for income taxes for the six months ended June 30, 1999 and 1998
consists of $40,000 and $1.4 million respectively in deferred taxes. The
statutory tax rate in Argentina is 35%.
- 27 -
<PAGE> 30
9. COMMITMENTS AND CONTINGENCIES
IMPSAT S.A. leases leased telecommunications link with annual rental
commitments of approximately $18.0 million through the year 2001. In
addition, IMPSAT S.A. has commitments to purchase communications equipment
amounting to approximately $7.5 million at June 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
$3.3 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 expires in September 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. IMPSAT S.A. has
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.'s management based on the advice of local legal counsel.
IMPSAT S.A. will continue to assess the effect that the ENCOTESA
receivables situation will have on its results of operations, liquidity or
capital resources.
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.
Agreement with El Sitio. IMPSAT S.A. has formed an agreement in principle
with El Sitio International Corp. for the sale of IMPSAT S.A.'s retail
Internet businesses to El Sitio for approximately $6.2 million, subject to
certain adjustments. 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.
The transaction contemplated by the agreement with El Sitio is subject to
the negotiation of definitive documentation and various other conditions,
including governmental approvals, and accordingly, there can be no
assurance that these transactions will be completed. Subject to the
satisfaction of these conditions, the transaction is expected to be
consummated by the end of 1999.
- 28 -
<PAGE> 31
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We are a leading provider of private telecommunications network
services in Latin America. We offer tailor-made, integrated
telecommunications solutions, with an emphasis on data transmission, for
national and multinational companies, financial institutions, governmental
agencies and other business customers. We currently have operations in
Argentina, Colombia, Venezuela, Ecuador, Mexico, Brazil and the United
States. In addition, we are building an extensive pan-Latin American high
capacity fiber optic network, which we believe will allow us to expand and
enhance the services we provide. We call this network the Broadband
Network. We expect the first phase of the Broadband Network, which will
connect points across Argentina and Brazil, to be completed by November
2000.
We currently provide our telecommunications and data services through
our advanced fiber optic, satellite and microwave telecommunications
networks. Our networks consist of owned teleports, earth stations, fiber
optic and microwave links, and leased satellite and fiber optic links. We
operate 12 metropolitan area networks in some of the largest cities in
Latin America, including Buenos Aires, Sao Paulo, Bogota and Caracas.
Revenues. We provide services to our customers pursuant to contracts
which typically range from six months to five years, but generally are for
three years. The customer generally pays an installation charge at the
beginning of the contract and a monthly fee based on the quantity and type
of equipment installed. The fees stipulated in the contracts are generally
denominated in U.S. dollar equivalents. Services (other than installation
fees) are billed on a monthly, predetermined basis, which coincide with the
rendering of the services. We report net revenues, which are after
deductions for sales taxes.
We recently 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 renew and/or expand our contracts with existing
customers, the prices we charge to our customers have generally declined.
As a result, our revenues per unit of satellite capacity utilized have been
decreasing relative to prior years. 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, to a lesser
extent, in Colombia. To compensate for slower growth in maturing markets,
we seek to expand into new countries and to provide new services.
Although we believe that our geographic diversification provides some
protection against economic downturns in any particular country, our
results and 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 countries account for only
a small portion of our consolidated revenues, each of the countries in
which we operate has experienced economic contraction and financial
difficulties during 1999. In particular, Argentina and Colombia, our two
largest markets, have during 1999 experienced significant recessions. It is
impossible to predict whether current economic conditions prevalent in
Latin America will improve or worsen, or what effect any such circumstances
or conditions, which are entirely outside of our control, will have on the
countries in which we operate or upon our business. Such conditions and
events may have 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:
- 29 -
<PAGE> 32
- demand for and market acceptance of our products and services
- introductions of 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
In addition, although a relatively large portion of our expenses are
predictable in the short-term, particularly with respect to leased
telecommunications links, depreciation, interest expenses and personnel
salaries and wages, we expect these expenses to increase in future periods
due to the planned expansion of our operations and our network capacity in
connection with the development of the Broadband Network. We believe that
our operating results in past periods cannot be relied upon as indicators
of future performance.
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 the selling, general and administrative costs required
in connection with developing and commencing the Broadband Network's
operations. We can provide no assurance that we will be able to generate
operating income or positive cash flows in the future or that our operating
losses and negative cash flows will not increase. Any failure to generate
operating income or positive cash flows could have 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. Installation and
de-installation costs are the costs we incur when we install or remove
earth stations, microstations and other equipment on or from customer
premises. Our selling, general and administrative ("SG&A") 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
- 30 -
<PAGE> 33
Currency Risks. Our contracts with customers generally provide for
payment in U.S. dollars or for payment in local currency linked to the
exchange rate at the time of invoicing between the local currency and the
U.S. dollar. Accordingly, inflationary pressures on local economies in the
countries in which we operate did not have a material effect on our
revenues during 1998 and the first six months of 1999. Inflation has in the
past and could in the future, adversely affect the economies of certain of
the countries in which we operate by, among other things, increasing the
cost of local capital and capital inflows from the United States and
elsewhere. Given that the exchange rate is generally set at the date of
invoicing and that we in some cases experience substantial delays in
collecting receivables, we are exposed to exchange rate risk. Furthermore,
pursuant to Brazilian law, our contracts with customers in Brazil cannot be
linked to the exchange rate between the Brazilian real and the U.S. dollar.
