IMPSAT FIBER NETWORKS INC - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2004

¨	Transition report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 000-29085

IMPSAT Fiber Networks, Inc.

(Exact name of registrant as specified in its charter)

Delaware

52-1910372

(state or other jurisdiction

incorporation or organization)

(IRS employer

identification number)

Elvira Rawson de Dellepiane 150

Piso 8, C1107BCA

Buenos Aires, Argentina

(5411) 5170-0000

(Address, including zip code, and telephone number, including area code, of registrants’ principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Securities Exchange Act Rule 12b-2). YES ¨ NO x

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES x NO ¨

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of June 30, 2004, the registrant had outstanding 10,100,000 shares of common stock, $0.01 par value.

IMPSAT FIBER NETWORKS, INC.


			Page No.
PART I FINANCIAL INFORMATION

	ITEM 1.	FINANCIAL STATEMENTS	F-1

	ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	1

	ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	14

	ITEM 4.	CONTROLS AND PROCEDURES	15

PART II OTHER INFORMATION			16

	ITEM 1.	LEGAL PROCEEDINGS	16

	ITEM 2.	CHANGES IN SECURITIES AND USE OF PROCEEDS	16

	ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	16

	ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS	16

	ITEM 5.	OTHER INFORMATION	17

	ITEM 6.	EXHIBITS AND REPORTS ON FORM 8-K	17

SIGNATURES

PART I

FINANCIAL INFORMATION

Item 1. Financial Statements

PART I

FINANCIAL INFORMATION

IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (SUCCESSOR COMPANY)

AS OF DECEMBER 31, 2003 AND JUNE 30, 2004

(In thousands of U.S. Dollars, except share amounts)

(Unaudited)


	Successor Company
	December 31, 2003			June 30, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	61,498		$	63,265
Trading investments		2,474			251
Trade accounts receivable, net		31,213			28,683
Other receivables		11,630			11,291
Prepaid expenses		2,249			4,062

Total current assets		109,064			107,552

PROPERTY, PLANT AND EQUIPMENT, Net		315,817			303,142

NON-CURRENT ASSETS:
Investments in common stock		1,873
Other non-current assets		13,875			15,961

Total non-current assets		15,748			15,961

TOTAL	$	440,629		$	426,655

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable — trade	$	37,095		$	35,179
Current portion of long-term debt		11,851			28,974
Accrued and other liabilities		33,140			29,587

Total current liabilities		82,086			93,740
LONG-TERM DEBT, Net		249,394			238,039
OTHER LONG-TERM LIABILITIES		11,904			14,649

Total liabilities		343,384			346,428

COMMITMENTS AND CONTINGENCIES (NOTE 14)
STOCKHOLDERS’ EQUITY:
Preferred stock, $0.01 par value; 5,000,000 shares authorized, no shares outstanding as of December 31, 2003 and June 30, 2004
Common stock, $0.01 par value; 50,000,000 shares authorized, 10,100,000 shares issued and outstanding (including 150,000 and 100,000 restricted shares held in the 2003 Stock Incentive Plan as of December 31, 2003 and June 30, 2004, respectively)		101			101
Additional paid in capital		90,294			90,294
Retained earnings (accumulated deficit)		9,477			(7,006	)
Deferred stock-based compensation		(1,320	)		(880	)
Accumulated other comprehensive loss		(1,307	)		(2,282	)

Total stockholders’ equity		97,245			80,227

TOTAL	$	440,629		$	426,655

See notes to condensed consolidated financial statements.

F - 1

IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2003 (SUCCESSOR COMPANY), FOR THE THREE MONTHS

ENDED JUNE 30, 2004 (SUCCESSOR COMPANY), FOR THE THREE MONTHS ENDED MARCH 31, 2003

(PREDECESSOR COMPANY) AND FOR THE SIX MONTHS ENDED JUNE 30, 2004 (SUCCESSOR COMPANY)

(In thousands of U.S. Dollars, except per share amounts)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	Successor Company			Successor Company			Predecessor Company			Successor Company			Successor Company
	2003			2004			Three Months Ended March 31, 2003			Three Months Ended to June 30, 2003			2004
NET REVENUES:
Broadband and satellite	$	41,781		$	40,005		$	41,382		$	41,781		$	79,579
Internet		5,761			6,716			5,733			5,761			12,700
Value added services		3,852			3,832			4,781			3,852			8,036
Telephony		4,595			4,903			4,106			4,595			10,049
Sales of equipment		385			90			74			385			242

Total net revenues		56,374			55,546			56,076			56,374			110,606

COSTS AND EXPENSES:
Direct costs:
Contracted services		4,525			5,065			4,125			4,525			9,392
Other direct costs		7,868			5,761			4,696			7,868			9,518
Leased capacity		17,559			15,945			17,407			17,559			31,735
Cost of equipment sold		108			80			48			108			177

Total direct costs		30,060			26,851			26,276			30,060			50,822
Salaries and wages		11,842			11,773			10,727			11,842			23,980
Selling, general and administrative		7,127			5,961			5,553			7,127			11,466
Gain on extinguishment of debt		(8,793	)								(8,793	)
Depreciation and amortization		8,969			10,560			19,358			8,969			20,721

Total costs and expenses		49,205			55,145			61,914			49,205			106,989

Operating income (loss)		7,169			401			(5,838	)		7,169			3,617

OTHER INCOME (EXPENSE):
Interest income		970			296			200			970			607
Interest expense (contractual interest of $21,801 for the three months ended March 31, 2003 (Predecessor))		(6,281	)		(5,272	)		(1,909	)		(6,281	)		(10,206	)
Net gain (loss) on foreign exchange		21,445			(5,519	)		9,969			21,445			(9,910	)
Reorganization items								726,127
Other income (loss), net		(313	)		1,420			2,923			(313	)		1,291

Total other income (expense)		15,821			(9,075	)		737,310			15,821			(18,218	)

INCOME (LOSS) BEFORE INCOME TAXES		22,990			(8,674	)		731,472			22,990			(14,601	)
PROVISION FOR FOREIGN INCOME TAXES		(744	)		(1,339	)		(406	)		(744	)		(1,882	)

NET INCOME (LOSS)	$	22,246		$	(10,013	)	$	731,066		$	22,246		$	(16,483	)

NET INCOME (LOSS) PER COMMON SHARE:
BASIC	$	2.26		$	(1.00	)	$	8.00		$	2.26		$	(1.65	)

DILUTED	$	1.62		$	(1.00	)	$	8.00		$	1.62		$	(1.65	)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
BASIC		9,850			10,000			91,429			9,850			9,975

DILUTED		15,901			10,000			91,429			9,850			9.975

See notes to condensed consolidated financial statements.

F - 2

IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE MONTHS ENDED JUNE 30, 2003 (SUCCESSOR COMPANY), FOR THE THREE MONTHS

ENDED JUNE 30, 2004 (SUCCESSOR COMPANY), FOR THE THREE MONTHS ENDED MARCH 31, 2003

(PREDECESSOR COMPANY) AND FOR THE SIX MONTHS ENDED JUNE 30, 2004 (SUCCESSOR COMPANY)

(In thousands of U.S. Dollars)

(Unaudited)


	Three Months Ended June 30,						Six Months Ended June 30,
	Successor Company			Successor Company			Predecessor Company			Successor Company			Successor Company
	2003			2004			Three Months Ended March 31, 2003			Three Months Ended to June 30, 2003			2004
NET INCOME (LOSS)	$	22,246		$	(10,013	)	$	731,066		$	22,246		$	(16,483	)

OTHER COMPREHENSIVE (LOSS) INCOME
Foreign currency translation adjustment		(4,538	)		590			(4,097	)		(4,538	)		757
Unrealized gain on investments available for sale		62			(1,362	)		55			62			122
Reclasification adjustment for gains included in net income					(1,947	)								(1,854	)

TOTAL		(4,476	)		(2,719	)		(4,092	)		(4,476	)		(975	)

COMPREHENSIVE INCOME (LOSS)	$	17,770		$	(12,732	)	$	727,024		$	17,770		$	(17,458	)

See notes to condensed consolidated financial statements.

F - 3

IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE SIX MONTHS ENDED JUNE 30, 2004 (SUCCESSOR COMPANY)

(In thousands of U.S. Dollars)

(Unaudited)


	Common Stock			Additional Paid In Capital		Retained Earnings (Accumulated Deficit)			Deferred Stock- Based Compensation			Accumulated Other Comprehensive Loss			Total
	Shares	Amount		Additional Paid In Capital		Retained Earnings (Accumulated Deficit)			Deferred Stock- Based Compensation			Accumulated Other Comprehensive Loss			Total
BALANCE AT DECEMBER 31, 2003 (SUCCESSOR COMPANY)	10,100,000	$	101	$	90,294	$	9,477		$	(1,320	)	$	(1,307	)	$	97,245
Recognition of deferred compensation										440						440
Unrealized loss on investment available for sale													(1,732	)		(1,732	)
Foreign currency translation adjustment													757			757
Net loss for the period							(16,483	)								(16,483	)

BALANCE AT JUNE 30, 2004 (SUCCESSOR COMPANY)	10,100,000	$	101	$	90,294	$	(7,006	)	$	(880	)	$	(2,282	)	$	80,227

See notes to condensed consolidated financial statements

F - 4

IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE THREE MONTHS ENDED MARCH 31, 2003 (PREDECESSOR), THREE MONTHS ENDED JUNE 30, 2003

(SUCCESSOR COMPANY)

AND FOR THE SIX MONTHS ENDED JUNE 30, 2004 (SUCCESSOR COMPANY)

(In thousands of U.S. Dollars)

(Unaudited)


	Six Months Ended June 30,
	Predecessor Company Three Months Ended March 31, 2003			Successor Company Three Months Ended June 30, 2003			Successor Company
							2004
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	731,066		$	22,246		$	(16,483	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Amortization and depreciation		19,358			8,969			20,721
Gain on extinguishment of debt		(728,203	)		(8,793	)
Stock-based compensation		440						440
Deferred income tax provision		82			103			(1,157	)
Provision for (reversal of allowance for) doubtful accounts		515			2,123			(2,100	)
Paid-in-kind interest on Senior Notes					3,433			6,767
Loss on sale of assets held for dispossal					94
Net (gain) loss on foreign exchange		(9,969	)		(21,445	)		9,910
Net gain on sale of investments								(1,854	)
Net loss (gain) on disposals of property, plant and equipment		772			(126	)		1,125
Changes in assets and liabilities:
(Increase) decrease in trade accounts receivable		(3,816	)		(2,149	)		4,356
Increase in prepaid expenses		(943	)		(555	)		(1,830	)
Decrease (increase) in other receivables and other non-current assets		1,214			5,364			(5,644	)
(Decrease) increase in accounts payable — trade		(2,709	)		(5,836	)		(1,028	)
Increase (decrease) in accrued and other liabilities		5,549			3,140			(791	)
Decrease in deferred revenues		(1,132	)
(Decrease) increase in other long-term liabilities		(721	)		(562	)		3,256

Net cash provided by operating activities		11,503			6,006			15,688

CASH FLOWS FROM INVESTING ACTIVITIES:
Net (increase) decrease in trading investments		(3,303	)		26,324			2,223
Purchases of property, plant and equipment		(3,266	)		(4,394	)		(16,142	)
Proceeds from sale of property, plant and equipment		340			1,590			277
Proceeds from sale of assets held for disposal					2,435
Proceeds from the sale of investment								1,995

Net cash (used in) provided by investing activities		(6,229	)		25,955			(11,647	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings from short-term debt					348
Repayments of long-term debt		(1,857	)		(2,186	)		(1,674	)

Net cash used in financing activities		(1,857	)		(1,838	)		(1,674	)

EFFECT OF EXCHANGE RATE CHANGE ON CASH AND CASH EQUIVALENTS		(415	)		(1,927	)		(600	)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		3,002			28,196			1,767
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD		32,563			35,565			61,498

CASH AND CASH EQUIVALENTS AT END OF THE PERIOD	$	35,565		$	63,761		$	63,265

SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid	$	940		$	778		$	1,734

Foreign income taxes paid	$	594		$	1,598		$	2,934

CASH PAID DURING THE PERIOD FOR REORGANIZATION ITEMS:
Professional fees and other reorganization payments	$	1,714		$	5,841

SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Change in unrealized gain in investment available for sale.	$	55		$	62		$	122

Issuance of Series B Notes in settlement of certain vendor financing obligations				$	1,689

See notes to condensed consolidated financial statements.

F - 5

IMPSAT FIBER NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(TABLES IN THOUSANDS OF U.S. DOLLARS, EXCEPT FOR PER SHARE AMOUNTS)

(Unaudited)

1. GENERAL

IMPSAT Fiber Networks, Inc., a Delaware holding company (the “Holding Company”), and subsidiaries (collectively the “Company” or the “Successor Company”) is a 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:


Argentina		Impsat S.A.
Brazil		Impsat Comunicacoes Ltda.
Chile		Impsat Chile S.A.
Colombia		Impsat S.A.
Ecuador		Impsatel del Ecuador S.A.
Peru		Impsat S.A.
USA		Impsat USA, Inc.
Venezuela		Telecomunicaciones Impsat S.A.

