Item 1. Business
General
We are a leading provider of private telecommunications network and Internet services in Latin America. We offer integrated data, voice, and Internet solutions, with an emphasis on broadband transmission, for national and multinational companies, financial institutions, governmental agencies and other business customers. We have operations in Argentina, Colombia, Brazil, Venezuela, Ecuador, Mexico, Chile, Peru and the United States and also provide our services in other countries in Latin America. We provide telecommunications and Internet services through our networks, which consist of owned fiber optic and wireless links, teleports, earth stations and leased fiber optic and satellite links. We own and operate 15 metropolitan area networks in some of the largest cities in Latin America, including Buenos Aires, Bogotá, Caracas and São Paulo.
In the fourth quarter of 2000, we completed the construction of an extensive pan-Latin American broadband fiber optic network (which we call our Broadband Network) connecting major cities across Argentina and Brazil, and the commencement of commercial operation of the full Broadband Network in those locations. Our Broadband Network allows us to enhance the services we presently provide and significantly increase our transmission speed and capacity. At December 31, 2002, the Broadband Network comprised twelve metropolitan area fiber optic networks and wireless links, extending over 1,000 route kilometers in the largest cities in Argentina, Brazil, Colombia and Peru, and long-haul fiber optic backbones in Brazil, Argentina, Chile and Colombia extending over 8,880 route kilometers. Our Broadband Network uses advanced transmission technologies, including dense wave division multiplexing, or DWDM, asynchronous transfer mode, or ATM, and Internet protocol, or IP.
IMPSAT Fiber Networks, Inc. was organized in 1994 as a Delaware holding company to combine the IMPSAT businesses in Argentina, Colombia and Venezuela. Our operations started in Argentina in 1990 under the name IMPSAT S.A. (IMPSAT Argentina). We began operations outside of Argentina with the establishment of IMPSAT S.A. (IMPSAT Colombia) in 1991 and the establishment of Telecomunicaciones Impsat S.A. (IMPSAT Venezuela) in 1992. New operating subsidiaries were created in Ecuador (Impsatel del Ecuador S.A., which we call IMPSAT Ecuador) and Mexico (Impsat S.A. de C.V., which we call IMPSAT Mexico) in 1994, in the United States (IMPSAT USA, Inc.) in 1995 and in Brazil (Impsat Comunicacoes Ltda., which we call IMPSAT Brazil) in 1998. In January 2000, we changed our company’s name from IMPSAT Corporation to IMPSAT Fiber Networks, Inc. During 2001, we commenced operations in Chile (Impsat Chile S.A., or IMPSAT Chile) and Peru (Impsat S.A., or IMPSAT Peru).
Chapter 11 Filing and Emergence
On June 11, 2002, we filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code with the Bankruptcy Court. On September 4, 2002, we filed the Plan with the Bankruptcy Court. During our bankruptcy proceedings, we operated our business and managed our assets in the ordinary course as a debtor-in-possession.
By order dated December 16, 2002, the Bankruptcy Court confirmed the Plan. In accordance with the terms of the Plan, we formally emerged from bankruptcy on the Effective Date, March 25, 2003.
Under the Plan, we issued shares of New Common Stock to holders of our 13 3/4% Senior Notes due 2005 and 12 3/8% Senior Notes due 2008 (the “2005/2008 Holders”) in full satisfaction of their claims thereunder, including the outstanding principal and all accrued and unpaid interest. The 2005/2008 Holders received their ratable portion of 9.8 million shares of New Common Stock, as may be decreased to allow for the allocation of a ratable number of such shares of New Common Stock to the holders of the Post-Effective Date Contingencies and certain other claims of unsecured creditors of our parent holding company. (See “Certain Considerations - We are in default under certain of our operating subsidiary indebtedness.”) Under the Plan, the dollar value of the Post-Effective Date Contingencies and other unsecured claims is to be determined after
the Effective Date based on factors at the level of our operating subsidiaries. Accordingly, the Plan required us to establish on the Effective Date a reserve (the “Common Stock Reserve Pool”) consisting of an estimated sufficient portion of such 9.8 million shares of New Common Stock to enable us to make any distributions after the Effective Date on account of Post-Effective Date Contingencies and other unsecured claims. To this end, based on the estimated maximum value of the Post-Effective Date Contingencies and other unsecured claims, we and the creditors committee under the Plan determined that the Common Stock Reserve Pool shall be composed of 686,000 shares of New Common Stock. Accordingly, the 2005/2008 holders have initially received on the Effective Date 9.1 million shares of New Common Stock, net of the Common Stock Reserve Pool. Pursuant to the Plan, any settlements or distributions from the Common Stock Reserve Pool with the holders of the Post-Effective Date Contingencies and other unsecured claims shall be made in accordance with the disputed claims resolution process contained therein. Following the resolution of these claims, we will distribute any shares of New Common Stock remaining in the Common Stock Reserve Pool ratably among the 2005/2008 Holders in accordance with the terms of the Plan. Holders of our pre-Chapter 11 common stock (the “Old Common Stock”) and holders of any other equity interest received no distribution under the Plan. All Old Common Stock and all other equity interests were cancelled on the Effective Date.
In addition, on or shortly after the Effective Date of the Plan, we consummated several transactions pursuant to the Plan. We:
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filed with the Delaware Secretary of State a Restated Certificate of Incorporation (the “Certificate of Incorporation”);
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amended and restated our Bylaws (the “Bylaws”)
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cancelled all Old Common Stock, and all other existing securities and agreements to issue or purchase any equity interests;
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issued $67,531,000 in aggregate principal amount of Series A 6% Senior Guaranteed Convertible Notes due 2011 (initially convertible, in the aggregate, into 22.8% of the New Common Stock on a fully diluted basis) (the “Series A Notes”) to holders of our former 12 1/8% Senior Guaranteed Notes due 2003 (the “2003 Noteholders”), in full satisfaction of the claims of the 2003 Noteholders, including the outstanding principal and all accrued and unpaid interest thereon;
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issued to (i) holders of debt under our pre-Effective Date Broadband Network vendor financing agreements (the “Original Vendor Financing Agreements”) and (ii) other creditors of our operating subsidiaries holding guarantees by our parent holding company of such indebtedness who voted to accept the Plan, a combination of new senior secured indebtedness totaling $143.8 million, $23.9 million in the aggregate of new Series B 6% Senior Guaranteed Notes due 2011 (“Series B Notes”) (initially convertible in the aggregate into 5.3% of the New Common Stock on a fully diluted basis), and eight-year warrants to acquire 15.3% in the aggregate of the New Common Stock (on a fully diluted basis);
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issued 200,000 shares of New Common Stock to certain officers of the Company in accordance with our 2003 Stock Incentive Plan (the “2003 Stock Incentive Plan”); and
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agreed, subject to our compensation committee’s approval, to issue options for 1,646,332 shares of New Common Stock to senior officers.
Under our Certificate of Incorporation, our authorized capital stock as of the Effective Date consists of (i) 50,000,000 shares of the New Common Stock, with a par value of $0.01 per share and (ii) 5,000,000 shares of Preferred Stock, with a par value of $0.01 per share (the “Preferred Stock”). No Preferred Stock has been issued. Pursuant to the Certificate of Incorporation, Preferred Stock may be issued in one or more series as determined from time to time by our board of directors (the “Board”) without further approval of our stockholders. Upon issuance of any series of Preferred Stock, the Board will fix the voting powers, designations, preferences, and relative, participating, optional, redemption, conversion, exchange or other special rights, qualifications, limitations or restrictions of such Preferred Stock, to the extent permitted by law. Pursuant to the Certificate of Incorporation, we may not create, designate, authorize or cause to be issued any
class or series of nonvoting stock to the extent prohibited by Section 1123 of the United States Bankruptcy Code.
In connection with the reorganization our Board was reconstituted and is composed of seven directors. In accordance with the Plan and the Certificate of Incorporation, the directors (the “Directors”) consist of (1) our Chief Executive Officer; (2) two individuals (the “Category 2 Directors”) elected by the initial holders of Series A Notes issued under the Plan (the “Initial Series A Noteholders”) for so long as the sum of (x) the aggregate number of shares of New Common Stock issuable upon conversion of Series A Notes issued to and held by the Initial Series A Noteholders or any of their respective affiliates, and (y) the aggregate number of shares of New Common Stock issued to and held by the Initial Series A Noteholders or such affiliates upon conversion of such Series A Notes continues to represent in the aggregate 7.5% or more of the New Common Stock on a fully diluted basis (but excluding for purposes of this calculation shares of New Common Stock issued or issuable pursuant to our 2003 Stock Incentive Plan or subsequent stock plan adopted by the Board, or any modification, renewal or extension thereof) (a “Fully Diluted Basis”); (3) one individual elected by Nortel Networks Limited (“Nortel”), as an initial holder of Series B Notes and warrants to purchase New Common Stock (the “Warrants”) issued to Nortel under the Plan, for so long as the sum of (x) the aggregate number of shares of New Common Stock issuable upon conversion of Series B Notes and Warrants issued to and held by Nortel or any of its affiliates, and (y) the aggregate number of shares of New Common Stock issued to and held by Nortel or such affiliate upon conversion of such Series B Notes and Warrants, continues to represent in the aggregate 4.5% or more of the New Common Stock on a Fully Diluted Basis; and (4) three individuals (the “Category 4 Directors”) elected by the initial 2005/2008 Holders who received New Common Stock under the Plan (the “Initial 2005/2008 Common Stock”), for so long as the holders of the Initial 2005/2008 Common Stock or any of their respective affiliates continue to beneficially own Initial 2005/2008 Common Stock equal, in the aggregate, to 15% or more of the New Common Stock on a Fully Diluted Basis; provided that, for so long as the Initial Series A Noteholders have the right to elect the Category 2 Directors, no more than two of the Category 4 Directors may be persons who are affiliates of Morgan Stanley & Co. Incorporated. The initial term of the Category 2 Directors and the Category 4 Directors will end on the date of the annual meeting to be held in 2004. Thereafter, the Category 2 and Category 4 Directors will be elected each year for a term ending on the date of the annual meeting of stockholders in the following year. Subject to the rights of certain parties, a director may be removed with or without cause in accordance with the procedures set forth in the Certificate of Incorporation.
Our Services
Our comprehensive telecommunications solutions consist of any combination of our service offerings, including the enhanced and additional services that we are able to offer using our Broadband Network in Argentina and Brazil. We currently classify these service offerings into four categories: data and value added services, Internet services, services to carriers, and telephony services.
Data Transmission and Value Added Services. We offer our customers a broad range of end-to-end network service combinations for their point-to-point and point-to-multipoint telecommunications needs, ranging from simple connections to customized private network solutions. We offer our network services over our proprietary and leased networks, which are comprised of metropolitan area fiber optic rings and wireless networks, fiber optic and satellite links. We also offer value-added services, including secure web and applications hosting services through our advanced data center facilities.
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Connection Services. Our customers can purchase clear channels, frame relay services, ATM services and Internet protocol digital connection services to support their specific transmission requirements. Clear channels are typically purchased by customers that constantly transmit large amounts of voice, data and video traffic. Frame relay and ATM services are typically purchased by customers requiring reliable and rapid transmission of variable amounts of voice, data and video traffic. We typically offer our clear channel connection services from 64 Kbps to 2 Mbps, and we intend to expand this offering to 155 Mbps of capacity. Our frame relay services are typically offered from 64 Kbps to 2 Mbps and we intend to offer our ATM services from 2 Mbps to 155 Mbps. In addition, we offer digital connections
using Internet protocol with interfaces of 10 Mbps to 100 Mbps as one of our options for local data network solutions.
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Private Network Services. For customers that require significant bandwidth and reliable data transmission between a number of sites, we offer customized private networks that combine fiber optic, fixed wireless and satellite technology. We also provide them with a variety of other services including network management services, trouble shooting reports, quality control and value-added services. Our consultative sales process ensures that each private network is designed to meet the evolving specific business and systems requirements of each customer. We also offer services such as video conferencing and remote learning as part of our private network services.
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Other Value-Added Services. We offer information technology solutions and data center services designed to facilitate our customer’s e-business and e-commerce needs and optimize our customers’ business processes.
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Data Center Services. We have established 14 data center facilities that offer hosting services by integrating our broadband services with advanced value-added solutions in the region. We offer our clients a complete set of data center services ranging from housing, shared and dedicated hosting to more complex managed hosting solutions, including disaster recovery and applications management and outsourcing services. We also offer co-location services to carriers, including the rental of secure space, equipment provisioning and operation and maintenance services.
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Information Technology Solutions. As part of our end-to-end solutions, we also offer a variety of information technology services, including the design, installation and integration of intranets, extranets and virtual private data networks, through which our customers can conduct business in a secure environment as well as integrate these new systems with their legacy telecommunications systems. In addition, we offer an outsourcing solution for customers that do not have the technical personnel or choose not to operate, manage and maintain their telecommunications systems and networks.
Internet Services. We have offered Internet access services to corporate and ISP customers since 1996. Our Broadband Network in Argentina and Brazil links our Latin American Internet backbone, as part of the Broadband Network, to the U.S. Internet through our U.S.-based point of presence using our fiber optic links in addition to our leased satellite links. With the objective of positioning ourselves as the Latin America Internet Backbone, we have deployed a series of data centers within the region.
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Corporate Internet Services. As part of providing our customers with a total telecommunications solution, we currently offer our corporate customers Internet access services including line provisioning, equipment provisioning and installation, primary and secondary domain registration and maintenance and technical support.
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Wholesale Internet Services. We provide a complete Internet service for ISPs, including managed line provisioning for domestic and international backbone connections between points of presence, access to our co-location sites and server services (e-mail and hosting services), managed modem and roaming services, as well as the use of our network operation and help desk services.
Services to Carriers. We offer dark fiber capacity, “lit” fiber services and duct capacity to ISPs and telecommunications carriers. Our network provides customers with reliable broadband connections between and among our metropolitan area networks at high speeds. Customers that choose to purchase “lit” capacity are able to purchase an initial amount of capacity (typically 45 Mbps) and increase that capacity on demand.
Telephony Services. We provide switched-voice domestic and international long distance telephony services to corporate customers and resellers in Argentina, international long distance service in the United States, where we have our international hub, and international long distance service in Peru. We plan to further expand these offerings to other countries in the region, of which Brazil is expected to provide the most significant market opportunities. In November 2002, we received a license to provide switched voice services to or from Brazil. As components of our telephony services, we currently offer local, national and international
long-distance services, Private Branch Exchange (PBX), toll free services and local numbering to our corporate customers as well as wholesale voice services to other carriers and resellers.
The following table shows our company’s net revenues breakdown by service for the years ended December 31, 2000, 2001 and 2002:
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Increase (decrease) compared to previous year.
(2)
“Value added services” includes revenues from our data center services, systems integration and other information technology solutions services.
The Broadband Network
Our Broadband Network, enables us to provide high capacity, high speed telecommunications services across Latin America. Our Broadband Network consists of:
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fiber optic local rings and wireless access points within major cities in Latin America, including Buenos Aires, São Paulo and Rio de Janeiro
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long-haul, high capacity fiber optic backbones linking major cities in Latin America
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capacity on undersea cable systems to provide connections between and among major Latin American countries, as well as global telecommunications connections and Internet access
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data center facilities in major cities in Latin America
We believe that our Broadband Network enables us to:
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cost-effectively offer more bandwidth-intensive services, including intranet and extranet services
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reduce our costs for leased satellite capacity and leased telecommunications links as a percentage of our net revenues
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create a high capacity, pan-Latin American Internet backbone
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offer Latin American companies more efficient access to the U.S. Internet backbone
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continue to provide consistent, high quality service by keeping our customer traffic on our network
Our Broadband Network is a fully integrated terrestrial fiber optic network connecting Santiago, Chile; Buenos Aires, Argentina; and São Paulo and Rio de Janeiro, Brazil with points in between.
Customers
Overview. We have grown rapidly since the commencement of our operations in 1990. Our customer base has increased from 125 corporate customers in two countries at December 31, 1992 to 2,649 corporate customers in nine countries at December 31, 2002. Larger entities, which often have significant needs for reliable, cost-effective data transmissions and other telecommunications services, were the first to use our customized telecommunications services. As a result, a significant portion of our revenues has been derived from our largest customers. A significant number of our customers, including our largest customers, are in Argentina and Colombia, which, having commenced in 1990 and 1992, respectively, are the locations of our longest-standing operations. Our customer base in Brazil has grown from 48 at the end of 1998 to 366 at the end of 2002. As our business further matures and as we extend the operation of the Broadband Network, we expect that the average size of our customers will decline.
Our customers consist of financial institutions, major governmental agencies, and leading national and multinational corporations and private sector companies, including Repsol YPF, Petroleo Brasileiro S.A. - Petrobras, Siemens and Reuters. Our ten largest customers accounted for approximately 20.8% of our revenues in 2002 and approximately 22.9% in 2001.
Our ten largest customers as of December 31, 2002 were:
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subsidiaries of Global Crossing Ltd., a Bermuda-headquartered corporation that constructs, and offers carrier’s carrier services over, worldwide terrestrial and submarine fiber optic networks
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Instituto Nacional de Hipodromos (INH), a Venezuelan horse racing track
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Confederaçaõ Nacional da Industria, Brazil’s national association of private industrial companies
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Corporacion Nacional de Ahorro y Vivienda, or Conavi, one of Colombia’s largest financial institutions
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Citicorp Global Technology, Inc.
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OpenTech S.A., a communications equipment and software distributor based in Venezuela.
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Empresa de Telecomunicaciones de Bogotá S.A., E.S.P., one of Colombia’s largest telecommunications companies
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HSBC Bank Brasil S.A., the third-largest privately-owned bank in Brazil
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Perez Companc S.A., an Argentine energy conglomerate
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Gobierno de la Provincia de Buenos Aires, the local government of the province of Buenos Aires
The following table shows our customer concentration by country as of the dates indicated. Totals presented do not include customers from our fax, store and forward service.
Customer Contracts. Our contracts with our customers have in the past typically ranged in duration from six months to five years and contracts with our private telecommunications network customers have generally been three-year contracts. Under the Argentine “pesification” decree, if a contract denominated in pesos is entered into after the decree’s enactment, payments under that contract are not entitled to be adjusted according to the CER or any other consumer price index. Accordingly, in order to mitigate our inflation risk, our new peso-denominated contracts in Argentina are typically for shorter terms ranging from three to six months. Contracts generally may be terminated by the customer without penalty. The private telecommunications network customers generally pay a one-time installation fee and a fixed, monthly fee. We believe that as we further commercialize our Broadband Network, we may develop a more flexible pricing structure, using both a usage-based billing and fixed fee-based billing model.
The ongoing severe economic downturn in Argentina and recessionary economic conditions in Latin America as a whole, has adversely affected many of our customers and caused a number of them to terminate their contracts with us, fail to renew their contracts, or reduce the amount of services contracted.
Except in Brazil (and in certain instances since the “pesification” decree, in Argentina), our contracts 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. The revenues of our customers are generally denominated in local currencies. Although our customers include some of the largest and most financially sound companies and financial institutions in their markets, devaluation of local currencies relative to the U.S. dollar and foreign exchange controls restricting the exchange or convertibility of such currencies could have a material adverse effect on the ability of our customers to pay us for our services. Such currency devaluations and foreign exchange controls could also result in our customers seeking to renegotiate their contracts with us or, alternatively, defaulting on their contracts.
Sales, Marketing and Customer Services
We view our relationship with our customers as a long-term partnership in which customer satisfaction is of paramount importance. For this reason, we apply an integrated approach to our sales, marketing and customer service functions. We emphasize the highest quality in our sales, marketing and customer services and an enduring commitment to providing fast and flexible responses to customer demands. In order to efficiently meet these challenges, we adapt and tailor our customer service function to match the scale and complexity of the solutions we provide.
Customers who require or are better-suited to standardized or bundled solutions are serviced by dedicated sales teams with shared centralized support, along with available assistance from our 24 hours a day, 365 days a year call centers. Customers that utilize complex, customized solutions composed of a variety of different services are assigned to designated multi-task customer service teams that develop and maintain long-term, cooperative relationships with these customers. These relationships provide us with an in-depth understanding of the customer’s evolving telecommunications service requirements and levels of service satisfaction. The customer service team oversees all phases of initial customer contact, service planning, installation and ongoing service. After we establish initial contact with a potential customer, the customer service team conducts a thorough evaluation of the customer’s telecommunications needs. As a result of this team-oriented approach, we believe that we have achieved high levels of customer satisfaction while being able to identify new revenue generating opportunities, customer telecommunications solution enhancements and product or service improvements previously overlooked or not adequately addressed by the client.
To market our new and enhanced services, such as telephony and data centers, we have developed several sales and marketing teams, each focusing on a particular type of service. In addition to salaried sales and marketing personnel, we often use the services of third-party sales representatives to assist in generating sales and managing the contract process between us and our potential customers. We typically pay these third parties a commission and royalties equal to a percentage of the revenues we collect from any contract with those customers obtained as a result of the efforts of the third-party sales representative.
Competition
We compete on the basis of our experience, network quality, customer service, range of services offered and price. Our competitors fall into three broad categories:
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PTOs in each country where we operate
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other companies that operate competing satellite and terrestrial data transmission businesses, including newer entrants from more developed telecommunications markets outside of Latin America
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large international telecommunications carriers
In the past, the PTOs and international telecommunications carriers have focused on local and long-distance telephony services. More recently, however, they have focused a degree of attention and resources towards the private telecommunications network systems segment of the telecommunications market, and may be expected to increasingly do so in the future. Several of these entities have significantly greater financial and other resources than we do, including greater access to financing. These competitors may also be able to subsidize their private telecommunications network businesses with revenues from their other business lines.
With the first group of competitors, our further expansion into the telecommunications services market along with continued deregulation of the telecommunications industry in Latin America, has brought us into more direct competition with the PTOs. Many of the PTOs in the countries where we operate have established and marketed “large customer” or “grand user” business teams in an attempt to provide dedicated services to the type of customer that represents our most important target market.
We believe that by maintaining our position as a reliable, high quality provider of telecommunications services, while strengthening the quality of our network and the breadth of service offerings through our Broadband Network, we will be able to maintain our current customers and successfully attract new customers. We might consider strategic alliances and other cooperative ventures with the PTOs to take advantage of each partner’s relative strengths.
In the second category, our competitors include data transmission providers. We believe that we are able to compete successfully in data transmission services because we offer a broad array of services, provide high quality, custom-designed services that are tailored to meet the specific needs of each customer and have a greater geographical footprint for our Broadband Network than our current competitors among these providers. Among our competitors in this category are:
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MetroRED Telecomunicaciones, owned by Fidelity Investments, a data transmission service operator in Argentina, Brazil and Mexico that offers local network services in the cities of Buenos Aires in Argentina, São Paulo and Rio de Janeiro in Brazil, and Mexico City in Mexico
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Pegasus Telecom S.A., a provider of broadband data transmission services throughout 25 cities in Brazil and an affiliate of Brazilian fixed line and wireless operator, Telemar Participacoes S.A.
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Engenharia de Redes S.A., a Brazilian infrastructure and data services provider that uses both fiber optic and wireless links
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NetUno, a local exchange carrier and provider of broadband local access, Internet and private network services in Venezuela
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TechTel (an Argentine telecommunications company jointly owned by Grupo Techint SA, one of Argentina’s largest industrial groups, and Telmex (Telefonos de Mexico S.A. de C.V.), Mexico’s dominant telecommunications carrier), which offers long distance, data transmission and basic telephony services in Argentina and has announced plans to expand its operations into Uruguay
In the third category, major telecommunications carriers have entered or indicated their intention to enter the market as deregulation in Latin America and elsewhere opens new market opportunities. Increasing competition may significantly affect our pricing policies. We cannot assure you that any future competition arising from major telecommunications carriers will not adversely affect our financial condition or results of operations.
Furthermore, we cannot assure you that competing technologies will not become available that will negatively affect our position. For example, technologies such as DSL can significantly enhance the speed of traditional copper lines. These technologies enable our PTO competitors to offer customers high-speed services without undergoing the expense of replacing their existing twisted-pair copper networks. This, in turn, could negate our last mile advantage. Our private telecommunications services could also face future competition from entities using or proposing to use new or emerging voice and data transmission services or technologies that are not widely available in Latin America, such as space based systems dedicated to data distribution services.
Rates are not regulated in our countries of operation, and the prices for our services are strongly influenced by market forces. We believe that increasing competition will result in increased pricing pressures. We have faced and expect to continue to face declining prices and may experience margin pressure as the PTOs in the countries where we have operations modernize their facilities, adapt to a competitive marketplace and place greater emphasis on data telecommunications and as other companies enter the Latin American telecommunications market. These price and margin declines have also accelerated, and will likely continue to do so, as new competitors enter our markets.
The principal barriers to entry for prospective providers of private telecommunications network services such as ours are the development of the requisite understanding of customer needs and the technological and commercial experience and know-how, infrastructure to provide quality services to meet those needs and working capital.
Regulation
Domestic Service. We are subject to regulation by the national telecommunications authorities of the countries where we operate, and our operations require us to procure permits and licenses from these authorities. While we believe that we have received all required authorizations from regulatory authorities for us to offer our services in the countries in which we operate, the conditions governing our service offerings may be altered by future legislation or regulation that could affect our business and operations.
Cross-Border Service. We provide integrated data, voice and video transmission under the Interplus name between and among nineteen Latin American and Caribbean countries and the United States. In November 2000, we were granted a license to provide switched voice services to or from Argentina, and in November 2002 we received authorization to provide these services in Brazil. International private line services such as Interplus are traditionally provided by local carriers in each country acting as correspondents and establishing dedicated telecommunications links between their facilities. Due to our pan-Latin American presence, we are often able to offer our Interplus service using our own facilities and personnel at both ends of the private line circuit. As a result of this end-to-end control, we maintain customer service and quality assurance at both ends of an Interplus link and realize better margins than when we use a correspondent carrier.