Therefore, our expansion in Brazil will increase our exposure to exchange
rate risks.
The following financial table summarizes our historical results of operations:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 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............. $48,498 100.0% $57,658 100.0% $93,651 100.0% $111,218 100.0%
Variable cost of services.............. 6,548 13.5 9,425 16.3 13,747 14.7 20,341 18.3
Leased telecommunications links........ 7,741 16.0 12,095 21.0 14,382 15.4 20,908 18.8
Salaries, wages and benefits........... 9,191 19.0 11,377 19.7 16,962 18.1 22,192 20.0
Selling, general and administrative
expenses............................... 12,288 25.3 12,305 21.3 20,798 22.2 22,781 20.5
Depreciation and amortization.......... 8,568 17.7 12,414 21.5 16,629 17.8 23,329 21.0
Interest expense, net.................. 9,406 19.4 13,746 23.8 17,191 18.4 28,106 25.3
Net loss on foreign exchange........... 181 0.4 1,774 3.1 158 0.2 7,986 7.2
(Provision for) benefit from foreign
income taxes........................... (616) (1.3) 1,874 3.3 (2,251) (2.4) 4,017 3.6
Comprehensive loss..................... 9,709 20.0 17,416 30.2 13,341 14.3 41,121 37.0
</TABLE>
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Revenues. Our net revenues for the three and six months ended June 30,
1999 totaled $57.7 million and $111.2 million, an increase of $9.2 million
(or 18.9%) and $17.6 million (or 18.8%) from net revenues for the same
periods in 1998. Economic difficulties in many of the countries in which we
operate and competitive pressures in Argentina and Colombia contributed to
our lower rate of revenue growth during the first half of 1999 compared to
prior periods. We anticipate that these conditions could affect subsequent
quarters.
The following table shows our revenues by operating subsidiary for the
periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------------------- -------------------------------
1998 1999 1998 1999
-------------- --------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
IMPSAT Argentina.... $23,598 $25,143 $47,534 $51,927
IMPSAT Colombia..... 14,258 14,494 28,095 30,106
IMPSAT Venezuela.... 3,395 4,956 6,387 10,174
IMPSAT Ecuador...... 2,293 3,005 4,139 6,206
IMPSAT Mexico....... 909 731 1,645 1,572
IMPSAT Brazil....... 504 909 504 2,462
Mandic S.A.......... 999 2,030 999 4,264
IMPSAT USA.......... 2,533 2,291 4,348 4,449
</TABLE>
Our revenue growth for the first half of 1999 was attributable to an
overall increase in the number of customers and services we provided to
them. Excluding Internet and Global Fax
- 31 -
<PAGE> 34
customers, we had a total of 1,579 customers at June 30, 1999, compared to
1,321 customers at June 30, 1998.
The adverse economic conditions experienced in Argentina and Colombia
and increased competition in the telecommunications industry during the
first half of 1999 resulted in certain of our customers canceling their
contracts or reducing the services we provide to them. For example, IMPSAT
Argentina's contract to provide private telecommunications network services
to Banco Bansud SA., one of Argentina's largest private commercial banks
and one of IMPSAT Argentina's top 10 customers in 1997, was terminated due
to pricing competition during the April 1999. IMPSAT Argentina recorded
$1.6 million in revenues from its contract with Banco Bansud during 1998.
In Colombia, our contracts to provide private telecommunications network
services to six of IMPSAT Colombia's customers within the Suramericana
group of companies were renegotiated during the first quarter of 1999. This
renegotiation resulted in an approximately 24% decrease in the prices
charged by IMPSAT Colombia for the services it provides under these
contracts. IMPSAT Colombia's revenues from its contracts with those six
companies in the Suramericana group totaled $2.0 million during 1998. The
Suramericana group of companies, which is a group of over 100 affiliated
financial services, food, textile and apparel, construction and real estate
companies, includes some of IMPSAT Colombia's largest customers such as
BanColombia S.A., a private bank headquartered in Bogota, Colombia and the
largest commercial bank in Colombia, and Corporacion Nacional de Ahorro y
Vivienda, one of Colombia's largest financial institutions.
In addition, we anticipate that the growth in revenues at IMPSAT
Ecuador could decline during the remainder of 1999 due to the effects of
the economic crisis experienced there during the first half of this year.
Although IMPSAT Ecuador's revenues and revenue growth have not been
adversely affected to date by Ecuador's ongoing recession, we cannot
predict the effect of any continuation of the economic crisis in Ecuador on
our results for the remainder of 1999.
Revenues for the first half of 1999 recorded by IMPSAT Brazil and
Mandic S.A. were negatively affected by the devaluation of the Brazilian
real against the U.S. dollar during that period. Although IMPSAT Brazil's
expansion of its customer base (72 customers as of June 30, 1999 compared
to 21 customers as of the same date in 1998) and operations continued
during the first half of 1999, the adverse economic conditions in Brazil,
including the devaluation of the real against the U.S. dollar from
approximately R$1.21 = $1.00 to approximately R$1.79 = $1.00 between
January 1, 1999 and June 30, 1999, resulted in a decline in IMPSAT Brazil's
revenues in U.S. dollar terms.