In addition, the Company owns other subsidiaries, which serve intermediary functions to the Holding Company and its operating subsidiaries.

2. FINANCIAL RESTRUCTURING, PETITION FOR RELIEF UNDER CHAPTER 11 AND EMERGENCE

On March 11, 2002, the Holding Company 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 (a) $125.0 million 12-1/8% Senior Guaranteed Notes due 2003, (b) $300.0 million 13-3/4% Senior Notes due 2005 and (c) $225.0 million 12-3/8% Senior Notes due 2008 (collectively, the “Senior Notes”) regarding a non-binding term sheet (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.

In connection with the Restructuring Term Sheet, 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 were stayed while the Holding Company continued business operations as Debtor-in-Possession.

F - 6

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 reflected the terms of the pre arranged plan of reorganization that a majority of the holders of the indebtedness under the Company’s Vendor Financing Agreements and the holders of the Senior Notes agreed to support. 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 would be made to the Holding 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.

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 the previous stock options plans.

Although the Holding Company has emerged from bankruptcy, the Company remains in default under indebtedness owed to a creditor who voted against the Plan. Under the Plan, the claims of this creditor were a contingent obligation arising under a guarantee by the Holding Company of certain primary indebtedness of IMPSAT Argentina. Notwithstanding the Company’s emergence from bankruptcy and the extinguishment of Company’s guarantee as a result, an event of default has occurred and is continuing with respect to the related primary underlying indebtedness of IMPSAT Argentina. This default, which relates to indebtedness totaling approximately $7.6 million in outstanding principal amount as of June 30, 2004, gives the creditor the right to accelerate such indebtedness and seek immediate repayment of all outstanding amounts and accrued interest thereon. The Company is currently conducting negotiations at the level of IMPSAT Argentina with this creditor with a view to rescheduling or otherwise restructuring the defaulted debt obligation. There is no assurance, however, that the Company will be successful in these negotiations or that the Company will reach a definitive agreement with this creditor to reschedule or restructure such obligations.

Following is a summary of the significant transactions consummated on March 25, 2003 under the Plan:

•

issued shares of the Holding Company’s new common stock (the “New Common Stock”) to holders of the Company’s 13³/4% Senior Notes due 2005 and 12³/8% 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, less an allocation of a ratable number of such shares of New Common Stock to the holders of certain other claims of unsecured creditors of the Holding Company. Under the Plan, the dollar value of such other unsecured claims was determined after the Effective Date based on factors at the level of the Holding 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 portion of such 9.8 million shares of New Common Stock sufficient to enable the Company to make any distributions after the Effective Date on account of such 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 determined that the Common Stock Reserve Pool should be composed of 686,000 shares of New Common Stock. The 2005/2008 Holders 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 other unsecured claims were to be made in accordance with the disputed claims resolution process contained therein. Following the resolution of these claims, the Plan provided that the Company would 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. In accordance with such disputed claims resolution procedure, in December 2003, the Holding Company issued 11,564 shares of New Common Stock to holders of allowed unsecured claims and the remainder of the Common Stock Reserve Pool to the 2005/2008 Holders. 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”);

F - 7

•

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 Holding 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 $144.0 million, $23.9 million in the aggregate of new Series B 6% Senior Guaranteed Notes due 2011 (the “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 restricted New Common Stock to certain officers of the Company in accordance with the Company’s 2003 Stock Incentive Plan; and

•

approved stock options for 1,646,332 shares of New Common Stock to senior officers.

Under the Holding 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 Holding 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 Holding 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.

As a result of these transactions, as of March 31, 2003, the Company had 10,000,000 shares of New Common Stock issued and outstanding (including 686,000 shares held in the Common Stock Reserve Pool pending the resolution of disputed claims and 150,000 shares of unvested restricted stock issued under the 2003 Stock Incentive Plan).

Because the Company emerged from bankruptcy on March 25, 2003 referred to as the “Successor Company” (as of and subsequent to March 31, 2003), for financial reporting purposes the Company used an effective date of March 31, 2003 and applied fresh-start accounting to the condensed consolidated balance sheet as of that date in accordance with the American Institute of Certified Public Accountants’ Statement of Position (“SOP”) 90-7, Financial Reporting by Entities in Reorganization Under the Bankruptcy Code. In accordance with SOP 90-7, the Company adopted fresh-start accounting because (i) the holders of the existing voting shares immediately before filing and confirmation of the Plan received less than 50% of the voting shares of the emerging company and (ii) the Company’s reorganization value, which served as the basis for the Plan approved by the Bankruptcy Court, was less than the Company’s post-petition liabilities and allowed claims, as shown below:


Post-petition current liabilities	$	8,070
Liabilities deferred under the Chapter 11 proceedings		727,522

Total post-petition liabilities and allowed claims		735,592
Reorganization value		(557,000	)

Excess of liabilities over reorganization value	$	178,592

F - 8

Under fresh-start accounting, a new reporting entity is considered to be created and the Company adjusts the recorded amounts of assets and liabilities to reflect their estimated fair values at the date fresh-start accounting is applied. Accordingly, the estimated reorganization value of the Company of $557.0 million represents the total fair value that the Company allocated to the assets of the Company. In conformity with Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, the Holding Company has used purchase accounting (“pushed down” to its operating subsidiaries) to account for the assets and liabilities as of the fresh-start date.

The Company’s financial advisors assisted the Company in determining its estimated reorganization value of $557 million and its reorganization equity value of the Company of approximately $88.0 million. The financial advisors used two methodologies to derive the total estimated reorganization value: (a) the application of comparable company multiples to the Company’s historical and projected financial results; and (b) a calculation of the present value of the Company’s free cash flows under the Company’s revised business plan using financial projections through 2010, including an assumption for a terminal value, discounted at the Company’s estimated post-restructuring weighted-average cost of capital. In estimating the total reorganization value, the Company’s advisors considered the Company’s market share and position, competition and general economic considerations, projected revenue growth, potential profitability, working capital requirements and other relevant factors.

As a result of the Company’s reorganization and application of fresh-start accounting, during the three months ended March 31, 2003, the Predecessor Company recognized a gain of approximately $728.2 million on the extinguishment of the Predecessor Company’s Senior Notes, Broadband Vendor Financing agreements and other trade accounts payable.

The effect of the Plan and the resulting fresh-start accounting adjustments on the Company’s condensed consolidated balance sheet as of March 31, 2003, is as follows:


									Elimination of Equity and Fresh Start Adjustments
	Pre- Reorganization Balance Sheet March 31, 2003		Debt Extinguishment and Reorganization		Common Stock Reserve Pool		2003 Stock Incentive Plan		Equity Elimination		Allocation of Reorganization Value			Post Reorganization Balance Sheet March 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	35,565												$	35,565
Trading investments		26,324													26,324
Trade accounts receivable, net		34,493													34,493
Other receivables		13,235													13,235
Prepaid expenses		3,696													3,696
Assets held for disposal		5,222									$	263			5,485
Total current assets		118,535		—				—		—		263			118,798
PROPERTY, PLANT AND EQUIPMENT, Net		390,674										(72,871	)		317,803
NON-CURRENT ASSETS:
Investments in common stock		141													141
Other non-current assets		10,987													10,987
Total non-current assets		11,128		—				—		—		—			11,128

TOTAL	$	520,337	$	—	$	—	$	—	$	—	$	(72,608	)	$	447,729

F - 9


													Elimination of Equity and Fresh Start Adjustments
	Pre- Reorganization Balance Sheet March 31, 2003			Debt Extinguishment and Reorganization			Common Stock Reserve Pool			2003 Stock Incentive Plan			Equity Elimination			Allocation of Reorganization Value			Post Reorganization Balance Sheet March 31, 2003
LIABILITIES AND STOCKHOLDERS’ (DEFICIENCY) EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES:
Accounts payable – trade	$	74,444		$	(22,442	)													$	52,002
Current portion of long-term debt		282,474			(258,832	)														23,642
Accrued and other liabilities		51,633			(25,137	)														26,496

Total current liabilities		408,551			(306,411	)					—			—			—			102,140

LONG-TERM DEBT, Net		24,334			219,490															243,824

OTHER LONG-TERM LIABILITIES		13,765																		13,765

DEFERRED REVENUES		69,377														$	(69,377	)		—

LIABILITIES SUBJECT TO COMPROMISE		727,522			(727,522	)														—

Total liabilities		1,243,549			(814,443	)								—			(69,377	)		359,729

STOCKHOLDERS’ (DEFICIENCY) EQUITY:
Common Stock – old		914											$	(914	)					—
Common Stock – new					98					$	2									100
Additional paid in capital – old		537,725												(537,725	)					—
Additional paid in capital – new					86,142		$	6,037			1,758						1,320			95,257
Accumulated deficit		(1,273,542	)		728,203						(440	)		550,330			(4,551	)		—
Common stock reserve pool								(6,037	)											(6,037	)
Deferred stock-based compensation		(4,530	)								(1,320	)		4,530						(1,320	)
Accumulated other comprehensive income		16,221												(16,221	)					—

Total stockholders’ (deficiency) equity		(723,212	)		814,443			—			—			—			(3,231	)		88,000

TOTAL	$	520,337		$	—		$	—		$	—		$	—		$	(72,608	)	$	447,729

These adjustments primarily include the following:

Debt Extinguishment and Reorganization

•

The extinguishment of the Company’s 2005/2008 Senior Notes plus accrued interest in exchange for the issuance of 9.8 million shares of the Company’s New Common Stock (including 686,000 shares held in the Common Stock Reserve Pool pending the resolution of the Post-Effective Date Contingencies);

•

The extinguishment of the Company’s 2003 Senior Notes plus accrued interest in exchange for the issuance of $67.5 million in aggregate principal amount of Series A Notes ($60.0 million as of March 31, 2003);

•

The extinguishment of the Company’s Broadband Vendor Financing agreements that voted in favor of the plan plus accrued interest in exchange for the issuance of a combination of $144.0 million in senior indebtedness issued by IMPSAT Argentina and IMPSAT Brazil ($128.0 million as of March 31, 2003), $23.9 million in aggregate principal amount of Series B Notes ($21.2 million as of March 31, 2003) and eight-year warrants to acquire 15.3% in the aggregate of the Company’s New Common Stock;

F - 10

Common Stock Reserve Pool

•

The establishment of the Common Stock Reserve Pool of 686,000 shares.

2003 Stock Incentive Plan

•

The issuance of 200,000 shares of the New Common Stock to certain officers of the Company in accordance with the 2003 Stock Incentive Plan, of which 50,000 shares vested immediately upon issuance;

Equity Eliminations

•

The cancellation of all outstanding Old Common Stock and other equity interests and the elimination of all components of stockholders’ deficiency, including paid-in-capital, accumulated deficit, deferred compensation and accumulated other comprehensive income; and

Allocation of Reorganization Value

•

The adjustments to the carrying values of the Company’s property, plant and equipment, based on the Company’s estimates of their relative fair values, which the Company determined in consultation with an external valuation specialist that the Company hired are as follows:


Adjustment to record at fair value	$	36,901
Allocation of the excess of fair value assigned to the net assets acquired over cost		(109,772	)

Net adjustment	$	(72,871	)

In accordance with SFAS No. 141, the excess of fair value assigned to net assets acquired over cost was applied to reduce the carrying value of property, plant and equipment.

•

The adjustment to the Predecessor Company’s deferred revenue in accordance with Emerging Issues Task Force (“EITF”) 01-3, Accounting in a Business Combination for Deferred Revenue of an Acquiree, which requires the acquiring entity to recognize a liability (based on its fair value at the date of acquisition) related to a deferred revenue of an acquired entity only if that deferred revenue represents a legal obligation assumed by the acquiring entity (a legal performance obligation). The Successor Company determined that the deferred revenue represented a legal performance obligation under EITF 01-3; however, the fair value (based on incremental costs incurred to honor the legal performance obligation) was determined during the period ended June 30, 2003, to not be material to the Successor Company’s condensed consolidated balance sheet.

3. LIQUIDITY

As discussed in Note 2, the Company successfully emerged from bankruptcy on March 25, 2003 with an approved reorganization plan. Prior to June 11, 2002 (the Petition Date), the Company had incurred substantial net losses and had both working capital and stockholders’ deficiencies. Emerging from bankruptcy gives the Company a chance to become successful in its future operations. The primary benefit of the bankruptcy was to relieve the Company of the obligations of the Senior Notes and Broadband Network Vendor Financing Agreements along with the related interest expense. As a result, the Company has generated positive operating income and cash flows from operations of $3.6 million and $15.7 million, respectively, for the six months ended June 30, 2004. As of June 30, 2004, the Company has cash and cash equivalents and trading investments of $63.5 million, which includes approximately $8.4 million in Venezuela (see Note 4). Based on its current business plan, the Company believes that the cash balances as of June 30, 2004 and the expected cash flows to be generated by the Company’s operations will be sufficient to pay its obligations when due for the foreseeable future, including any acceleration of the approximately $7.6 million owed to the creditor mentioned in Note 2. However, management can give no assurances that the Company will be successful in executing its business plan nor that the Company will be able to achieve profitability in the long-term.