In countries where we do not maintain customer premises equipment or where we are not authorized to operate in that fashion, our Interplus service uses our facilities in the originating country to connect with a correspondent local carrier in the destination country or vice-versa. To date, we have signed Interplus correspondent agreements with carriers in several Latin American and Caribbean countries. We charge customers a monthly fee for Interplus that is based on the capacity of the circuit provided.
Deregulation. Various countries in Latin America have taken steps towards deregulation in the telecommunications market during the last few years. Several Latin American countries have completely or partially privatized their national carriers, including Argentina, Brazil, Mexico and Venezuela. Furthermore, some countries have demonopolized their dominant telecommunications providers. For example, Argentina and Venezuela completed the demonopolization of public telephone services by their PTOs during 2000. We believe that these events of deregulation, while serving to increase competition, have presented and will continue to present significant opportunities for us to expand our private telecommunications network services to, from and within the region, as well as to present opportunities for us in areas of telecommunications currently permitted to be conducted only by the PTOs.
Employees
As of December 31, 2002, we employed a total of 1,271 persons, of whom 453 were employed by IMPSAT Argentina, 225 by IMPSAT Brazil, and 229 by IMPSAT Colombia. Except with respect to our Chief Executive Officer and our Chief Financial Officer, we do not have any long-term employment contracts with any of our employees, including management, and none of our employees are members of any union. We believe that our relations with our employees are good.
Item 2.
Item 2. Properties
Metropolitan Area Networks. We operate 15 metropolitan area networks, composed of a combination of owned and leased fiber optic and microwave links covering a total of 1,000 route kilometers. Our first metropolitan area network was established in Buenos Aires, Argentina in 1990. In addition, we currently provide services over our metropolitan area networks in Córdoba, Mendoza and Rosario, in Argentina; Bogotá, Medellín and Cali, Colombia; Rio de Janeiro, Curitiba, São Paulo and Belo Horizonte in Brazil; Caracas, Venezuela; Quito and Guayaquil, Ecuador; and Lima, Peru. We also manage and operate data transmission services offered over a fiber optic network covering 352 route kilometers in Bogotá, Colombia, pursuant to a joint venture with Empresa de Telecomunicaciones de Santafe de Bogotá, the Colombian PTO that provides local telephone service in the Bogotá region. In addition, we own and control several microwave links in smaller cities in Latin America.
Fiber Optic Long-Haul Capacity. The long-haul segment of our Broadband Network, which comprises a seamless long-haul, high capacity fiber optic backbone extending over 8,880 route kilometers, stretches from the Pacific Ocean at Valparaiso, Chile to the Atlantic coast in Buenos Aires, Argentina, and from there into Curitiba, Rio de Janeiro and São Paulo, Brazil. We also own and operate a long haul fiber optic network connecting the cities of Cali, Medellín and Bogotá in Colombia. To link the Broadband Network to other parts of Latin America and the world, we have purchased IRU capacity on Global Crossing Ltd.’s undersea digital fiber optic cable systems (and associated terrestrial capacity) between the United States and Latin America, including Global Crossing’s South American network, as well as leased capacity from other undersea fiber optic cable operations, including on the submarine system between Latin America and the United States of Latin American Nautilus S.A., an affiliate of the Telecom Italia Group. This capacity enables our company to transmit telecommunications traffic seamlessly from the United States to major countries in South America using the latest fiber optic technology. For a discussion of certain risks that could adversely affect our rights to IRU capacity on Global Crossing’s network, see “Certain Considerations - We are negatively impacted by Global Crossing’s insolvency.”
In addition to our IRU capacity on Global Crossing’s undersea fiber optic networks, we are a member of the Americas-1 and Columbus-II undersea fiber optic cable consortia, and have purchased an initial total capacity of 2 Mbps on each system. Americas-1, which commenced commercial operation in December 1994, is a 4,960 mile fiber optic cable system connecting Vero Beach, Florida with the U.S. Virgin Islands, Trinidad, Brazil and Venezuela. Columbus-II links Mexico, the United States, the U.S. Virgin Islands, Spain, Portugal and Italy with about 7,440 miles of fiber optic cable. We also have reserved up to 18 Mbps, 4 Mbps and 24 Mbps of capacity on the Americas-II, Pan American and Arcos I undersea fiber optic cable networks, respectively. The 8,300 km Americas-II fiber optic submarine cable connects St. Croix, Puerto Rico, Curacao, Venezuela and Brazil. Pan American runs between the U.S. Virgin Islands, Aruba, Venezuela, Colombia, Panama, Ecuador, Peru and Chile. Arcos I, an 8,600 km fiber optic cable system, connects the United States with 14 Caribbean and Latin American nations.
Data Centers. To complement our Broadband Network infrastructure, we operate in major cities in Latin America 14 advanced data center hosting facilities with an aggregate of approximately 500,000 gross square feet. These state-of-the-art facilities, which are capable of supporting the most advanced application hosting services, are located in Buenos Aires, Mendoza, Córdoba and Rosario in Argentina; São Paulo, Rio de Janeiro and Curitiba in Brazil; Santiago, Chile; Fort Lauderdale, United States; Mexico City, Mexico; Bogotá, Colombia; Caracas, Venezuela; Quito, Ecuador; and Lima, Peru.
Teleports. We own and operate teleports in Buenos Aires, Argentina; São Paulo, Brazil; Bogotá, Colombia; Caracas, Venezuela; Quito, Ecuador; Mexico City, Mexico; Lima, Peru; and Fort Lauderdale, Florida, United States. In addition to the teleport in Fort Lauderdale, Florida, IMPSAT USA operates leased teleport facilities in New Jersey. We also own and operate regional teleports in Mendoza, Córdoba, Rosario, Tucumán, Mar del Plata, La Plata and Neuquén in Argentina; Medellín, Cali and Barranquilla in Colombia; Guayaquil, Ecuador; and Rio de Janeiro and Curitiba, Brazil.
Satellite Capacity. Our satellite transmissions use both C-band (4-7 GHz) and Ku-band (10-18 GHz) frequencies. As of December 31, 2002, we had a total available leased capacity of 143.0 MHz. Our lease payments for satellite capacity totaled approximately $32.1 million in 2002. We will contract for additional leased satellite capacity if business requires. A portion of our satellite capacity is leased by our wholly-owned subsidiary, International Satellite Capacity Holding, Ltd. This subsidiary’s principal function is to lease private telecommunications capacity from telecommunications carriers and then sublease this capacity at market rates to our operating subsidiaries. We believe that this method of centralizing our leasing of telecommunications capacity provides us with better terms.
Item 3.
Item 3. Legal Proceedings
As more fully described in Item 1 - “Business” and Item 7 - “Management’s Discussion and Analysis of Financial Condition and Results of Operations” we sought protection under Chapter 11 of the United States Bankruptcy Code on June 11, 2002. We developed a Plan that was approved by the Bankruptcy Court on December 16, 2002. On March 25, 2003, the Plan became effective and we emerged from the proceedings under Chapter 11 of the United States Bankruptcy Code pursuant to the terms of the Plan.
We are also involved in or subject to various litigation and legal proceedings incidental to the normal conduct of our business, including with respect to regulatory matters.
IPO Allocations Class Action. As previously reported, on November 1, 2001, a lawsuit (the “IPO Class Action”) was filed in the United States District Court for the Southern District of New York against our company, certain individuals who were then officers and directors of our company, and the underwriters to our initial public offering (IPO). This lawsuit alleged on behalf of a proposed class of all shareholders that our company and its underwriters violated various provisions of the securities laws in connection with the IPO in February 2000. Pursuant to the Plan, the plaintiffs in the IPO Class Action received in connection with their claims the assignment of any insurance proceeds that we receive in connection with the litigation, but otherwise the claims of the plaintiffs against us or any of our other assets have been discharged as part of our Chapter 11 proceedings.
360networks, Inc. During June 2001, we terminated a series of contracts that we had signed in the first quarter of 2001 with 360americas network (Bermuda) Ltd., a subsidiary of 360networks, Inc., and certain other subsidiaries of 360networks, Inc. (collectively, “360networks”), to construct and provide IRU dark fiber, capacity services and conduit to 360networks over the Broadband Network in Argentina and Brazil, including the new Argentina-Brazil link, as a result of the breach by 360networks of its payment obligations under those contracts. Between March and May 2001, we made segments of the IRU dark fiber and capacity services available to 360networks for acceptance, but 360networks failed to make certain payments as required by our contracts with them. 360networks also failed to make certain payments for collocation space in our telehouses in Sao Paulo and Rio de Janeiro, Brazil and Buenos Aires, Argentina, and we terminated those contracts as well. We also terminated a contract with 360networks for collocation space in Caracas, Venezuela, also for payment default by 360networks.
Our IRU dark fiber, capacity services and construction contracts with 360networks contemplated total payments of approximately $98.8 million in advance upon delivery of the IRU dark fiber, capacity services and conduit construction to 360networks and additional recurring payments, totaling approximately $45.0 million over the term of the contracts, for maintenance services. As of the termination of the contracts, 360networks had paid us a total of $25.8 million and was in default on additional payments totaling $32.0 million. In addition, 360networks was in default on payments for collocation services totaling $0.8 million.
We commenced arbitration and litigation proceedings against 360networks for damages under the terminated contracts for the provision of IRU dark fiber and capacity services, as contemplated by the relevant agreements. During November 2002, we reached an agreement (the “Settlement Agreement”) with 360networks pursuant to which we agreed to dismiss our arbitration and litigation proceedings against 360networks and, in return, we became entitled to certain funds totaling $22.6 million that 360networks had advanced to us in connection with the contracts between us and 360networks. These funds had been recorded by us as deferred revenues during the pendency of the litigation and arbitration proceedings. In addition, under the Settlement Agreement, we received from 360networks assets with a fair value of approximately $1.6 million. The Settlement Agreement became effective on December 20, 2002.
Global Crossing Ltd. Global Crossing Ltd. filed for protection under Chapter 11 of the Bankruptcy Code in January 2002, and the Global Crossing subsidiaries to whom our company provides services and infrastructure, as described below, were included in Global Crossing’s Chapter 11 proceedings during August 2002. We are party to a series of agreements with Global Crossing for the provision of telecommunications services. Pursuant to those agreements, our company constructed a terrestrial portion of Global Crossing’s South American network between landing points on the Atlantic Ocean in Argentina and the Pacific Ocean in Chile, granted Global Crossing a series of indefeasible rights of use (IRU) over ducts and dark fiber on its broadband telecommunication network in Argentina, Brazil and Peru, provided Global Crossing with collocation space and related services in its telehouses in Argentina, Brazil, Chile, Venezuela and Peru and provided Global Crossing with maintenance services for their telecommunications assets in Latin America. In addition, we acquired IRU and leased capacity on Global Crossing’s South American undersea fiber optic cable system in order to connect our Broadband Network with other parts of Latin America and the world.
Commencing in the first quarter of 2002 and subsequent to the filing of Global Crossing’s petition under Chapter 11, Global Crossing has disputed a number of invoices that we have delivered to it in connection with the services which we are rendering to Global Crossing and has failed to make full payment in accordance with the terms of our invoices. The principal disputed matters include the following:
Beginning in the first quarter of 2002, Global Crossing disputed certain of our invoices sent to its Argentine and Brazilian subsidiaries for collocation and related services in our telehouses in those countries. On January 15, 2003, we filed a motion in the Global Crossing Chapter 11 proceeding seeking an order that Global Crossing either irrevocably reject or assume the telehouse agreements and that Global Crossing make payment of all shortfalls under the telehouse agreements after the respective petition dates of the Global Crossing debtors through December 31, 2002, in the aggregate amount of $1,069,051.57, plus interest on the past due amounts, as administrative expense claims. On February 19, 2003, Global Crossing responded to our motion. In its response, Global Crossing stated its intention to assume the Brazil and Argentina telehouse agreements, along with three other telehouse agreements covering collocation space in Santiago, Chile, Lima, Peru and Caracas, Venezuela, although it also stated its right under its plan of reorganization to reconsider its assumption of such agreements at any time prior to the effective date of the Global Crossing plan of reorganization. Global Crossing denied that it owed any unpaid amounts with respect to the Argentine or Brazilian telehouse agreements. We and Global Crossing are currently seeking to agree to a schedule for evidence, briefing and adjudication of the disputes regarding the Argentine and Brazilian telehouse agreements.
In October 2002, Global Crossing failed to make payment of the full amount of recurring service charges for operation and maintenance of the IRUs that Global Crossing acquired under the TAC Turnkey Construction and IRU Agreement dated September 22, 1999 (the “TAC Agreement”). During the first quarter of 2003, Global Crossing also paid recurring service charges under the TAC Agreement and the other backhaul agreements in amounts less than we assert to be contractually required. As part of our January 15, 2003 motion in Global Crossing’s bankruptcy proceeding, we requested that the bankruptcy court find that Global Crossing has failed to make the full recurring service charges required by the TAC Agreement and order Global Crossing to make payment of such amounts as administrative expenses through December 31, 2002, in the amount of $614,470.50, plus interest on the past due amounts as set forth in the TAC Agreement. In its response to our motion, Global Crossing requested that the bankruptcy court defer determination of our
entitlement to the recurring service charges until such time as Global Crossing has decided to assume or reject the TAC Agreement and other backhaul agreements.
On March 26, 2003, Global Crossing filed an adversary proceeding with the bankruptcy court overseeing its Chapter 11 case asserting a proprietary interest in the IRUs granted to them under the TAC Agreement and other backhaul agreements entered into between the two companies. Our response to Global Crossing’s complaint is due on April 25, 2003. Our company and Global Crossing are currently seeking to agree to a schedule for evidence, briefing and adjudication of Global Crossing’s asserted proprietary interest in the IRUs arising under the TAC Agreement and other backhaul agreements.
On March 26, 2003, Global Crossing Bandwidth, Inc., one of the debtors in Global Crossing’s Chapter 11 proceeding, filed an adversary proceeding in the Global Crossing Chapter 11 case claiming IMPSAT USA had failed to pay Global Crossing Bandwidth, Inc. a total of $466,820 for IP transit services pursuant to a Carrier Service Agreement dated January 19, 2001 between IMPSAT USA and Global Crossing Bandwidth, Inc. We intend to dispute Global Crossing Bandwidth’s complaint on the basis that IMPSAT USA has paid in full all amounts owed by it under the Carrier Services Agreement. Our answer to the complaint in this matter is due on April 25, 2003.
See “Certain Considerations - We are negatively impacted by Global Crossing’s insolvency” for more information concerning our commercial relationships and current disputes with Global Crossing.
Item 4.
Item 4. Submission of Matters to a Vote of Security-Holders
On or around November 1, 2002, ballots respecting the Plan and the related disclosure statement dated as of October 23, 2002 were circulated to our security holders and other persons entitled to vote on the Plan. Notice of the Plan was also mailed to our equity holders. The majority of holders of the Class 2 and Class 3 claims voted in favor of the restructuring set forth in the Plan, which was confirmed by the Bankruptcy Court on December 16, 2002. No vote was taken of the equity holders as they were not entitled to vote in accordance with the United States Bankruptcy Code.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters
Our Old Common Stock had been traded on the Nasdaq National Market under the symbol “IMPT” since the effective date of our initial public offering on February 4, 2000. On May 15, 2002, the Old Common Stock was delisted from the Nasdaq National Market because the Old Common Stock failed to maintain a minimum market value of $3 over 30 consecutive trading days and failed to maintain a minimum market value of public float of $15,000,000. Since May 15, 2002, the Old Common Stock was traded on the Nasdaq Over-The-Counter Bulletin Board under the symbol “IMPTQ.”
The following tables shows the high and low sales price of the Old Common Stock for each fiscal quarter between January 1, 2001 through May 15, 2002 as reported on Nasdaq National Market System and, after May 15, 2002 through December 31, 2002, on the Nasdaq Over-The-Counter Bulletin Board.
In accordance with the Plan, all pre-existing equity interests of IMPSAT Fiber Networks, Inc. were cancelled on the Effective Date. We anticipate the New Common Stock to trade on the Nasdaq Over-The-Counter Bulletin Board some time during the second quarter of 2003. As of March 31, 2003 there was no market for our New Common Stock and there were approximately nine holders of record of our New Common Stock, not including beneficial owners in nominee or street name. Our board of directors has not declared any dividends on our Old Common Stock in past, and we do not anticipate paying any cash dividends on the New Common Stock in the foreseeable future. In addition, the terms of our Series A Notes and Series B Notes restrict our ability to pay dividends on the New Common Stock.
The information required concerning compensation plans under which equity securities of our company are authorized for issuance is set forth in Item 12 of this Report under the caption “Equity Compensation Plan Information.”
Item 6.
Item 6. Selected Financial Data
The following selected financial data are for our company on a consolidated basis in accordance with U.S. GAAP. The following financial data have been derived from our company’s audited consolidated financial statements for the respective years. The selected financial data set forth below should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and notes included at the back of this Report.
Item 7.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
Reorganization. As discussed above under “Business - Chapter 11 Filing and Emergence,” the Bankruptcy Court confirmed the Plan on December 16, 2002. In accordance to the terms of the Plan, we formally emerged from bankruptcy on the Effective Date, March 25, 2003. Pursuant to the Plan, on the Effective Date, all of the shares of our Old Common Stock, options granted under our stock option plans and any other equity interests were cancelled, retired and eliminated with no consideration paid thereon. We also adopted a new 2003 Stock Incentive Plan and terminated our 1998 Stock Option Plan and our 1999 Stock Option Plan. Also under the Plan, we restructured our obligations with certain holders of our Original Vendor Financing Agreements and the holders of our former Senior Notes. On the Effective Date, in full satisfaction of the claims of the 2005/2008 Holders, we issued 9.8 million shares of New Common Stock (as decreased by the number of shares necessary to allow for the allocation of the Common Stock Reserve Pool to Post-Effective Date Contingencies and other general unsecured claims (see “Business - Chapter 11 Filing and Emergence”)) in accordance with the Plan. Each holder of our Notes Due 2003 has received, in full satisfaction of its claims, including the outstanding principal and all accrued and unpaid interest thereon, its ratable portion of our $67,531,000 aggregate principal amount of Series A Notes. In full satisfaction of their claims, the holders of the Original Vendor Financing Agreements and other creditors of our operating subsidiaries holding guarantees by our parent holding company of such indebtedness who voted to accept the Plan have received, inter alia, $23.9 million in aggregate principal amount of our new Series B Notes and restructured senior debt of one or more of our operating subsidiaries in the amounts provided for in the Plan, and an aggregate of 3,155,244 New Warrants. We also issued, pursuant to the Plan 200,000 shares of New Common Stock to certain of our officers in accordance with our 2003 Stock Incentive Plan.
Pursuant to our reorganization, we have substantially reduced our outstanding debt and annual interest expense and increased our liquidity. At December 31, 2002, prior to the reorganization, our long-term debt,
including current maturities and estimated liabilities subject to Chapter 11 proceedings, aggregated approximately $1.09 billion. Such liabilities at December 31, 2002, adjusted to give pro forma effect to the consummation of the reorganization, aggregate approximately $267.0 million. Also at December 31, 2002, our total indebtedness aggregated $1.04 billion and our cash and cash equivalents totaled $32.6 million. As of the Effective Date, our total indebtedness was approximately $264.9 million and our cash and cash equivalents totaled approximately $61.1 million. Our reported net interest expense for 2002 totaled $73.9 million (not including $52.2 million of contractually accrued interest on our unsecured, pre-petition obligations, which, pursuant to the provisions of the Bankruptcy Code, ceased to accrue at and after June 11, 2002, the date of our Chapter 11 filing). As a consequence of our Chapter 11 reorganization, we estimate that our net cash interest expense will be reduced to approximately $18.7 million during 2003.
Upon our emergence from bankruptcy on March 25, 2003, we have adopted “fresh start” reporting as required by “American Institute of Certified Public Accountants Statement of Position 90-7, Financial Reporting by Entities in Reorganization under the Bankruptcy Code” (“SOP 90-7”). Under SOP 90-7 fresh start reporting, a new reporting entity is considered to be created and the recorded amounts of assets and liabilities are adjusted to reflect their estimated fair values at the date fresh start reporting is applied. Among other things, this requires us to allocate the reorganization value of our reorganized company to its specific tangible and identifiable assets and liabilities. The effect of the reorganization and the implementation of SOP 90-7 fresh start reporting on our consolidated financial statements as if we had formally emerged from bankruptcy on December 31, 2002 is discussed in detail in Note 17 (unaudited) to our audited consolidated financial statements included elsewhere in this Report. As a result of the implementation of SOP 90-7 fresh start reporting, the consolidated financial statements of our company from and after its emergence from bankruptcy will not be comparable to the consolidated financial statements of prior periods.
Revenues. Our contracts with our customers have in the past typically ranged in duration from six months to five years and contracts with our private telecommunications network customers have generally been three-year contracts. Under the Argentine “pesification” decree, if a contract denominated in pesosis entered into after the decree’s enactment, payments under that contract are not entitled to be adjusted according to the CER or any other consumer price index. Accordingly, in order to mitigate our inflation risk, our new peso-denominated contracts in Argentina will typically be for shorter terms ranging from three to six months. The customer generally pays an installation charge at the beginning of the contract and a monthly fee based on the quantity and type of equipment installed. Except in Brazil and, since the “pesification” decree, in Argentina, the fees stipulated in the contracts are generally denominated in U.S. dollar equivalents. See “Certain Considerations - We are vulnerable to currency fluctuations . . .” and “- Currency Risks.” Services (other than installation fees) are billed on a monthly, predetermined basis, which coincide with the rendering of the services. We report our revenues net of deductions for sales taxes.
We have experienced, and anticipate that we will continue to experience, downward pressure on our prices as we expand our customer base, confront growing competition for private telecommunications network services, and endure the effects of economic downturns in our countries of operation. When we have renewed and/or expanded our contracts with existing customers, the prices we charge have generally declined.
Although we believe that our geographic diversification provides some protection against economic downturns in any particular country, our results of operations and business prospects depend upon the overall financial and economic conditions in Latin America. Most of the countries in which we operate are undergoing, or have experienced in recent years, political and economic volatility. With the exception of the United States, each of the countries in which we operate have suffered in recent years and, in some cases, continue to experience, economic recession. In particular, Argentina (our largest market in terms of revenues generated) and Venezuela are experiencing severe economic and political crises. See “Certain Considerations - Economic and political conditions in Latin America pose numerous risks to our operations.” These conditions may have material adverse effects on our business, results of operation and financial condition.
Costs and Expenses. Our costs and expenses principally include:
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direct costs
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salaries and wages
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selling, general and administrative expenses
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depreciation and amortization
Our direct costs include payments for leased satellite transponder and fiber optic capacity. The completion of the Broadband Network has decreased our payments for leased capacity as we have shifted transmission from leased satellite facilities to our Broadband Network after satellite contracts expire. The other principal items composing direct costs are contracted services costs, and other direct costs. Contracted services costs include costs of maintenance and installation (and de-installation) services provided by outside contractors. Installation and de-installation costs are the costs we incur when we install or remove earth stations, microstations and other equipment from customer premises. Other direct costs include:
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licenses and other fees
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sales commissions paid to third-party sales representatives
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allowance for doubtful accounts
Our selling, general and administrative expenses consist principally of:
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publicity and promotion costs
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fees and other remuneration
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travel and entertainment
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rent
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plant services, insurance and corporate telecommunication and energy expenses
Currency Risks. Except in Argentina (since the “pesification” decree, to the extent discussed below) and Brazil, our contracts with customers generally provide for payment in U.S. dollars or for payment in local currency linked to the exchange rate between the local currency and the U.S. dollar at the time of invoicing. Accordingly, inflationary pressures on local economies in the other countries in which we operate did not have a material effect on our revenues during 2002. Nevertheless, 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, even in countries other than Argentina and Brazil. Furthermore, under Brazilian law and to the extent discussed above, under Argentina’s “pesification” decree, our contracts with customers in Brazil cannot and, under certain circumstances, our contracts with customers in Argentina may not, be linked to the exchange rate between the local currency and the U.S. dollar. Accordingly, operations in Argentina and Brazil increase our exposure to exchange rate risks. In addition, the foreign currency exchange and transfer controls established by the Venezuelan government in February 2003 are likely to adversely affect the collectibility of our dollar-denominated contracts in Venezuela.
In early January 2002, the government of President Eduardo Duhalde, who abandoned the decade-old fixed peso-dollar exchange rate and permitted the pesoto float freely against the U.S. dollar. The peso free market opened on January 11, 2002 and traded at 1.65 pesos to the U.S. dollar and has traded as low as 3.87 pesos to the U.S. dollar on June 26, 2002. As of March 31, 2003, the floating exchange rate was 2.88 pesos to the U.S. dollar. The devaluation of the Argentine peso will generally affect our consolidated financial statements by generating foreign exchange gains or losses on dollar-denominated monetary liabilities and assets of IMPSAT Argentina and will generally result in a decrease, in U.S. dollar terms, in our revenues, costs and expenses in Argentina.