Revenues from our VSAT-based services (principally VSAT, Minidat,
Difusat and Telecampus) during the three and six months ended June 30, 1999
totaled $15.5 million and $31.4 million, compared to $15.6 million and
$29.2 million for the corresponding periods in 1998. Revenues from Minidat
services for the first half of 1999 totaled $2.9 million, compared to
revenues of $0.6 million for the first half of 1998. At June 30, 1999, we
had installed 916 Minidat microstations compared to installations of 547
Minidat microstations at June 30, 1998. As a percentage of our total net
revenues, revenues from VSAT-based services declined to 28.2% for the first
half of 1999 from 31.9% for the corresponding period in 1998. Adverse
economic conditions and competitive pressures in Argentina and Colombia
prevented us from matching increased bandwidth utilization by customers
with proportionate increases in the prices charged for our VSAT services in
those countries.
Revenues from our single channel per carrier (also called "SCPC")
service offerings (principally, Dataplus, Interplus and Regional Teleports)
for the three and six months ended June 30, 1999 totaled $20.2 million and
$40.3 million, compared to $16.5 million and $32.5 million for the
corresponding periods in 1998. As their bandwidth needs have increased,
many of our customers have supplemented or replaced their VSAT services
with SCPC services. We expect this trend to continue. We anticipate that
the percentage, and absolute amount, of net revenues represented by
non-VSAT-based service offerings (i.e., SCPC, value-added and terrestrial
services) will continue to grow at a faster rate than net revenues from our
VSAT-based service offerings.
- 32 -
<PAGE> 35
At June 30, 1999, we had more than 92,000 retail dial-up access
Internet customers, compared to more than 77,000 retail Internet customers
at June 30, 1998. Mandic S.A.'s net revenues from Internet services for the
first half of 1999 totaled $4.0 million. IMPSAT Argentina's net revenues
from Internet services for the first half of 1999 totaled $4.3 million, an
increase of $0.9 million compared to the first half of 1998. On August 4,
1999, we signed an agreement to transfer our retail Internet business in
Argentina, Brazil and Colombia to El Sitio International Corp. for $21.5
million. See "Framework Agreement with El Sitio" in Item 5 of this Report.
Variable Cost of Services. Our variable cost of services for the three
and six months ended June 30, 1999 totaled $9.4 million and $20.3 million,
an increase of $2.9 million (or 43.9%) and $6.6 million (or 48.0%), from
our variable cost of services for the same periods in 1998. Of total
variable cost of services for the three and six months ending June 30,
1999, $5.9 million and $11.6 million, respectively, related to the
operations of IMPSAT Argentina, and $3.0 million and $6.1 million,
respectively related to the operations of IMPSAT Colombia. This compares to
variable cost of services for the three and six months ended June 30, 1998
of $3.9 million and $8.5 million at IMPSAT Argentina and $2.1 million and
$4.1 million at IMPSAT Colombia. Variable costs of services for the three
and six months ended June 30, 1999 totaled $0.5 million and $0.9 million
for Mandic S.A. and $0.5 million and $0.8 million for IMPSAT Brazil.
The principal items comprising total variable cost of services are
installation (including de-installation) costs and sales commissions paid
to third-party sales representatives and maintenance costs. Maintenance
costs include maintenance services contracted from outside providers.
Maintenance costs for our telecommunications network infrastructure
totaled $3.2 million and $6.1 million for the three and six months ended
June 30, 1999, compared to $2.2 million and $4.6 million for the
corresponding periods in 1998.
Installation costs totaled $2.2 million and $4.5 million for the three
and six months ended June 30, 1999 and $1.7 million and $3.2 million for
the corresponding periods in 1998. Installation costs at IMPSAT Argentina
totaled $1.2 million and $2.7 million for the three and six months ended
June 30, 1999 as compared to $1.0 million and $1.9 million for the
corresponding periods in 1998. The increase in these costs was related 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 half of 1999 in connection with IMPSAT Argentina's
contracts to provide private telecommunications network services
to Gobierno de la Provincia de Buenos Aires and Banco Provincia
de Buenos Aires
We contract equipment installation services to outside providers.
Sales commissions paid to third-party sales representatives totaled
$2.0 million and $3.6 million for the three and six months ended June 30,
1999. In comparison, sales commissions that we paid to third party sales
representatives totaled $1.8 million and $3.2 million, respectively, for
the three and six months ended June 30, 1998. The principal amount of these
commissions related to customers of IMPSAT Argentina. Sales commissions
paid to third-party sales representatives in Argentina totaled $1.7 million
and $3.0 million, respectively, for the three and six months ended June 30,
1999, compared to $1.5 million and $2.6 million for the three and six
months ended June 30, 1998.
In addition, fees paid in connection with our licenses to governmental
entities increased to $0.4 million and $1.0 million for the three and six
months ended June 30, 1999 from $0.3 million and $0.6 million for the three
and six months ended June 30, 1998. This increase was principally
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related to new telecommunications regulations in Colombia which broadened
the base of IMPSAT Colombia's revenues upon which the royalties are levied.