F - 11

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation — The financial statements are presented on a condensed consolidated basis and include the accounts of IMPSAT Fiber Networks, Inc. and its subsidiaries. All significant intercompany transactions and balances have been eliminated.

Interim Financial Information — The unaudited condensed consolidated financial statements as of June 30, 2004 and for the three and six months then ended have been prepared on the same basis as the Company’s audited consolidated financial statements as of and for the nine months ended December 31, 2003. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the results for such periods. The operating results for the three and six months ended June 30, 2004 are not necessarily indicative of the operating results to be expected for the remainder of calendar year 2004 or for any future period.

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 currency controls, price controls, interest rates, changes in governmental economic policies, 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 — The Argentine peso has been volatile since January 2002, when it traded at 1.65 pesos to the U.S. dollar. At December 31, 2003 and June 30, 2004, the Argentine peso traded at 2.95 pesos to the U.S. dollar. The devaluation of the Argentine peso will generally affect the Company’s condensed consolidated financial statements by generating foreign exchange gains or losses on peso-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.

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 are adversely affected by devaluations of the Brazilian real against the U.S. dollar. At December 31, 2003 and June 30, 2004, the real traded at R$2.89 and R$3.11 to the U.S. dollar, respectively. Devaluations of the real against the U.S. dollar have had a negative effect on the Company’s real denominated revenues. 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.

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 1,600 bolivars to the U.S. dollar. These exchange rate controls make it difficult for the Company’s customers in Venezuela to obtain the U.S. dollars needed to make payments due to the Company in U.S. dollars on a timely basis. These exchange controls also limit the Company’s ability to convert local currency into U.S. dollars and transfer funds out of Venezuela. During February 2004, the Venezuelan government further devalued the bolivar and fixed the bolivar’s value to the U.S. dollar at 1,920. As of June 30, 2004, approximately $8.4 million of the Company’s cash and cash equivalents were held in Venezuela bolivars by IMPSAT Venezuela (translated into U.S. dollars at the fixed exchange rate imposed by the Venezuelan government). Pursuant to the discussions by the AICPA International Practices Task Force during their March 2003 meeting, the Company has used the official government exchange rate of 1,920 bolivars to the U.S. dollar to remeasure the financial statements of IMPSAT Venezuela.

F - 12

Cash and Cash Equivalents — Cash and cash equivalents include time deposits or money market funds 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. Included in cash and cash equivalents is approximately $0.4 million of restricted cash in IMPSAT Peru related to certain of its borrowings and other obligations.

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 may receive fixed advance payments for the IRUs, which would be recognized as revenue ratably over the life of the IRU. Amounts received in advance would be recorded as deferred revenue. 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 for the three months ended June 30, 2003 and the three and six months ended June 30, 2004.

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.

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:


Buildings and improvements		10-25 years
Operating communications equipment		5-10 years
Network infrastructure (including rights of way)		10-20 years
IRU investments		15 years
Furniture, fixtures and other equipment		2-10 years

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.

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 asset carrying amounts are adjusted to fair value.

Income Taxes — Deferred income taxes result from temporary differences in the recognition of expenses for tax and financial reporting purposes and are accounted for in accordance with SFAS No. 109, Accounting for Income Taxes, which requires the asset and liability method of computing deferred income taxes. Under the asset and liability method, deferred taxes are adjusted for tax rate changes as they occur.

F - 13

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 loss in stockholders’ equity.

Stock-Based Compensation — Generally accepted accounting principles encourage, but do not require, companies to record compensation cost for stock-based employee and non-employee director compensation plans at fair value. However, the Company has chosen to continue to account for stock-based compensation to employees and non-employee directors using the intrinsic value method. Accordingly, compensation cost for stock options issued to employees and non-employee directors is 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.

Had compensation costs been recognized based on the fair value at the date of grant for options awarded under the previous stock option plans and the 2003 Plan, the pro forma amounts of the Company’s net income (loss) and net income (loss) per common share would have been as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	Successor Company		Successor Company			Predecessor Company		Successor Company		Successor Company
	2003		2004			Three Months Ended March 31, 2003		Three Months Ended to June 30, 2003		2004
Net income (loss):
As reported	$	22,246	$	(10,013	)	$	731,066	$	22,246	$	(16,483	)
Pro forma		21,561		(10,184	)	$	730,891		21,561		(16,825	)

Net income per common share (loss):
Basic:
As reported		2.26		(1.00	)	$	8.00		2.26		(1.65	)
Pro forma		2.19		(1.02	)	$	7.99		2.19		(1.69	)
Diluted:
As reported		1.62		(1.00	)	$	8.00		1.62		(1.65	)
Pro forma		1.57		(1.02	)	$	7.99		1.57		(1.69	)

For purposes of the pro forma disclosures, the fair value of the options granted in 2003 (see Note 13) was estimated using the minimum value method, as the Company’s new common stock had not traded between the date of emergence and the date of the granting of the options. The assumptions used by the Company were as follows: no dividend yield; no volatility; risk-free interest rate of 3%; and an expected term of seven years. No stock options were granted during the six months ended June 30, 2004. No stock-based compensation cost from stock options is reflected in the accompanying condensed consolidated statements of operations because all the options granted had an exercise price greater than the market value of the underlying common stock on the date of grant.

Fair Value of Financial Instruments — As of June 30, 2004, the Company’s financial instruments include trading investments, receivables, payables and long-term debt. The Company’s trading investments were valued at market closing prices at June 30, 2004. The fair value of these investments is presented in Note 5. The fair values of all other financial instruments, which approximate their carrying value, have been estimated by management using available market information and interest rates as of June 30, 2004.

F - 14

Net Income (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 using the treasury stock method. The calculation of diluted income (loss) per share was the same as the calculation of basic income per share for the three months ended June 30, 2004 and March 31, 2003 and the six months ended June 30, 2004 since the inclusion of potential common stock in the computation would be antidilutive. The computation of net income (loss) per share is as follows:


	Three Months Ended June 30,					Six Months Ended June 30,
	Successor Company		Successor Company			Predecessor Company		Successor Company		Successor Company
	2003		2004			Three Months Ended March 31, 2003		Three Months Ended to June 30, 2003		2004
Net income (loss)	$	22,246	$	(10,013	)	$	731,066	$	22,246	$	(16,483	)
Add back: interest on Series A and B Notes as if converted		3,433							3,433

Adjusted Net Income (loss)	$	25,679	$	(10,013	)	$	731,066	$	25,679	$	(16,483	)

Weighted average number of common shares outstanding used in basic per share calculation		9,850		10,000			91,429		9,850		9,975

Basic net income (loss) per common share	$	2.26	$	(1.00	)	$	8.00	$	2.26	$	(1.65	)

Weighted average number of common shares outstanding used in basic earnings per share calculation		9,850		10,000			91,429		9,850		9,975
Effect of dilutive securities:
Series A and B Notes (convertible)		5,901							5,901
Shares of restricted stock		150							150

Weighted average number of common shares outstanding used in diluted earnings per share calculation		15,901		10,000			91,429		15,901		9,975

Diluted net income per common share	$	1.62	$	(1.00	)	$	8.00	$	1.62	$	(1.65	)

Antidilutive securities not included in diluted earnings per common share computation:
Stock Options		1,676,332		1,676,332					1,676,332		1,676,332

Exercise Price	$	15.00	$	15.00				$	15.00	$	15.00

Warrants		3,257,178		3,257,178					3,257,178		3,257,178

Exercise Price	$	15.00	$	15.00				$	15.00	$	15.00

Series A and B Notes				6,033,000							6,033,000

Conversion Price			$ $	14.39 and 22.06						$ $	14.39 and 22.06

Accumulated Other Comprehensive Loss — Accumulated other comprehensive loss is as follows:


	FOREIGN CURRENCY TRANSLATION			UNREALIZED GAIN ON INVESTMENTS AVAILABLE FOR SALE			TOTAL
Balance at December 31, 2003 (Successor Company)	$	(3,039	)	$	1,732		$	(1,307	)
Change during the period		757			(1,732	)		(975	)

Balance at June 30, 2004 (Successor Company)	$	(2,282	)	$	—		$	(2,282	)

New Accounting Pronouncement — In January 2003, the Financial Accounting Standards Board (“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 condensed 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 new variable interest entities created or acquired after January 31, 2003. During October 2003, the FASB deferred the effective date of FIN 46 until the end of the first interim or annual period ending after December 15, 2003. In addition the FASB issued a revised interpretation of FIN 46 (“FIN 46-R”) in December 2003. The adoption of FIN 46-R during the six months ended June 30, 2004 did not have a material effect on the Company’s financial condition or results of operations.

F - 15

Reclassifications — Certain amounts in the 2003 condensed consolidated financial statements have been reclassified to conform with the 2004 presentation.

5. INVESTMENTS

The Company’s investments consist of the following at December 31, 2003 and June 30, 2004:


	Successor Company
	December 31, 2003		June 30, 2004
Trading investments, at fair value	$	2,474	$	251

Investments in common stock	$	1,873	$	—

Trading investments as of December 31, 2003 and June 30, 2004 consist of approximately $2.5 million and $0.3 million, respectively, in short –term bonds issued by the Venezuelan government.

The Company’s investments in common stock at December 31, 2003 included an ownership interest of less than 5% in the outstanding common stock of Claxson Interactive Group Inc. (“Claxson”), an integrated media company with operations in Latin America. The Company sold its investment in Claxon during the six months ended June 30, 2004 for approximately $ 2.0 million and recorded a gain on sale of approximately $ 1.9 million. This gain is recorded in other income (loss), net in the accompanying condensed consolidated statements of operations.

6. TRADE ACCOUNTS RECEIVABLE

Trade accounts receivable, by operating subsidiaries, at December 31, 2003 and June 30, 2004, are summarized as follows:


	Successor Company
	December 31, 2003			June 30, 2004
IMPSAT Argentina	$	25,465		$	20,544
IMPSAT Brazil		5,804			4,073
IMPSAT Colombia		3,680			3,774
IMPSAT Venezuela		6,692			6,866
All other countries		10,214			10,023

Total		51,855			45,280
Less: allowance for doubtful accounts		(20,642	)		(16,597	)

Trade accounts receivable, net	$	31,213		$	28,683

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 customer financial history is analyzed.

The activity for the allowance for doubtful accounts for the three months ended March 31, 2003, for the nine months ended December 31, 2003 and for the six months ended June 30, 2004 is as follows:


	Predecessor Company			Successor Company			Successor Company
	March 31, 2003			December 31, 2003			June 30, 2004
Beginning balance	$	23,384		$	21,358		$	20,642
Provision for (reversal of allowance for) doubtful accounts		515			2,365			(2,100	)
Write-offs		(1,553	)		(3,238	)		(1,947	)
Effect of exchange rate change		(988	)		157			2

Ending balance	$	21,358		$	20,642		$	16,597

F - 16

7. 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, 2003 and June 30, 2004:


	Successor Company
	December 31, 2003		June 30, 2004
IMPSAT Argentina	$	577	$	484
IMPSAT Brazil		2,633		1,989
IMPSAT Colombia		3,522		1,824
IMPSAT Venezuela		2,794		1,898
All other countries		2,104		5,096

Total	$	11,630	$	11,291

8. PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment at December 31, 2003 and June 30, 2004 consists of:


	Successor Company
	December 31, 2003			June 30, 2004
Land	$	10,109		$	10,109
Building and improvements		33,921			35,662
Operating communications equipment		160,804			171,322
Network infrastructure (including rights of way)		103,828			100,212
IRU investments		19,381			18,567
Furniture, fixtures and other equipment		13,765			14,047

Total		341,808			349,919
Less: accumulated depreciation		(29,389	)		(49,019	)

Total		312,419			300,900
Equipment in transit		2,484			2,060
Construction in process		914			182

Property, plant and equipment, net	$	315,817		$	303,142

The activity in accumulated depreciation for the three months ended March 31, 2003, for the nine months ended December 31, 2003 and for the six months ended June 30, 2004 is as follows:


	Predecessor Company			Successor Company			Successor Company
	March 31, 2003			December 31, 2003			June 30, 2004
Beginning balance	$	465,142		$	—		$	29,389
Depreciation expense		19,216			29,535			20,721
Exchange rate effects		1,889			226			(641	)
Disposals and retirements		(4,845	)		(372	)		(450	)
Application of fresh-start reporting		(481,402	)

Ending balance	$	—		$	29,389		$	49,019

IRU Agreements —The Company has entered into several 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. As described in Note 2, these advance payments were initially recorded as deferred and adjusted in the application of fresh-start accounting in accordance with EITF 01-3.