Since the “pesification” decree, IMPSAT Argentina’s customer contracts and operating cash inflows are now predominantly denominated in pesos. However, IMPSAT Argentina’s debt service payments and a
significant portion of its costs (including capital equipment purchases and payments for certain leased telecommunications capacity) remain denominated and payable in U.S. dollars. Accordingly, our financial condition and results of operations in Argentina are dependent upon IMPSAT Argentina’s ability to generate sufficient pesos (in U.S. dollar terms) to pay its costs and expenses and to satisfy its debt service requirements. Because of the recent nature of these events and the significant uncertainties regarding the extent and duration of the devaluation and the direction of the fiscal policies in Argentina, management cannot presently determine or reasonably estimate the impact a continued economic crisis in that country could possibly have on IMPSAT Argentina’s and our consolidated cash flows, financial condition, and results of operations.
Our operations in Brazil have also been affected by currency devaluation during 2002. Investors became increasingly uneasy about Brazil due to, among other factors, an increasingly uncertain political environment leading up to the election at the end of October 2002 of Luiz Inacio Lula da Silva. The markets are awaiting further clarification as to the policies that will be implemented by his administration and the effect of these policies, although there has been a positive market reaction to Mr. da Silva’s actions and appointments thus far. The election was preceded by the rapid decline in the value of Brazil’s currency compared to the U.S. dollar and speculation about the ability of Brazil to service its approximately $239 billion of public debt, much of which must be refinanced in the next several years. At December 31, 2001, the real traded at a rate of R$2.41 = $1.00. The real depreciated during 2002, reaching a low of R$4.03 = $ 1.00 during the third and fourth quarters of that year, and closing at R$3.53 = $1.00 at December 31, 2002. At March 31, 2003, the real traded at a rate of R$3.46 = $1.00.
Widespread discontent with the policies of the current Venezuelan government produced a country-wide strike in the beginning of December 2002 that lasted two months and seriously disrupted economic activity in Venezuela and severely curtailed the production and export of oil, the major source of Venezuela’s foreign exchange. In response, on February 5, 2003, the Venezuelan government imposed foreign exchange and price controls, making it difficult for our customers in that country to obtain the U.S. dollars needed to make payments due to us in U.S. dollars on a timely basis. These foreign exchange controls could also limit our ability to convert local currency into U.S. dollars and transfer funds out of Venezuela. At December 31, 2001, the bolivartraded at a rate of Bs.769.00 = $1.00, at December 31, 2002, it traded at a rate of Bs.1,392.00 = $1.00, and at February 5, 2003, it traded at the rate of Bs.1,924 = $1.00. On February 6, 2003, the Venezuelan government set a single fixed exchange rate for the bolivar against the U.S. dollar of approximately Bs.1,600 = $1.00 as part of the new currency controls.
Global Crossing Insolvency. We are party to a series of agreements with several subsidiaries of Global Crossing Ltd. for the provision of telecommunications services. Pursuant to those agreements, which were initially signed in 1999, we constructed a terrestrial portion of Global Crossing’s South American network between landing points on the Atlantic Ocean in Argentina and the Pacific Ocean in Chile, granted Global Crossing a series of indefeasible rights of use (IRU) over ducts and dark fiber on our Broadband Network in Argentina, Brazil and Peru, provided Global Crossing with collocation space and related services in our data centers in Argentina, Brazil, Chile, Venezuela and Peru and provided Global Crossing with maintenance services for their telecommunications assets in Latin America. In addition, we acquired IRU and leased capacity on Global Crossing’s South American undersea fiber optic cable system in order to connect our Broadband Network with other parts of Latin America and the world.
During 2002, we recognized revenues totaling $14.8 million from Global Crossing for the services provided under our agreements with Global Crossing. Of this amount, $10.6 million represented services that were billed on a quarterly basis, and $4.2 million represented the recognition of revenue that had been deferred under the IRUs that we granted to Global Crossing. In 2002, Global Crossing invoiced us a total of $2.0 million, principally for maintenance services on the IRUs that we have acquired from Global Crossing. In general, invoices under our agreements with Global Crossing are submitted quarterly in advance and are payable 30 days after receipt.
In January 2002, Global Crossing Ltd. filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Although the Global Crossing subsidiaries to whom we provide services and infrastructure were not originally included in Global Crossing Ltd.’s Chapter 11 filing, during August 2002 Global Crossing Ltd.
amended its Chapter 11 proceeding to include its subsidiaries that are counterparties to the agreements with us.
As of December 31, 2002, Global Crossing owed us $3.3 million that we invoiced to them during 2002. We have recorded a provision for doubtful accounts of $2.1 million against these receivables. As of March 7, 2003, Global Crossing owed us $4.8 million that we invoiced them during 2002 and the first quarter of 2003. We have recorded a provision for doubtful accounts of $2.8 million against these receivables.
We have disputed a total of $[0.1] million that Global Crossing has invoiced us for services through the end of 2002. The amounts that we owe Global Crossing are principally owed to Global Crossing Bandwidth, Inc., a subsidiary of Global Crossing that is among the Global Crossing parties that have filed for relief under Chapter 11.
Global Crossing’s reorganization plan was approved in December 2002. Global Crossing is awaiting receipt of certain regulatory approvals and satisfaction of other conditions to the effectiveness of its plan of reorganization, and there is no guaranty as to when or whether it will emerge from bankruptcy. The difficulties being experienced by Global Crossing, including Global Crossing’s Chapter 11 proceeding, have had an adverse effect on our financial condition and operations. At a minimum, Global Crossing’s bankruptcy proceedings have caused delays in our efforts to enforce our contracts with Global Crossing. In the event of a rejection of any of the contracts by Global Crossing, any pre-petition damages that we might have in respect of such rejected contracts would be treated as claims in the applicable Global Crossing bankruptcy proceedings, which claims may not realize any meaningful recovery to us. In this regard, in connection with Global Crossing’s filing at the end of August 2002 to include certain of its subsidiaries in its Chapter 11 proceedings, Global Crossing rejected one of its agreements with us, pursuant to which agreement IMPSAT Colombia had agreed to lease space in its telehouse in Bogota, Colombia to Global Crossing. More recently, Global Crossing has indicated in its filings related to its Chapter 11 proceeding that it might reject some or all of the other agreements that it has with us.
We are monitoring the Global Crossing commercial relationship and the outcome of its bankruptcy proceedings carefully. We have filed motions in Global Crossing’s bankruptcy proceeding seeking an order that Global Crossing make payment to us of the amounts claimed by us and that Global Crossing either accept or reject its contracts with us. Global Crossing has disputed that it owes us any amounts under the contracts at issue and has filed a proceeding seeking that the bankruptcy court grant Global Crossing a property right in the IRUs that it acquired from us. See “Certain Considerations - We are negatively impacted by Global Crossing’s insolvency” and “Legal Proceedings - Global Crossing.”
Critical Accounting Policies
In the ordinary course of business, our company has made a number of estimates and assumptions relating to the reporting of results of operations and financial position in the preparation of its financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”). We use our best judgment based on our knowledge of existing facts and circumstances and actions that we may undertake in the future, as well as the advice of external experts in determining the estimates that affect our consolidated financial statements. Actual results could differ significantly from those estimates under different assumptions and conditions. Our most critical accounting policies are:
Revenue Recognition. We record revenues from data, value-added telephony, IT solutions and Internet services monthly as the services are provided. Equipment sales are recorded upon delivery to and acceptance by the customer.
We have entered into agreements with carriers granting indefeasible rights of use (“IRUs”) and access to portions of our Broadband Network capacity and infrastructure. Pursuant to these agreements, we receive fixed advance payments for the IRUs and recognize the revenue from the IRUs ratably over the life of the IRUs. Amounts received in advance are recorded as deferred revenue.
Non-Monetary Transactions. We may exchange capacity on our Broadband Network for capacity from other carriers through the exchange of IRUs. We account for these transactions as an exchange of similar IRUs at historical carryover basis with no revenue, gain or loss recognized.
Broadband Network and Property, Plant and Equipment. Our business is capital intensive. We record at cost our telecommunications network assets and other improvements that, in management’s opinion, extend the useful lives of the underlying assets, and depreciate such assets and improvements over their estimated useful lives. Our telecommunications network is highly complex and, due to innovation and enhancements, certain components of the network may lose their utility faster than anticipated. We periodically reassess the economic lives of these components and make adjustments to their expected lives after considering historical experience and capacity requirements, consulting with the vendors, and assessing new product and market demands and other factors. When these factors indicate that network components may not be useful for as long as anticipated, we depreciate their remaining book values over their residual useful lives. The timing and deployment of new technologies could affect the estimated remaining useful lives of our telecommunications network assets, which could have a significant impact on our results of operations in the future.
Impairment of Long-Lived Assets. We periodically review the carrying amounts of our Broadband Network and property, plant, and equipment to determine whether current events or circumstances warrant adjustments to the carrying amounts. As part of this review, we analyze the projected undiscounted cash flows associated with our Broadband Network and property, plant, and equipment. Considerable management judgment is required in establishing the assumptions necessary to complete this analysis. Although we believe these estimates to be reasonable, they could vary significantly from actual results and our estimates could change based on market conditions. Variances in results or estimates could cause changes to the carrying value of our assets including, but not limited to, recording additional impairment charges for some of these assets in future periods. During the year ended December 31, 2001, we recorded a $381.9 million impairment charge primarily related to our telecommunications network.
Basis for Translation. IMPSAT maintains its accounts in U.S. dollars. The accounts of our subsidiaries are maintained in the currencies of the respective countries. In accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation,” the accounts of our subsidiaries are translated from local currency amounts to U.S. dollars. The method of translation is determined by the functional currency of our subsidiaries. A subsidiary’s functional currency is defined as the currency of the primary environment in which a subsidiary operates and is determined based on management’s judgment. When a subsidiary’s accounts are not maintained in the functional currency, the financial statements must be remeasured into the functional currency. This involves remeasuring monetary assets and liabilities using current exchange rates and non-monetary assets and liabilities using historical exchange rates. The adjustments generated by remeasurement are included in our consolidated statement of operations.
When the local currency of a subsidiary is determined to be the functional currency, the statements are translated into U.S. dollars using the current rate method. The adjustments generated by translation using the current rate method are accumulated in an equity account entitled “Accumulated other comprehensive loss” within our consolidated balance sheets.
Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Our consolidated financial statements have been prepared in accordance with AICPA Statement of Position (“SOP”) 90-7, “Financial Reporting by Entities in Reorganization under the Bankruptcy Code.” Pursuant to SOP 90-7, an objective of financial statements issued by an entity in Chapter 11 is to reflect its financial evolution during the proceeding. For that purpose, the consolidated financial statements for periods including and subsequent to filing of our Chapter 11 petition should distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of our business. Expenses and other items not directly related to ongoing operations are reflected separately in the consolidated statement of operations as reorganization items.
Upon consummation of the Plan, we will apply “Fresh-Start” reporting in accordance with GAAP and the requirements of SOP 90-7. Under Fresh Start reporting, the reorganization value of our company, which generally represents its going concern value, is ultimately determined pursuant to the approval of the Plan by its creditors and confirmation of the Plan by the Bankruptcy Court. Upon the Effective Date, a new capital
structure will be established and assets and liabilities, other than deferred taxes, will be stated at their relative fair values. Deferred taxes are determined in conformity with the Financial Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards No. 109.
These policies, which are those that are most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgments, often are a result of the need to make estimates about the effect of matters that are inherently uncertain. We have not made any changes in any of these critical accounting policies during 2002, nor have we made any material changes in any of the critical accounting estimates underlying these accounting policies during 2002.
Results of Operations
The following table summarizes our results of operations:
2002 Compared to 2001
Revenues. Our total net revenues for 2001 and 2002 equaled $326.5 million and $230.2 million. Net revenues were composed of net revenues from services, sales of equipment and Broadband Network development revenues. The decrease in our net revenues was principally due to the continuing adverse economic conditions being experienced throughout Latin America, including the significant devaluations of the Argentine peso and the Brazilian real during 2002.
Our net revenues from services for 2002 totaled $229.0 million, a decrease of $75.3 million (or 24.7%) compared to 2001. Our net revenues from services during 2002 included net revenues from:
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data and value added services, which include satellite and broadband data transmission services, data center services, and other value-added services
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Internet, which is composed of our Internet backbone access and managed modem services
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telephony, including local, national and international long-distance services, and
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services to carriers, which consist of our wholesale services to other telecommunications carriers (including revenue recognition from the sale of IRU capacity on our Broadband Network to, and our provision of switching and transportation of telecommunications traffic services for, such carriers), and related maintenance services to those carriers.
The following table shows our revenues from services by business lines (after elimination of intercompany transactions) for the periods indicated:
(1)
Increase (decrease) compared to previous year.
(2)
Includes our data center services, systems integration and other information technology solutions services.
The decrease in our net revenues from services during 2002 as compared to 2001 primarily resulted from lower revenues from data and value added services and Internet services (offset in part by an increase in our revenues from telephony services during 2002). Changes in our revenues during 2002 as compared to 2001 include the following:
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Our revenues from satellite services during 2002 declined in comparison to 2001 due to (i) the effect of devaluations of the Argentine peso and the Brazilian real, (ii) lower satellite-based services volume (as we transferred telecommunications services to our Broadband Network), (iii) downward pressure on our prices because of competition and adverse economic conditions, and (iv) a number of customer cancellations or non-renewals.
•
Our revenues from broadband services decreased during 2002 as compared to 2001 due to the negative effect on these revenues (in U.S. dollar terms) primarily attributable to the devaluation of the Argentine peso and the Brazilian real.
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The decline in our revenues from Internet services during 2002 over the prior year is attributable to (i) pricing pressure (because of competition and adverse economic conditions), (ii) the effect of devaluations of the Argentine peso and the Brazilian real, and (iii) our sale during 2002 of our retail Internet service provider business in Ecuador.
•
Our telephony services revenues increased during 2002 as compared to 2001. Our telephony services in Argentina, which we introduced as a new service in 2001, are utilized by third-party resellers. The overall increase in our telephony services revenues for 2002 over 2001 was generated in connection with our increased delivery during that period of switched voice services to corporate customers in Argentina and international call terminations to end-user customers in Peru and the United States.
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Our revenues from services to carriers decreased during 2002 compared to 2001. Our revenues from services to carriers during 2002 have been impacted by the cancellation of our contracts with 360networks in June 2001 and a general decline in demand by telecommunications companies for “dark” and “lit” fiber capacity.
We had 2,649 customers at December 31, 2002, compared to 2,877 customers at December 31, 2001.
The following table shows the evolution of our customer base for the periods indicated:
(1)
Increase (decrease) as of December 31, 2002 compared to as of December 31, 2001.
During 2002, we lost a net total of 228 customers, a decrease of 7.9% compared to the prior year. Due to adverse economic conditions in Argentina, we lost a net total of 147 customers in that country during 2002. In addition to poor economic conditions in Argentina and Brazil, negative or sluggish economic growth persisted throughout most of the Latin American region during 2002. During 2002, we have not experienced any significant customer losses to our competitors.
In addition to net revenues from services, our total net revenues for 2002 included revenues from sales of equipment. Revenues from equipment sales for 2002 totaled $1.2 million, a $13.8 million (or 92.2%) decrease over 2001. We did not record any Broadband Network development revenues during 2002. Our Broadband Network development revenues for 2001 totaled $7.2 million. Because equipment sales are ancillary to our core business and are generally engaged in by our company only on an opportunistic basis, we are currently unable to predict more than minimal sales of equipment during 2003. We do not anticipate any Broadband Network development revenues during 2003.
The following table shows by operating subsidiary our revenues from services and total revenues (in each case, including intercompany transactions) for the periods indicated:
(1)
This subsidiary’s principal function is to lease private telecommunications capacity from telecommunications carriers and then sublease this capacity at market rates to our operating subsidiaries.
The growth in our net revenues from services has been adversely impacted during the past three years by the continued adverse economic conditions in our most important markets in Argentina, Brazil and Colombia, as well as in Venezuela. See “Certain Considerations - Economic and political conditions in Latin America pose numerous risks to our operations.”
Argentina, which has been mired in economic recession for the past four years, is our largest market in terms of number of customers and, until the devaluation of the peso in 2002, in revenues. In the first weeks of January 2002, Argentina defaulted on its external debt payments and devalued its currency, exacerbating declining commercial confidence and activity and further inflating exorbitant costs of financing for Argentine companies. Argentina continues to experience adverse economic conditions and a lack of access to international capital markets and has faced during 2002 internal disruption and social unrest. For 2003, we do not expect that the conditions affecting the Argentine economy will subside or that future economic developments in Argentina will improve in any significant respect, and it is possible that the Argentine economic and political environment could deteriorate even further. The political and economic crises in Argentina, our largest country of operation, will continue to have a materially adverse impact on our financial condition and results of operations. See “Certain Considerations - Economic and political conditions in Latin America pose numerous risks to our operations” for a description of the economic and political crises in Argentina.
During 2002, IMPSAT Argentina’s financial condition and results of operations were severely and negatively affected by currency fluctuations, inflation, interest rates, taxation and other political, social and economic developments in and affecting Argentina. The ongoing severe economic downturn in Argentina has adversely affected many of our customers in that country and caused a number of them to terminate their contracts with us, fail to renew their contracts, or reduce the amount of services contracted. See “Business - Customers.” During the remainder of 2003, we expect these negative conditions to continue to adversely impair our business, financial condition and results of operations.
Our total net revenues at IMPSAT Argentina for 2002 totaled $56.6 million, a decrease of $73.7 million (or 56.6%) compared to 2001. This decrease was primarily caused by the devaluation of the Argentine peso following the implementation of the “pesification” decree and general recessionary conditions in that country.
Our results in Brazil also were adversely affected during 2002 as compared to 2001 by the devaluation of the Brazilian real against the U.S. dollar. At December 31, 2001, the real traded at a rate of R$2.41 = $1.00, and at December 31, 2002 it had depreciated 46.5% to R$3.53 = $1.00. As of March 31, 2003, the real traded at a rate of R$3.46 = $1.00. These and prior devaluations have had a negative effect on our real-denominated revenues. The devaluation of the real and the decline in growth in the Brazilian economy have been caused in part by the continued recession in the region, a general aversion to emerging markets by foreign direct and financial investors and the overall decline in worldwide economic production. In addition, there remains some concern among the international investor community that Mr. da Silva, who was elected president of Brazil on October 27, 2002, will cause Brazil to alter its policies in a manner that would adversely affect its economy. These conditions have had, and can be expected to continue to have, an adverse effect on IMPSAT Brazil’s and our company’s overall financial condition and results of operations.
IMPSAT Brazil’s revenues from services for 2002 totaled $35.8 million, a decrease of $7.0 million (or 16.4%) compared to the same periods in 2001. This decrease in revenues relates primarily to the effect of the devaluation of the real. In local currency terms, IMPSAT Brazil’s revenues for 2002 decreased by 3.8% as compared to 2001.
IMPSAT Colombia recorded revenues from services of $58.3 million during 2002, compared to $62.1 million for 2001. Our net revenues from services in Colombia have been negatively impacted by sustained adverse economic conditions in that country and increased competition. Colombia’s economy continues to suffer as a result of devaluations of the Colombian peso and an enduring civil war.
Revenues from services at IMPSAT Venezuela equaled $31.3 million for 2002, compared to $31.4 million for 2001. On February 12, 2002, Venezuela’s government floated its currency, ending a five-year-old regime that permitted the bolivar to trade only within a fixed-band against the U.S. dollar. As a result, devaluation of the bolivar occurred. Venezuela has experienced and continues to experience political and economic uncertainty following the attempted military coup staged against that country’s President Hugo Chavez during the first weeks of April 2002 and the labor strikes that commenced in December 2002 and ended two months later. In response to this political and economic turmoil affecting Venezuela, that country’s government imposed foreign exchange and price controls during February 2003, making it difficult for our
customers in that country to obtain the U.S. dollars needed to make payments due to us in U.S. dollars on a timely basis. These foreign exchange controls could also limit our ability to convert local currency into U.S. dollars and transfer funds out of Venezuela. See “Certain Considerations - Economic and political conditions in Latin America pose numerous risks to our operations.” The continuation or worsening of this crisis in Venezuela could have a material adverse effect on IMPSAT Venezuela’s results of operations and financial condition. See “Certain Considerations - Economic and political conditions in Latin America pose numerous risks to our operations.”
Direct Costs. Our direct costs for 2002 totaled $120.4 million, a decrease of $56.5 million (or 31.9%), compared to 2001. As compared to 2001, this reduction during 2002 was caused principally by (i) the devaluation of local currencies in Argentina, Brazil, Colombia and Venezuela during 2002, which had the effect of decreasing our direct costs in those countries in U.S. dollar terms, and (ii) our incurring significantly lower total costs of equipment sold and no Broadband Network development costs during 2002. Of our total direct costs for 2002, $42.8 million related to the operations of IMPSAT Argentina, compared to $86.7 million at IMPSAT Argentina for 2001. Direct costs for IMPSAT Brazil totaled $21.9 million for 2002, compared to $32.3 million for 2001. Direct costs of our subsidiaries are described prior to the elimination of intercompany transactions.
(1) Contracted Services. Contracted services costs include costs of maintenance and installation (and de-installation) services provided by outside contractors. During 2002, our contracted services costs totaled $19.2 million, a decrease of $21.4 million (or 52.7%) compared to 2001. Of this amount, maintenance costs for our telecommunications network infrastructure, including the Broadband Network, totaled $14.4 million for 2002 compared to $27.4 million during 2001. The decrease in our maintenance costs and installation costs is partially attributable to the effect of the devaluation of the peso on such costs in Argentina and the favorable renegotiation of certain of our agreements for maintenance services with third-party contractors in that country. Also, our installation costs decreased because we had fewer new customers during 2002 compared to during 2001. Of our total contracted services costs for 2002, $5.9 million related to the operations of IMPSAT Argentina, compared to $17.5 million at IMPSAT Argentina for 2001.
(2) Other Direct Costs. Other direct costs principally include licenses and other fees; sales commissions paid to third-party sales representatives; and our provision for doubtful accounts.
Sales commissions paid to third-party sales representatives for 2002 totaled $5.2 million compared to $8.2 million in 2001. The year over year decline in these commissions is primarily attributable to the effect of the devaluation of the peso on such costs in Argentina, which resulted in lower amounts of such commissions in U.S. dollar terms.
We recorded a provision for doubtful accounts of $13.1 million for 2002, compared to a provision of 16.8 million for the previous year. At December 31, 2002, approximately 37.0% of our gross trade accounts receivable were past due more than six months compared to 32.0% at the end of 2001. At the same date in 2002, our allowance for doubtful accounts covered approximately 116.0% of our gross trade accounts receivable past due more than six months. The average days in quarterly gross trade accounts receivable decreased from 89 days at December 31, 2001 to 83 days at December 31, 2002. The recession in Argentina has adversely affected the quality of our accounts receivable from our customers in that country. IMPSAT Argentina’s allowance for doubtful accounts at year-end 2002 covered approximately 102.0% of its gross trade accounts receivable past due more than six months. In addition, as a consequence of the economic and political turmoil in Venezuela, we increased our allowance for doubtful accounts in that country by $1.2 million for 2002.
(3) Leased Capacity. Our leased capacity costs for 2002 totaled $74.7 million, which represented a decrease of $12.4 million (or 14.2%) compared to 2001. This decrease occurred notwithstanding an increase in costs for interconnection and telephony termination costs (which are components of our leased capacity costs), as described below. The decrease in our leased capacity costs is attributable to our favorable renegotiation of the terms of certain of the underlying capacity leases and, to a lesser extent, the effects of currency devaluations in our countries of operation during 2002. As a percentage of our total
revenues, our leased capacity costs increased, principally because such costs are incurred in U.S. dollars, while our revenues in Argentina and Brazil are principally denominated and generated in local currency.
Our leased capacity costs for satellite capacity for 2002 totaled $32.1 million, a decrease of $7.0 million (or 17.8%) compared to 2001. In Argentina, our leased satellite capacity costs totaled $8.1 million for 2002, as compared to $10.5 million for 2001. Our leased satellite capacity costs for IMPSAT Brazil totaled $4.1 million for 2002, as compared to $5.9 million for 2001. Our satellite capacity costs decreased in Argentina and Brazil, in part because of (i) our favorable renegotiation of certain of our agreements satellite capacity providers, (ii) our transitioning customers from satellite-based solutions onto the Broadband Network, and (iii) the effect on such costs of the devaluations of the peso and the real. We had approximately 873 MHz of leased satellite capacity at December 31, 2002 and 967 MHz at December 31, 2001.
Our costs for dedicated leased capacity on third-party fiber optic networks totaled $25.7 million for 2002, a decrease of $9.9 million (or 27.8%) compared to 2001. These costs were incurred principally in Argentina, Brazil, Colombia and the United States. Prior to the implementation of our Broadband Network, we had incurred these higher costs of leased fiber optic capacity in Argentina and Brazil due to the continued demand by our customers in those countries for greater bandwidth and, in the United States, due to the expansion of our Internet service offerings where we provide a link between Latin America and the U.S. Internet backbone. Although we have transferred substantial amounts of our telecommunications traffic to the Broadband Network as we migrated our customers to our Broadband Network, we will continue to require leased capacity to provide telecommunications services to clients with facilities outside of the footprint of our Broadband Network in order to provide end-to-end telecommunications services. The decrease in these costs was also due, in part, to the effect on such costs of the currency devaluations experienced during 2002 in certain of our countries of operation.
In connection with certain new services that we are offering as a result of the implementation of our Broadband Network and the effectiveness of our license in Argentina to provide domestic and international long distance services, we also incur costs for interconnection and telephony termination (“I&T”) and frequency rights. Our I&T and frequency rights costs totaled $14.9 million during 2002 (which includes $11.7 million of I&T costs). This compares to $12.4 million of I&T and frequency rights costs for 2001 (which includes $8.0 million of I&T costs). Our I&T costs, which are principally denominated in local currencies, have increased in connection with the growth of our telephony revenues (as discussed above under “- Revenues”), notwithstanding the effects of currency devaluations in our countries of operation during 2002.