Salaries, Wages and Benefits. Salaries, wages and benefits for the
three and six months ended June 30, 1999 totaled $11.3 million and $22.2
million, respectively, an increase of $2.2 million (or 23.8%) and $5.2
million (or 30.8%), over our expenses for salaries, wages and benefits
during the corresponding periods in 1998. Salaries, wages and benefits paid
by IMPSAT Argentina for the three and six months ended June 30, 1999
totaled $4.9 million and $9.3 million, an increase of $0.8 million (or
19.4%) and $1.3 million (or 16.1%) over the corresponding periods in 1998.
The increase in our salaries, wages and benefits resulted primarily from:
- an increase in the number of employees, from 874 employees at
June 30, 1998 to 1,156 at June 30, 1999
- increases in the salaries, wages and benefits of our personnel to
match market rates and increases in cost of living
- salaries, wages and benefits for the three and six months ended
June 30, 1999 paid with respect to IMPSAT Brazil, which totaled
$1.1 million and $2.1 million and Mandic S.A., which totaled $0.6
million and $1.1 million
IMPSAT Argentina's increase in salaries, wages and benefits in the second
quarter of 1999 compared to the same period in 1998 was due, in part, to an
increase in the number of its employees, particularly in connection with
the phased development of Broadband Network in Argentina. At June 30, 1999
IMPSAT Argentina had 384 employees compared to 332 at June 30, 1998. Of our
total number of employees at June 30, 1999, 42 individuals were assigned
to the Broadband Network. Salaries, wages and benefits for the first half
of 1999 relating to the Broadband Network totaled $0.7 million.
Leased Telecommunications Links Cost. Leased telecommunications links
costs comprise payments to lease satellite capacity and payments for the
right to use fiber optic capacity owned by third parties. Our leased
telecommunication links expenses for the three and six months ended June
30, 1999 totaled $12.1 million and $20.9 million. This represents increases
of $4.4 million (or 56.3%) and $6.5 million (or 45.4%) over such payments
for the corresponding period in 1998. We had approximately 696.4 MHz and
516.7 MHz of leased satellite capacity at June 30, 1999 and 1998,
respectively.
The expansion of our satellite capacity during the first half of 1999
compared to the first half of 1998 is attributable primarily to
contractually scheduled increases in satellite capacity to match
anticipated growth in customer demand for greater bandwidth in connection
with our services. A portion of this increase is 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. In
addition, to remain competitive and satisfy increasing customer demand for
high bandwidth telecommunications links, during the first six months of
1999 we have increased our leased dedicated capacity on third-party fiber
optic networks in Argentina. IMPSAT Argentina's leased fiber optic capacity
costs totaled $1.8 million for the first half of 1999 compared to $0.4
million for the first half of 1998. Due to this increased need for greater
bandwidth in the provision of our services, we expect our leased
telecommunication links expense to increase significantly in future periods
until we implement the first phase of the Broadband Network.
Selling, General and Administrative Expenses. Our SG&A expenses
consist principally of:
- publicity and promotion costs
- provisions for doubtful accounts
- fees and other remuneration
- travel and entertainment
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- rent
- plant services, telephone and energy expenses
We incurred SG&A expenses of $12.3 million and $22.8 million for the
three and six months ended June 30, 1999. Although they decreased as a
percentage of net revenue, SG&A expenses increased $17,000 (or 0.1%) and
$2.0 million (or 9.6%), from the three and six months ended June 30, 1998.
This increase relates in part to SG&A expenses incurred by our two newest
subsidiaries, IMPSAT Brazil and Mandic S.A. SG&A expenses incurred by
IMPSAT Brazil for the three and six months ended June 30, 1999 totaled $1.0
million and $2.4 million compared to $1.2 million in each of the
corresponding periods in 1998. Mandic S.A.'s SG&A expenses for the same
periods totaled $0.6 million and $1.1 million compared to $0.3 million in
each of the corresponding period in 1998. SG&A expenses at IMPSAT Argentina
for the three and six months ended June 30, 1999 totaled $5.6 million and
$9.6 million, a decrease of $1.2 million (or 17.5%) and a decrease of $1.7
million (or 15.1%), from SG&A expenses incurred by IMPSAT Argentina for the
three and six months ended June 30, 1998.
Compared to the corresponding periods in 1998, the increase in SG&A
expenses for the second quarter and the first half of 1999 reflect:
- legal and tax adviser fees, which totaled $2.0 million and $3.5
million during these periods in 1999, compared to $1.7 million
and $3.3 million for the corresponding periods in 1998
- maintenance expenses, which totaled $1.0 million and $2.2 million
during these periods in 1999, compared to $1.1 million and $1.7
million for the corresponding periods in 1998
We expect SG&A expense to increase in future periods, reflecting
growth in our operations, including the development and implementation of
the Broadband Network.
We recorded a provision for doubtful accounts in the first half of
1999 of $3.1 million, compared to $4.2 million for the same period in 1998.