F - 17

9. LONG TERM DEBT

The Company’s long-term debt at December 31, 2003 and June 30, 2004 is detailed as follows:


	Successor Company
	December 31, 2003			June 30, 2004
Series A 6% Senior Guaranteed Notes due 2011	$	62,773		$	64,656
Series B 6% Senior Guaranteed Notes due 2011		23,792			24,505
Senior Secured Notes 10%, maturing 2009		138,447			142,599
Senior Notes issued by IMPSAT Colombia due 2008 and 2010 (interest rate 13.88%), collateralized by the assignment of customers contracts		16,197			16,669
Term notes, maturing through 2007; collateralized by buildings and equipment, the assignment of customer contracts and investment; denominated in:
U.S. dollars (interest rates 3,27% to 11.68%)		1,278			1,124
Local currency (interest rate 12.85%)		6,839			6,158
Eximbank notes (interest rates 3.34% to 3.88%), maturing semiannually through 2007		3,770			3,275
Vendor financing (3.47% to 11%)		8,149			8,027

Total long-term debt		261,245			267,013
Less: current portion including defaulted indebtedness		(11,851	)		(28,974	)

Long-term debt, net	$	249,394		$	238,039

The Company’s Series A, Series B and Senior Secured Notes shown above were originally issued in conjunction with effecting the Plan described in Note 2. The Series A, Series B and Senior Secured Notes and 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. As discussed in Note 2, the Company is in default on approximately $7.6 million of vendor financing obligations with one vendor. The Series A and Series B Notes were initially convertible into the Company’s stock at a conversion price of $14.39 and $22.06, respectively. The conversion price is reduced with the passage of time. As of June 30, 2004, the Series A and Series B Notes were convertible into approximately 4,874,000 and 1,205,000 shares of common stock, respectively.

10. INCOME TAXES

The composition of the provision for income taxes, all of which is for foreign taxes, for the three months ended March 31, 2003 (Predecessor Company) and the three months ended June 30, 2003 (Successor Company) and the three and six months ended June 30, 2004 is as follows:


	Three Months Ended June 30,						Six Months Ended June 30,
	Successor Company			Successor Company			Predecessor Company			Successor Company			Successor Company
	2003			2004			Three Months Ended March 31, 2003			Three Months Ended June 30, 2003			2004
Current	$	(641	)	$	(182	)	$	(324	)	$	(641	)	$	(725	)
Deferred		(103	)		(1,157	)		(82	)		(103	)		(1,157	)

Total	$	(744	)	$	(1,339	)	$	(406	)	$	(744	)	$	(1,882	)

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.

F - 18

Net Operating Losses Carryforward (NOLs) - For U.S. income tax purposes, the income recognized upon the cancellation of debt upon emergence from bankruptcy is excluded from the Company’s taxable income. The Company is required to reduce its tax attributes to compensate for the exclusion of debt cancellation income. The attribute reduction will occur as of the first day of the tax year following the year of emergence from bankruptcy. In general, the amount of the reduction is one dollar for each dollar excluded from gross income (the reduction to credits is 33¹/3 cents for each dollar excluded). Attribute reduction is generally applied in the following order:

•

Net operating losses and net operating loss carryovers

•

General business credits

•

Minimum tax credits

•

Capital losses and capital loss carryovers

•

Basis of property (depreciable and non-depreciable)

•

Passive activity loss carryovers

•

Foreign tax credit carryovers

In addition, the Company’s ability to utilize its remaining NOLs will be limited as a result of the change in ownership resulting from the bankruptcy restructuring.

The Company recorded a valuation allowance of approximately $207 million 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 term refers to the liabilities incurred prior to the commencement of the Chapter 11 case. These liabilities consisted primarily of amounts outstanding under the Company’s Old Senior Notes and also included accounts payable, accrued interest and other accrued expenses. These amounts represented the Company’s estimate of known or potential claims to be resolved in connection with the Chapter 11 case. These liabilities were restructured in accordance with the Plan, see Note 2.

Liabilities subject to compromise as of March 25, 2003 were as follows:


Senior Notes:
12.125% Senior Guaranteed Notes due 2003	$	125,000
13.75% Senior Notes due 2005		300,000
12.375% Senior Notes due 2008		225,000
Accrued Interest		77,317
Accounts payable		205

Total	$	727,522

Contractual interest expense not accrued on prepetition debt totaled $52.2 million and $72.1 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, and March 25, 2003, the date of the Company’s emergence from bankruptcy, respectively.

Reorganization items — Reorganization items during the three-month period ended March 31, 2003 are comprised of the following:


Professional fees	$	(1,636	)
Gain on extinguishments of debt		728,203
Stock-based compensation		(440	)

Total	$	726,127

F - 19

12. OPERATING SEGMENT INFORMATION

The Company’s operating segment information, by subsidiary, is as follows:


Three months ended June 30, 2003 (Successor Company)	Argentina			Brazil			Colombia			Venezuela		All other countries			Eliminations			Total
Net Revenues
Satellite and Broadband	$	9,404		$	6,162		$	12,064		$	7,480	$	13,269		$	(6,598	)	$	41,781
Internet		1,567			759			1,136			765		3,879			(2,345	)		5,761
Value added services		1,332			901			340			368		1,065			(153	)		3,852
Telephony		2,986			4			41					3,125			(1,562	)		4,595
Sales of equipment		339									30		16						385

Total net revenues	$	15,628		$	7,826		$	13,581		$	8,643	$	21,354		$	(10,658	)	$	56,374

Operating income (loss)	$	1,122		$	(2,654	)	$	2,070		$	2,763	$	4,456					$	7,169

Total assets	$	121,422		$	117,238		$	79,963		$	49,775	$	90,070					$	458,468


Three months ended June 30, 2004 (Successor Company)	Argentina			Brazil			Colombia			Venezuela		All other countries			Eliminations			Total
Net Revenues
Satellite and Broadband	$	8,331		$	5,694		$	12,015		$	7,183	$	11,624		$	(4,842	)	$	40,005
Internet		1,783			911			1,769			600		3,747			(2,094	)		6,716
Value added services		3,739			1,010			556			438		950			(2,861	)		3,832
Telephony		3,246			90			59					2,881			(1,373	)		4,903
Sales of equipment		20			51			2			10		7						90

Total net revenues	$	17,119		$	7,756		$	14,401		$	8,231	$	19,209		$	(11,170	)	$	55,546

Operating income (loss)	$	1,779		$	(1,268	)	$	1,179		$	2,203	$	(3,492	)				$	401

Total assets	$	113,395		$	97,760		$	77,312		$	59,039	$	79,149					$	426,655


Three months ended March 31, 2003 (Predecessor Company)	Argentina			Brazil			Colombia			Venezuela		All other countries			Eliminations			Total
Net Revenues
Satellite and Broadband	$	9,196		$	5,504		$	12,068		$	7,510	$	14,432		$	(7,328	)	$	41,382
Internet		1,585			838			1,147			910		2,810			(1,557	)		5,733
Value added services		1,157			956			225			518		2,541			(616	)		4,781
Telephony		2,701						117			—		2,439			(1,151	)		4,106
Sales of equipment		41			—						29		4			—			74

Total net revenues	$	14,680		$	7,298		$	13,557		$	8,967	$	22,226		$	(10,652	)	$	56,076

Operating income (loss)	$	(3,004	)	$	(2,761	)	$	(2,729	)	$	2,459	$	197					$	(5,838	)

Total assets	$	124,570		$	100,023		$	79,925		$	45,524	$	97,687					$	447,729

Three months ended June 30, 2003 (Successor Company)	Argentina			Brazil			Colombia			Venezuela		All other countries			Eliminations			Total
Net Revenues
Satellite and Broadband	$	9,404		$	6,162		$	12,064		$	7,480	$	13,269		$	(6,598	)	$	41,781
Internet		1,567			759			1,136			765		3,879			(2,345	)		5,761
Value added services		1,331			901			340			368		1,065			(153	)		3,852
Telephony		2,987			4			41			—		3,125			(1,562	)		4,595
Sales of equipment		339			—						30		16			—			385

Total net revenues	$	15,628		$	7,826		$	13,581		$	8,643	$	21,354		$	(10,658	)	$	56,374

Operating income (loss)	$	1,122		$	(2,654	)	$	2,070		$	2,763	$	4,456					$	7,169

Total assets	$	121,422		$	117,238		$	79,963		$	49,775	$	90,070					$	458,468


Six months ended June 30, 2004 (Successor Company)	Argentina			Brazil			Colombia			Venezuela		All other countries			Eliminations			Total
Net Revenues
Satellite and Broadband	$	16,393		$	11,063		$	23,838		$	14,357	$	24,471		$	(10,543	)	$	79,579
Internet		3,319			1,776			3,003			1,197		6,908			(3,503	)		12,700
Value added services		5,390			2,109			1,023			753		1,786			(3,025	)		8,036
Telephony		6,667			103			108			—		6,045			(2,874	)		10,049
Sales of equipment		117			51			36			30		9			—			242

Total net revenues	$	31,886		$	15,102		$	28,008		$	16,337	$	39,219		$	(19,945	)	$	110,606

Operating income (loss)	$	2,568		$	(2,945	)	$	2,933		$	4,708	$	(3,647	)				$	3,617

Total assets	$	113,395		$	97,760		$	77,312		$	59,039	$	79,149					$	426,655

F - 20

13. STOCKHOLDERS’ EQUITY

2003 Stock Incentive Plan – On the Effective Date, in accordance with the Plan, the Company adopted the 2003 Stock Incentive Plan (the “2003 Plan”), which provides for the grant to the Company’s 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”). The total number of shares of common stock for which Awards may be granted pursuant to the 2003 Plan is 3,087,044, subject to certain adjustments reflecting changes in the Company’s capitalization (provided that no more than 200,000 shares of common stock may be issued pursuant to Awards that are not stock options or stock appreciation rights). The 2003 Plan is administered by the Company’s compensation committee. The compensation committee determines, among other things, which of the Company’s 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 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 expiration date of the 2003 Plan is March 25, 2013.

The exercise price of incentive and non-qualified stock options is determined by the compensation committee. In the case of incentive stock options and other options intended to qualify as “performance-based compensation under Section 162(m) of the U.S. Internal Revenue Code (“Section 162(m)”), the excercise price may not be less than the fair market value of the common stock on the date of grant. The term of any 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 the company’s 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 Company’s common stock then owned by the optionee or, subject to certain conditions, the surrender to the Company of an exercisable option to purchase shares of the Company’s common stock under the 2003 Plan. Stock options and stock appreciation rights granted pursuant to the 2003 Plan are generally not transferable, other than by will or the laws of descent and distribution in the event of death.

The Company’s compensation committee has the right at any time and from time to time to amend or modify the 2003 Plan, without the consent of the Company’s stockholders (unless otherwise required by law or regulations, including to prevent awards from failing to qualify as performance-based compensation under Section 162(m)) or grantees of Awards. However, no such action may adversely affect Awards previously granted without the grantee’s consent.

Restricted Stock – On the Effective Date, in accordance with the Plan, the Company granted certain officers 200,000 shares of the Company’s New Common Stock. These shares vest 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 the company on such respective date).

In connection with the restricted stock grant above, the Company recorded approximately $1.3 million in stockholders’ equity as deferred compensation (see Note 2). The deferred compensation will be amortized to expense over the vesting period.

Stock Options – On May 19, 2003, the Company granted stock options for 1,646,332 shares of the Company’s New Common Stock, at an exercise price of $15 per share to certain key employees. These stock options vest in one-quarter increments on the date of grant and on each of the successive first three anniversaries of the date of grant. In addition, on such date, the Company also granted stock options for 30,000 shares to certain directors of the Company at an exercise price of $15 per share. These stock options vested immediately. Any unexercised stock options will expire on May 19, 2011. No options were granted during the six months ended June 30, 2004.

Warrants – On the Effective Date, in accordance with the Plan, the Company issued 3,257,178 eight-year warrants to acquire the Company’s stock at $ 15.00 per share (see Note 2). As of June 30, 2004, all the warrants remain outstanding.

F - 21

14. COMMITMENTS AND CONTINGENCIES

Commitments — The Company leases satellite capacity with average annual rental commitments of approximately $15.6 million through the year 2008 under non cancelable agreements. In addition, the Company has committed to long-term contracts for the purchase of satellite and terrestrial links from third parties for approximately $15.0 million and $14.8 million through 2015 and 2008, respectively. The Company has commitments to purchase communications and data center equipment amounting to approximately $8.0 million at June 30, 2004.

The Company is a guarantor of the Senior Secured Notes issued by its subsidiaries under the Plan and other financing agreements entered by certain of its subsidiaries. At June 30, 2004, the balances outstanding were approximately $142.6 million and $0.4 million respectively (see Note 9).

Employment Agreements – Upon emergence, the Company entered into employment agreements with certain of its senior executives with provide for a three year term (subject to recurrent automatic one year renewals). Under such agreements, the base salary of these executives amounts to approximately $0.8 million per year.

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 Holding Company, certain individuals who were then officers and directors of the Company, and the underwriters to the Holding Company’s initial public offering (IPO). This lawsuit alleges on behalf of a proposed class of all shareholders that the Holding 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 Holding Company receives in connection with the litigation, but otherwise the claims of the plaintiffs against the Holding Company or any of its other assets, have been discharged as part of the Chapter 11 proceedings.

Pursuant to a Court order in August, 2001, the IPO Class Action was consolidated for all pre-trial purposes in In re Initial Public Offering Securities Litigation, 21 MC 92, an intra-district proceeding involving approximately 900 lawsuits relating to the initial public offerings of approximately 310 companies. In July 2002, the Holding Company and the other defendants filed a motion to dismiss, which was denied as to the Holding Company and one individual officer in February 2003. In April 2003, the Holding Company was advised that global settlement discussions between the plaintiffs and the Holding Company’s insurer (on behalf of the Holding Company and the individual defendants) to resolve plaintiffs’ claims against all 310 companies had reached an advanced stage. Among other things, the proposed settlement would result in a broad release of claims against the Holding Company, its officers and directors, and other issuers, and their officers and directors without a direct financial contribution by the Holding Company. Settlement papers seeking preliminary approval of the settlement and certification of the investor class were submitted to the court in June 2004. The settlement is subject to court approval.