Our I&T and frequency rights costs in Argentina totaled $7.7 million during 2002 (which includes $7.0 million of I&T costs). This compares to $6.7 million of I&T and frequency rights costs for 2001 (which includes $4.3 million of I&T costs).
(4) Costs of Equipment Sold and Broadband Network Development. In 2002, we incurred costs of equipment sold of $0.6 million, compared to costs of equipment sold of $10.5 million for 2001. During 2002, we incurred no Broadband Network development costs, compared to $3.3 million of such costs in 2001.
Salaries and Wages. Salaries and wages for 2002 totaled $47.9 million, a decrease of $34.2 million (or 41.7%) compared to 2001. As a result of the adverse economic conditions experienced in Argentina, Brazil and elsewhere in Latin America and as part of cost-control measures implemented by management commencing at the end of the first quarter of 2001, our aggregate number of employees fell from 1,711 at December 31, 2000 to 1,271 at December 31, 2002. Management expects to continue to monitor the size of its total workforce and to make appropriate adjustments as required by financial and competitive circumstances. The decrease in these costs was also due, in part, to the effect on such costs of the currency devaluations experienced during 2002 in certain of our countries of operation.
IMPSAT Argentina incurred salaries and wages for 2002 totaling $9.2 million, a decrease of $26.0 million (or 73.9%) over 2001. This decrease was due to the devaluation of the peso, which decreased the dollar
value of our salaries and wages expenses incurred in Argentina during 2002. IMPSAT Argentina had 453 employees as of December 31, 2002 as compared to 446 employees as of December 31, 2001.
IMPSAT Brazil incurred salaries and wages for 2002 of $11.2 million, a decrease of $4.8 million (or 30.1%) compared to 2001. IMPSAT Brazil decreased its number of employees to 225 persons at December 31, 2002, compared to 316 persons at December 31, 2001. In addition to our reduced employee headcount in that country, the decrease in salaries and wages at IMPSAT Brazil during 2002 is related to the devaluation of the real against the U.S. dollar, which resulted in a decrease in U.S. dollar terms of our salaries and wages expense in Brazil.
Selling, General and Administrative Expenses. Our SG&A expenses consist principally of:
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publicity and promotion costs
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professional fees and other remuneration
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travel and entertainment
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rent
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plant services, insurance, telephone and energy expenses
We incurred SG&A expenses of $28.2 million for 2002, representing a decrease of $24.8 million (or 46.7%) compared to 2001. Our SG&A expenses for 2002 declined due principally to a decrease in our publicity and promotion costs, the effects of currency devaluations in our countries of operation during 2002 (which decreased the dollar value of our SG&A expenses in those countries), and overall cost control measures undertaken by management. SG&A expenses at IMPSAT Argentina for 2002 totaled $7.6 million, a decrease of $11.2 million (or 59.8%) compared to 2001. Management intends to take efforts in the coming periods to further control or reduce SG&A expenses.
Asset Impairment Charge. During 2001, in connection with our ongoing review of our business plan, cash flow and liquidity position, and the economic environment in Latin America, we determined that our long-lived assets primarily related to our telecommunication infrastructure were likely impaired. We calculated the present value of expected cash flows of our operating subsidiaries to determine the fair value of our telecommunication infrastructure. Accordingly, our company recorded a non-cash impairment charge of $381.9 million for 2001. This total charge included approximately $245.6 million for IMPSAT Argentina, $24.7 million for IMPSAT Brazil and $28.9 million for all other countries. In addition, the total charge also included approximately $82.7 million for a write-down of the value of goodwill generated by the acquisition of certain minority interests in the operating subsidiaries. Our company recorded this impairment charge based on internal estimates of fair value and other indicators, and not independent valuations of its telecommunication infrastructure. We did not record any similar charges in 2002.
Gain on Early Extinguishment of Debt. We recorded a gain of $16.4 million during 2002, which was attributable to the repurchase at a discount of indebtedness, plus accrued interest, owed to an unrelated third party by IMPSAT Argentina through our subsidiary International Satellite Communication Holding Ltd. (a wholly-owned Liechtenstein non-operating subsidiary of our company, whose principal function is to lease telecommunications capacity from carriers and then sublease this capacity at market rates to our operating subsidiaries).
Depreciation and Amortization. Our depreciation and amortization expenses for 2002 totaled $82.8 million, a decrease of $40.9 million (or 33.1%) compared to depreciation and amortization for 2001. Depreciation and amortization expenses for IMPSAT Argentina for 2002, totaled $24.9 million. This represents a decrease of $30.5 million (or 55.0%) compared to IMPSAT Argentina’s depreciation and amortization expenses for 2001. The decrease in depreciation and amortization primarily is the result of the asset impairment charge of $381.9 million recorded in 2001, which reduced the dollar value of our depreciable fixed asset base.
Interest Expense, Net. Our net interest expense for 2002 totaled $73.9 million, consisting of interest expense (including financing costs and taxes) of $97.9 million, a gain for a waiver of interest of $22.1 million and interest income of $1.9 million. The waived interest was due and payable to one of IMPSAT Brazil’s
vendors. Our net interest expense for 2002 decreased $58.9 million (or 44.4%) compared to net interest expense for 2001.
Pursuant to the provisions of the Bankruptcy Code, as of June 11, 2002, the date of our Chapter 11 filing, contractual interest on our unsecured, pre-petition obligations, which were entirely constituted by our former 12 1/8% Senior Guaranteed Notes due 2003, 13 3/4% Senior Notes due 2005, and 12 3/8% Senior Notes due 2008 (collectively, the “Senior Notes”) ceased to accrue at and after such date. Such post-petition contractual interest, which is excluded in our reported interest expense for 2002, totaled $52.2 million.
Prior to our emergence from bankruptcy, we were also in default on certain amounts of accrued and unpaid interest under our Original Vendor Financing Agreements and certain other subsidiary indebtedness. Such defaulted interest components, which aggregated $49.7 million for 2002, are included in our net interest expense for 2002 as discussed in the preceding paragraph.
In accordance with GAAP, the filing of our Chapter 11 petition on June 11, 2002 resulted in the classification as of such date of our primary obligations under the Senior Notes and certain other accounts payables (which, including accrued interest, totaled $727.5 million) as “liabilities subject to compromise” on our consolidated balance sheet. (See Notes 1 and 11 to our consolidated financial statements, included elsewhere in this Report.) Also in accordance with GAAP, our contingent liabilities as guarantor under the Original Vendor Financing Agreements and certain other indebtedness of our subsidiaries, which aggregated $281.7 million as of December 31, 2002, have been classified as current portion of long-term indebtedness.
Net Loss on Foreign Exchange. We recorded net losses on foreign exchange for 2002 of $91.9 million, compared to net losses of $41.2 million for 2001. As discussed in greater detail below, the increase in our losses on foreign exchange was primarily due to the devaluation of the Argentine peso and the Brazilian real against the U.S. dollar during 2002.
IMPSAT Brazil recorded net losses on foreign exchange for 2002 totaling $79.5 million, compared to net losses of $25.1 million for 2001. This net loss on foreign exchange reflects the effect of the devaluation of the real against the U.S. dollar in 2002 on the book value of the dollar-denominated debt of IMPSAT Brazil under the Original Vendor Financing Agreements. At December 31, 2002, the real traded at a rate of R$3.53 = $1.00. At December 31, 2001, the real traded at a rate of R$2.41 = $1.00.
Decreases in U.S. dollar terms of IMPSAT Argentina’s peso-denominated assets during 2002 caused by the devaluation were partially offset by the effects of decreases in U.S. dollar terms of peso-denominated liabilities during the same period. IMPSAT Argentina recorded net losses on foreign exchange for 2002 totaling $13.9 million. In comparison, IMPSAT Argentina recorded net losses on foreign exchange of $17.9 million during 2001.
IMPSAT Colombia recorded net income on foreign exchange for 2002 totaling $3.8 million. This compares to net income on foreign exchange of $1.2 million for 2001.
Recognition of Other-Than-Temporary Decline in Value. We recorded non-cash charges of $0.8 million and $20.7 million during 2002 and 2001 relating to the decline in value of our shares of common stock of Claxson Interactive Group Inc., an integrated media company with operations in Latin America (the “Claxson Shares”). This loss relating to our write down of our investment in the Claxson Shares was recorded because we had determined that, in accordance with the requirements under Statement of Financial Accounting Standards No. 115, the Claxson Shares had experienced an other than temporary decline in value.
Reorganization Items. We recorded reorganization items for 2002 of $23.3 million. The majority of these costs represent professional service fees that were incurred in connection with the negotiation and formation of our Plan and Chapter 11 filing. These amounts also include the remaining deferred financing costs on our Senior Notes and other subsidiary indebtedness that were expensed during 2002.
Legal Settlement. During 2002, we recorded a legal settlement gain of $26.2 million. During November 2002, we entered into the Settlement Agreement with 360networks pursuant to which we agreed to dismiss our arbitration and litigation proceedings against 360networks and, in return, we became entitled to certain funds totaling $22.6 million that 360networks had advanced to us in connection with the contracts between us
and 360networks (described above under “Legal Proceedings - 360networks, inc.”). These funds had been recorded by us as deferred revenues during the pendency of the litigation and arbitration proceedings. In addition, under the Settlement Agreement, we received from 360networks assets with a fair vale of approximately $1.6 million.
Other Losses, Net. We recorded other losses, net, for 2002 of $5.9 million, as compared to other losses, net, of $2.1 million for 2001.
Benefit From (Provision for) Foreign Income Taxes. For 2002, we recorded a provision for foreign income taxes of $2.3 million, compared to a provision for foreign income taxes of $27.4 million for 2001. The smaller provision for foreign income taxes in 2002 compared to 2001 was principally caused by a one-time valuation allowance made in the second quarter of 2001 totaling approximately $25.5 million, which was required to be recorded because we could not conclude that utilization of tax benefits resulting from operating losses and other temporary differences was “more likely than not” to be realized under GAAP.
Net Loss. For 2002, we incurred a net loss of $204.5 million, a decrease of $510.7 million (or 71.4%) compared to 2001.
2001 Compared to 2000
Revenues. Our total net revenues for 2000 and 2001 equaled $322.1 million and $326.5 million. Net revenues were composed of net revenues from services, sales of equipment and Broadband Network development revenues.
Our net revenues from services for 2001 totaled $304.3 million, an increase of $53 million (or 21.1%) from 2000. Our net revenues from services during 2001 included net revenues from:
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data and value added services
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Internet
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telephony, including local, national and international long-distance services, and
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services to carriers
Growth in our net revenues from services resulted primarily from data and other value added services, Internet and telephony services and from services to carriers.
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With respect to revenues from data and other value added services, revenues from our broadband services increased compared to 2000 in concert with the migration during 2001 of new and existing customer traffic to the Broadband Network, the construction of which was completed in the last quarter of 2000. Data service center services also contributed to our revenues in this category. Our revenues from satellite services during 2001 declined in comparison to 2000 due to: (i) lower satellite-based services volume (as we transferred telecommunications services to our Broadband Network), (ii) downward pressure on our prices (because of competition and adverse economic conditions), and (iii) a number of customer cancellations or non-renewals.
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The increase in Internet services resulted in part from the expansion during 2001 of our Internet access services in Argentina to AOL Argentina S.R.L., an affiliate of America Online, Inc., which services commenced upon AOL Argentina’s launch in August 2000. The total increase in our Internet revenues was partially offset by lower revenues caused by renegotiated or terminated contracts with Internet service providers in Argentina and Brazil.
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Our telephony services revenues grew during 2001 following the introduction of switched voice service in Argentina during the fourth quarter of 2000. In particular, during the second half of 2001, switched voice services to corporate customers in Argentina and international call terminations provided to end-users in Peru and the United States were principal sources of this revenue growth.
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Our revenues from services to carriers increased in 2001 compared to 2000 as a result of our completion of the Broadband Network in the fourth quarter of 2000, which enabled us to more fully implement this service line.
Overall, growth in our revenues from services for 2001 as compared to the prior year reflected a net increase in the number of customers and scope of services we provided, offset in part by decreasing prices. We had 2,877 customers at December 31, 2001, compared to 2,656 customers at December 31, 2000.
During 2001, we gained a net total of 221 customers, an increase of 8.3% compared to the prior year. Due to adverse economic conditions in Argentina, we lost a net total of 46 customers in that country during 2001.
In addition to net revenues from services, our total net revenues for 2001 included revenues from sales of equipment and Broadband Network development revenues. Revenues from equipment sales for 2001 totaled $15.0 million, a $1.9 million (or 14.3%) increase over 2000. Broadband Network development revenues for 2001 totaled $7.2 million compared to $57.7 million of such revenues for 2000.
Our Broadband Network development revenues for 2000 related to our construction, on behalf of affiliates of Global Crossing Ltd., of certain terrestrial segments connecting that company’s fiber optic cable system between South America with North America. Our Broadband Network development revenues for 2001 related to our construction of additional backhaul segments for Global Crossing’s fiber optic cable system and for a similar fiber optic cable system that was being developed by 360networks, Inc. These revenues were predominantly recorded during the first quarter of 2001 upon our delivery of the constructed segments to Global Crossing and 360networks.
Our total net revenues at IMPSAT Argentina for 2001 totaled $130.2 million, a decrease of $30.3 million (or 18.8%) compared to 2000. This decrease in revenues related principally to our recognition in the third quarter of 2000 of $32.3 million in Broadband Network development revenues upon delivery of telecommunications infrastructure to Global Crossing. Excluding Broadband Network development revenues and other equipment sales revenues, IMPSAT Argentina’s net revenues from services for 2001 totaled $122.3 million, an increase of $6.3 million (or 5.4%) compared to 2000.
Brazil, where we commenced operations in 1998, experienced a significant devaluation of its currency against the U.S. dollar during 2001. As of December 31, 2001, the real had devalued against the U.S. dollar by 18.7% compared to the exchange rate as of December 31, 2000. Despite the devaluation of the Brazilian real against the U.S. dollar, IMPSAT Brazil’s revenues for 2001 totaled $48.0 million, an increase of $10.4 million over 2000. Revenues from services for 2001 were $42.8 million, a 53.4% increase from 2000. In local currency terms, IMPSAT Brazil’s 2001 revenues from services increased by 95.3% as compared to 2000. At December 31, 2000, the real traded at a rate of R$1.95 = $1.00. The real depreciated during 2001, reaching a low of R$2.78 = $1.00 during the fourth quarter of that year, and closing at R$2.32 = $1.00 at December 31, 2001.
In Colombia, after a period of declining revenues throughout 2000 due to the general deterioration in the Colombian economy, we recorded an increase in revenues during 2001 of 14.2% over 2000.
Revenues at IMPSAT Venezuela equaled $32.6 million for 2001, an increase of $4.5 million (or 16.1%) over 2000. IMPSAT Ecuador’s revenues grew during 2001 to a total of $15.8 million, an increase of $1.2 million (or 8.2%) over 2000. In 2001, our operations in the United States also showed improved results. IMPSAT USA’s revenues totaled $37.2 million in 2001, an increase of $9.5 million (or 34.2%) as compared to 2000. This was primarily the result of increased network services and Internet backbone access services to multinational corporations with operations in Latin America.
Direct Costs. Our direct costs for 2001 totaled $176.9 million, an increase of $4.8 million (or 2.8%), compared to 2000.
Of our total direct costs for 2001, $86.7 million related to the operations of IMPSAT Argentina, compared to $86.2 million at IMPSAT Argentina for 2000. Direct costs for IMPSAT Brazil totaled $32.3 million for 2001, compared to $30.7 million for 2000. Direct costs of our subsidiaries are described prior to the elimination of intercompany transactions.
(1) Contracted Services. Contracted services costs include costs of maintenance and installation (and de-installation) services provided by outside contractors. During 2001, our contracted services costs totaled $40.6 million, an increase of $11.1 million (or 37.4%) compared to 2000. Of this amount, maintenance costs for our telecommunications network infrastructure, including the Broadband Network, totaled $27.4 million for 2001 compared to $17.0 million during 2000. Our maintenance costs increased because we had more infrastructure, including the Broadband Network. Installation costs totaled $13.2 million for 2001 compared to $12.6 million during 2000.
(2) Other Direct Costs. Other direct costs principally include licenses and other fees; sales commissions paid to third-party sales representatives; and our provision for doubtful accounts.
Sales commissions paid to third-party sales representatives for 2001 totaled $8.2 million compared to $8.1 million in 2000. The majority of these commissions related to customers of IMPSAT Argentina.
We recorded a provision for doubtful accounts of $16.8 million for 2001, compared to a provision of $4.8 million for the previous year. At December 31, 2001, approximately 32.0% of our gross trade accounts receivable were past due more than six months compared to 26.4% at the end of 2000. At December 31, 2001, our allowance for doubtful accounts covered approximately 90.4% of our gross trade accounts receivable past due more than six months. The average days in quarterly gross trade accounts receivable increased from 71 days at December 31, 2000 to 89 days at December 31, 2001. IMPSAT Argentina’s allowance for doubtful accounts at year-end 2001 covered approximately 86.4% of its gross trade accounts receivable past due more than six months.
(3) Leased Capacity. Our leased capacity costs for 2001 totaled $87.1 million, which represented an increase of $12.9 million (or 17.4%) compared to 2000. This increase was primarily due to an increase in costs for interconnection and telephony termination costs and frequency rights, as further discussed below.
Our leased capacity costs for satellite capacity for 2001 totaled $39.1 million, a decrease of $0.2 million (or 0.5%) compared to 2000. Leased satellite capacity costs declined in Argentina during 2001 as compared to 2000, in part due to our transitioning customers from satellite-based solutions onto the Broadband Network. Our satellite capacity costs increased principally in Venezuela and the United States, where we increased our satellite capacity to satisfy customer needs. We had approximately 967 MHz of leased satellite capacity at December 31, 2001 and 1,203 MHz at December 31, 2000.
Our costs for dedicated leased capacity on third-party fiber optic networks totaled $35.6 million for 2001, an increase of $3.3 million (or 10.3%) compared to 2000. These costs were incurred principally in Argentina, Brazil and the United States. Prior to the implementation of our Broadband Network, we had incurred these higher costs of leased fiber optic capacity in Argentina and Brazil due to the continued demand by our customers in those countries for greater bandwidth and, in the United States, due to the expansion of our Internet service offerings where we provide a link between Latin America and the U.S. Internet backbone.
In connection with certain services that we offered during 2001 as a result of the implementation of our Broadband Network and the effectiveness of our license in Argentina to provide domestic and international long distance services, we incurred costs for interconnection and telephony termination costs and frequency rights. These costs totaled $12.4 million during 2001 (which includes $8.0 million for interconnection and telephony termination costs and $4.4 million for frequency rights) as compared to $2.7 million for 2000 (entirely composed of costs for frequency rights). Our interconnection and telephony termination costs in Argentina totaled $6.7 million during 2001 (which includes $4.3 million for interconnection and telephony termination costs and $2.4 million for frequency rights) as compared to $1.2 million for 2000 (entirely composed of costs for frequency rights). Our interconnection and telephony termination costs increased during 2001 primarily as a result of the completion of our Broadband Network in Argentina and the effectiveness of our license in Argentina to offer telephony services. These events enabled us to provide the switched-voice domestic and international long distance telephony services that generated these costs in Argentina during 2001.
(4) Costs of Equipment Sold and Broadband Network Development. In 2001, we incurred costs of equipment sold of $10.5 million compared to costs of equipment sold of $12.3 million for 2000. During 2001, we incurred Broadband Network development costs of $3.3 million, compared to $34.7 million in 2000.
Salaries and Wages. Salaries and wages for 2001 totaled $82.1 million, an increase of $13.2 million (or 19.1%) compared to 2000.
As a result of the adverse economic conditions experienced in Argentina, Brazil and elsewhere in Latin America and as part of cost-control measures implemented by management following the end of the first quarter of 2001, our aggregate number of employees fell from 1,711 at December 31, 2000 to 1,370 at December 31, 2001. In connection with this reduction, our salaries and wages for 2001 included one-time severance payments totaling approximately $4.4 million, of which severance payments totaled $2.5 million at IMPSAT Argentina and $0.4 million at IMPSAT Brazil.
IMPSAT Argentina incurred salaries and wages for 2001 totaling $35.2 million, an increase of $5.5 million (or 18.5%) over 2000. IMPSAT Argentina had 446 employees as of December 31, 2001 as compared to 587 employees as of December 31, 2000.
IMPSAT Brazil incurred salaries and wages for 2001 of $16.0 million, an increase of $3.0 million (or 23.1%) compared to 2000. IMPSAT Brazil decreased its number of employees to 316 persons at December 31, 2001, compared to 438 persons at December 31, 2000.
Selling, General and Administrative Expenses. We incurred SG&A expenses of $53.0 million for 2001. These SG&A expenses represented a decrease of $5.5 million (or 9.4%) compared to 2000. Our SG&A expenses for 2001 declined due, in part, to a decrease in our publicity and promotion costs and to the positive effects of the devaluation of the real against the U.S. dollar, which decreased the dollar value of our SG&A expenses incurred in Brazil. SG&A expenses at IMPSAT Argentina for 2001 totaled $18.8 million, a decrease of $7.7 million (or 29.1%) compared to 2000.
Asset Impairment Charge. As discussed above under “- 2002 Compared to 2001 - Asset Impairment Charge,” during 2001 we recorded an asset impairment charge based on internal estimates of fair value and other indicators, and not independent valuations of our telecommunication infrastructure.
Depreciation and Amortization. Our depreciation and amortization expenses for 2001 totaled $123.7 million, an increase of $39.2 million (or 46.4%) compared to our depreciation and amortization for 2000. The increase in our depreciation and amortization expense reflected the continued growth in our asset base. Depreciation and amortization for IMPSAT Argentina for 2001 totaled $55.4 million. This represented an increase of $17.2 million (or 45.1%) compared to IMPSAT Argentina’s depreciation and amortization for 2000.
Interest Expense, Net. Our net interest expense for 2001 totaled $132.8 million, consisting of interest expense (including financing costs and taxes) of $143.5 million and interest income of $10.7 million. Our net interest expense for 2001 increased $47.3 million (or 55.4%) over net interest expense for 2000. At December 31, 2001, we had cash, cash equivalents and other short-term trading investments of $64.9 million compared to $308.6 million at December 31, 2000. Our interest income has declined as we utilized our cash and trading investments in connection with capital expenditures and general corporate purposes.
Our total indebtedness as of December 31, 2001 was $990.6 million as compared to $968.2 million as of December 31, 2000. As of December 31, 2001, total outstanding indebtedness at IMPSAT Argentina totaled $168.0 million ($165.6 million after eliminating intercompany items), compared to $159.4 million ($151.9 million after eliminating intercompany items) as of December 31, 2000. For 2001, the average interest rate on our indebtedness was 12.0%, compared to an average interest rate of 12.5% for 2000.
Net Loss on Foreign Exchange. We recorded net losses on foreign exchange for 2001 of $41.2 million, compared to net losses of $10.6 million for 2000. As discussed in greater detail below, the increase in our losses on foreign exchange was primarily due to the devaluation of the Argentine peso and the Brazilian real against the U.S. dollar. IMPSAT Argentina recorded net losses on foreign exchange for 2001 totaling
$17.9 million, compared to a net gain of $0.2 million for 2000. The explanation for this increase in IMPSAT Argentina’s net losses from foreign exchange is as follows. In response to the devaluation of the peso following the Argentine government’s adoption of the floating exchange rate system in January 2002, and the depreciation of our accounts receivable (in U.S. dollar terms) as a result of the “pesification” decree, we remeasured IMPSAT Argentina’s financial position and results of operations for 2001 using the first subsequent free-floating rate for the settlement of transactions (which was 1.65 pesos = $1.00). This resulted in a remeasurement loss of approximately $16.5 million, which was included in IMPSAT Argentina’s (and our company’s consolidated) net loss on foreign exchange for 2001. IMPSAT Brazil recorded net losses on foreign exchange for 2001 totaling $25.1 million, compared to a net losses of $10.6 million for 2000. The net losses on foreign exchange reflect the effect of the devaluation of the real against the U.S. dollar on the book value of our monetary assets and liabilities in Brazil, including the primarily dollar-denominated debt of IMPSAT Brazil under the Nortel Networks vendor financing agreement. At December 31, 2000, the realtraded at a rate of R$1.95 = $1.00. At December 31, 2001, the real traded at a rate of R$2.32 = $1.00.
Recognition of Other-Than-Temporary Decline in Value. As discussed above under “- 2002 Compared to 2001 - Recognition of Other-Than-Temporary Decline in Value,” we recorded a loss of $20.6 million during 2001 relating to the decline in value of our Claxson Shares. Our Claxson Shares, which had a market value of $0.9 million at December 31, 2001, were initially acquired in the fourth quarter of 1999 for a cost of $21.5 million.
Benefit From (Provision for) Foreign Income Taxes. For 2001, we recorded a provision for foreign income taxes of $27.4 million, compared to a benefit for foreign income taxes of $4.5 million for 2000. The provision for foreign income taxes in 2001 was principally caused by a valuation allowance made in the second quarter of 2001 totaling approximately $25.5 million. This valuation allowance was required to be recorded because it was not clear that utilization of tax benefits resulting from operating losses and other temporary differences are “more likely than not” to be realized, as stipulated by Statement of Financial Accounting Standards 109.
Net Loss Attributable to Common Stockholders. For 2001, we incurred a net loss attributable to common stockholders of $715.3 million, an increase of $561.1 million (or 364.0%) compared to 2000. The increase in our net loss attributable to common stockholders was principally due to our recording in the third and fourth quarters of 2001 of the non-cash impairment charges discussed above.