We review the status of accounts receivable from our customers and make
adjustments to our reserve for uncollectible receivables as we deem
appropriate. At June 30, 1999, excluding amounts owed by two large former
customers that are the subject of certain litigation actions described in
footnotes 4 and 13 to our consolidated financial statements, approximately
11% of our gross current trade accounts receivable were past due more than
six months but less than one year and approximately 20% of gross accounts
receivable were past due more than one year.
The decrease in our provision for doubtful accounts in the first half
of 1999 as compared to the first half of 1998 was due in part to the change
in our policies for provisioning past due accounts that we implemented at
June 30, 1998. Prior to that time, our general policy had been to reserve
30% for accounts receivable in excess of 180 days and less than one year,
and 100% of all accounts receivable in excess of 360 days. Our current
policy is to reserve 100% for all accounts receivable in excess of 180
days. This policy is not to be applied to a receivable if the president of
an operating subsidiary determines that the receivable will be collected
within a further 60 days. As a result of the change in our policies, at
June 30, 1998, we recorded a one-time increase of $2.7 million in doubtful
accounts.
The adverse economic conditions experienced in Argentina during the
first half of 1999 have adversely affected the rate of turnover of our
receivables. The average days in net trade due receivables for IMPSAT
Argentina increased from 62 days at June 30, 1998 to 97 days at June 30,
1999. Although the increased time for collection of such receivables has
not been reflected in our provisions for doubtful accounts because most of
these receivables are not yet 180 days past due, we cannot assess whether
it will be necessary in subsequent periods to increase our provision for
doubtful accounts. The Company has recently increased its efforts to
collect past due receivables. During July 1999, IMPSAT Argentina collected
approximately $12.7 million (or 19.4%) of total
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accounts receivable outstanding at the beginning of that month. This
compares to IMPSAT Argentina's collection during June 1999 of approximately
$8.4 million (or 13.5%) of total accounts receivable outstanding at the
beginning of that month and its collection during May 1999 of approximately
$7.3 million or (12.6%) of total accounts receivable outstanding at the
beginning of that month.
Depreciation and Amortization. Our depreciation and amortization expenses
for the three and six months ended June 30, 1999 totaled $12.4 million and
$23.3 million. This represents an increase of $3.9 million (or 44.9%) and
$6.7 million (or 40.3%), compared to our depreciation and amortization for
the three and six months ended June 30, 1998. Depreciation and amortization
for IMPSAT Argentina for the three and six months ended June 30, 1999,
totaled $6.5 million and $12.2 million. This represents an increase of $1.5
million (or 31.0%) and $2.5 million (or 25.5%), compared to IMPSAT
Argentina's depreciation and amortization the three and six months ended
June 30, 1998. We expect these expenses to increase in future periods due
to our plans to invest significant capital expanding our network capacity
in connection with the development of the Broadband Network.
Interest Expense, Net. Our net interest expense for the three and six
months ended June 30, 1999 totaled $13.8 million and $28.1 million. This
consists of interest expense of $15.7 million and $31.1 million for the
three months ended June 30, 1999 and interest income of $2.0 million and
$3.0 million for the six months ended June 30, 1999. Our net interest
expense increased $4.3 million (or 46.1%) and $10.9 million (or 63.5%) from
net interest expense for the three and six months ended June 30, 1998.
For the three and six months ended June 30, 1999:
- IMPSAT Argentina's net interest expense totaled $3.3 million and
$6.2 million ($1.2 million and $2.2 million, after eliminating
intercompany items), compared to $3.5 million and $6.6 million,
($2.4 million and $3.7 million after eliminating intercompany
items) for the corresponding periods in 1998
- Net interest expense at IMPSAT Colombia totaled $1.4 million and
$3.6 million ($1.9 million and $3.7 million after eliminating
intercompany items), compared to $2.2 million and $4.2 million
($1.7 million and $3.4 million after eliminating intercompany
items) for the corresponding periods in 1998
Our total indebtedness as of June 30, 1999 was $426.8 million as
compared to $464.7 million as of June 30, 1998. As of June 30, 1999, total
outstanding indebtedness at:
- IMPSAT Argentina totaled $145.5 million ($22.4 million after
eliminating intercompany items), compared to $150.7 million
($59.7 million after eliminating intercompany items) as of June
30, 1998
- IMPSAT Colombia totaled $58.7 million ($45.7 million after
eliminating intercompany items), compared to $57.2 million ($44.2
million after eliminating intercompany items) as of June 30, 1998
The increase in our net interest expense reflects higher interest
bearing indebtedness in the first half of 1999 compared to the first half
of 1998, which resulted from the June 17, 1998 offering of our $225 million
principal amount 12 3/8% Senior Notes due 2008. For the first half of 1999,
the average interest rate on our indebtedness was 12%, compared to an
average interest rate of 12.5% for the first half of 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. See " -- Liquidity and Capital Resources."
Net Loss on Foreign Exchange. We recorded a net loss on foreign
exchange for the three and six months ended June 30, 1999 of $1.8 million
and $8.0 million (compared to $0.2 million and
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$0.2 million for the corresponding periods in 1998), primarily as a result
of the devaluation of the Brazilian real against the U.S. dollar.
Provision for Income Taxes. We recorded a benefit for income taxes
(all of which are for foreign taxes) of $1.9 million and $4.0 million, for
the three and six months ended June 30, 1999, compared to a provision for
income taxes of $0.6 million and $2.3 million for the corresponding periods
in 1998.