Employee Severance Litigation—On December 26, 2003, a lawsuit was filed in an Argentine court against IMPSAT Argentina by the former chairman of the Company’s board of directors, Mr. Enrique M. Pescarmona. This lawsuit alleged that IMPSAT Argentina failed to pay Mr. Pescarmona severance compensation in the amount of $2.9 million which the plaintiff believes is required by Argentine labor law in connection with his termination from the Company upon the effectiveness of the Plan. The Company believes that it has meritorious defenses to the allegations in the complaints and intends to defend the litigation vigorously.

US Municipal Taxes—Pursuant to a certain state provision in the US, charges for telecommunications services that originate or terminate in and are charged to a service address in such state are subject to a discretionary municipal tax. Charges for long distance service ending or originating out of such state are exempt. The Company believes that substantially all the transactions of IMPSAT USA are excluded from the scope of the tax. To date, the state has not notified IMPSAT USA of any tax due under any municipality’s discretionary municipal tax or any state tax on telecommunications services. Accordingly, the Company is unable to determine if they are liable for any municipal taxes under such state provisions.

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 and foreign tax assessment 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.

F - 22

15. GUARANTOR FINANCIAL INFORMATION

The financial information of IMPSAT Argentina, a guarantor subsidiary of the Holding Company’s Series A 6% Senior Guaranteed Notes due 2011 and Series B 6% Senior Guaranteed Notes due 2011, as of December 31, 2003 and as of and for the three and six months ended June 30, 2004 is shown in a separate column in the accompanying consolidating financial information, as follows:

CONSOLIDATING BALANCE SHEET (SUCCESSOR COMPANY)

AS OF DECEMBER 31, 2003

(In thousands of U.S. Dollars)


	Holding Company		IMPSAT Argentina		Non-Guarantor Subsidiaries		Intercompany Eliminations			Consolidated
			(Guarantor)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	43,883	$	1,432	$	16,183	$			$	61,498
Trading investments						2,474					2,474
Trade accounts receivable, net				14,087		17,126					31,213
Other receivables		96,610		17,654		48,414		(151,048	)		11,630
Prepaid expenses		193		432		1,935		(311	)		2,249

Total current assets		140,686		33,605		86,132		(151,359	)		109,064

PROPERTY, PLANT AND EQUIPMENT, Net				74,848		240,969					315,817

NON-CURRENT ASSETS:
Investments in common stock		47,225						(45,352	)		1,873
Other non-current assets				5,578		8,297					13,875

Total non-current assets		47,225		5,578		8,297		(45,352	)		15,748

TOTAL	$	187,911	$	114,031	$	335,398	$	(196,711	)	$	440,629

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable — trade	$	4,048	$	22,344	$	63,343	$	(52,640	)	$	37,095
Current portion of long-term debt				7,712		4,139					11,851
Accrued and other liabilities		53		11,151		33,185		(11,249	)		33,140

Total current liabilities		4,101		41,207		100,667		(63,889	)		82,086
LONG-TERM DEBT, Net		86,565		52,896		109,933					249,394
OTHER LONG-TERM LIABILITIES				7,480		92,438		(88,014	)		11,904

Total liabilities		90,666		101,583		303,038		(151,903	)		343,384
STOCKHOLDERS’ EQUITY		97,245		12,448		32,360		(44,808	)		97,245

TOTAL	$	187,911	$	114,031	$	335,398	$	(196,711	)	$	440,629

F - 23

CONSOLIDATING BALANCE SHEET (SUCCESSOR COMPANY)

AS OF JUNE 30, 2004

(In thousands of U.S. Dollars)


	Holding Company		IMPSAT Argentina		Non-Guarantor Subsidiaries			Intercompany Eliminations			Condensed Consolidated
	Holding Company		IMPSAT Argentina		Non-Guarantor Subsidiaries			Intercompany Eliminations			Condensed Consolidated
			(Guarantor)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	39,621	$	2,037	$	21,607		$	—		$	63,265
Trading investments						251						251
Trade accounts receivable, net				11,672		17,011						28,683
Other receivables		93,745		19,423		52,027			(153,904	)		11,291
Prepaid expenses		428		719		5,203			(2,288	)		4,062

Total current assets		133,794		33,851		96,099			(156,192	)		107,552

PROPERTY, PLANT AND EQUIPMENT, Net				72,842		230,300						303,142

NON-CURRENT ASSETS:
Investments		42,356				(12	)		(42,344	)
Other non-current assets				6,702		9,259						15,961

Total non-current assets		42,356		6,702		9,247			(42,344	)		15,961

TOTAL	$	176,150	$	113,395	$	335,646		$	(198,536	)	$	426,655

LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable — trade	$	6,696	$	19,620	$	62,770		$	(53,907	)	$	35,179
Current portion of long-term debt				13,690		15,284						28,974
Accrued and other liabilities		66		10,880		40,955			(22,314	)		29,587

Total current liabilities		6,762		44,190		119,009			(76,221	)		93,740
LONG-TERM DEBT, Net		89,161		48,402		100,476						238,039
OTHER LONG-TERM LIABILITIES				4,337		90,855			(80,543	)		14,649

Total liabilities		95,923		96,929		310,340			(156,764	)		346,428
STOCKHOLDERS’ EQUITY		80,227		16,466		25,306			(41,772	)		80,227

TOTAL	$	176,150	$	113,395	$	335,646		$	(198,536	)	$	426,655

F - 24

CONSOLIDATING STATEMENT OF OPERATIONS (SUCCESSOR COMPANY)

FOR THE THREE MONTHS ENDED JUNE 30, 2003

(In thousands of U.S. Dollars)


	Holding Company			IMPSAT Argentina (Guarantor)			Non-Guarantor Subsidiaries			Intercompany Eliminations			Condensed Consolidated
NET REVENUES:
Broadband and satellite	$			$	9,404		$	38,975		$	(6,598	)	$	41,781
Internet					1,567			6,539			(2,345	)		5,761
Value added services					1,331			2,674			(153	)		3,852
Telephony					2,987			3,170			(1,562	)		4,595
Sales of equipment					339			46						385

Total net revenues					15,628			51,404			(10,658	)		56,374

COSTS AND EXPENSES:
Direct costs:
Contracted services					1,770			5,905			(3,150	)		4,525
Other direct costs					4,463			3,405						7,868
Leased capacity					5,338			19,273			(7,052	)		17,559
Cost of equipment sold					62			66			(20	)		108

Total direct costs					11,633			28,649			(10,222	)		30,060
Salaries and wages					3,074			8,768						11,842
Selling, general and administrative		986			2,193			4,374			(436	)		7,127
Gain on extinguishment of debt		(4,538	)		(4,255	)								(8,793	)
Depreciation and amortization					1,861			7,108						8,969

Total costs and expenses		(3,552	)		14,506			48,909			(10,658	)		49,205

Operating (loss) income		3,552			1,122			2,495						7,169

OTHER INCOME (EXPENSE):
Interest income		4,900			761			(9,536	)		4,845			970
Interest expense		(1,703	)		(2,108	)		2,375			(4,845	)		(6,281	)
Net gain (loss) on foreign exchange		31			662			20,752						21,445
Equity in income of affiliates		15,155						9,164			(24,329	)
Other income (loss), net		612			(79	)		(836	)					(313	)

Total other (expense) income		18,995			(764	)		21,909			(24,329	)		15,821

(LOSS) INCOME BEFORE INCOME TAXES		22,547			358			24,414			(24,329	)		22,990
PROVISION FOR FOREIGN INCOME TAXES		(301	)					(443	)					(744	)

NET (LOSS) INCOME	$	22,246		$	358		$	23,971		$	(24,329	)	$	22,246

F - 25

CONSOLIDATING STATEMENT OF OPERATIONS (SUCCESSOR COMPANY)

FOR THE THREE MONTHS ENDED JUNE 30, 2004

(In thousands of U.S. Dollars)


	Holding Company			IMPSAT Argentina (Guarantor)			Non-Guarantor Subsidiaries			Intercompany Eliminations			Condensed Consolidated
NET REVENUES:
Broadband and satellite	$			$	8,331		$	36,516		$	(4,842	)	$	40,005
Internet					1,783			7,027			(2,094	)		6,716
Value added services					3,739			2,954			(2,861	)		3,832
Telephony					3,246			3,030			(1,373	)		4,903
Sales of equipment					20			70						90

Total net revenues					17,119			49,597			(11,170	)		55,546

COSTS AND EXPENSES:
Direct costs:
Contracted services					2,026			5,887			(2,848	)		5,065
Other direct costs					1,875			3,886						5,761
Leased capacity					4,636			17,018			(5,709	)		15,945
Cost of equipment sold					2			85			(7	)		80

Total direct costs					8,539			26,876			(8,564	)		26,851
Salaries and wages					3,038			8,735						11,773
Selling, general and administrative		3,444			1,674			3,449			(2,606	)		5,961
Depreciation and amortization					2,089			8,471						10,560

Total costs and expenses		3,444			15,340			47,531			(11,170	)		55,145

Operating (loss) income		(3,444	)		1,779			2,066						401

OTHER INCOME (EXPENSE):
Interest income		1,561			63			(2,808	)		1,480			296
Interest expense		(1,410	)		(1,308	)		(1,074	)		(1,480	)		(5,272	)
Net gain (loss) on foreign exchange		(12	)		(71	)		(5,436	)					(5,519	)
Equity in income of affiliates		(8,468	)					(4,794	)		13,262
Other income (loss), net		1,760			(253	)		(87	)					1,420

Total other (expense) income		(6,569	)		(1,569	)		(14,199	)		13,262			(9,075	)

(LOSS) INCOME BEFORE INCOME TAXES		(10,013	)		210			(12,133	)		13,262			(8,674	)
PROVISION FOR FOREIGN INCOME TAXES								(1,339	)					(1,339	)

NET (LOSS) INCOME	$	(10,013	)	$	210		$	(13,472	)	$	13,262		$	(10,013	)

F - 26

CONSOLIDATING STATEMENT OF OPERATIONS (SUCCESSOR COMPANY)

FOR THE SIX MONTHS ENDED JUNE 30, 2004

(In thousands of U.S. Dollars)


	Holding Company			IMPSAT Argentina (Guarantor)			Non-Guarantor Subsidiaries			Intercompany Eliminations			Condensed Consolidated
NET REVENUES:
Broadband and satellite	$			$	16,393		$	73,729		$	(10,543	)	$	79,579
Internet					3,319			12,884			(3,503	)		12,700
Value added services					5,390			5,671			(3,025	)		8,036
Telephony					6,667			6,256			(2,874	)		10,049
Sales of equipment					117			125						242

Total net revenues					31,886			98,665			(19,945	)		110,606

COSTS AND EXPENSES:
Direct costs:
Contracted services					4,049			11,151			(5,808	)		9,392
Other direct costs					2,488			7,030						9,518
Leased capacity					9,150			34,097			(11,512	)		31,735
Cost of equipment sold					70			114			(7	)		177

Total direct costs					15,757			52,392			(17,327	)		50,822
Salaries and wages		440			5,926			17,614						23,980
Selling, general and administrative		4,125			3,424			6,535			(2,618	)		11,466
Depreciation and amortization					4,211			16,510						20,721

Total costs and expenses		4,565			29,318			93,051			(19,945	)		106,989

Operating (loss) income		(4,565	)		2,568			5,614						3,617

OTHER INCOME (EXPENSE):
Interest income		3,152			75			(5,590	)		2,970			607
Interest expense		(2,702	)		(2,578	)		(1,956	)		(2,970	)		(10,206	)
Net gain (loss) on foreign exchange					(622	)		(9,288	)					(9,910	)
Equity in income of affiliates		(14,213	)					(6,714	)		20,927
Other income (loss), net		1,845			125			(679	)					1,291

Total other (expense) income		(11,918	)		(3,000	)		(24,227	)		20,927			(18,218	)

(LOSS) INCOME BEFORE INCOME TAXES		(16,483	)		(432	)		(18,613	)		20,927			(14,601	)
PROVISION FOR FOREIGN INCOME TAXES								(1,882	)					(1,882	)

NET (LOSS) INCOME	$	(16,483	)	$	(432	)	$	(20,495	)	$	20,927		$	(16,483	)

F - 27

CONSOLIDATING STATEMENT OF CASH FLOWS (SUCCESSOR COMPANY)

FOR THE SIX MONTHS ENDED JUNE 30, 2004

(In thousands of U.S. Dollars)


	Holding Company			IMPSAT Argentina (Guarantor)			Non-Guarantor Subsidiaries			Intercompany Eliminations			Condensed consolidated
Cash flows provided by (used in) operating activities	$	(14,774	)	$	2,003		$	24,323		$	4,136		$	15,688
Cash flows provided by (used in) investing activities		10,454			(2,297	)		(15,668	)		(4,136	)		(11,647	)
Cash flows provided by (used in) financing activities		(700	)		899			(1,873	)					(1,674	)
Effect of exchange rate change on cash and cash equivalents		758						(1,358	)					(600	)