Liquidity and Capital Resources
At December 31, 2002, we had total cash, cash equivalents and trading investments of $55.6 million (as compared to $64.9 million as of December 31, 2001). At December 31, 2002, our total indebtedness was $1.04 billion (as compared to $990.6 million as of December 31, 2001), of which $281.7 million represented current portion of long-term debt, $27.6 million represented long-term debt, and $727.5 million represented principal and accrued interest of indebtedness subject to compromise. Following our emergence from bankruptcy and before the end of the second quarter of 2003, in accordance with the Plan, we expect to pay approximately $6.1 million (including amounts paid to date) in satisfaction of all allowed general unsecured convenience class claims as well as certain fees and expenses relating to our Chapter 11 proceedings and reorganization. As a result of the financial reorganization of our Senior Notes and the Original Vendor Financing Agreements that accompanied our emergence from Chapter 11 protection, our capital requirements for 2003 are projected to be less than our available capital resources. Our capital expenditures budget for 2003 contemplates that we will need approximately $21.0 million (including amounts spent to date) through the end of 2003 for capital expenditures.
As set forth in our consolidated statement of cash flows, our operating activities provided $26.4 million in net cash flow for 2002, compared to $71.1 million used by operating activities during 2001. In addition to the decrease in our operating losses discussed above, the increase in cash flow from operating activities in 2002 was primarily due to an increase in accrued and other liabilities of $67.9 million (as compared to an increase of $25.4 million in 2001). Also, during 2002, a decrease in our trade accounts receivable of $30.7 million (compared to a decrease of $8.2 million for 2001) and an increase in trade accounts payable of $9.2 million
(as compared to a decrease of $26.5 million in 2001), contributed to the increase in net cash flow from operating activities during the period. These changes to our accounts receivable and payable during 2002 reflect actual operating cash flows, as well as changes in the value of those accounts (in U.S. dollar terms) caused by the devaluation of the Brazilian real and the Argentine peso during that period.
For 2002, we used $11.6 million in net cash flow from investing activities, compared to $51.9 million of net cash flow generated by investing activities during 2002. The decreased net cash flow from investing activities was principally due to a decrease in our trading investments of $6.3 million during 2002, compared to decrease in our trading investments of $211.6 million during 2001. During 2002, we used $17.2 million in net cash flows from financing activities. This compares to $6.0 million in net cash flows used in financing activities during 2001.
At December 31, 2002, we had leased satellite capacity with annual rental commitments of approximately $21.9 million through the year 2007. In addition, at December 31, 2002, we had commitments to purchase telecommunications equipment amounting to approximately $1.8 million. Our commitments in respect of IRU purchases under contracts with 360networks and Global Crossing have been terminated under the Settlement Agreement (in the case of 360networks) and in connection with the Plan (in the case of Global Crossing). Furthermore, we had leased from third parties a series of terrestrial links for the provision of data, Internet and telephony services to our clients in the different countries in which we operate. We have committed to long term contracts for the purchase of terrestrial links from third parties in Argentina, Colombia, and the United States for approximately $2.5 million per year through 2007. The remainder of the leases are typically under one-year contracts, the early cancellation of which is subject to a fee.
The following table sets forth due dates of our contractual obligations:
(1)
As discussed above, our contingent liability as guarantor under the Original Vendor Financing Agreements is included in our current portion of long-term indebtedness, which reclassified amounts are not included in this line item as being due in 2002, but instead are set forth based on their originally scheduled contractual due dates.
(2)
As discussed elsewhere in this Report, as a result of our default under our Senior Notes and the Chapter 11 filing, our “liabilities subject to compromise” are constituted by IMPSAT Fiber Network Inc.’s primary obligations under the Senior Notes and certain other accounts payables.
The following table illustrates expirations of our commercial commitments as provided in corresponding contracts:
(1)
Commitments are contractual obligations (other than indebtedness) that could potentially require our performance in the event of demands by third-parties or contingent events.
(2)
This includes commitments to purchase communications and data center equipment and long-term contracts for the purchase of satellite capacity and terrestrial links.
Forward Looking Statements
Forward Looking Statements. Some of the statements in this Management’s Discussion and Analysis of Financial Condition and Results of Operations are forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Forward-looking statements include but are not limited to:
•
our expectations and estimates as to maintenance and growth of our Broadband Network, and
•
future financial performance, including growth in sales and income.
Factors that could cause our actual results to differ materially from those expressed in any forward-looking statements we make include those in the “Certain Considerations” section of this Report, and the following factors, among others:
•
factors affecting our performance and financial conditions
•
the availability and terms of additional capital to fund our continuing efforts
•
adequacy of cash from operations for our future liquidity and working capital needs
•
inaccuracies in our forecasts of customer or market demand
•
loss of a customer that provides us with significant revenues
•
highly competitive market conditions
•
changes in or developments under laws, regulations and licensing requirements
•
changes in telecommunications technology
•
currency fluctuations, and
•
changes in economic conditions in the Latin American countries where we operate.
These factors should not be construed as exhaustive. We will not update or revise any forward-looking statements.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The sections below highlight our exposure to interest rate and foreign exchange rate risks and changes in the market values of our investment in equity securities. The analyses presented below are illustrative and should not be viewed as predictive of our future financial performance. Additionally, we cannot assure you that our actual results in any particular year will not differ from the amounts indicated below. However, we believe that these results are reasonable based on our financial instrument portfolio at December 31, 2002 and assuming that the hypothetical interest rate and foreign exchange rate changes used in the analyses occurred during year 2002. We do not hold or issue any market risk sensitive instruments for trading purposes.
Interest Rate Risk. Our cash, cash equivalents and trading investments consist of highly liquid investments with a maturity of less than 360 days. As a result of the short-term nature of these instruments, we do not believe that a hypothetical 10% change in interest rates would have a material impact on our future earnings and cash flows related to these instruments. A hypothetical 10% change in interest rates would also have an immaterial impact on the fair values of these instruments.
We are exposed to interest rate risk on our floating rate indebtedness, which affects our cost of financing. Prior to our Chapter 11 filing, our floating rate indebtedness had increased as we drew down commitments under our vendor financing agreements to cover capital expenditures, including the Broadband Network. Following our emergence from bankruptcy, our floating rate debt and, therefore, our exposure to interest rate risk, has decreased. At December 31, 2002, our total floating rate indebtedness aggregated $284.5 million. As of the Effective Date, our total floating rate indebtedness was approximately $27.9 million. Our actual interest rate is not quantifiable or predictable because of the variability of future interest rates and business requirements. We do not believe such risk is material and we do not customarily use derivative instruments to adjust interest rate risk. As of December 31, 2002 and as of the Effective Date, a hypothetical 100 basis point increase in the London Interbank Offered Rate (LIBOR) would adversely affect our annual interest cost related to our floating rate indebtedness by approximately $2.8 million and $0.2 million, respectively.
Foreign Currency Risk. A substantial portion of our costs, including lease payments for certain satellite transponder and fiber optic capacity, purchases of capital equipment, and payments of interest and principal on our indebtedness, is payable in U.S. dollars. To date, we have not entered into hedging or swap contracts to address currency risks because our contracts with our customers generally have provided for payment in U.S. dollars or for payment in local currency linked to the exchange rate between the local currency and the U.S. dollar at the time of invoicing. These contractual provisions are structured to mitigate our risk if currency exchange rates fluctuate. However, given that the exchange rate is generally set at the date of invoicing and that in some cases we experience substantial delays in collecting receivables, we are exposed to some exchange rate risk.
As previously discussed in this Report, during January 2002 Argentina abandoned the fixed dollar-to-peso exchange rate and devalued the Argentine peso and, on February 3, 2002, pursuant to the “pesification” decree, the Argentine government announced the mandatory conversion of all foreign currency denominated contractual obligations governed by Argentine law into Argentine pesos at a rate of one Argentine peso to one U.S. dollar. The floating exchange rate at March 31, 2003 was pesos 2.88 = $1.00. These and any further devaluations of the peso have and will adversely affect IMPSAT Argentina’s results of operations and, in turn, our company’s consolidated results of operations and financial condition. Management is currently unable to predict the most likely average or end-of-period peso/dollar exchange rates for 2003 or provide estimates of the impacts that the changes in Argentine laws, the potential impacts of the currency devaluation and other recent events in Argentina could have on our company’s consolidated results of operation and financial condition. There is likely to occur during 2003 increases to our consolidated net losses that would result from transaction gains or losses on our dollar-denominated monetary assets and liabilities. Also, operating income reductions are likely to result from the potential impacts on our consolidated revenues from services of the conversion to pesos of contract obligations that were previously tied to the dollar. Balance sheet exposures include the reduction to our consolidated stockholders’ equity due to the effects of lower net income on retained earnings. Our management is continuing to assess the impacts that the events in Argentina could have on our consolidated results of operations and financial condition.
As discussed under “Certain Considerations - Economic and political conditions in Latin America pose numerous risks to our operations,” in Brazil, the real has devalued significantly during 2002, mostly related to uncertainty surrounding the presidential elections. At December 31, 2001, the real traded at a rate of R$2.41 = $1.00, and at December 31, 2002 it had depreciated to R$3.53 = $1.00. These and prior devaluations have had a negative effect on our real-denominated revenues.
Pursuant to laws in Brazil, our contracts with customers in Brazil cannot be denominated in dollars or linked to the exchange rate between the Brazilian real and the U.S. dollar. In Brazil, we are permitted to amend the pricing of our services for our long-term telecommunication services contracts with our customers annually based on changes in the consumer price index in Brazil for the prior year. In Argentina, obligations that are mandatorily converted to pesos under the “pesification” decree may be adjusted pursuant to the CER, an index rate based on variations in the Argentine consumer price index. These aspects of the laws in Brazil and Argentina do not eliminate completely the currency exchange risk facing our operations in those countries. Changes in the consumer price indices in Brazil and Argentina may lag or be lower than changes in the exchange rate between the Brazil and Argentine local currencies and the U.S. dollar and therefore may not fully allow us to address the impact of a devaluation of those currencies against the U.S. dollar. Also, contracts entered into after the “pesification” decree’s enactment that are initially denominated in pesos are not entitled to be adjusted according to the CER or any other consumer price index. Accordingly, our operations in Brazil and Argentina have exposed us, and will increase our exposure, to exchange rate risks.
As discussed above, in response to political and economic turmoil currently affecting Venezuela, that country’s government imposed foreign exchange and price controls during February 2003, making it difficult for our customers in Venezuela to obtain the U.S. dollars needed to make payments due to us in U.S. dollars on a timely basis. These foreign exchange controls could also limit our ability to convert local currency into U.S. dollars and transfer funds out of Venezuela. At December 31, 2001, the bolivar traded at a rate of Bs.769.00 = $1.00, at December 31, 2002, it traded at a rate of Bs.1,392.00 = $1.00, and at February 5, 2003, it traded at the rate of Bs.1,924 = $1.00. On February 6, 2003, the Venezuelan government set a single fixed exchange rate for the bolivar against the U.S. dollar of approximately Bs.1,600 = $1.00 as part of the new currency controls.
Revenues from services from our Argentine operations for each of 2001 and 2002 represented approximately 40.2% and 24.5% of our total net revenues from services for such years. Revenues from services from our Brazilian operations for each of 2001 and 2002 represented approximately 14.1% and 15.6% of our total net revenues from services for such periods. However, this proportion can be expected to increase significantly in future periods in connection with the progression of our operations in Brazil and the further development of the Broadband Network. At December 31, 2002 and March 31, 2003, the peso traded at a rate of pesos 3.40 = $1.00 and pesos 2.88 = $1.00, respectively. At December 31, 2002 and March 31, 2003, the real traded at a rate of R$3.53 = $1.00 and R$3.46 = $1.00. Our revenues from services in Venezuela accounted for 10.3% and 13.7% of our total revenues from services in 2001 and 2002.
Item 8.
Item 8. Financial Statements and Supplementary Data
Information required by this Item is included herein beginning on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Officers
The Bylaws of our company provide that the number of members of its board of directors shall initially be seven. (See Item 1 - Business - Chapter 11 Filing and Emergence for further details and description of the Board.)
The officers of IMPSAT Fiber Networks, Inc. are appointed by its board of directors. All officers hold office until their successors are elected and qualified, or until their earlier death, resignation or removal. Executive officers of IMPSAT Fiber Networks, Inc. are employees of IMPSAT Argentina and IMPSAT Brazil.
No family relationship exists among any of our directors or executive officers.
Set forth below are the names, ages and positions of directors and executive officers of our company as of March 31, 2003.
Biographies of Directors and Executive Officers
Information with respect to the business experience and the affiliations of the current directors and executive officers of our company is set forth below.
Ricardo A. Verdaguer has been President, Chief Executive Officer and a member of our board of directors since September 1994. Mr. Verdaguer has been director of IMPSAT Argentina since 1988 and served as President of IMPSAT Argentina from April 1988 until February 1994. Mr. Verdaguer is also a director of Claxson Interactive Group, Inc., a multimedia company headquartered in Argentina that provides branded entertainment content targeted to Spanish and Portuguese speakers around the world.
William Connors is a Portfolio Manager for W.R. Huff Asset Management Co., LLC and Chief Investment Officer of WRH Partners Global Securities, LP. He has worked with the Huff group since 1992. Mr. Connors serves on the board of directors at ICG Communications, Inc. He is a chartered financial analyst.
Thomas Doster IV is an Executive Director at Morgan Stanley & Co. Incorporated, where he has worked since 1996. Prior to joining Morgan Stanley, Mr. Doster worked in the bank debt group at Goldman, Sachs & Co.
Elias Makris is Head of Customer Finance Americas of Nortel Networks Limited since November 2002. Previously, he held various other positions within Nortel since joining that company in 1999, including Director, Customer Finance North America and Director, Global Credit. Prior to joining Nortel, Mr. Makris was Director, Structured Finance at Bank of Montreal since 1996 and held financing and team leadership positions at Export Development Corporation since 1988.
Raul Ramirez is an Executive Director at Morgan Stanley & Co. Incorporated, and head of Morgan Stanley’s European Special Situations Research. Previously, he has held various positions with Morgan Stanley, where he has worked since 1996, including within Latin American Corporate Bonds under the High Yield Group.
Joseph R. Thornton is counsel to W.R. Huff Asset Management Co., LLC, where he has worked for more than ten years. Mr. Thornton serves on the board of directors of ICG Communications, Inc., and has served on the on the boards of directors of e.spire Communications, Inc. and Uniflex, Inc., and as an observer to the board of directors of Price Communications. Mr. Thornton is a chartered financial analyst.
Ignacio Troncoso is the founder and chief executive officer of each of planOK, a company that provides document management services through the world wide web, and AIMSA, a company focused on data integration in the telecommunications and electrical engineering markets. He previously served as country manager for Chile for Raychem Corporation from July 1988 to November 1999.
Héctor Alonso is our Executive Vice President and Chief Financial Officer since June 2002, and was our Chief Operating Officer from September 1996 until May 2002. Mr. Alonso was President of IMPSAT Colombia from September 1993 to August 1996. Prior to joining IMPSAT Colombia, Mr. Alonso had 14 years of experience in a variety of management positions with Industrias Metalúrgicas Pescarmona S.A.I.C. y F. (“IMPSA”).
Guillermo V. Pardo has served as our Senior Vice President, Corporate Finance and Treasury since June 2002 and as our Secretary since February 2000. Previously, Mr. Pardo served as our Vice President, Planning from January 1995 to May 2002. Mr. Pardo was previously Managing Director of the Guido Di Tella companies and has had over 20 years of experience in finance positions in a number of companies in Argentina and Spain. Mr. Pardo is a member of the board of directors of FAIC S.A. and the Fundacion Torcuato Di Tella.
José R. Torres has served as our Senior Vice President, Accounting since March 25, 2003, and as a Director of IMPSAT Argentina since 1990. Previously, he was our Vice President, Administration and Chief Accounting Officer from January 1995 until March 25, 2003. Mr. Torres previously worked as Assistant Finance Manager of IMPSA and as Finance Manager of IMPSAT Argentina for five years until December 1994.
Marcelo Girotti is our Executive Vice President, Products and Marketing since March 25, 2003. He was Regional Manager, Southern Cone from September 2000 until March 25, 2003 and has served as chairman of the board of directors of IMPSAT Argentina since March 2000. He is also President of IMPSAT Argentina, a position he has held since August 1998. Mr. Girotti joined IMPSAT Argentina in 1992 where he has held several managerial positions, including Manager of Special Accounts from 1996 to 1997 and Business Manager of the value-added unit from 1997 to 1998.
Mariano Torre Gómez is our Executive Vice President, Sales and Services since March 25, 2003 and, before that, was President of IMPSAT Brazil and Regional Manager, Brazil since September 2000. Mr. Torre Gómez was President of IMPSAT Colombia from July 1999 to June 2000 and of IMPSAT Venezuela from April 1997 to July 1999. Mr. Torre Gómez was President of IMPSAT Ecuador for two years prior to his transfer to IMPSAT Venezuela. Before that, Mr. Torre Gómez served four years at IMPSAT Argentina in the commercial and new licenses departments. Mr. Torre Gómez has served in a variety of positions involving
engineering, production, planning, business development and new markets with IMPSA over a period of 17 years.
Matias Heinrich is our Executive Vice President, Networks since March 25, 2003. Before that, he was our Regional Manager, Network Operations from June 1999 and Vice President of Operations and Director of IMPSAT Venezuela from 1997 until 1999. Mr. Heinrich joined IMPSAT Argentina in 1990 and has held several managerial positions there, including Teleport Manager from 1995 to 1996 and Terrestrial Network (Teledatos) Manager from 1996 to 1997.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires that our company’s directors, executive officers and persons who own more than 10% of a registered class of our company’s equity securities file with the SEC initial reports of ownership and reports of changes in ownership of our Old Common Stock and other equity securities of our company. Directors, executive officers and greater than 10% stockholders are required by the SEC regulations to furnish our company with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of the Section 16(a) reports furnished to our company and written representations that no other reports were required, during 2002, all Section 16(a) filing requirements applicable to our directors, executive officers and greater than 10% beneficial owners were complied with.
Director Compensation
During 2002, the members of our board of directors did not receive any compensation for their services on our board.
Board of Directors, Committees and Attendance at Meetings
During 2002, our board of directors held six meetings, three of which were by telephone conference. During their term, all of the then incumbent directors were present for at least 75 percent of the meetings of our board of directors and the committees of our board of directors on which they serve. In accordance with the Plan, the directors of our company immediately before the Effective Date resigned as of the Effective Date and were thereupon replaced by the current members of our board of directors.
Our board of directors has two standing committees: the audit committee and the compensation committee.
The audit committee held four meetings during the year ended December 31, 2002. The audit committee, composed of non-employee directors, oversees the engagement of our independent auditors and, together with our independent auditors, reviews our accounting practices, internal accounting controls and financial results. Our audit committee was dissolved on the Effective Date upon the reconstitution of our board of directors in accordance with the Plan. The new audit committee, which was established by our board of directors on April 9, 2003, is currently constituted by Messrs. Joseph Thornton, Ignacio Troncoso and Raul Ramirez, each of whom has served as a non-employee director since our emergence from bankruptcy.
During 2002, the compensation committee held one meeting. Our compensation committee traditionally establishes salaries, incentives and other forms of compensation for our directors and officers and recommends policies relating to our benefit plans. During our debt restructuring negotiations during the first half of 2002, our compensation committee did not make any decisions regarding executive compensation. For the duration of our Chapter 11 bankruptcy proceedings (beginning with the filing of our Plan on June 11, 2002 through our emergence from bankruptcy on March 25, 2003), the compensation committee did not take any actions in respect of salaries, incentives and other benefits for our officers and directors because of the limitations regarding approval of such matters under the United States Bankruptcy Code. Our compensation committee was dissolved on the Effective Date upon the reconstitution of our board of directors in accordance with the Plan. Our current compensation committee, which was established by our board of directors on April 9, 2003, is currently constituted by Messrs. William Connors and Raul Ramirez, each of whom has served as a director
since our emergence from bankruptcy. Our current compensation committee has not taken any actions in respect of salaries, incentives and other benefits for our officers and directors following our emergence from bankruptcy.
2002 Audit Committee Report
Our board of directors has adopted a written audit committee charter. All members of the audit committee are independent as defined in Rule 4200(a)(15) of the National Association of Securities Dealers Listing Standards.
In discharging its oversight responsibility as to the audit process, the audit committee has reviewed and discussed with management and Deloitte & Touche LLP, our company’s independent auditors, our company’s audited financial statements included in our company’s Annual Report on Form 10-K for the year ended December 31, 2002. In addition, the audit committee has discussed with Deloitte & Touche LLP, the matters required to be discussed by Statement on Auditing Standards (SAS) No. 61 “Communication with Audit Committees.”
The audit committee has obtained from Deloitte & Touche LLP a formal written statement describing all relationships between the auditors and our company that might bear on the auditors’ independence consistent with the Independence Standards Board Standard No. 1, discussed with the auditors any relationships that may impact their objectivity and independence and satisfied itself as to the auditors’ independence.
Based on the review and discussions referred to above in this report, the audit committee has recommended to the board of directors that the audited financial statements be included in our company’s Annual Report on Form 10-K for the year ended December 31, 2002, for filing with the SEC.
By the Audit Committee:
Joseph Thornton
Ignacio Troncoso
Raul Ramirez
Auditors’ Fees
Aggregate fees billed to the Company for the year ended December 31, 2002 by the Company’s principal accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu and their respective affiliates (“Deloitte & Touche”) were:
•
Audit Fees. The aggregate fees billed for professional services rendered for the audit of our consolidated financial statements and local statutory financial statements for 2002 were $586,532.
•
Financial Information Systems Design and Implementation Fees. There were no fees billed for the professional services described in Paragraph (c)(4)(ii) of Rule 2-01 of Regulation S-X (17 CFR 210.2-01(c)(4)(ii)) rendered by Deloitte & Touche during 2002.
•
All Other Fees. All other fees paid to Deloitte & Touche for 2002, aggregated $486,626, and included internal audit services of $36,992, bankruptcy and reorganization services of $223,849 and other services of $225,785.
The audit committee has concluded that the provision of services covered in the above paragraph captioned “All Other Fees” are compatible with maintaining Deloitte & Touche’s independence.
Item 11.
Item 11. Executive Compensation
Executive Compensation
Under rules established by the SEC, we are required to provide certain data and information with respect to the compensation and benefits provided to our company’s Chief Executive Officer and other executive officers of our company.
Employment Agreements
Employment Agreements With Messrs. Verdaguer and Alonso. On the Effective Date, pursuant to the Plan, Messrs. Ricardo Verdaguer and Héctor Alonso, entered into employment contracts with our company as of such date.
•
Each employment agreement with Messrs. Verdaguer and Alonso is for a three-year term, subject to recurrent automatic one-year renewals (unless the agreement is first terminated as provided therein). Mr. Verdaguer will continue to serve as our President and Chief Executive Officer, and Mr. Alonso will serve as our Chief Financial Officer and Executive Vice President - Corporate Services.
•
Pursuant to the employment agreements, the terms of which were negotiated between management and the creditors committee during our Chapter 11 proceedings, Mr. Verdaguer and Mr. Alonso (each, an “executive”) were on the Effective Date granted bonuses of $200,000 and $75,000, respectively, in respect of their performances for 2002. Following below is a summary of the additional key terms of the employment agreements.
-
Base Salary. During the initial three-year term, Mr. Verdaguer’s annual base salary will be $510,000 and Mr. Alonso’s annual base salary will be $310,000.
-
Bonus. For each year, the executives will be eligible to participate in our Executive Incentive Bonus Plan (the “Incentive Bonus Plan”). Under the Incentive Bonus Plan, if our company and the respective executive meet certain targets for the year, as set by our compensation committee, the executive will receive an annual bonus equal to 100% of the executive’s annual base salary, subject to the right of the compensation committee, in its sole discretion, to pay a lesser such percentage (or to pay no annual bonus whatsoever). The targets for each year will be determined by our compensation committee by no later than March 31 of such year and paid no later than thirty days following receipt by our board of directors of our audited financial statements for such year.
-
Stock Options. Subject to the approval of our compensation committee, Messrs. Verdaguer and Alonso were granted under our 2003 Stock Incentive Plan and their employment agreements eight-year stock options for 617,400 and 154,350 shares of our New Common Stock, respectively, at an exercise price of $15 per share (or, if greater, the fair market value of the stock) and vesting in one-quarter increments on the date of grant and on each of the successive first three anniversaries of the date of grant.
-
Restricted Stock. On the Effective Date, we granted Mr. Verdaguer and Mr. Alonso under our 2003 Stock Incentive Plan and their employment agreements 100,000 and 25,000 shares of our New Common Stock, respectively, vesting in one-quarter increments on the date of grant and on each of the successive first three anniversaries of the date of grant (but, in each case, only if the executive is still employed with us on such respective date).
-
Termination. Under the employment agreements, subject to certain narrow exceptions contained therein, if an executive’s employment is terminated due to death or disability, by our company without cause, or by the executive for good reason, then (A) the executive is entitled to receive a lump sum payment equal to (1) if the termination occurs during the initial three-year term, the sum of (x) the amount to which the executive would be entitled in respect of his annual base salary for the remainder of the such initial term plus a bonus equal to 50% of such amount and (y) 100% of his then current annual base salary, or (2) if the termination occurs after the initial three-year term, 100% of the executive’s then current annual base salary; and (B) any unvested portion of the stock option and the restricted stock grants discussed above will automatically and fully vest. If the executive’s employment is terminated by our company for cause or by the executive without good reason, the executive will only be entitled to receive accrued annual base salary and benefits through the date of such termination.