- IMPSAT Argentina recorded a provision for income taxes for the
three and six months ended June 30, 1999 of zero and $40,000
compared to $0.4 million and $1.4 million in the corresponding
periods in 1998
- IMPSAT Colombia recorded a provision for income taxes for three
and six months ended June 30, 1999 of $0.5 million and $0.8
million compared to $0.8 million and $1.5 million for the three
and six months ended June 30, 1998
Comprehensive Loss. For the three and six months ended June 30, 1999,
we incurred a comprehensive loss of $17.4 million and $41.1 million, an
increase of $7.7 million and $27.8 million, compared to a comprehensive
loss of $9.7 million and $13.3 million for the three and six months ended
June 30, 1998. In addition to the items described in the preceding
paragraph, the principal reasons for the increase in our comprehensive loss
as compared to prior periods related to the effect of:
- accrued dividends of $6.8 million on the preferred stock during
the first half of 1999
- the foreign currency translation adjustment loss of $3.2 million
for the first half of 1999, in addition to the fluctuations
discussed in the previous paragraphs
For the three and six months ended June 30, 1999, IMPSAT Argentina
recorded net losses of $2.6 million and $2.8 million, compared to net
losses of $2.5 million and $3.2 million for the corresponding periods in
1998. For the three and six months ended June 30, 1999, IMPSAT Brazil
recorded net losses of $5.1 million and $11.8 million, compared to net
losses of $1.5 million for each of the corresponding periods in 1998.
IMPSAT Colombia recorded net income for the three and six months ended June
30, 1999 of $2.7 million and $3.2 million, compared to net income of $1.7
million and $3.5 million for the corresponding periods in 1998.
LIQUIDITY AND CAPITAL RESOURCES
We anticipate that we will continue to make significant capital
expenditures in the next several years in connection with our development
of the Broadband Network, the expected growth of our commercial operations
in Argentina, Colombia, Venezuela, Ecuador, Mexico and the United States,
and the further development of our operations in Brazil. We intend to meet
our capital requirements during the remainder of 1999 from:
- unused proceeds of the June 1998 offering of our 12 3/8% Senior
Notes due 2008
- proceeds of our April 1999 $125 million private equity placement
to British Telecommunications
We currently anticipate that we will require approximately $160
million during the period June 30, 1999 through the end of 2000 for capital
expenditures related to our existing telecommunications business (including
amounts already expended to date), and significant amounts thereafter.
Our budget further contemplates that we will need approximately $300
million for the period from June 30, 1999 through the end of 2000
(including amounts already expended to date) for capital expenditures
related to the adequate build-out of phase one of the Broadband Network.
The timing and development of the Broadband Network has not been finalized
and will be dependent on
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the availability of adequate financing, among other factors. We expect that
sources of financing may include vendor financing and/or the private or
public sale of equity or debt securities. As discussed in Item 5 of this
Report, we are currently negotiating vendor financing commitments of up to
approximately $250 million with Lucent and Nortel Networks. Assuming
acceptable market conditions, we are currently considering an initial
public offering of our common equity during the next twelve months. Any
initial public offering would be effected by our preparing and filing
with the Securities and Exchange Commission a registration statement
covering the offering in compliance with the Securities Act of 1933, and
the declaration or ordering of effectiveness of the registration statement
by the Commission. We expect that we would use the net proceeds of the
initial public offering to make capital expenditures relating to the
Broadband Network, to redeem our preferred stock, for potential
acquisitions, and for working capital and general corporate purposes,
including to fund losses.
We can provide no assurance that we will be successful in obtaining
these or any other commitments or financing for the funding of the
Broadband Network. As a result, the further development of the Broadband
Network will be dependent upon our ability to obtain additional financing.
Our ability to continue the expansion of our private telecommunications
network systems as is necessary to provide high-quality, competitive
private network services to our customers and to meet our debt service
obligations will be dependent upon our future performance, including our
ability to obtain additional debt financing and potential equity financing.
Our ability to maintain our planned program of capital expenditures will be
dependent on our ability to obtain additional sources of financing. If we
are unable to obtain such additional sources of financing, we will not be
able to maintain our levels of growth and market position in any of the
countries in which we operate, which could have an adverse effect on our
business and future prospects.
As set forth in our consolidated statement of cash flow, in the six
months ended June 30, 1999, we used $21.9 million in net cash flow from
operating activities, compared with $18.3 million generated for the six
months ended June 30, 1998. The decrease in cash flow from operating
activities in the first half of 1999 was primarily attributable to an
increase in our net loss and an increase in our other receivables and other
non-current assets. Financing activities provided $126.6 million in net
cash flow for the six months ended June 30, 1999, compared with $236.5
million from cash flow generated by financing activities for the six months
ended June 30, 1998. During the six months ended June 30, 1999, we used
$40.0 million in net cash flow for investing activities, compared to $64.6
million for the six months ended June 30, 1998. We had a cash balance of
$151.5 million as of June 30, 1999.
We lease satellite capacity with annual rental commitments of
approximately $25 million through the year 2003. In addition, we have
commitments to purchase telecommunications equipment amounting to
approximately $10.6 million at June 30, 1999.