Net increase in cash and cash equivalents		(4,262	)		605			5,424						1,767
Cash and cash equivalents at beginning of the period		43,883			1,432			16,183						61,498

Cash and cash equivalents at end of the period	$	39,621		$	2,037		$	21,607		$	—		$	63,265

CONSOLIDATING STATEMENT OF CASH FLOWS (SUCCESSOR COMPANY)

FOR THE THREE MONTHS ENDED JUNE 30, 2003

(In thousands of U.S. Dollars)


	Holding Company			IMPSAT Argentina (Guarantor)			Non-Guarantor Subsidiaries			Intercompany Eliminations			Condensed consolidated
Cash flows provided by (used in) operating activities	$	5,171		$	(1,191	)	$	(5,617	)	$	7,649		$	6,006
Cash flows provided by (used in) investing activities		21,947			(1,016	)		12,673			(7,649	)		25,955
Cash flows provided by (used in) financing activities					(1,366	)		(472	)					(1,838	)
Effect of exchange rate change on cash and cash equivalents		(4,476	)					2,549						(1,927	)

Net increase in cash and cash equivalents		22,642			(3,579	)		9,133						28,196
Cash and cash equivalents at beginning of the period		5,059			8,067			22,439						35,565

Cash and cash equivalents at end of the period	$	27,701		$	4,488		$	31,572		$	—		$	63,761

* * * * * *

F - 28

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Reorganization

As discussed in our 2003 Annual Report on Form 10-K, which we filed with the Securities and Exchange Commission (the “SEC”) on March 30, 2004, (the “2003 Form 10-K”), we filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code with the United States District Court for the Southern District of New York on June 11, 2002 (the “Bankruptcy Case”). We subsequently filed a plan of reorganization (the “Plan”) in the Bankruptcy Case, which Plan was confirmed in the Bankruptcy Case and became effective on March 25, 2003 (the “Effective Date”), at which time we emerged from bankruptcy. Pursuant to the Plan, we substantially reduced our outstanding debt and annual interest expense and increased our liquidity. At December 31, 2002, prior to the effectiveness of the Plan, our long-term debt, including current maturities and estimated liabilities subject to the Chapter 11 proceeding, aggregated approximately $1.09 billion. Also at December 31, 2002, our total indebtedness (including unpaid accrued interest through the petition date related to the Plan) aggregated $1.04 billion and our cash, cash equivalents and trading investments totaled $55.6 million. As of March 31, 2003, upon the effectiveness of the Plan, our total indebtedness was reduced to approximately $267.5 million, and our cash, cash equivalents and trading investments totaled approximately $61.9 million.

Upon our emergence from bankruptcy on March 25, 2003, we adopted “fresh start” reporting as required by 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 required 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 condensed consolidated financial statements is discussed in detail in Note 2 to our unaudited condensed 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 are not be comparable to the consolidated financial statements in 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 described below under “Currency Risks,” 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 peso-denominated contracts in Argentina are typically 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 Argentina, the fees stipulated in the majority of our contracts with customers are denominated in U.S. dollar equivalents. Services (other than installation fees) are billed on a monthly, predetermined basis, which coincide with the rendering of the services. We report our revenues net of deductions for sales taxes.

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. 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:

•

direct costs

•

salaries and wages

•

selling, general and administrative expenses

•

depreciation and amortization

Our direct costs include payments for leased satellite transponder, fiber optic and other terrestrial capacity. Our pan-Latin American broadband fiber optic network (the “Broadband Network”), which we began to commercialize in the fourth quarter of 2000, has enabled us to decrease our payments for leased satellite capacity as we have shifted transmission from leased satellite facilities to our Broadband Network after the satellite contracts expire. Other principal items composing direct costs are contracted services costs and allowance for doubtful accounts. 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, micro-stations and other equipment from customer premises. Direct costs also include licenses and other fees and sales commissions paid to third-party sales representatives and to our salaried sales force.

Our selling, general and administrative expenses consist principally of:

•

publicity and promotion costs

•

fees and other remuneration

•

travel and entertainment

•

Rent

•

plant services, insurance and corporate telecommunication and energy expenses

Currency Risks

Except in Argentina and Brazil, the majority of our contracts with customers 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 the second quarter of 2004. 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. Under applicable law, 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, as a result of foreign currency exchange and transfer controls established by the Venezuelan government in February 2003, our contracts with customers in Venezuela are currently being paid in local currency at the fixed exchange rate established by the Venezuelan government between the local currency and the U.S. dollar. As the exchange control regulations do not permit us to exchange our cash and cash equivalents in local currency into U.S. dollars without specific governmental authorizations, the Venezuelan exchange control regulations have adversely affected our exchange rate risks for all dollar-denominated liabilities owing by our Venezuelan operating subsidiary and our ability to receive dividends or other distributions from that subsidiary. We cannot predict the duration or other adverse effects that the current Venezuelan exchange controls may have on our operating results and financial condition.

Argentina

In early January 2002, the Argentine government 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 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. At June 30, 2003, the exchange rate was 2.82 pesos to the U.S. Dollar, and at June 30, 2004, the exchange rate was 2.95 pesos to the U.S. dollar. Any 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.

Brazil

At June 30, 2003, the real traded at a rate of R$2.87 = $1.00, and it depreciated to R$3.11 = $1.00 at June 30, 2004. The daily average exchange rate for the real during the second quarter of 2004 was R$3.06= $1.00, as compared to R$2.99 = $1.00 during the second quarter of 2003. Accordingly, our revenues in Brazil during the second quarter of 2004 were adversely affected by the depreciation of the real as compared to the corresponding quarter in 2003. Such depreciation, however, has resulted in decreases in our real-denominated costs and expenses as compared to the corresponding quarter in 2003.

Venezuela

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 also severely limit our ability to convert local currency into U.S. dollars and transfer funds out of Venezuela. At December 31, 2002, the bolivar traded at a rate of Bs.1,392.00 = $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.1,600.00 = $1.00 as part of the new currency controls. The Venezuelan government further devalued the bolivar to Bs.1,920.00 = $1.00 on February 9, 2004. As such, on June 30, 2003, the bolivar traded at a rate of Bs.1,600.00 = $1.00, and on June 30, 2004, the bolivar traded at a rate of Bs.1,920.00 = $1.00.

Termination of Mexican Operations

During the first quarter of 2003, we determined to close our operations in Mexico, which we initially established in 1994. We entered into agreements with various parties to sell our real estate and other real and personal property, including our permits and licenses and our contracts with customers. These transactions closed during 2003. Our results for the six months ended June 30, 2003 accordingly include revenues and expenses related to our Mexican operations.

Off-Balance Sheet Arrangements

An off-balance sheet arrangement is any transaction, agreement or other contractual arrangement involving an unconsolidated entity under which a company has (1) made guarantees, (2) a retained or a contingent interest in transferred assets, (3) an obligation under derivative instruments classified as equity, or (4) any obligation arising out of a material variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to the company, or that engages in leasing, hedging or research and development arrangements with the company. We have no arrangements of the types described in any of these four categories that we believe may have a material current or future effect on our financial condition, liquidity or results of operations.

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. 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 condensed 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 some of these agreements entered into prior to the filing of our Bankruptcy Case, we received fixed advance payments for the IRUs, which amounts received in advance were recorded as deferred revenue. See Note 2 “Financial Restructuring, Petition For Relief Under Chapter 11 And Emergence – Allocation of Reorganization Value” for a discussion of the treatment of deferred revenues not yet earned as of the Effective Date. In the event that we enter into any such IRU agreements in the future, we expect that we will defer any fixed advanced payments for IRUs and will recognize the deferred revenues from such IRUs ratably over the life of the IRUs.

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.

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 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 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.

Basis for Translation

We maintain our consolidated accounts in U.S. dollars. The accounts of our subsidiaries are maintained in the currencies of the respective countries. 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 condensed consolidated statements 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 exchange rate method. The adjustments generated by translation using the current exchange rate method are accumulated in an equity account entitled “Accumulated other comprehensive income (loss)” within our condensed consolidated balance sheets.

Tax and Legal Contingencies

We are involved in foreign tax and legal proceedings, claims and litigation arising in the ordinary course of business. We periodically assess our liabilities and contingencies in connection with these matters based upon the latest information available. For those matters where it is probable that we have incurred a loss and the loss or range of loss can be reasonably estimated, we have recorded reserves

in our condensed consolidated financial statements. In other instances, because of the uncertainties related to both the probable outcome and amount or range of loss, we are unable to make a reasonable estimate of any liability. As additional information becomes available, we adjust our assessment and estimates of such liabilities accordingly.

In addition, we may be audited by foreign and state (as it relates to our U.S. operations) tax authorities. We provide reserves for potential exposures when we consider it probable that a taxing authority may take a sustainable position on a matter contrary to our position. We evaluate these reserves, including interest thereon, on a quarterly basis to ensure that they have been appropriately adjusted for events that may impact our ultimate payment for such exposures.

Financial Reporting by Entities in Reorganization under the Bankruptcy Code

Our condensed consolidated financial statements have been prepared in accordance with SOP 90-7. 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 condensed consolidated financial statements for periods including and subsequent to the 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 were reflected separately during the first quarter of 2003 in the consolidated statement of operations as reorganization items.

Upon consummation of the Plan, we applied “Fresh-Start” reporting in accordance with GAAP and the requirements of SOP 90-7. Upon the Effective Date, a new capital structure was established and assets and liabilities, other than deferred taxes, were stated at their relative fair values. 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 other temporary differences are “more likely than not” to be realized.

Changes in Policies

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 the second quarter of 2004, nor have we made any material changes in any of the critical accounting estimates underlying these accounting policies during 2004.

Period Comparisons

As discussed above, under SOP 90-7 fresh starting reporting, our condensed consolidated financial statements after the Effective Date are those of a new reporting entity (the Successor Company) and certain costs are not comparable to those of our company during pre-Effective Date periods (the Predecessor Company). For purposes of this discussion, where the six months ended June 30, 2004 are compared to the six months ended June 30, 2003, the latter combines the three-month period ended June 30, 2003 (for the Successor Company) with the three-month period ended March 31, 2003 (for the Predecessor Company). Differences between periods due to fresh-start accounting adjustments are explained when necessary. The lack of comparability in the accompanying unaudited condensed consolidated financial statements is most apparent in our capital costs (interest expense and depreciation and amortization), as well as long-term indebtedness and reorganization items.

Results of Operations

The following table summarizes our results of operations:


	Three Months Ended June 30,										Six Months Ended June 30,
	2003					2004					Combined Predecessor and Successor Companies 2003					Successor Company 2004
	(in thousands and as a percentage of consolidated revenues)
Net revenues:
Net revenues from services:
Broadband and satellite	$	41,781		74.1	%	$	40,005		72.0	%	$	83,163		74.0	%	$	79,579		71.9	%

Internet		5,761		10.2			6,716		12.1			11,494		10.2			12,700		11.5
Value added services		3,852		6.8			3,832		6.9			8,633		7.7			8,036		7.3
Telephony		4,595		8.2			4,903		8.8			8,701		7.7			10,049		9.1

Total net revenues from services		55,989		99.3			55,456		99.8			111,991		99.6			110,364		99.8
Sales of equipment		385		0.7			90		0.2			459		0.4			242		0.2

Total net revenues		56,374		100.0			55,546		100.0			112,450		100.0			110,606		100.0

Direct costs:
Contracted services		4,525		8.0			5,065		9.1			8,650		7.7			9,392		8.5
Other direct costs		7,868		14.0			5,761		10.4			12,564		11.2			9,518		8.6
Leased capacity		17,559		31.1			15,945		28.7			34,966		31.1			31,735		28.7
Cost of equipment sold		108		0.2			80		0.1			156		0.1			177		0.2

Total direct costs		30,060		53.3			26,851		48.3			56,336		50.1			50,822		46.0
Salaries and wages		11,842		21.0			11,773		21.2			22,569		20.1			23,980		21.7
Selling, general and administrative expenses		7,127		12.6			5,961		10.7			12,680		11.3			11,466		10.4
Gain on extinguishment of debt		(8,793	)	(15.6	)		0		0			(8,793	)	(7.8	)		0		0
Depreciation and amortization		8,969		15.9			10,560		19.0			28,327		25.2			20,721		18.7
Interest expense, net		(5,311	)	(9.4	)		(4,976	)	(9.0	)		(7,020	)	(6.2	)		(9,599	)	(8.7	)
Net gain (loss) on foreign exchange		21,445		38.0			(5,519	)	(9.9	)		31,414		27.9			(9,910	)	(9.0	)
Reorganization items		0		—			0		—			726,127		645.7			0		0
Other (loss) income, net		(313	)	(0.6	)		1,420		2.6			2,610		2.3			1,291		1.2
Provision for foreign income taxes		(744	)	1.3			(1,339	)	2.4			(1,150	)	1.0			(1,882	)	(1.7	)

Net income (loss)	$	22,246		39.5	%	$	(10,013	)	18.0	%	$	753,312		669.9	%	$	(16,483	)	(14.9	)%

Three and Six Months Ended June 30, 2004 Compared to Three and Six Months Ended June 30, 2003

Revenues. Our total net revenues for the three and six months ended June 30, 2004 equaled $55.5 million and $110.6 million. This compares to total net revenues of $56.4 million and $112.5 million for the corresponding periods in 2003. Net revenues are composed of net revenues from services and sales of equipment.