Offer Letters With Messrs. Giroti, and Torre Gómez. On the Effective Date, Messrs. Marcelo Girotti and Mariano Torre Gómez received offer letters for “at will” employment with our company.
-
Base Salary. During their respective “at will” employment terms, the annual base salary of each of Messrs. Girotti and Torre Gómez (an each, an “additional executive”) will be $310,000.
-
Stock Options. Subject to the approval of our compensation committee, each additional executive was granted under our 2003 Stock Incentive Plan and their offer letters eight-year stock options for 154,350 shares of our New Common Stock, at an exercise price of $15 per share (or, if greater, the fair market value of the stock) and vesting in one-quarter increments on the date of grant and on each of the successive first three anniversaries of the date of grant, but, in each case, only if the additional executive is still employed with us on such date.
-
Restricted Stock. On the Effective Date, we granted each additional executive under our 2003 Stock Incentive Plan and their respective offer letter, 25,000 shares of our New Common Stock, vesting in one-quarter increments on the date of grant and on each of the successive first three anniversaries of the date of grant (but, in each case, only if the additional executive is still employed with us on such date).
-
Termination. The additional executives’ employment with us is “at will” and is terminable by us upon 30 days’ prior written notice. Under the offer letters, subject to certain narrow exceptions contained therein, if an additional executive’s employment is terminated by our company without cause or by the additional executive for good reason, then (A) the additional executive is entitled to receive a lump sum payment equal to 100% of his then current annual base salary; and (B) any unvested portion of the stock option and the restricted stock grants discussed above will automatically and fully vest. If the additional executive’s employment is terminated by our company for cause or by the additional executive without good reason, the additional executive will only be entitled to receive accrued annual base salary and benefits through the date of such termination.
2002 Report of the Compensation Committee
During 2002, our executive officers, including our Chief Executive Officer, were paid the same base salaries they received during 2001. Except as discussed above under “-Employment Agreements,” we awarded no stock options, bonuses or other cash compensation to our executive officers during 2002. As discussed above due to the exigencies related to our bankruptcy negotiations and Chapter 11 proceedings, neither our compensation committee (or any other board committee performing equivalent functions) nor our board of directors engaged in any deliberation or decision making regarding executive officer compensation for 2002. Our current compensation committee, which was constituted on April 9, 2003, has not taken any actions in respect of salaries, incentives and other benefits for our officers and directors following our emergence from bankruptcy.
The following is a discussion of our overall executive compensation philosophy.
General. IMPSAT’s overall compensation philosophy is to link executives’ total compensation to the short-term and long-term performance of our company so as to maximize long-term stockholder value. The policy is designed to provide a competitive compensation program that will enable our company to attract, motivate, reward and retain executives and other employees who have the skills, experience and talents required to promote IMPSAT’s short and long-term financial performance and growth. IMPSAT believes that the compensation levels of its executive officers, who provide leadership and strategic direction, should be targeted to provide opportunities that are comparable to other similarly situated telecommunications and technology companies, and should consist of:
•
fair base salaries
•
cash bonuses based on achievement of performance objectives established by our company and
•
stock option and restricted stock grants, which align management compensation with long-term value gains realized by the stockholders.
Base Salary. Generally, our company’s salaries policy is designed to provide executive officers and other management personnel with a base salary that is competitive both for the industry and the specific countries where IMPSAT has its operations.
Bonus. As a further component of the total cash compensation payable to its executive officers, IMPSAT has established a program of target annual bonuses. This program rewards our executive officers for their contributions to our company and motivates them to perform to the full extent of their abilities. Target bonuses for executive officers are determined on the basis of specific goals to be achieved by each covered executive officer, including , among others, revenue growth, EBITDA evolution, and attainment of network development milestones. Except as discussed above under “- Employment Agreements,” no target bonuses were set, earned or paid during 2002.
Stock Options and Restricted Stock. Awards of options or restricted under our stock incentive plans are based on criteria that reflect contributions to long-term stockholder value. We will generally grant stock options and/or restricted stock to our executive officers at levels comparable to competitive business entities, and such grants are intended to focus the performance of these executive officers towards increasing our stockholder value. We expect to use stock-based incentive grants, including stock options and restricted stock, as a significant component of executive compensation. During 2002, no stock options or restricted stock were earned by or awarded to our executive officers.
Section 162(m) of the Internal Revenue Code. Section 162(m) of the Internal Revenue Code generally denies a deduction to any publicly-held corporation for compensation paid to its chief executive officer and its four other highest-paid executive officers to the extent that any such individual’s compensation exceeds $1 million, subject to certain exceptions. Certain forms of compensation meeting a tax law definition of “performance-based” is generally exempt from this deduction limit. Our company does not currently intend to qualify cash compensation paid to executive officers for deductibility under Section 162(m). Further, in general, our company does not currently have a policy that requires or encourages the Committee to qualify other types of compensation awarded to executive officers for deductibility under Section 162(m).
The foregoing information is provided by the compensation committee of our company:
By the compensation committee:
William Connors
Raul Ramirez
Summary Compensation Table
The following tables set forth the compensation paid or accrued to our chief executive officer and each of our four other most highly compensated executive officers (whom we refer to as the “named executive officers”) receiving compensation in excess of $100,000 per year during 2002. We do not maintain any long-term incentive plans and have not granted stock appreciation rights or restricted stock awards.
(1)
Mr. Enrique M. Pescarmona ceased to be a Chairman and a member of our board of directors as of the Effective Date.
(2)
This amount represents bonuses awarded in 2003 pursuant to the executive employment agreements discussed above under “-Employment Agreements.” This amount relates to our 2002 operating results. No bonuses were paid with respect to our 2001 operating results.
(3)
This amount represents bonuses we paid to the executive officers named in the table above in June 2001. This amount relates to our 2000 operating results.
(4)
This amount represents bonuses we paid to the executive officers named in the table above in December 2000. This amount relates to our 1999 operating results.
(5)
Annual housing allowance.
Stock Option Grants
No grants of options to purchase our Old Common Stock were made by us during 2002 to any of the named executive officers. We granted no stock appreciation rights during 2002. No stock options were exercised by the named executives during 2002.
Aggregate Option Exercise During 2002 and Option Values on December 31, 2002
(1)
As discussed previously in this Report, on the Effective Date, we adopted a new 2003 Stock Incentive Plan and terminated our 1998 Stock Option Plan and our 1999 Stock Option Plan, and all of the shares of our Old Common Stock, options granted under such plans were cancelled, stock option plans were cancelled, retired and eliminated with no consideration paid thereon. See “Business - Chapter 11 Filing and Emergence.”
(2)
Value is calculated as the difference between the fair market value of a share of our Old Common Stock on December 31, 2002 ($0.01 per share as of close of business on December 31, 2002 by the Nasdaq Over-The-Counter Bulletin Board) and the exercise price of the options.
Stock Option Plans
2003 Stock Incentive Plan. On the Effective Date, in accordance with the Plan, we adopted the 2003 Stock Incentive Plan, which provides for the grant to our officers, key employees, consultants, advisors, directors or affiliates of (i) “incentive stock options” within the meaning of Section 422 of the U.S. Internal Revenue Code of 1986, as amended, (ii) stock options that are non-qualified for U.S. federal income tax purposes, (iii) restricted stock grants and (iv) stock appreciation rights (collectively the “Awards”). A copy of the 2003 Stock Incentive Plan is included as Exhibit 9.1 to this Report. The total number of shares of New Common Stock for which Awards may be granted pursuant to the 2003 Stock Incentive Plan is 3,087,044, subject to certain adjustments reflecting changes in our capitalization (provided that no more than 200,000 shares of New Common Stock may be issued pursuant to Awards that are not stock options or stock
appreciation rights). The 2003 Stock Incentive Plan is administered by our compensation committee (or, if we do not have a compensation committee, by our full board of directors). The compensation committee determines, among other things, which of our officers, employees, consultants, advisors, affiliates and directors will receive Awards under the plan, the time when Awards will be granted, and the type of Awards to be granted. Awards granted under the 2003 Stock Incentive Plan are on such terms, including the number of shares subject to each Award, the time or times when the Awards will become exercisable, and the price and duration of the Award, as determined by the compensation committee.
The exercise price of incentive and non-qualified stock options is determined by the compensation committee, but may not be less than the fair market value of the common stock on the date of grant and the term of any such option may not exceed ten years from the date of grant (or five years in the case of an incentive stock option granted to an employee owning 10% or more of our voting stock).
Payment of the exercise price of a stock option or stock appreciation right must be made by cash or, in the sole discretion of the compensation committee, by promissory note, tender of shares of the New Common Stock then owned by the optionee or, subject to certain conditions, the surrender to us of an exercisable option to purchase shares of New Common Stock under the 2003 Stock Incentive Plan. Stock options and stock appreciation rights granted pursuant to the 2003 Stock Incentive Plan are generally not transferable, other than by will or the laws of descent and distribution in the event of death.
Our board of directors has the right at any time and from time to time to amend or modify the 2003 Stock Incentive Plan, without the consent of our stockholders (unless otherwise required by law) or grantees of Awards; provided, that no such action may adversely affect Awards previously granted without the grantee’s consent.
Compensation Committee Interlocks and Insider Participation
Mr. Roberto Vivo, who was a member of our board of directors prior to the Effective Date, is a member of the compensation committee of the board of directors of Claxson Interactive Group, Inc. (formerly, El Sitio, Inc.).
Performance Graph
Our Old Common Stock first traded publicly on February 4, 2000. Prior to such date, there was no established market for our Old Common Stock. Our Old Common Stock was delisted from the NASDAQ National Market effective on May 15, 2002. Thereafter, until the Effective Date, our Old Common Stock was traded on the NASDAQ Over-The-Counter Bulletin Board. The following performance graph compares our company’s cumulative total stockholder return on the Old Common Stock from February 4, 2000, through May 15, 2002 with the cumulative total return of an overall stock market index (NASDAQ National Market) and a published industry group index the (NASDAQ Telecomm Index) over the same period. The graph assumes that the value of the investment in the Old Common Stock and each index was $100 at February 4, 2000, and all dividends were reinvested.
The foregoing graph is based on historical data and is not necessarily indicative of future performance.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Equity Compensation Plan Information
The following table provides information as of December 31, 2002 about our Old Common Stock that was then issuable upon the exercise of options, warrants, and rights under all of our then existing equity
compensation plans, including the 1998 Stock Option Plan and the 1999 Stock Option Plan. As discussed previously in this Report, on the Effective Date, we adopted a new 2003 Stock Incentive Plan and terminated our 1998 Stock Option Plan and our 1999 Stock Option Plan, and all of the shares of our Old Common Stock, options granted under such plans were cancelled, stock option plans were cancelled, retired and eliminated with no consideration paid thereon. See “Business - Chapter 11 Filing and Emergence.”
(1)
Our sole stockholder approved equity compensation plan as of December 31, 2002 was our 1998 Stock Option Plan.
(2)
Our sole non-stockholder approved equity compensation plan as of December 31, 2002 was our 1999 Stock Option Plan. A description of the material features of the 1999 Stock Option Plan is set forth in Note 12 to our audited consolidated financial statements included elsewhere in this Report.
Beneficial Ownership
The following table sets forth certain information, to the best of our information and knowledge, regarding the beneficial ownership of our New Common Stock as of March 26, 2003, by (i) each person known by our company to be the beneficial owner of five percent or more of the New Common Stock, (ii) each director of our company, (iii) each executive officer of our company named in the summary compensation table below (see “Further Information - Executive Compensation”), and (iv) all current directors and executive officers of our company as a group. Except as otherwise indicated below, the beneficial owners of the New Common Stock listed below have sole investment and voting power with respect to such
shares. The business address of our executive officers and directors is c/o IMPSAT Fiber Networks, Inc., Elvira Rawson de Dellepiane 150, 8th Floor, C1107BCA Buenos Aires, Argentina.
(*) Less than 1%.
(1)
For purposes of this table, “beneficial ownership” is determined in accordance with Rule 13d-3 under the U.S. Securities Exchange Act of 1934, pursuant to which a person or group of persons is deemed to have “beneficial ownership” of any shares of Common Stock that such person has the right to acquire within 60 days. The percentage of total outstanding for each stockholder is calculated by dividing (i) the number of shares of New Common Stock deemed to be beneficially owned by such stockholder as of March 26, 2003 by (ii) the sum of (A) the number of shares of New Common Stock outstanding as of March 26, 2003 plus (B) the number of shares of New Common Stock issuable upon the exercise of options or warrants or conversion of convertible securities held by such stockholder that were exercisable or convertible as of March 26, 2003 or will become exercisable or convertible within 60 days thereafter.
(2)
Includes Series B Notes currently convertible into 722,484 shares of New Common Stock and currently exercisable warrants to purchase 2,667,975 shares of New Common Stock. Mr. Elias Makris was nominated to our board of directors by Nortel Networks. Mr. Makris disclaims any beneficial interest in these shares. The address of Nortel Networks Inc. is 8200 Dixie Road Suite 100, Brampton, Ontario, L6T 5P6 Canada.
(3)
Represents Series A Notes currently convertible into 2,593,866 shares of New Common Stock, which are held by Mr. William R. Huff through two controlled entities: W.R.H. Partners Global Securities, L.P. and W.R. Huff Asset Management Co., L.L.C. Messrs. Thornton and Connors are employees of W.R. Huff Asset Management Co., L.L.C. Messrs. Thornton and Connors disclaim any beneficial interest in these shares. The address for Mr. William R. Huff is c/o W.R. Huff Asset Management Co., L.L.C, 1776 On the Green, 67 Park Place, Morristown, New Jersey 07960.
(4)
Messrs. Ramirez and Doster are employed in various capacities by Morgan Stanley. They disclaim any beneficial interest in these shares owned by Morgan Stanley. The address for Morgan Stanley is 1585 Broadway New York, NY 10036.
(5)
On the Effective Date, we agreed, subject to the approval of our compensation committee, to grant to certain of our executive officers eight-year stock options with an exercise price of $15 per share (or, if greater, the fair market value of the stock) and vesting in one-quarter increments on the date of grant and on each of the successive first three anniversaries of the date of grant for the purchase of the number of shares of our New Common Stock as follows: Mr. Verdaguer - 617,400 shares; Mr. Alonso - 154,350 shares; Mr. Girotti - 154,350 shares; Mr. Torre Gomez - 154,350 shares; and Mr. Heinrich - 154,350 shares. As discussed previously, our compensation committee has not taken any actions in respect of salaries, incentives and other benefits for our officers and directors since the Effective Date and, therefore, these stock options have not yet been granted.
Item 13.
Item 13. Certain Relationships and Related Transactions
Overview
In the normal course of business, we engage in transactions with companies in which direct or indirect material interests are held by our directors, executive officers, five-percent stockholders, or immediate family members of any of the preceding persons. The following is a description of the most significant of these transactions during 2002. Although we believe that these transactions are generally conducted on an arm’s length basis, conflicts of interest are inherent in these transactions.
CORIM
Our company provides telecommunications services to companies controlled by Corporación IMPSA S.A. (CORIM). CORIM is an Argentine holding company for businesses engaged in a variety of activities including property, casualty and other insurance, heavy-steel capital goods, manufacturing auto parts and environmental services. Mr. Enrique Pescarmona, who was the Chairman of our board of directors during 2002, is an affiliate of CORIM and serves as the Chairman of CORIM’s board of directors. Total telecommunications services provided by us during 2002 to companies controlled by CORIM totaled approximately $0.5 million. During the same period, companies controlled by CORIM provided services to IMPSAT Argentina totaling approximately $0.1 million.
Suramericana Group
The Suramericana Group, which was formed in Medellin, Colombia in the mid-1970s, is a group of over 100 companies related through cross-ownership and interlocking directorates. Companies within the Suramericana Group were significant stockholders of our Company during 2002, and during 2002, representatives of the Suramericana Group served as directors of IMPSAT Colombia and IMPSAT Venezuela, our operating subsidiaries in Colombia and Venezuela, respectively. During 2002, the total dollar amount of telecommunications services rendered by our company to the Suramericana Group totaled approximately $9.8 million. The most significant of these transactions included services provided by IMPSAT Colombia to Corporación Nacional de Ahorro y Vivienda totaling $4.3 million, and to BanColombia totaling $1.4 million.
During 2002, companies within the Suramericana Group provided us with services totaling $3.3 million. This total comprises amounts in respect of insurance premiums, accrued interest on indebtedness, pension fund services, health benefit services, and employee luncheon services. Certain companies within the Suramericana Group are creditors of IMPSAT Colombia, including Corporación Financiera Nacional y Suramericana S.A. (Corfinsura) and BanColombia, which are financial institutions, and Suleasing, which is a financial leasing company. As of December 31, 2002, we were indebted to companies within the Suramericana Group in the amount of approximately $15.0 million. This includes indebtedness of approximately $7.1 million to BanColombia and $2.8 million to Corfinsura (with respect to which indebtedness we paid, in the aggregate, interest of $1.5 million during 2002); and indebtedness of approximately $2.8 million to Suleasing (with respect to which indebtedness we paid interest totaling $0.5 million during 2002).
Claxson Interactive Group, Inc.
Claxson Interactive Group, Inc, a British Virgin Islands multimedia company providing branded entertainment content targeted to Spanish and Portuguese speakers around the world, is headquartered in Argentina and has operations in Brazil, Mexico, Colombia, Venezuelan, Chile, Uruguay and the United States. As of March 31, 2003, we held an approximately 3.3% equity interest in Claxson. Affiliates of Mr. Roberto Vivo (a member of our board of directors during 2002) and Mr. Ricardo Verdaguer (the chairman of our board of directors), also have equity interests in Claxson. Mr. Roberto Vivo is Claxson’s chief executive officer, the chairman of its board of directors and a member of its compensation committee. In addition, Mr. Ricardo Verdaguer is a director of Claxson.
Claxson is a party to certain telecommunications services agreements pursuant to which our subsidiaries provide Claxson with telecommunication networks to access the Internet backbone. During 2002, the total value of telecommunications services we rendered to Claxson was approximately $0.1 million.
Morgan Stanley
During 2002 (prior to the Effective Date of our Chapter 11 restructuring), affiliates of Morgan Stanley & Co. Incorporated (“Morgan Stanley”) beneficially owned 16.3% of our Old Common Stock. For information concerning Morgan Stanley’s current ownership of our New Common Stock, see “Security Ownership of Certain Beneficial Owners and Management.” During 2002, we paid fees totaling $1.0 million to Morgan Stanley in connection with the structuring and negotiation of the terms of the Plan.
Nortel Networks Ltd.
During 2002, we paid fees totaling $1.0 million to Nortel Networks Ltd. (“Nortel”) in connection with the structuring and negotiation of the terms of the Plan. For information concerning Nortel’s current ownership of our New Common Stock, see “Security Ownership of Certain Beneficial Owners and Management.”
W.R.H. Partners Global Securities, L.P.
During 2002, we paid fees totaling $1.0 million to W.R.H. Partners Global Securities, L.P. in connection with the structuring and negotiation of the terms of the Plan. For information concerning current ownership of our New Common Stock by W.R.H. Partners Global Securities, L.P. and/or its affiliates, see “Security Ownership of Certain Beneficial Owners and Management.”
British Telecommunications
Prior to the Effective Date, Nunsgate Limited, a wholly-owned subsidiary of British Telecommunications, beneficially owned 20% of our Old Common Stock.
During 2002, the total value of telecommunications services we rendered to British Telecommunications was approximately $0.7 million. During the same period, we purchased telecommunications capacity from British Telecommunications totaling approximately $1.4 million.
Item 14.
Item 14. Controls and Procedures
Under the supervision and with the participation of our Chief Executive Officer and our Executive Vice President and Chief Financial Officer (our company’s principal executive officer and principal financial officer, respectively), management has evaluated the effectiveness of the design and operation of our company’s disclosure controls and procedures within 90 days of the filing date of this quarterly report. Based on that evaluation, our Chief Executive Officer and our Executive Vice President and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) List of Financial Statements
Consolidated Financial Statements of IMPSAT Fiber Networks, Inc. and Subsidiaries
•
Consolidated Balance Sheets as of December 31, 2001 and 2002
•
Consolidated Statements of Operations for Each of the Three Years in the Period Ended December 31, 2002
•
Consolidated Statements of Comprehensive Loss for Each of the Three Years in the Period Ended December 31, 2002.
•
Consolidated Statements of Stockholders’ Equity (Deficiency) for Each of the Three Years in the Period Ended December 31, 2002
•
Consolidated Statements of Cash Flows for Each of the Three Years in the Period Ended December 31, 2002
•
Notes to the consolidated financial statements
(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.
(a)(3) Exhibits
The exhibits listed in the accompanying Exhibit Index and required by Item 601 of Regulation S-K (numbered in accordance with Item 601 of Regulation S-K) are filed or incorporated by reference as part of this Report.
(b) Reports on Form 8-K.
During the period covered by this Report, the registrant filed with the Commission the following current reports on Form 8-K:
•
On February 15, 2002, announcing our failure to make a $20.6 million interest payment due on February 15, 2002 on our $300 million principal amount of 13 3/4% Senior Notes due 2005. Also announcing that we received a notice from the Nasdaq National Market warning that our stock would be delisted for failure to maintain a minimum bid price of $3 over the preceding 30 consecutive trading days and failed to maintain a minimum market value of public float of $15,000,000.
•
On June 11, 2002, announcing our company’s voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code.
•
On December 19, 2002, announcing the confirmation of the Plan by the Bankruptcy Court.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, in the City of Buenos Aires in the Republic of Argentina, on April 15, 2003.
IMPSAT Fiber Networks, Inc.
By:
/s/ Ricardo A. Verdaguer
Ricardo A. Verdaguer,
President and Chief
Executive Officer
Date:
April 15, 2003
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below (each, a “Signatory”) constitutes and appoints Héctor Alonso and José R. Torres (each, an “Agent,” and collectively, “Agents”) or either of them, his true and lawful attorney-in-fact and agent, each with full power of substitution and resubstitution, for and in his name, place and stead, in any and all capacities, to sign this Report of Form 10-K (this “Report”) and any and all amendments thereto and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the SEC. Each Signatory further grants to the Agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary, in the judgment of such Agent, to be done in connection with any such signing and filing, as full to all intents and purposes as he might or could do in person, and hereby ratifies and confirms all that said Agents, or any of them, or their or his other substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed by the following persons in the capacities and on the dates indicated.
CERTIFICATIONS
Chief Executive Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of
I, Ricardo A. Verdaguer, certify that:
1.
I have reviewed this annual report on Form 10-K of IMPSAT Fiber Networks, Inc. (the “Registrant”);
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities and Exchange Act of 1934 Rules 13a-14 and 15d-14) for the Registrant and we have:
(a)
designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and
6.
The Registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/RICARDO A. VERDAGUER
Ricardo A. Verdaguer
President and Chief Executive Officer
April 15, 2003
Chief Financial Officer Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of
I, Héctor Alonso, certify that:
1.
I have reviewed this annual report on Form 10-K of IMPSAT Fiber Networks, Inc. (the “Registrant”);
2.
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
3.
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
4.
The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in the Securities and Exchange Act of 1934 Rules 13a-14 and 15d-14) for the Registrant and we have:
(a)
designed such disclosure controls and procedures to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
(b)
evaluated the effectiveness of the Registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
(c)
presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
5.
The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent function):
(a)
all significant deficiencies in the design or operation of internal controls which could adversely affect the Registrant’s ability to record, process, summarize and report financial data and have identified for the Registrant’s auditors any material weaknesses in internal controls; and
(b)
any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal controls; and
6.
The Registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
/s/HÉCTOR ALONSO
Héctor Alonso
Chief Financial Officer
April 15, 2003
INDEPENDENT AUDITORS’ REPORT
To the Board of Directors and Stockholders of IMPSAT Fiber Networks, Inc.:
We have audited the accompanying consolidated balance sheets of IMPSAT Fiber Networks, Inc. (Debtor-in-Possession) and its subsidiaries (the “Company”) as of December 31, 2001 and 2002, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity (deficiency) and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respect, the financial position of the Company at December 31, 2001 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business. The Company emerged from bankruptcy on March 25, 2003.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s recurring losses from operations, negative working capital, and stockholders’ capital deficiency raise substantial doubt about its ability to continue as a going concern. Management’s plans concerning these matters are also discussed in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Certified Public Accountants
Miami, Florida
March 28, 2003
PART I
FINANCIAL INFORMATION
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. Dollars, except share amounts)
See notes to consolidated financial statements.
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share amounts)
See notes to consolidated financial statements.
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands of U.S. dollars)
See notes to consolidated financial statements.
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 2000, 2001 AND
(In thousands of U.S. Dollars)
See notes to consolidated financial statements.
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
See notes to consolidated financial statements.
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tables in Thousands of U.S. Dollars, Except for per Share Amounts)
1. General
IMPSAT Fiber Networks, Inc., a Delaware holding company (the “Holding Company”), and subsidiaries (collectively the “Company”) is a leading provider of integrated broadband, data, Internet, voice and data center services in Latin America. The Company offers integrated telecommunications solutions, with an emphasis on end-to-end broadband data transmission, for national and multinational companies, financial institutions, governmental agencies and other business customers.
The Company currently provides telecommunications services to its customers using its local access and long haul fiber optic and satellite networks. The deployed facilities include 15 metropolitan area networks in the largest cities of the region, long haul networks across Argentina, Brazil, Chile and Colombia, and leased submarine capacity to link South America to the United States. In addition, the Company has 500,000 gross square feet of premises housing advanced hosting capabilities.