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 such a 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 plan for year 2000 compliance includes the following
phases:
- establishment of a task force, which includes our senior
management, to address the year 2000 problem
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- compilation of an inventory of equipment currently involved or
anticipated to be involved in operations
- 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
subject matter 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 currently use in the provision of 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.
Following supplier advice or, in appropriate cases, our own criteria, we
developed plans for remediation and testing of all the equipment found to
be year 2000 non-compliant. We have completed remediation and testing of
approximately 95% of our information technology and non-information
technology systems, including all our critical equipment and systems, and
expect to complete such testing and remediation by September 1999.
In developing 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, where not already in place,
have commenced formulating and installing preventive and remedial measures,
such as alternative sources of power generation. We are in the process of
developing contingency plans for worst case scenarios dealing with the year
2000 problem. We expect to finalize and extend our contingency plans after
completing final testing of systems and software involved in our
operations. We expect that our contingency plans will include procedures 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
$1.5 million of costs related to the year 2000 problem. We currently
estimate that the cost of remediation will total approximately $3.5
million, including amounts spent to date. We estimate that most of these
costs will be incurred with respect to IMPSAT Argentina ($1.6 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, $2.5 million on system upgrades, and $0.6 million on
personnel and consultant salaries and fees. While these cost estimates are
not definitive, management does not expect final costs to have a material
adverse impact on our financial position, results of operations or cash
flows.
In addition, we face risks to the extent that suppliers, satellite
providers, customers and others with whom we transact business do not have
business systems or products that comply with the year 2000 requirements.
In providing our services, our systems might sometimes be required to
communicate electronically with customer-owned systems with respect to a
variety of functions. Failure of the systems of our customers to address
the year 2000 problem, particularly satellite providers, could impair our
ability to perform these functions. Furthermore, if any of our suppliers
cannot timely provide us with products, services or systems that meet the
year 2000 requirements, our operating results could be materially adversely
affected.
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We have sent questionnaires to third parties, such as suppliers and
customers, to inquire about their preparedness with respect to the year
2000. To date, we have received responses to approximately 95% of these
inquiries, including responses from all of our material suppliers 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 are not yet able to estimate our costs of addressing the
potential impact on our operations of year 2000 failures of our customers
and 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
future consolidated results of operations. We cannot assure you that the
systems of our customers and suppliers will be prepared for the year 2000
problem. We could be adversely affected by the year 2000 problem if our
suppliers, customers and other businesses do not address this issue
successfully.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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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 Networks Letter of Intent. Pursuant to a letter of intent with
us dated May 17, 1999, Nortel Networks Inc. has agreed to design and
construct the first phase of the Broadband Network for what is currently
estimated to be up to approximately $250 million. The letter of intent
contemplates our negotiation and execution of a turnkey agreement with
Nortel Networks to develop the first phase of the Broadband Network
consisting of the following:
- a long-haul, high capacity fiber optic backbone linking major
cities in Argentina and Brazil
- fiber optic and microwave radio "local rings" within major cities
in Argentina and Brazil
- connections in Argentina and Brazil that will integrate our
networks with other providers' facilities, including submarine
cable systems, and provide us with access to global
telecommunications links
Nortel Networks is expected to 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
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Our letter of intent with Nortel Networks also contemplates our
entering into a vendor financing agreement with Nortel Networks. Under this
vendor financing agreement, Nortel Networks is expected to provide us with
loans in an aggregate amount of up to approximately $250 million, which
will be used by us to finance the purchase of certain telecommunications
equipment, software and services pursuant to the definitive turnkey
agreement contemplated by our letter of intent with Nortel Networks and to
provide working capital.
The obligation of Nortel Networks to enter into the turnkey agreement
and to provide the vendor financing is subject to numerous conditions,
including the negotiation, execution and delivery of definitive
documentation relating to the these matters. There can be no assurance that
we will be able to reach agreement with Nortel Networks on the terms of
such definitive documentation.
Framework Agreement with Global Crossing. On July 27, 1999, we entered
into a framework agreement with Global Crossing Development Co., a
subsidiary of Global Crossing Ltd., that contemplates our entering into a
series of definitive agreements to construct for Global Crossing, on a
turnkey basis before the end of the first quarter of 2001, certain portions
of the network that will interconnect Global Crossing's South American
submarine cable system's coastal landing points in Argentina, Brazil,
Chile, Colombia, Peru and Venezuela to major cities in these countries.
As part of these arrangements, we will construct the terrestrial
portion of Global Crossing's South American network between Las Toninas,
Argentina and Valparaiso, Chile (which portion we call the Trans Andean
Crossing System) through our:
- construction of three ducts and related facilities between Las
Toninas and Buenos Aires, Argentina
- licensing to Global Crossing of a duct on our Broadband Network
between the cities of Buenos Aires and Mendoza in Argentina
- construction of three ducts and related facilities between
Mendoza, Argentina and Valparaiso, Chile
- construction of telehouses in Buenos Aires, Argentina and
Santiago, Chile
In addition to the Trans Andean Crossing System, we 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
- telehouses in Rio de Janeiro and Sao Paulo, Brazil; Bogota,
Colombia; Lima, Peru; and Caracas, Venezuela
Our telehouses will contain switching, routing and other network
co-location equipment owned by us or lessees of space in our telehouses. We
will lease space in our telehouses to Global Crossing for its network
operations.