Our net revenues from services for the three and six months ended June 30, 2004 totaled $55.5 million and $110.4 million, a decrease of $0.6 million (or 1.0%) and $1.6 million (or 1.5%) compared to the corresponding periods in 2003. Our net revenues from services during the second quarter of 2004 included net revenues from:

•

data and value added services, which include satellite and broadband data transmission services, data center services, and other value-added services

•

internet, which is composed of our Internet backbone access, managed security and managed modem services, and

•

telephony, including local, national and international long-distance services.

The following table shows our revenues from services by business lines (after elimination of intercompany transactions) for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
	2003		2004		% change⁽¹⁾		2003		2004		% change⁽¹⁾
	(dollar amounts in thousands)
Broadband and satellite	$	41,781	$	40,005	(4.3	)%	$	83,163	$	79,579	(4.3	)%
Internet		5,761		6,716	16.6			11,494		12,700	10.5
Value added services⁽²⁾		3,852		3,832	(0.5	)		8,633		8,036	(6.9	)
Telephony		4,595		4,903	6.7			8,701		10,049	15.5

Total net revenues from services	$	55,989	$	55,456	(1.0	)	$	111,991	$	110,364	(1.5	)

(1)	Percentage increase (decrease) in relevant period 2004 compared to corresponding period in 2003.

(2)	Includes data center services and systems integration and other information technology services.

Our lower total net revenues from services in the second quarter of 2004, as compared to the corresponding period in 2003, were principally due to lower revenues from broadband and satellite services, which were only partially offset by increases in our revenues from Internet and telephony services. Changes in our revenues during the second quarter of 2004 as compared to the second quarter of 2003 related to the following:

•

Our revenues from broadband and satellite services decreased during the second quarter of 2004 in comparison to the second quarter of 2003 primarily due to lower satellite-based services volume and pricing pressures, offset in part by an increase in terrestrial-based services.

Our revenues from Internet services increased during the second quarter and first half of 2004 as compared to the same periods in 2003 was due to a short-term contract entered into by IMPSAT Colombia with a customer in Colombia, which expired in May 2004.

•

Our telephony revenues increased during the second quarter of 2004 as compared to the same quarter in 2003 due to our increased delivery during the second quarter of 2004 of switched voice services to corporate customers in Argentina, increased traffic at higher rates and international call terminations to end-user customers in Peru, partially offset by the relative depreciation of the Argentine peso.

Our net revenues discussed above were negatively affected in U.S. dollar terms by the depreciation of the Argentine peso and the Brazilian real to the U.S. dollar during the second quarter of 2004 as compared to the same quarter in the prior year. In U.S. dollar terms, our revenues in Argentina and Brazil, the majority of which are denominated in local currencies and represent a significant proportion of our consolidated net revenues, generally decrease when the currencies in those countries depreciate against the U.S. dollar, and increase when those currencies appreciate. The following table shows U.S. dollar exchange rates for the currencies of these countries at the dates indicated:


Currency	December 31, 2002	March 31, 2003	June 30, 2003	December 31, 2003	March 31, 2004	June 30, 2004
	(exchange rate per U.S.$1.00)
Argentina Peso	3.40	3.00	2.82	2.95	2.88	2.95
Brazil Real	3.53	3.46	2.87	2.89	2.94	3.11

We had 2,993 customers as of June 30, 2004, compared to 2,799 customers at December 31, 2003 and 2,706 customers at June 30, 2003. The following table shows the evolution of our customer base as of the dates indicated:


	Number of Customers as of:
	June 30, 2003	December 31, 2003	June 30, 2004	% Change⁽¹⁾		% Change⁽²⁾
IMPSAT Argentina	918	997	1,088	18.5		9.1
IMPSAT Colombia	704	723	747	6.1		3.3
IMPSAT Brazil	386	390	400	3.6		2.6
IMPSAT Venezuela	209	172	170	(18.7	)	(1.2	)
IMPSAT Ecuador	218	229	241	10.6		5.2
IMPSAT Chile	102	108	120	17.6		11.1
IMPSAT Peru	88	106	147	67.0		38.7
IMPSAT USA	72	74	69	(4.2	)	(6.8	)
Other	9	—	11	22.2		—

Total	2,706	2,799	2,993	10.6		6.9

(1)

Increase (decrease) as of end of second quarter of 2004 compared to end of second quarter of 2003.

(2)

Increase (decrease) as of end of second quarter of 2004 compared to end of 2003.

We gained a net total of 194 customers during the first half of 2004. Of this increase, we had a net gain of 91 customers in Argentina. During the second quarter of 2004, we do not believe that we lost any major customers to our competitors.

In addition to net revenues from services, our total net revenues for the second quarter and first half of 2004 included revenues from sales of equipment, which totaled $0.1 million and $0.2 million, respectively. This compares to $0.4 million and $0.5 million for the same periods in 2003. Equipment sales are ancillary to our core business and are generally engaged in by our company only on an opportunistic basis or in connection with the implementation of new contracts where the customer wishes to acquire needed telecommunications equipment rather than have our company purchase the equipment.

The following table shows by operating subsidiary our revenues from services and total revenues (in each case, including intercompany transactions) for the periods indicated:


	Three Months Ended June 30,						Six Months Ended June 30,
	2003		2004		% change⁽¹⁾		2003		2004		% change⁽¹⁾
	(dollar amounts in thousands)
IMPSAT Argentina
Services	$	15,289	$	17,099	11.8	%	$	29,928	$	31,769	6.2	%
Sale of equipment		339		20	(94.1	)		380		117	(69.2	)

Total	$	15,628	$	17,119	9.5		$	30,308	$	31,886	5.2

IMPSAT Colombia
Services	$	13,581	$	14,399	6.0		$	27,138	$	27,972	3.1
Sale of equipment		0		2	—			0		36	—

Total	$	13,581	$	14,401	6.0		$	27,138	$	28,008	3.2

IMPSAT Brazil
Services	$	7,826	$	7,705	(1.5	)	$	15,124	$	15,051	(0.5	)
Sale of equipment		0		51	—			0		51	—

Total	$	7,826	$	7,756	(0.9	)	$	15,124	$	15,102	(0.1	)

IMPSAT Venezuela
Services	$	8,613	$	8,221	(4.6	)	$	17,551	$	16,307	(7.1	)
Sale of equipment		30		10	(66.7	)		59		30	(49.2	)

Total	$	8,643	$	8,231	(4.8	)	$	17,610	$	16,337	(7.2	)


	Three Months Ended June 30,						Six Months Ended June 30,
	2003		2004		% change⁽¹⁾		2003		2004		% change⁽¹⁾
	(dollar amounts in thousands)
IMPSAT Ecuador
Services	$	3,799	$	4,287	12.8		$	7,726	$	8,552	10.7
Sale of equipment		0		8	—			0		9	—

Total	$	3,799	$	4,295	13.1		$	7,726	$	8,561	10.8

IMPSAT Chile
Services	$	2,279	$	1,874	(17.8	)	$	4,566	$	3,812	(16.5	)

Total	$	2,279	$	1,874	(17.8	)	$	4,566	$	3,812	(16.5	)

IMPSAT Peru
Services	$	3,506	$	3,345	(4.6	)	$	6,716	$	6,854	2.1

Total	$	3,506	$	3,345	(4.6	)	$	6,716	$	6,854	2.1

IMPSAT USA
Services	$	7,444	$	6,646	(10.7	)	$	15,825	$	13,906	(12.1	)
Sale of equipment		16		0	(100.0	)		20		0	(100.0	)

Total	$	7,460	$	6,646	(10.9	)	$	15,845	$	13,906	(12.2	)

International Satellite Capacity Holding, Ltd.⁽²⁾
Services	$	3,634	$	2,801	(22.9	)	$	7,294	$	5,620	(23.0	)

Total	$	3,634	$	2,801	(22.9	)	$	7,294	$	5,620	(23.0	)

Other
Services	$	676	$	249	(63.2	)	$	1,433	$	466	(67.5	)

Total	$	676	$	249	(63.2	)	$	1,433	$	466	(67.5	)

(1)

Percentage increase (decrease) in relevant period in 2004 compared to corresponding period in 2003.

(2)

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.

Argentina, which is emerging from the economic recession that has affected it since 1999, is our largest market in terms of number of customers and in revenues. Although Argentina’s economy recovered during 2003 and the first half of 2004, the private and public sector continue to experience a lack of access to international capital markets and a lack of international investor confidence as a result of the pendency of the Argentine Government’s negotiations with its foreign creditors over the restructuring of Argentina’s sovereign debt, which the Argentine Government defaulted on in 2001. The Argentine peso remained steady during the first half of 2004 (2.95 pesos = $1.00 at June 30, 2004, the same as at December 31, 2003), although it devalued as compared to June 30, 2003 (2.82 pesos = $1.00 at June 30, 2003). Despite the depreciation of the Argentine peso in comparison to the first half of 2003, our total net revenues from services at IMPSAT Argentina for the three and six months ended June 30, 2004 increased, totaling $17.1 million and $31.8 million, respectively, an increase of $1.8 million (or 11.8%) and of $1.8 million (or 6.2%) compared to the corresponding periods in 2003. This increase was due to increased revenues from value added services and telephony services, offset by a decrease in broadband and satellite services. Nonetheless, the Argentine economy continues to face challenges, and IMPSAT Argentina’s financial condition and results of operations will continue to be impacted by changes in Argentine political and economic policies.

IMPSAT Brazil’s revenues from services for the three and six months ended June 30, 2004 totaled $7.7 million and $15.1 million, a decrease of $0.1 million (or 1.5%) and $0.1 million (or 0.5%) compared to the corresponding periods in 2003. At June 30, 2003, the real traded at a rate of R$2.87 = $1.00, and it depreciated to R$3.11 = $1.00 at June 30, 2004. Future or repeated devaluations of the real and the decline in growth in the Brazilian economy could have an adverse effect on IMPSAT Brazil’s and our company’s overall financial condition and results of operations. In local currency terms, revenues at IMPSAT Brazil for the three and six months ended June 30, 2004 increased by 7.1% and decreased 2.8% compared to the corresponding periods in 2003. We anticipate revenue growth in local currency terms in Brazil during the remainder of 2004.

IMPSAT Colombia recorded revenues from services of $14.4 million and $28.0 million during the three and six months ended June 30, 2004, compared to $13.6 million and $27.1 million for the same periods in 2003.

Revenues at IMPSAT Venezuela equaled $8.2 million and $16.3 million for the second quarter and first half of 2004, compared to $8.6 million and $17.6 million for the same periods in 2003. Venezuela has experienced and continues to experience political and economic uncertainty following the attempted military coup staged against President Hugo Chavez during the first weeks of April 2002 and the labor strikes that commenced in December 2002 and ended two months later. A recall referendum is scheduled for August 15, 2004 to revoke the remainder of President Chavez’ term. The results of the recall referendum could have significant effects on the Venezuelan political and economic situation.

In response to the political and economic turmoil affecting Venezuela, the Venezuelan 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. In February 2004, Venezuela’s government further devalued its currency exchange rate to Bs.1,920.00 = $1.00. We are currently receiving payment for the majority of our U.S. dollar denominated contracts in Venezuela in bolivars at the official fixed exchange rate. The foreign exchange controls limit our ability to convert local currency into U.S. dollars and transfer funds out of Venezuela. 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.

Direct Costs. Our direct costs for the second quarter and first half of 2004 totaled $26.9 million and $50.8 million, a decrease of $3.2 million (or 10.7%) and a decrease of $5.5 million (or 9.8%) compared to the same periods in 2003. Of our total direct costs for the three and six months ended June 30, 2004, $8.5 million and $15.8 million related to the operations of IMPSAT Argentina, compared to $11.6 million and $21.1 million for the corresponding periods in 2003. Direct costs for IMPSAT Brazil totaled $3.7 million and $7.3 million for the three and six months ended June 30, 2004, compared to $4.5 million and $8.3 million for the same periods in 2003. 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 the three and six months ended June 30, 2004, our contracted services costs totaled $5.1 million and $9.4 million, an increase of $0.6 million (or 11.9%) and $0.7 million (or 8.6%) compared to the same periods in 2003. Of these amounts, maintenance costs for our telecommunications network infrastructure, including the Broadband Network, totaled $3.4 million and $6.4 million for the second quarter and first half of 2004 compared to $3.4 million and $6.6 million for the same periods in 2003. Installation costs totaled $1.7 million and $3.0 million for the second quarter and first half of 2004 compared to $1.1 million and $2.1 million during the corresponding periods in 2003. Our installation costs increased because we had more new customers in the first half of 2004 compared to the same period in 2003. Of our total contracted services costs for the second quarter and first half of 2004, $2.0 million and $4.0 million related to the operations of IMPSAT Argentina, compared to $1.8 million and $3.2 million at IMPSAT Argentina for the same periods in 2003. We anticipate that our contracted services costs will increase slightly during the second half of 2004 due to scheduled maintenance and an increase in new installations.