The Holding Company’s operating subsidiaries are wholly owned (except for a small number of shares issued to other persons to comply with local corporate law requirements). A listing of the Holding Company’s operating subsidiaries is as follows:
In addition, the Company owns other subsidiaries, which serve intermediary functions to the Holding Company and its operating subsidiaries.
Financial Restructuring - On March 11, 2002, the Holding Company, which was advised by Houlihan Lokey Howard & Zukin Capital, concluded negotiations with an ad hoc committee representing certain creditors under the Holding Company’s Broadband Network Vendor Financing Agreements, and certain holders of its $125.0 million 12.125% Senior Guaranteed Notes due 2003, $300.0 million 13.75% Senior Notes due 2005 and $225.0 million 12.375% Senior Notes due 2008 (collectively, the “Senior Notes”) of a non-binding term sheet agreement in principle (the “Restructuring Term Sheet”) relating to the terms of a proposed restructuring of these long-term obligations, as part of a comprehensive financial restructuring of the Company. The Restructuring Term Sheet contemplates the following principal components of the proposed restructuring plan:
•
all of the shares of the Holding Company’s existing common stock, options granted under the Holding Company’s stock option plans, and any other equity interests would be cancelled, retired and eliminated with no consideration paid therefore, and the Holding Company would issue “new common stock” in accordance with the proposed restructuring plan;
•
creditors under the Broadband Network Vendor Financing Agreements would receive
-
$143.8 million senior secured debt issued by IMPSAT Argentina and IMPSAT Brazil and guaranteed by the Holding Company;
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
-
$23.9 million of new senior convertible notes guaranteed by IMPSAT Argentina and initially convertible into 5% of the Holding Company’s new common stock on a fully-diluted basis; and
-
warrants to acquire up to 15% of the Holding Company’s new common stock on a fully-diluted basis.
•
holders of the Notes due 2003 would receive $67.5 million of new senior convertible notes of the Holding Company guaranteed by IMPSAT Argentina and initially convertible into 23% of the Holding Company’s new common stock on a fully-diluted basis
•
holders of the Notes due 2005 and the Notes due 2008 would exchange those securities for 98% of the Holding Company’s new common stock, subject to certain dilutive events
•
the Holding Company’s guarantees of certain indebtedness owed by the Holding Company’s operating subsidiaries to certain of their respective creditors will either be restructured in exchange for new senior convertible notes and warrants consistent with and proportionate to the restructuring treatment of analogous indebtedness under the Broadband Network Vendor Financing Agreements, or canceled in exchange for equity in the Holding Company
•
no distribution to the existing stockholders of the Holding Company
•
management would receive 2% of the Holding Company’s new common stock plus stock options representing 8% of the Holding Company’s new common stock.
The Restructuring Term Sheet provided that completion of the proposed restructuring plan would be subject to certain conditions, including the plan’s acceptance by affected classes of the Holding Company’s securities holders in accordance with the United States Bankruptcy Code (“Bankruptcy Code”).
Petition for Relief Under Chapter 11 and Emergence - On June 11, 2002 (the “Petition Date”), the Holding Company filed a voluntary petition for relief under Chapter 11 of the federal bankruptcy laws in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”). Under Chapter 11, certain claims against the Holding Company in existence prior to the filing of the petition for relief under the federal bankruptcy laws are stayed while the Holding Company continues business operations as Debtor-in-Possession. These claims are reflected in the December 31, 2002 consolidated balance sheet as “liabilities subject to compromise”. Additional claims (liabilities subject to compromise) may arise subsequent to the filing date resulting from rejection of executory contracts, including leases, and from the determination of the Bankruptcy Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts.
On September 4, 2002, the Holding Company filed a Disclosure Statement (the “Disclosure Statement”) and a Plan of Reorganization (the “Plan”) with the Bankruptcy Court. The Plan reflects the terms of the pre-arranged plan of reorganization that holders of the indebtedness under the Company’s Vendor Financing Agreements and Senior Notes agreed to support. The Plan provided for the restructuring of the Company’s indebtedness in the manner described above in the caption “Financial Restructuring”. The Disclosure Statement summarized the Plan and contained information concerning among other matters the history, business, results of operations, management, properties, liabilities and the assets available for distribution under the Plan as well as the anticipated organization and operation of a reorganized Holding Company. The Disclosure Statement also described certain effects of Plan confirmation, certain risk factors associated with the Plan, the manner in which distributions will be made to the Company’s creditors under the Plan for all amounts that were owed to such parties on the Petition Date and the confirmation process and voting procedures that holders of claims in impaired classes must follow for their votes to be counted.
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The Plan received the affirmative vote of the Holding Company’s creditors in accordance with the Bankruptcy Code in December 2002 and was confirmed by order of the Bankruptcy Court on December 16, 2002. In accordance with the Plan, the Holding Company emerged from bankruptcy on March 25, 2003 (the “Effective Date”). Pursuant to the Plan, on the Effective Date, all of the shares of the Company’s old common stock, options granted under the Company’s stock option plans and all other equity interests were cancelled, retired and eliminated with no consideration paid thereon. The Company also adopted a new 2003 Stock Incentive Plan and terminated all stock options plans described in Note 12. In addition, the Company restructured its obligations as contemplated under the “Financial Restructuring” section described above. See Note 17.
Although the Company has emerged from bankruptcy, the Company remains in default under indebtedness owed to certain creditors who voted against the Plan. Under the Plan, the claims of these creditors were contingent obligations arising under guarantees by the Holding Company of certain primary indebtedness of its operating subsidiaries. In accordance with the Plan, these holders will receive, in full satisfaction of their contingent guarantee claim (“Post-Effective Date Contingencies”), a pro rata share of the shares of the Company’s new common stock issuable to the Holding Company’s creditors under the Plan, see Note 17. Notwithstanding the Company’s settlement of the Post-Effective Date Contingencies, as a consequence of the Company’s Chapter 11 bankruptcy, an event of default has occurred and is continuing with respect to certain of the related primary underlying indebtedness of the Company’s operating subsidiaries. These defaults, which relate to indebtedness totaling approximately $18.6 million in outstanding principal amount, give the respective creditors the right to accelerate such indebtedness and seek immediate repayment of all outstanding amounts and accrued interest thereon.
The Holding Company’s unconsolidated balance sheet as of December 31, 2002 consists primarily of cash and trading investments of approximately $28.3 million, other assets of approximately $0.1 million and the net investment in each of its consolidated subsidiaries. The Holding Company’s liabilities consist primarily of accounts payable of approximately $6.6 million (not including payables to subsidiaries of approximately $2.8 million) and the “liabilities subject to compromise” described in Note 11.
The Holding Company’s statement of operations for the year ended December 31, 2002 consists of the equity in the earnings of its consolidated subsidiaries, interest income earned on its trading investment, offset by the interest expense on the Senior Notes, certain general and administrative expenses and the reorganization items described in Note 11.
The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Holding Company; or (d) as to operations, the effect of any changes that may be made in the business of the Holding Company and its subsidiaries.
Going Concern Matters - The Company’s history of losses, negative working capital and stockholders’ deficiency raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amount and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The ability of the Holding Company to continue as a going concern and to appropriately use the going concern basis is dependent upon, among other things, (i) the Company’s ability to revise and implement its business plan, (ii) the Company’s ability to achieve profitable operations after emergence from bankruptcy, and (iii) the Company’s ability to generate sufficient cash from operations to meet its obligations. The consolidated financial statements do not give effect to any adjustment
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
to the carrying value of assets or amounts and classifications of liabilities that might result from the uncertainties described above.
2. Summary of Significant Accounting Policies
Basis of Presentation - The financial statements are presented on a consolidated basis and include the accounts of IMPSAT Fiber Networks, Inc and its subsidiaries. All significant intercompany transactions and balances have been eliminated. AICPA Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code, was followed in the preparation of these consolidated financial statements.
Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“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. Significant assumptions and estimates were used in determining the carrying values of the Company’s telecommunication infrastructure and collectibility of receivables. Actual results could differ from those estimates.
Market Risk - The Company currently operates in countries throughout Latin America. The Company’s financial performance may be affected by inflation, exchange rates and controls, price controls, interest rates, changes in governmental economic policy, taxation and political, economic or other developments in or affecting the Latin America countries in which the Company operates. The Company has not entered into derivative transactions to hedge against potential foreign exchange or interest rate risks.
Currency Risks - In early January 2002, as Argentina’s ongoing political and financial crisis deepened, the country defaulted on its massive foreign debt and the government of President Eduardo Duhalde, who entered office on January 1, 2002, abandoned the decade-old fixed peso-dollar exchange rate and permitted the peso to float freely against the U.S. dollar. The peso free market opened on January 11, 2002 at 1.65 pesos to the U.S. dollar and has been volatile since. At December 31, 2002, the Argentine peso traded at 3.40 pesos to the U.S. dollar. The devaluation of the Argentine peso will generally affect the Company’s consolidated financial statements by generating foreign exchange gains or losses on dollar-denominated monetary liabilities and assets of IMPSAT Argentina and will generally result in a decrease, in U.S. dollar terms, in the Company’s revenues, costs and expenses in Argentina.
During December 2001, the Argentine government instituted a system for the freezing of the deposits in its financial system. In February 2002, these measures led to, among other things, the “pesification” decree. Generally, this decree mandates that all monetary obligations arising from agreements subject to Argentine law denominated in foreign currency and existing as of January 6, 2002 are mandatorily converted into monetary obligations denominated in pesos at an exchange rate of one U.S. dollar to one peso. Such obligations generally may be adjusted pursuant to the “coeficiente de estabilizacion de referencia” (“CER”), as published by the Argentine central bank based on the Argentine consumer price index. Under the “pesification” decree, after the foreign currency denominated contracts are converted to pesos (at the rate of one peso to one U.S. dollar rate), the contracts may be privately renegotiated by the parties back into foreign currency denominated terms. Under the “pesification” decree, if a contract governed by Argentine law is entered into after the decree’s enactment, that contract may be denominated in either U.S. dollars or pesos. However, if the parties choose to denominate the new contract in pesos, payments under that contract are not entitled to be adjusted according to the CER or any other consumer price index. Contracts denominated in pesos before the decree continue to be denominated in pesos, unaffected by the decree. Finally, the decree provides that if the value of the goods sold or services rendered is higher or lesser than the price payable after the mandatory “pesification”, either party may request an “equitable adjustment” of such price. If the parties
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
do not agree on the “equitable adjustment”, the dispute is to be settled by the courts, which will attempt to preserve the contractual agreement between the parties. The devaluation and the “pesification” of agreements of the Company governed by Argentine law may have adverse, unknown and unforeseeable effects on the Company.
Since the “pesification” decree, an increasing portion of IMPSAT Argentina’s customer contracts and operating cash inflows are denominated in pesos while its debt service payments and a portion of its costs (including capital equipment purchases and payments for certain leased telecommunication capacity) are denominated in U.S. dollars. Accordingly, the Company’s financial condition and results of operations in Argentina are dependent upon IMPSAT Argentina’s ability to generate sufficient pesos (in U.S. dollar terms) to pay its costs, expenses and to satisfy its debt service requirements. Because of the recent nature of these events and the significant uncertainties regarding the extent and duration of the devaluation and the direction of the fiscal policies in Argentina, management cannot presently determine or reasonably estimate the impact a continued economic crisis in that country could possibly have on IMPSAT Argentina’s and the Company’s overall cash flows, financial condition, and results of operations.
On March 5, 2003, Argentina’s Supreme Court declared the “pesification” decree unconstitutional to the extent that it required the mandatory redenomination of U.S. dollar bank deposits to pesos. Although the ruling applies only to amounts held by the petitioner in that case on deposit at a state-owned bank, the decision will likely strengthen existing (and create a profusion of similar) claims by other depositors seeking to “redollarize” their deposits. This could force the Argentine government to issue long-term bonds in satisfaction of such claims, which, in turn, could increase Argentina’s public debt burden and cause a further deterioration of its national economy. The future judicial implementation of the Argentine Supreme Court’s decision as well as any legislative or executive response could take an unknown variety of forms. Accordingly, its potential impact on the Argentine economy and on the Company’s operations in that country presently cannot be estimated.
Numerous uncertainties exist surrounding the ultimate resolution of Argentina’s economic and political instability and actual results could differ from those estimates and assumptions utilized. The Argentine economic and political situation continues to evolve and the Argentine government may enact future regulations or policies that, when finalized and adopted, may adversely and materially impact, among other items, (i) the realized revenues the Company receives for services offered in Argentina; (ii) the timing of repatriations of any dividends or other cash flows from IMPSAT Argentina to the Company in the United States; (iii) the Company’s asset valuations; and (iv) the Company’s peso-denominated monetary assets and liabilities.
The Company’s results in Brazil also were adversely affected during the period by the devaluation of the Brazilian real against the U.S. dollar. At December 31, 2001, the real traded at a rate of R$2.41 = $1.00, and at December 31, 2002 it had depreciated to R$3.53 = $1.00. These and prior devaluations have had a negative effect on the Company’s real-denominated revenues. The devaluation of the real and the decline in growth in the Brazilian economy have been caused in part by the continued recession in the region, a general aversion to emerging markets by foreign direct and financial investors and the overall decline in worldwide economic production. On October 27, 2002, Luiz Inacio Lula da Silva of the left-wing Workers’ Party was elected president of Brazil. Although, as a candidate, Mr. da Silva expressed support for tightening of Brazil’s fiscal policy as a condition of an IMF loan and promised to honor and stabilize government debt, anxiety has persisted within the investor community regarding whether Mr. da Silva can restore financial confidence and quickly establish trust in his administration and its ability to govern. A protraction or worsening of the economic difficulties in Brazil, including further currency devaluations, could have a material adverse effect on IMPSAT Brazil’s and the Company’s overall financial condition and results of operations.
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
In addition, in 2002, the Venezuelan government removed controls over the trading range of the bolivar, allowing the exchange rate to be determined by market conditions. As a result, during 2002, the bolivar decreased in value in relation to the U.S. dollar by approximately 85%. During February 2003, the Venezuelan government imposed exchange rate controls, fixing the bolivar’s value to the U.S. dollar at approximately 1,600 bolivars to the U.S. dollar.
Cash and Cash Equivalents - Cash and cash equivalents are time deposits with original maturities of three months or less at the time of purchase. Cash equivalents and short-term investments are stated at cost, which approximates fair value.
Revenue Recognition - Revenues from data, value-added telephony, IT solutions and Internet services are recognized monthly as the services are provided. Equipment sales are recorded upon delivery to and acceptance by the customer. In addition, the Company has entered into, and may enter into in the future, agreements with carriers granting indefeasible rights of use (“IRUs”) and access to portions of the Company’s broadband network capacity and infrastructure. Pursuant to these agreements, the Company will receive fixed advance payments for the IRU and will recognize the revenue from the IRU ratably over the life of the IRU. Amounts received in advance are recorded as deferred revenue in the accompanying consolidated balance sheets. The Securities and Exchange Commission (the “SEC”) issued Staff Accounting Bulletin (“SAB”) No. 101, Revenue Recognition in Financial Statements. SAB No. 101 summarizes the SEC’s views on the application of generally accepted accounting principles to revenue recognition. The Company has reviewed SAB No. 101 and believes that it is in compliance with the SEC’s interpretation of revenue recognition.
No single customer accounted for greater than 10% of total net revenues from services for the year ended December 31, 2000, 2001 and 2002.
Non-Monetary Transactions - The Company may exchange capacity on its Broadband Network for capacity from other carriers through the exchange of IRUs. These transactions are accounted for in accordance with Accounting Principles Board Opinion No. 29, Accounting for Nonmonetary Transactions, where an exchange of similar IRUs is recorded at a historical carryover basis with no revenue or any gain or loss being recorded.
Broadband Network - Costs in connection with the construction, installation and expansion of the Broadband Network are 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 Broadband Network. These capitalized agreements are being amortized over the term of the rights of way, which range from 10 to 20 years.
In addition, the Company has acquired IRUs from other entities for its own purposes. Such IRU investments are capitalized and amortized over their estimated useful lives, not to exceed 15 years. The acquired IRUs have a 25-year term. In those cases where the right of use has been acquired for a longer period of time (25 years) management believes that, due to anticipated advances in technology, the Company’s IRUs are not likely to be productive assets beyond 15 years.
IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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:
The operating communications equipment owned by the Company is subject to rapid technological obsolescence; therefore, it is reasonably possible that the equipment’s estimated useful lives could change in the near future.
Long-Lived Assets - Long-lived assets are reviewed on an ongoing basis for impairment based on a comparison of carrying values to the related undiscounted future cash flows. If the carrying amounts exceed such cash flows, identifying a possible impairment, the assets carrying amount is adjusted to fair value.
During the year ended December 31, 2001, in connection with the Company’s ongoing review of its business plan, cash flow and liquidity position, and the economic environment in Latin America, the Company determined that its long-lived assets primarily related to its telecommunication infrastructure were likely impaired. The Company calculated the present value of its expected cash flows of its operating subsidiaries to determine the fair value of its telecommunication infrastructure. Accordingly, the Company recorded a noncash impairment charge of $381.9 million. This charge included approximately $245.6 million for IMPSAT Argentina, $24.7 million for IMPSAT Brazil and $28.9 million for all other countries. In addition, the charge also included approximately $82.7 million for a write-down of the value of goodwill generated by the acquisition of certain minority interest in the operating subsidiaries. The Company recorded this impairment charge based on internal estimates of fair value, other indicators and not on an independent valuation of its telecommunication infrastructure. During the years ended December 31, 2000 and 2002, no impairments were recorded.
Investments - Investments covered under the scope of Statement of Financial Accounting Standards (“SFAS”) No. 115, Accounting for Certain Investments in Debt and Equity Securities, are classified by the Company as either “trading” for short term investments or “available for sale” for long term investments and are carried at fair value. Unrealized gains and losses for trading investments are included in the Company’s results of operations. Unrealized gains or losses for available for sale investments are included in accumulated other comprehensive loss within stockholders’ equity (deficiency). All other investments are carried at cost.
Deferred Financing Costs - Debt issuance costs and transaction fees, which are associated with the issuance of the Senior Guaranteed Notes were being amortized (and charged to interest expense) over the term of the related notes on a method which approximates the level yield method. During the year ended December 31, 2002, the unamortized balances of the deferred financing costs were written-off. See Note 11.
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 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, except for IMPSAT Brazil, which uses the local currency as the functional currency, and are included in accumulated other comprehensive income (loss) in stockholders’ equity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
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 director compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation to employees and non-employee directors 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 directors 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 director must pay for the stock. The Company also provides the required disclosures of SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure. This Statement, which is effective for fiscal years ending after December 15, 2002, amends SFAS No. 123, and provides alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based compensation. In addition, Statement No. 148 amends the disclosure requirements of SFAS No. 123 regardless of the accounting method used to account for stock-based compensation. The Company has chosen to continue to account for stock-based compensation of employees using the intrinsic value method prescribed in APB No. 25, and related interpretations. However, the Company will adopt the enhanced disclosure provisions as defined by SFAS No. 148.
The Company has adopted the disclosure-only provisions of SFAS No. 123. Had compensation costs been recognized based on the fair value at the date of grant for options awarded under the 1998 and 1999 Plans, the pro forma amounts of the Company’s net loss attributable to common stockholders and net loss per common share for the years ended December 31, 2000, 2001 and 2002 would have been as follows:
The fair value of the options granted in 2000 was estimated using the Black-Scholes option-pricing model assuming no dividend yield and the following weighted average assumptions:
Fair Value of Financial Instruments - The Company’s financial instruments include trading investments, receivables, investments in common stock, payables, short- and long-term debt. The Company’s trading and common stock investments were valued at market closing prices at December 31, 2001 and 2002. The fair value of these instruments are presented in Note 3. The fair value of the Company’s Senior Notes is not presented as such is not considered meaningful by management based on the pending financial restructuring and the Company’s petition for relief under Chapter 11. The fair value of all other financial instruments, which approximate their carrying value, have been determined using available market information and interest rates as of December 31, 2001 and 2002.
Net Loss Per Common Share - Basic earnings (loss) per share is computed based on the average number of common shares outstanding and diluted earnings (loss) per share is computed based on the average number of common and potential common shares outstanding under the treasury stock method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
Accumulated Other Comprehensive Income (Loss) - Accumulated other comprehensive income (loss) is comprised as follows:
New Accounting Pronouncements - In April 2002, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 145, Rescission of the FASB Statements No. 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections. SFAS No. 145 eliminates the requirement to classify gains and losses from the extinguishment of indebtedness as extraordinary, requires certain lease modifications to be treated the same as a sale-leaseback transaction, and makes other non-substantive technical corrections to existing pronouncements. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002, with earlier adoption encouraged. The Company does not expect the adoption of SFAS 145 to have a material effect on its consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. Examples of costs covered by the standard include lease termination costs and certain employee severance costs that are associated with a restructuring, discontinued operations, plant closing, or other exit or disposal activities. SFAS No. 146 is effective prospectively for exit or disposal activities initiated after December 31, 2002, with earlier adoption encouraged. As the provisions of SFAS No. 146 are required to be applied prospectively after the adoption date, the Company cannot determine the potential effects that adoption of SFAS No. 146 will have on its consolidated financial statements.
In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57, and 107 and Rescission of FASB Interpretation No. 34. FIN 45 clarifies the requirements of SFAS No. 5, relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. This Interpretation clarifies that a guarantor is required to recognize, at the inception of certain types of guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. The disclosure requirements in this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company is currently evaluating the impact of adopting FIN 45.
In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an Interpretation of APB No. 51. FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all
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new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The Company is currently evaluating the effect that the adoption of FIN 46 will have on its results of operations and financial condition.
Reclassifications - Certain amounts in the 2000 and 2001 consolidated financial statements have been reclassified to conform with the 2002 presentation.
3. Investments
The Company’s investments consist of the following at December 31, 2001 and 2002:
The Company’s trading investments consist of high-quality, short-term investments with maturities of less than 360 days.
The Company’s investments in common stock at December 31, 2001 included a 3.3% ownership interest in the outstanding common stock of Claxson Interactive Group Inc. (“Claxon”), an integrated media company with operations in Latin America, and a less than 1% ownership interest in New Skies Satellites, Inc. (“New Skies”), a provider of satellite capacity. During the years ended December 31, 2001 and 2002, the Company recorded a non-cash charge of $20.7 million and $0.8 million, respectively, which reflected an other-than-temporary decline in value of the Claxon investment based upon a sustained reduction in the quoted market price. During 2002, the Company sold its investment in New Skies for approximately $1.4 million and recorded a loss of approximately $1.0 million on the sale. This loss is included in other income (expense) in the accompanying consolidated financial statements.
4. Trade Accounts Receivable
Trade accounts receivable, by operating subsidiaries, at December 31, 2001 and 2002, are summarized as follows:
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 is susceptible to changes in the Latin American economies and political climates. Prior to extending credit, the customers’ financial history is analyzed.
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The activity for the allowance for doubtful accounts for the years ended December 31, 2000, 2001 and 2002 is as follows:
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 and are as follows at December 31, 2001 and 2002:
6. Broadband Network and Agreements
Broadband network and related equipment consists of the following at December 31, 2001 and 2002:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The recap of accumulated depreciation for the years ended December 31, 2000, 2001 and 2002 is as follows:
Nortel Networks Agreements - On September 6, 1999, the Company executed two turnkey agreements with Nortel Networks Limited (“Nortel”) relating to Nortel’s design and construction of segments of the Broadband Network in Argentina and Brazil for approximately $265 million.
On October 25, 1999, each of IMPSAT Argentina and IMPSAT Brazil signed definitive agreements with Nortel to borrow an aggregate of up to approximately $149.1 million and $148.3 million, respectively, of long-term vendor financing. The financing, which has a final maturity in 2006, was used to finance Nortel’s construction of the segments of the Broadband Network in Argentina and Brazil as well as additional purchases of telecommunications equipment. The Company has guaranteed the obligations of each of IMPSAT Argentina and IMPSAT Brazil under the Nortel financing agreements. At December 31, 2002, a total of $245.4 million was outstanding. See Notes 1 and 17 for a description of the restructuring of these amounts under the Holding Company’s proposed restructuring plan.
The Company’s subsidiaries have obtained additional vendor financing from Ericsson, Tellabs OY, DMC and Harris Canada, Inc. for the acquisition of fiber optic cable and other telecommunications equipment for the Broadband Network, with respect to which an aggregate of $14.5 million was outstanding as of December 31, 2002, which is guaranteed by the Company.
Global Crossing - During the year ended December 31, 2000, the Company completed and delivered to Global Crossing the portion of the Trans-Andean Crossing System connecting Las Toninas, Argentina and Santiago, Chile. As part of the Broadband Network and the South American Crossing, the Company also constructed turnkey backhaul segments and granted IRUs to Global Crossing in Peru and Brazil between Global Crossing’s landing points in those countries and its metropolitan points of presence located at the Company’s telehouses in Lima, Peru and Sao Paulo and Rio de Janeiro, Brazil. In connection with the delivery of such infrastructure to Global Crossing during 2000, the Company recognized during the years ended December 31, 2000 and 2001, revenues totaling $57.7 million and $7.2 million, respectively, and costs totaling $34.7 million and $3.3 million, respectively.
As part of its arrangements with Global Crossing, the Company has agreed to purchase from Global Crossing indefeasible rights of use of capacity valued at not less than $46 million on any of Global Crossing’s fiber optic cable networks worldwide. These rights enable the Company to interconnect the Company’s networks in Argentina and Brazil and give the Company global international access. The Company had purchased approximately $12.6 million and $9.7 million under this agreement as of December 31, 2002 and 2001, respectively, and did not purchase any amount during the year ended December 31, 2002. As part of the Holding Company’s emergence from bankruptcy, the Company rejected its obligation to purchase the outstanding balance of $23.7 million in IRUs from Global Crossing as permitted by the Bankruptcy Code.