As contemplated by the framework agreement, we also expect to enter
into definitive agreements with Global Crossing providing for our:
- purchase from Global Crossing of indefeasible rights to use
("IRU") capacity valued at not less than $46 million on any of
Global Crossing's fiber optic networks worldwide
- maintenance of Global Crossing's Trans Andean Crossing System and
the terrestrial backhauls in Brazil, Colombia, Peru and
Venezuela
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We expect that our IRU capacity on Global Crossing's fiber optic
networks will enable us to efficiently interconnect our networks in
Argentina and Brazil in conjunction with the first phase of our Broadband
Network. We also anticipate that this capacity will enable us to
comprehensively integrate any subsequent phases of the Broadband Network
that we might develop in other countries in South America.
Assuming that the definitive agreements for the Trans Andean Crossing
System are executed in the coming weeks, we plan to commence construction
of the Trans Andean Crossing System in September 1999. We anticipate that
Global Crossing will pay us approximately $64 million for our turnkey
construction of the Trans Andean Crossing System.
The transactions contemplated by the framework agreement are still
subject to negotiation of definitive documentation and various other
conditions, including any required governmental approvals and, accordingly,
there can be no assurance that these transactions will be completed on
favorable terms, if at all.
Lucent Letter of Intent. On July 16, 1999, we entered into a letter of
intent with Lucent Technologies S.A. Argentina, with respect to the
negotiation and execution of definitive agreement for our purchase from
Lucent of at least 1,840 km of fiber optic cable and related equipment and
for Lucent to provide certain technical assistance in connection with the
installation of this fiber optic cable in Argentina. We plan to use the
fiber optic cable to constitute portions of phase one of the Broadband
Network. Assuming the execution of a definitive purchase agreement, the
consideration we expect that the consideration we will pay for the Lucent
fiber optic cable would be approximately $16 million. The letter of intent
also contemplates Lucent entering into a definitive agreement to provide us
with vendor financing in connection with our purchase of the fiber optic
cable and related equipment. The proposed purchase and vendor financing
agreements are subject to negotiation of definitive documentation, which is
expected to be completed in October 1999.
Framework Agreement with El Sitio. On August 4, 1999, we entered into
a Framework Agreement with El Sitio International Corp. for the sale of our
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. In connection with these transactions, El Sitio will enter into
telecommunications services agreements with our subsidiaries in Argentina,
Brazil and Colombia under which we 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 established operations
in Argentina, Uruguay and Brazil, among other countries, and includes among
its shareholders affiliates of Hicks, Muse, Tate & Furst, the Cisneros
Organization, GC Companies, Inc. and Mr. Verdaguer, our Chief Executive
Officer and Mr. Vivo, our Deputy Chief Executive Officer.
After a period of evaluation, we determined that in the area of
Internet services it would be in our best interests to concentrate our
efforts on providing corporate and wholesale Internet access through our
existing networks and our planned Broadband Network to our existing
corporate customers and to new and existing Internet service providers that
are establishing operations in the countries in which we operate. We
concluded that our ability to attract and service large numbers of retail
Internet users, including the support, advertising and related functions
that are required for retail Internet services, was not consistent with our
corporate philosophy nor one of the higher priorities in our business plan.
Accordingly, we determined to sell our retail Internet business in order to
focus our priorities on wholesale Internet access and backbone services
where we believe that we have a competitive advantage.
The transactions contemplated by the El Sitio Framework Agreement are
subject to the negotiation of definitive documentation and various other
conditions, including governmental approvals, and accordingly, there can be
no assurance that these transactions will be completed.
- 43 -
<PAGE> 46
Subject to the satisfaction of these conditions, we expect the transactions
to be consummated by the end of 1999.
CNC License. In July 1999, IMPSAT Argentina received one of the three
licenses granted by the Argentine Comision Nacional de Comunicaciones to
operate national and international long distance in Argentina from 2000
onwards.
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.
- 44 -
<PAGE> 47
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: August 16, 1999
IMPSAT S.A.
By: /s/ Jose Torres
--------------------------
Jose Torres
Director and
Chief Accounting Officer
Date: August 16, 1999
- 45-
<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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 151,501
<SECURITIES> 0
<RECEIVABLES> 54,094
<ALLOWANCES> 11,935
<INVENTORY> 0
<CURRENT-ASSETS> 230,517
<PP&E> 346,894
<DEPRECIATION> 147,862
<TOTAL-ASSETS> 632,023
<CURRENT-LIABILITIES> 96,581
<BONDS> 388,784
141,853
0
<COMMON> 120,951
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 632,023
<SALES> 0
<TOTAL-REVENUES> 111,218
<CGS> 0
<TOTAL-COSTS> 109,551
<OTHER-EXPENSES> 8,550
<LOSS-PROVISION> 3,055
<INTEREST-EXPENSE> 28,106
<INCOME-PRETAX> (34,989)
<INCOME-TAX> 4,017
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,948)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