In January 2002, Global Crossing filed for protection under Chapter 11 of the U.S. Bankruptcy Code. Although the Global Crossing subsidiaries to which the Company provides services and infrastructure were not originally included in the Global Crossing’s Chapter 11 filing, during August 2002, Global Crossing amended its Chapter 11 proceeding to include its subsidiaries that are counter parties to the agreements with
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
the Company. As of December 31, 2002, Global Crossing was in default for a total of approximately $3.3 million for services provided under such agreements. The Company has recorded provisions for doubtful accounts of approximately $2.1 million against these receivables.
The Company has filed motions in Global Crossing’s bankruptcy proceeding seeking an order that Global Crossing make payment to the Company of the amounts claimed by the Company and that Global Crossing either accept or reject its agreements with the Company. Global Crossing has disputed that it owes the Company any amounts under the agreements at issue and has filed a proceeding seeking that the bankruptcy court grant Global Crossing a property right in certain of the IRUs that it acquired from the Company. See Note 15 for a further description of the commercial disputes between the Company and Global Crossing.
To link the Company’s Broadband Network to other parts of Latin America and the world, the Company has secured IRU and leased capacity on Global Crossing’s undersea fiber optic cable systems (and associated terrestrial capacity) between the United States and Latin America, including Global Crossing’s South American network. Global Crossing has not yet affirmed or rejected these agreements. If Global Crossing rejects these agreements or is unable to successfully reorganize and were to sell or terminate its South American operations as part of its bankruptcy proceedings, it is unclear what rights the Company would have to continue to utilize the IRU’s that the Company purchased from Global Crossing. It is possible that the Company’s agreements with Global Crossing would be terminated, and the Company would need to seek substitute sources of IRU or other capacity from competing undersea fiber optic systems to link its operations, including the Company’s Broadband Network, to other parts of Latin America and the world. As of December 31, 2002, the unamortized balance of IRU investments acquired from Global Crossing approximated $ 32.5 million.
IRU Agreements - The Company has entered into several framework agreements granting IRUs of up to 25 years on the Company’s Broadband Network, including network maintenance services and telehousing space. The Company has received advance payments related to these agreements. These advance payments are recorded as deferred revenue in the accompanying consolidated balance sheets. During the years ended December 31, 2001 and 2002, the Company recognized approximately $3.2 million and $5.0 million, respectively, from these agreements, which are reflected as services to carriers in the accompanying consolidated statement of operations.
7. Property, Plant and Equipment
Property, plant and equipment at December 31, 2001 and 2002, consisted of:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The recap of accumulated depreciation for the year ended December 31, 2000, 2001 and 2002, is as follows:
8. Short-Term Debt
As of December 31, 2001, several of the Company’s subsidiaries maintain short-term credit facilities with local banks, denominated in U.S. dollars with interest rates ranging from 14% to 21% and the amount outstanding under these credit facilities totaled approximately $8.3 million. During 2002 these credit facilities were repaid and not renewed.
9. Long-Term Debt
The Company’s long-term debt at December 31, 2001 and 2002 is detailed as follows:
The scheduled maturities of long-term debt at December 31, 2002 are as follows:
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The Company is in default on its senior notes since it did not make the semi-annual interest payments on the Senior Notes due 2003 (which were due on January 15, 2002), on the Senior Notes due 2005 (which were due on February 15, 2002), or on the Senior Notes due 2008 (which were due on December 15, 2001). As of June 11, 2002, the Company reclassified the senior notes, which were outstanding prior to the bankruptcy filing, to liabilities subject to compromise (see Note 11).
Some of the term notes contain certain covenants requiring the Company to maintain certain financial ratios, limiting the incurrence of additional indebtedness and capital expenditures, and restricting the ability to pay dividends.
The Company’s liquidity difficulties have led to non-compliance with certain covenant requirements and payment provisions under the Company’s Broadband Network Vendor Financing Agreements. On October 25, 2001, the Company obtained a waiver of covenant defaults and an extension from these lenders for scheduled principal and interest payments under the Broadband Network Vendor Financing Agreements totaling approximately $36.3 million that were due on that date. The waiver expired on November 25, 2001 and the Broadband Network Vendor Financing Agreements became due and payable, and the Company is in default. On June 11, 2002, the Holding Company filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code and, effective as of such date pursuant to the provisions of the Bankruptcy Code, contractually accrued interest on the Company’s unsecured, pre-petition obligations ceased to accrue. As a result of the Company’s default under the Broadband Network Vendor Financing Agreements, the defaulted amounts have been reclassified to current portion of long-term debts as of December 31, 2001 and 2002, respectively.
During the year ended December 31, 2002, the Company extinguished certain of its vendor financing obligations prior to maturity and recorded a gain on early extinguishment of approximately $16.4 million, which is included in operating loss of the 2002 consolidated statements of operations. In addition, during 2002, the Company negotiated a forgiveness of interest, which was due and payable to one of IMPSAT Brazil’s vendors. At the consummation of these negotiations, the Company recorded the total amount of forgiven interest of approximately $22.1 million as a reduction of interest expense.
10. Income Taxes
The composition of the benefit from (provision for) income taxes, all of which is for foreign taxes, for the years ended December 31, 2000, 2001 and 2002 is as follows:
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The foreign statutory tax rates range from 15% to 35% depending on the particular country. Deferred taxes result from temporary differences in revenue recognition, depreciation methods and net operating loss carryforwards. The composition of net deferred tax asset at December 31, 2000 and 2001 is as follows:
The Company recorded a valuation allowance to offset its deferred income tax asset because management cannot conclude that utilization of the tax benefits resulting from operating losses and the other temporary differences are “more likely than not” to be realized, as required by SFAS 109.
11. Liabilities Subject To Compromise and Reorganization Items
Liabilities subject to compromise - This refers to liabilities incurred prior to the commencement of the Chapter 11 case. These liabilities consist primarily of amounts outstanding under the Company’s Senior Notes and also include accounts payable, accrued interest and other accrued expenses. These amounts represent the Company’s estimate of known or potential claims to be resolved in connection with the Chapter 11 case. Such claims remain subject to future adjustments. Adjustments may result from (i) negotiations, (ii) actions of the Bankruptcy Court, (iii) further developments with respect to disputed claims, (iv) future rejection of additional executory contracts or unexpired leases, (v) the determination as to the value of any collateral securing claims, (vi) proof of claims or (vii) other events. Payment terms for these amounts, which are considered long-term liabilities at this time, will be established in connection with a plan of reorganization.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
The principal categories of claims classified as liabilities subject to compromise under reorganization proceedings are identified below:
Contractual interest expense not accrued on prepetition debt totaled $52.2 million for the period that began as of June 11, 2002, the date of the Company’s petition for relief under chapter 11 of the Bankruptcy Code, and ended December 31, 2002.
Reorganization items - Reorganization items during the year ended December 31, 2002 are comprised of the following:
12. Stock Option Plans
Pursuant to the Plan, on the Effective Date as described in Note 1, the Company’s stock option plans described below were terminated, and all of the options and any other equity interests granted thereunder were cancelled, retired and eliminated with no consideration paid thereon.
Plan - In December 1998, the Company adopted the 1998 Stock Option Plan (the “1998 Plan”), pursuant to which 4,776,016 shares of Company’s common stock were reserved for issuance upon exercise of options. The 1998 Plan was designed as a means to retain and motivate key employees and directors. The Company’s compensation 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 compensation 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.
Under the 1998 Plan, the Company granted options for 441,650 shares at an exercise price of $8.38 during the year ended December 31, 1998 and options for 393,340 shares at an exercise price of $10.47 during the year ended December 31, 1999 and options for 507,100 shares at an exercise price of $17.00 during the year ended December 31, 2000. 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 options vest fully upon a change of control of the Company.
Plan - On January 5, 2000, the Company’s Board adopted the 1999 Stock Option Plan (the “1999 Plan”), which provides for the grants to its key officers and employees of stock options that are non-qualified
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for U.S. federal income tax purposes. The terms of the 1999 Plan are otherwise identical to those of the 1998 Plan except that:
•
The total number of shares of our common stock for which options may be and were granted pursuant to the 1999 Plan is 355,214;
•
The exercise price is $1.69 per share of common stock; and
•
Ten percent, twenty percent, thirty percent and forty percent of the options granted vest on each of the fourth, fifth, sixth and seventh anniversaries, respectively, of the date of grant or upon a change of control of the Company.
The expiration date of the 1999 Plan is January 5, 2010.
In connection with the stock options granted under the 1999 Plan, the Company recorded $5.4 million in stockholders’ equity as deferred compensation during January 2000. The deferred compensation will be amortized to expense over the vesting period, which commences four years after the date of grant.
A summary of stock option transactions during each of the three years in the period ended December 31, 2002 is presented below:
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The following table summarizes information concerning outstanding stock options at December 31, 2002:
The weighted average fair value of options granted during 2000 was $14.95.
13. Operating Segment Information
The Company’s operating segment information, by subsidiary, is as follows for the years ended December 31, 2000, 2001 and 2002:
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14. Related Party Transactions
The Company provides telecommunications network services to affiliates of stockholders. During the years ended December 31, 2000, 2001 and 2002, such services totaled approximately $18.9 million, $12.2 million and $10.4 million, respectively. In addition, the Company also enters into transactions with such affiliates, which primarily include financial borrowings, insurance, and employee benefits services. During the years ended December 31, 2000, 2001 and 2002, such transactions totaled approximately $10.7 million, $9.8 million and $3.3 million, respectively.
The Company also has obtained certain financing from these affiliates, which are included in Term Notes in Note 9. Amounts outstanding totaled approximately $22.1 million and $15.0 million at December 31, 2001 and 2002, respectively.
During the years ended December 31, 2000, 2001 and 2002, the Company made approximately $1.1 million, $1.4 million and $1.4 million, respectively, in payments to British Telecommunications plc for satellite capacity. Investment banking fees amounting to $18.3 million, $0.3 million and $1.0 million were paid to representative affiliates of the former holders of the Company’s redeemable preferred stock during 2000, 2001 and 2002, respectively. These representative affiliates are current stockholders of the Company.
During 2002, the Company paid approximately $2.0 million in fees to affiliates of certain of the Company’s creditors for structuring and negotiation of the terms of the Plan.
15. Commitments and Contingencies
Commitments - The Company leases satellite capacity with average annual rental commitments of approximately $21.9 million through the year 2007. In addition, the Company had committed to long-term contracts for the purchase of terrestrial links from third parties for approximately $2.5 million per year through 2007. The Company has commitments to purchase communications and data center equipment amounting to approximately $1.8 million at December 31, 2002.
IMPSAT Brazil has entered into a $5.9 million term note with El Camino Resources, which is guaranteed by the Company and IMPSAT Argentina. At December 31, 2002, the balance outstanding was approximately $2.3 million.
360networks - During June 2001, the Company terminated a series of contracts which the Company had signed in the first quarter of 2001 with subsidiaries of 360americas networks (Bermuda) ltd., a subsidiary of 360networks, Inc., and certain other subsidiaries of 360networks, Inc. (collectively “360networks”), to construct and provide IRU dark fiber, capacity services and conduit to 360networks over the Company’s Broadband Network in Argentina and Brazil, including the Company’s new Argentina-Brazil link, as a result of the breach by 360americas of its payment obligations under those contracts. Between March and May 2001, the Company made segments of the IRU dark fiber and capacity services available to 360networks for acceptance, but 360networks failed to make certain payments as required by the Company’s contract with them. 360networks also failed to make certain payments for collocation space in the Company’s telehouses in Sao Paulo and Rio de Janeiro, Brazil and Buenos Aires, Argentina, and the Company terminated those contracts as well. The Company has also terminated a contract with 360networks for collocation space in Caracas, Venezuela, also for payment default by 360networks.
The Company’s IRU dark fiber, capacity services and construction contracts with 360networks contemplated total payments of approximately $98.8 million in advance upon delivery of the IRU dark fiber, capacity services and conduit construction to 360networks and additional recurring payments, totaling approximately $45.0 million over the term of the contracts, for maintenance services. As of the termination of the contracts,
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360networks had paid as a total of $25.8 million and was in default on additional payments totaling $32.0 million. In addition, 360networks is in default on payments to collocation services totaling $0.8 million.
The Company commenced arbitration and litigation proceedings against 360networks for damages under the terminated contracts for the provision of IRU dark fiber and capacity services, as contemplated by the relevant agreements. During November 2002, the Company reached a agreement (the “Settlement Agreement”) with 360networks in which the Company agreed to dismiss its arbitration and litigation proceedings against 360networks and in return, the Company would be entitled to the funds that 360networks had advanced the Company in the amount of $22.6 in relation to the contracts described above between the Company and 360networks. These funds had been recorded as deferred revenues by the Company. In addition, the Company received from 360networks, assets, with a fair value of approximately $1.6 million. In connection with the Settlement Agreement, the Company recorded a gain in the amount of $26.2 million. The gain was calculated as follows:
IPO Allocations Class Action - On November 1, 2001, a lawsuit (the “IPO Class Action”) was filed in the United States District Court for the Southern District of New York against the Company, certain individuals who were then officers and directors of the Company, and the underwriters to the Company’s initial public offering (IPO). This lawsuit alleged on behalf of a proposed class of all shareholders that the Company and its underwriters violated various provisions of the securities laws in connection with the IPO in February 2000. Pursuant to the Plan, the plaintiffs in the IPO Class Action received in connection with their claims the assignment of any insurance proceeds that the Company receives in connection with the litigation, but otherwise the claims of the plaintiffs against the Company or any of its other assets have been discharged as part of the Chapter 11 proceedings.
Global Crossing - Global Crossing Ltd. filed for protection under Chapter 11 of the Bankruptcy Code in January 2002, and the Global Crossing subsidiaries to whom the Company provides services and infrastructure, as described below, were included in Global Crossing’s Chapter 11 proceedings during August 2002. The Company is party to a series of agreements with Global Crossing for the provision of telecommunications services. Pursuant to those agreements, the Company constructed a terrestrial portion of Global Crossing’s South American network between landing points on the Atlantic Ocean in Argentina and the Pacific Ocean in Chile, granted Global Crossing a series of indefeasible rights of use (IRU) over ducts and dark fiber on its broadband telecommunication network in Argentina, Brazil and Peru, provided Global Crossing with collocation space and related services in its telehouses in Argentina, Brazil, Chile, Venezuela and Peru and provided Global Crossing with maintenance services for their telecommunications assets in Latin America. In addition, the Company acquired IRU and leased capacity on Global Crossing’s South American undersea fiber optic cable system in order to connect the Broadband Network with other parts of Latin America and the world, See Note 6.
Commencing in the first quarter of 2002 and subsequent to the filing of Global Crossing’s petition under Chapter 11, Global Crossing has disputed a number of invoices that the Company delivered to it in connection with the services the Company is rendering to Global Crossing and has failed to make full payment in accordance with the terms of such invoices. The principal disputed matters include the following:
Beginning in the first quarter of 2002, Global Crossing disputed certain of the invoices sent by the Company to its Argentine and Brazilian subsidiaries for collocation and related services in the Company’s
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
telehouses in those countries. On January 15, 2003, the Company filed a motion in the Global Crossing Chapter 11 proceeding seeking an order that Global Crossing either irrevocably reject or assume the telehouse agreements and that Global Crossing make payment of all shortfalls under the telehouse agreements after the respective petition dates of the Global Crossing debtors, through December 31, 2002, in the aggregate amount of approximately $1.1 million, plus interest on the past due amounts, as administrative expense claims. On February 19, 2003, Global Crossing responded to the Company’s motion. In its response, Global Crossing stated its intention to assume the Brazil and Argentina telehouse agreements, along with three other telehouse agreements covering collocation space in Santiago, Chile, Lima, Peru and Caracas, Venezuela, although it also stated its right under its plan of reorganization to reconsider its assumption of such agreements at any time prior to the effective date of the Global Crossing plan of reorganization. Global Crossing denied that it owed any unpaid amounts with respect to the Argentine or Brazilian telehouse agreements. The Company and Global Crossing are currently seeking to agree to a schedule for evidence, briefing and adjudication of the disputes regarding the Argentine and Brazilian telehouse agreements.
In October 2002, Global Crossing failed to make payment of the full amount of recurring service charges for operation and maintenance of the IRUs that Global Crossing acquired under the TAC Turnkey Construction and IRU Agreement dated September 22, 1999 (the “TAC Agreement”). During the first quarter of 2003, Global Crossing also paid recurring service charges under the TAC Agreement and the other backhaul agreements in amounts less than the Company asserts to be contractually required. As part of the Company’s January 15, 2003 motion in Global Crossing’s bankruptcy proceeding, the Company requested that the bankruptcy court find that Global Crossing has failed to make the full recurring service charges required by the TAC Agreement and order Global Crossing to make payment of such amounts as administrative expenses through December 31, 2002, in the amount of approximately $0.6 million, plus interest on the past due amounts as set forth in the TAC Agreement. In its response to the Company’s motion, Global Crossing requested that the bankruptcy court defer determination of the Company’s entitlement to the recurring service charges until such time as Global Crossing has decided to assume or reject the TAC Agreement and other backhaul agreements.
On March 26, 2003, Global Crossing filed an adversary proceeding with the bankruptcy court overseeing its Chapter 11 case asserting a proprietary interest in the IRUs granted to them under the TAC Agreement and other backhaul agreements entered into between the two companies. The Company’s response to Global Crossing’s complaint is due on April 25, 2003. The Company and Global Crossing are currently seeking to agree to a schedule for evidence, briefing and adjudication of Global Crossing’s asserted proprietary interest in the IRUs arising under the TAC Agreement and other backhaul agreements.
On March 26, 2003, Global Crossing Bandwidth, Inc., one of the debtors in Global Crossing’s Chapter 11 proceeding, filed an adversary proceeding in the Global Crossing Chapter 11 case claiming IMPSAT USA had failed to pay Global Crossing Bandwidth, Inc. a total of approximately $0.5 million for IP transit services pursuant to a Carrier Service Agreement dated January 19, 2001 between IMPSAT USA and Global Crossing Bandwidth, Inc. The Company intends to dispute Global Crossing Bandwidth’s complaint on the basis that IMPSAT USA has paid in full all amounts owed by it under the Carrier Services Agreement. The Company’s answer to the complaint in this matter is due on April 25, 2003.
Other Litigation - The Company is involved in or subject to various litigation and legal proceedings incidental to the normal conduct of its business, including with respect to regulatory matters. 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 a former customer, ENCOTESA, for amounts due and arising under IMPSAT Argentina’s contracts with ENCOTESA, the Argentine national postal service for $7.3 million. The
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ultimate collectibility of this matter continues to be negotiated for settlement; however, the Company has valued this receivable at a net realizable value of zero.
16. Selected Quarterly Financial Information (Unaudited)
Selected financial information for the quarterly periods in 2002 and 2001 is presented below:
The Company’s 2002 fourth quarter results were positively impacted as a result of the forgiveness of interest totaling approximately $22.1 million and the legal settlement totaling approximately $26.2 million recorded by the Company as discussed in Notes 9 and 15, respectively.
17. Subsequent Events (Unaudited)
Emergence from Chapter 11 - As discussed in Note 1, the Holding Company emerged from bankruptcy on March 25, 2003 as contemplated under the Plan and restructured its indebtedness in the manner described in the Financial Restructuring caption in Note 1, specifically:
The Company consummated the following:
•
Issued shares of New Common Stock to holders of the Company’s 13 3/4% Senior Notes due 2005 and 12 3/8% Senior Notes due 2008, (the “2005/2008 Holders”) in full satisfaction of their claims thereunder, including the outstanding principal and all accrued and unpaid interest. The 2005/2008 Holders received their ratable portion of 9.8 million shares of New Common Stock, as may be decreased to allow for the allocation of a ratable number of such shares of New Common Stock to the holders of the Post-Effective Date Contingencies and certain other claims of unsecured creditors of the Holding Company. Under the Plan, the dollar value of the Post-Effective Date Contingencies and other unsecured claims is to be determined after the Effective Date based on factors at the level of the Company’s operating subsidiaries. Accordingly, the Plan required the Company to establish on the Effective Date a reserve (the “Common Stock Reserve Pool”) consisting of an estimated sufficient portion of such 9.8 million shares of New Common Stock to enable the Company to make any distributions after the Effective Date on account of Post-Effective Date Contingencies and other unsecured claims. To this end, based on the estimated maximum value of the Post-Effective Date Contingencies and other unsecured claims, the Company and the creditors committee under the Plan have determined that the Common Stock Reserve Pool shall be composed of 686,000 shares of New Common Stock. The 2005/2008 holders have initially received on the Effective Date 9.1 million shares
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of New Common Stock, net of the Common Stock Reserve Pool. Pursuant to the Plan, any settlements or distributions from the Common Stock Reserve Pool with the holders of the Post-Effective Date Contingencies and other unsecured claims shall be made in accordance with the disputed claims resolution process contained therein. Following the resolution of these claims, the Company will distribute any shares of New Common Stock remaining in the Common Stock Reserve Pool ratably among the 2005/2008 Holders in accordance with the terms of the Plan. Holders of the Company’s pre-Chapter 11 common stock (the “Old Common Stock”) and holders of any other equity interest received no distribution under the Plan. All Old Common Stock and all other equity interests were cancelled on the Effective Date;
•
filed with the Delaware Secretary of State a Restated Certificate of Incorporation (“Certificate of Incorporation”);
•
amended and restated the Company’s Bylaws (“Bylaws”);
•
cancelled all Old Common Stock, and all other existing securities and agreements to issue or purchase any equity interest;
•
issued $67.5 million in aggregate principal amount of Series A 6% Senior Guaranteed Notes due 2011 (the “Series A Notes”) (initially convertible, in the aggregate, into 22.8% of the New Common Stock on a fully diluted basis) to holders of the Company’s former 12 1/8% Senior Guaranteed Notes due 2003 (the “2003 Noteholders”), in full satisfaction of the claims of the 2003 Noteholders, including the outstanding principal and all accrued and unpaid interest thereon;
•
issued to (i) holders of debt under the Company’s pre-Effective Date Broadband Network vendor financing agreements (the “Original Vendor Financing Agreements”) and (ii) other creditors of the Company’s operating subsidiaries holding guarantees by the Holding Company of such indebtedness who voted to accept the Plan, a combination of new senior indebtedness totaling $143.8 million, $23.9 million in the aggregate of new Series B 6% Senior Guaranteed Notes due 2011 (“Series B Notes”) (initially convertible in the aggregate into 5.3% of the New Common Stock on a fully diluted basis), and eight-year warrants to acquire 15.3% in the aggregate of the New Common Stock (on a fully diluted basis);
•
issued 200,000 shares of New Common Stock to certain officers of the Company in accordance with the Company’s 2003 Stock Incentive Plan (the “2003 Stock Incentive Plan”); and
•
issued options for 1,646,332 shares of New Common Stock to senior officers.
Under the Company’s Certificate of Incorporation, the authorized capital stock as of the Effective Date consists of (i) 50,000,000 shares of the New Common Stock, with a par value of $0.01 per share and (ii) 5,000,000 shares of Preferred Stock, with a par value of $0.01 per share (the “Preferred Stock”). No Preferred Stock has been issued. Pursuant to the Certificate of Incorporation, Preferred Stock may be issued in one or more series as determined from time to time by the Company’s Board of Directors (the “Board”) without further approval of the Company’s stockholders. Upon issuance of any series of Preferred Stock, the Board will fix the voting powers, designations, preferences, and relative, participating, optional, redemption, conversion, exchange or other special rights, qualifications, limitations or restrictions of such Preferred Stock, to the extent permitted by law. Pursuant to the Certificate of Incorporation, the Company may not create, designate, authorize or cause to be issued any class or series of nonvoting stock to the extent prohibited by Section 1123 of the United States Bankruptcy Code.
Fresh Start Accounting - The Company will record the reorganization and related transactions using “fresh start” accounting as required by SOP 90-7. In accordance with SOP 90-7, the reorganization value (approximately $370.0 million) will be allocated to specific tangible and identifiable assets and liabilities. The
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following Selected Consolidated Pro Forma Balance Sheet Data (Unaudited) reflects the Plan and fresh start accounting as if the Plan had been consummated on December 31, 2002. The fresh start adjustments reflected below are based on preliminary indications of fair values of the Company’s assets and liabilities as of December 31, 2002. Actual amounts are subject to change based on the actual carrying values of the Company’s assets and liabilities and completion of the fair value determinations as of March 25, 2003 (emergence date).
SELECTED CONSOLIDATED PRO FORMA BALANCE SHEET DATA
(Unaudited)
Adjustments:
(1)
To record the extinguishment of the Company’s broadband network vendor financing agreements and related balances for those creditors who voted to accept the Plan. Such amount is comprised as follows:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2)
To record the issuance of the new debt instruments (described above) pursuant to the Plan. Such amount is comprised as follows:
(3)
To record the extinguishment of liabilities subject to compromise per the Plan, see detail of amounts in Note 11.
(4)
To record the adjustments to stockholders’ equity upon emergence. Such amount is comprised of the gain on early extinguishment of debt of approximately $814 million, the adjustment to common stock to reflect the new amount of outstanding shares upon emergence and the eliminations of the balances in deferred stock-based compensation and accumulated other comprehensive income as of December 31, 2002.
(5)
To record the effect of applying fresh start accounting upon emergence based on the approved reorganization value pursuant to the Plan. The approved equity value approximated $87.9 million.
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EXHIBIT INDEX

Confidential treatment requested as to certain portions, which portions were omitted and filed separately with the Commission.