(2) Other Direct Costs. Other direct costs principally include licenses and other fees; sales commissions paid to our salaried sales staff and to third-party sales representatives; and our provision for doubtful accounts. We recorded other direct costs of $5.8 million and $9.5 million during the second quarter and first half of 2004, a decrease of $2.1 million (or 26.8%) and $3.0 million (or 24.2%) compared to the same periods in 2003.

Sales commissions paid to our salaried sales force and third-party sales representatives for the three and six months ended June 30, 2004 totaled $2.0 million and $3.9 million, compared to $1.6 million and $2.8 million for the corresponding periods in 2003. Of these amounts, in the respective periods in 2004, $1.0 million and $2.0 million related to IMPSAT Argentina.

We recorded a net reversal of a provision for doubtful accounts of $0.2 million and $2.1 million for the three and six months ended June 30, 2004, compared to provisions for doubtful accounts of $2.1 million and $2.6 million for the same periods in 2003. The reversal is due principally to the settlement of our disputes with Global Crossing. As a result of the settlement, Global Crossing made a payment on March 31, 2004, principally to our operating subsidiaries in Argentina and Brazil, of $1.4 million, which was applied against outstanding receivables that had been disputed by Global Crossing and for which we had reserved 100% of contractual revenues.

(3) Leased Capacity. Our leased capacity costs for the three and six months ended June 30, 2004 totaled $15.9 million and $31.7 million, a decrease of $1.6 million (or 9.2%) and $3.2 million (or 9.2%) from the corresponding periods in 2003. This decrease also reflects an overall reduction in costs for interconnection and telephony termination costs and frequency rights (which are components of our leased capacity costs), as described below.

Our leased satellite capacity costs for the three and six months ended June 30, 2004 totaled $5.9 million and $11.8 million, a decrease of $1.2 million (or 17.5%) and $2.5 million (or 17.7%) from the corresponding periods in 2003. In Argentina, our leased satellite capacity costs totaled $1.9 million and $3.6 million for the three and six months ended June 30, 2004, as compared to $1.9 million and $4.0 million for the same periods in 2003. Our leased satellite capacity costs for IMPSAT Brazil totaled $0.1 million and $1.4 million for the three and six months ended June 30, 2004, as compared to $1.0 million and $1.8 million for the same periods in 2003.

The reduction in our leased satellite capacity costs was principally due to our favorable renegotiation of, and settlement of disputes relating to, certain of our satellite capacity agreements. We had approximately 715 MHz of leased satellite capacity at June 30, 2004 and 753 MHz at June 30, 2003.

Our costs for leased terrestrial capacity on third-party networks totaled $6.9 million and $13.8 million for the second quarter and first half of 2004, an increase of $0.01 million (or 0.9%) and $0.2 million (or 1.7%) compared to the corresponding periods in 2003. These costs were incurred principally in Colombia, followed by Venezuela. 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.

We also incur costs for interconnection and telephony termination (“I&T”) and frequency rights. Our I&T and frequency rights costs totaled $3.1 million and $6.1 million during the second quarter and first half of 2004. These totals are composed of $2.7 million and $4.9 million of I&T costs. This compares to $3.6 million and $7.0 million of I&T and frequency rights costs during the second quarter and first half of 2003 (composed of $2.6 million and $5.2 million of I&T costs). Our I&T and frequency rights costs decreased during the second quarter of 2004 compared to such costs for the first quarter of 2004 principally because of the depreciation of the Argentine peso (which resulted in an decrease, in U.S. dollar terms, of the amounts paid to interconnect our telephony business in Argentina) and a higher volume of telephony business.

Our I&T and frequency rights costs in Argentina totaled $1.3 million and $2.6 million during the three and six months ended June 30, 2004. These totals are composed of $1.4 million and $2.5 million of I&T costs. This compares to $1.7 million and $3.3 million of I&T and frequency rights costs for the three and six months ended June 30, 2003 (composed of $1.6 million and $3.1 million of I&T costs).

(4) Cost of Equipment Sold. In the three and six months ended June 30, 2004, we incurred costs of equipment sold of $0.1 million and $0.2 million, compared to $0.1 million and $0.2 million for the same periods in 2003.

Salaries and Wages. Salaries and wages for the three and six months ended June 30, 2004 totaled $11.8 million and $24.0 million, a decrease of $0.01 million (or 0.6%) and an increase $1.4 million (or 6.3%), from the same periods in 2003. Our salaries and wages expenses for the first half of 2004 increased compared to the same period in 2003 due to the recognition at the end of the first quarter of 2004 of $0.4 million in salaries and wages expenses related to the vesting of certain shares of restricted common stock granted to senior management in connection with the Plan upon its vesting at the end of the first quarter of 2004. Our aggregate number of employees totaled 1,259 at June 30, 2004, compared to 1,250 at June 30, 2003. Management expects to continue to monitor the size of its total workforce and to make appropriate adjustments if required by financial and competitive circumstances.

IMPSAT Argentina incurred salaries and wages for the three and six months ended June 30, 2004, of $3.0 million and $5.9 million, a decrease of $0.1 million (or 1.2%) and an increase $0.3 million (or 5.3%) compared to the same periods in 2003. IMPSAT Argentina had 456 employees as of June 30, 2004 as compared to 464 employees as of June 30, 2003.

IMPSAT Brazil incurred salaries and wages for the three and six months ended June 30, 2004 of $2.0 million and $4.1 million, a decrease of $0.4 million (or 14.5%) and $0.2 million (or 4.8%) over the same periods in 2003. IMPSAT Brazil decreased its number of employees to 192 persons at June 30, 2004, compared to 211 persons at June 30, 2003. In addition to our reduced employee headcount in that country, the decrease in salaries and wages at IMPSAT Brazil during the first half of 2004 as compared to the same period in 2003 is in part related to the period over period relative 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:

•

publicity and promotion costs

•

professional fees and other remuneration

•

travel and entertainment

•

rent

•

plant services, insurance, telephone and energy expenses

We incurred SG&A expenses of $6.0 million and $11.5 million for the three and six months ended June 30, 2004, a decrease of $1.2 million (or 16.4%) and $1.2 million (or 9.6%) compared to the same periods in 2003. Our SG&A expenses for the second quarter of 2003 included legal and professional fees relating to our emergence from Chapter 11 on March 25, 2003. Legal and professional fees declined by $1.2 million for the second quarter of 2004 as compared to the second quarter of 2003. In addition, the effects of the relative currency devaluations of local currencies against the U.S. dollar during 2003 in our countries of operation and overall cost control measures undertaken by management resulted in a decrease in SG&A expenses as compared to the second quarter of 2003. SG&A expenses at IMPSAT Argentina for the three and six months ended June 30, 2004 totaled $1.7 million and $3.4 million, a decrease of $0.5 million (or 23.7%) and $0.6 million (or 14.3%) compared to corresponding periods in 2003.

Gain on Extinguishment of Debt. We recorded gains on extinguishment of debt of $8.8 million during the second quarter and first half of 2003 in connection with the restructuring and settlement of certain claims of creditors of certain of our subsidiaries not resolved as part of the Chapter 11 proceeding. We recorded no gains on extinguishment of debt for the second quarter and first half of 2004.

Depreciation and Amortization. Our depreciation and amortization expenses for the three and six months ended June 30, 2004 totaled $10.6 million and $20.7 million. This represents an increase of $1.6 million (or 17.7%) and a decrease $7.6 million (or 26.9%) compared to our depreciation and amortization for the corresponding periods in 2003.

Interest Expense, Net. Our net interest expense for the three months ended June 30, 2004 totaled $5.0 million, consisting of interest expense of $5.3 million and interest income of $0.3 million. Our net interest expense for the six months ended June 30, 2004 totaled $9.6 million, consisting of interest expense of $10.2 million and interest income of $0.6 million. Net interest expense for the second quarter and first half of 2003 totaled $5.3 million and $7.0 million, respectively. Our interest expense for the first half of 2004 increased principally because of “payment in kind” accretion on our Senior Notes and certain indebtedness of our subsidiaries, which, of our total interest expense for the three and six months ended June 30, 2004, represented $3.5 million and $6.8 million, respectively. Our total indebtedness as of June 30, 2004 was $267.0 million, as compared to $260.3 million as of June 30, 2003. The increase in our total indebtedness is comprised of the accretion of “payment in kind” interest of $13.3 million, offset by amortizations of $6.6 million.

Net Gain (Loss) on Foreign Exchange. We recorded a net loss on foreign exchange for the three and six months ended June 30, 2004 of $5.5 million and $9.9 million, compared to net gains of $21.4 million and $31.4 million for the same periods in 2003. This net loss on foreign exchange reflects principally the effect of the devaluation during the second quarter and first half of 2004 of the Argentine peso and the Brazilian real on the book value of our monetary assets and liabilities in Argentina and Brazil, as compared to the effect of the appreciation of such currencies against the U.S. dollar during the second quarter and first half of 2003.

IMPSAT Argentina recorded a net loss on foreign exchange for the three and six months ended June 30, 2004 of $0.1 million and $0.6 million, compared to net gains of $0.7 million and $1.2 million for the same periods in 2003. IMPSAT Brazil recorded a net loss on foreign exchange for the first quarter and second half of 2004 of $5.3 million and $7.2 million, compared to net gains of $21.5 million and $31.1 million for the same periods in 2003.

Reorganization Items. We recorded reorganization items of $726.1 million in connection with our emergence from Chapter 11 on March 25, 2003. See Note 11 to the Condensed Consolidated Financial Statements. No such amounts were recorded for the second quarter and first half of 2004.

Other Income (Loss), Net. We recorded other income, net of $1.4 million and $1.3 million for the second quarter and first half of 2004, compared to other expense, net of $0.3 million for the second quarter of 2003 and other income, net of $2.6 million for the first half of 2003. During the second quarter of 2004, we sold our shares of common stock of Claxson Interactive Group, Inc., which were recorded on our condensed consolidated balance sheet as Investments in common stock. See Note 5 to our Condensed Consolidated Financial Statements.

Provision for Foreign Income Taxes. For the three and six months ended June 30, 2004, we recorded a provision for foreign income taxes of $1.3 million and $1.9 million, compared to a provision of $0.7 million and $1.2 million for the same periods in 2003.

Net Income (Loss). For the three and six months ended June 30, 2004, we recorded net losses of $10.0 million and $16.5 million, compared to net income of $22.2 million and $753.3 million the same periods in 2003 (Predecessor Company).

Liquidity and Capital Resources

At June 30, 2004, we had total cash and cash equivalents of $63.5 million. This compares to our cash, cash equivalents and trading investments of $63.8 million at June 30, 2003, $64.0 million as of December 31, 2003, and $60.3 million at March 31, 2004. The increase in our cash and cash equivalents was due in part to an improvement in the average days outstanding of our net trade accounts receivable. As a result of improved collections in the second quarter of 2004, the balance of our trade accounts receivable, net declined to $28.7 million at June 30, 2004 from $32.0 million at March 31, 2004.

As of June 30, 2004, approximately $8.4 million of our cash and cash equivalents were held in Venezuelan bolivars by IMPSAT Venezuela (based on the official exchange rate at that date of Bs.1920 = $1.00). Foreign exchange controls instituted in Venezuela since February 2003 severely limit our ability to repatriate these amounts and any other earnings from our Venezuelan operations. Between June 30, 2004 and the date hereof, the Venezuelan government has authorized our Venezuelan subsidiary to exchange and remit outside of Venezuela $8.7 million of the amounts previously held in Venezuelan bolivars. We cannot predict the extent to which we may be affected by future changes in exchange rates and exchange controls in Venezuela. Future devaluations of the Venezuelan bolivar and/or the implementation of more stringent exchange control restrictions in that country could have a material adverse effect on the U.S dollar value or our cash equivalents held by Impsat Venezuela and would result in a loss in future periods in our consolidated statement of operations. Our inability to obtain U.S. dollars for the payment of trade accounts payable owed by IMPSAT Venezuela to non-Venezuelan vendors and suppliers has resulted in an increase in trade accounts payable owed by that subsidiary.

At June 30, 2004, our total indebtedness was $267.0 million (as compared to $260.3 million at June 30, 2003), of which $29.0 million represented current portion of long-term debt and $238.0 million represented long-term debt.

As a result of the expansion of our business during the first half of 2004, we anticipate increasing our capital expenditures for network and customer premises equipment for the remainder of the year as compared to our initial forecasts. We anticipate that the bulk of such increased capital expenditures will be made by our subsidiaries in Brazil, Colombia and Peru. Our revised capital expenditures budget for 2004 contemplates that we will need approximately $37.0 million (including amounts spent to date) for capital expenditures.

Although we have emerged from bankruptcy, we remain in default under indebtedness owed to one creditor who voted against the Plan. Under the Plan, the claims of that creditor were contingent obligations arising under guarantees by us of certain primary indebtedness of IMPSAT Argentina. This default, which relates to indebtedness totaling approximately $7.6 million in outstanding principal amount, gives the creditor the right to accelerate such indebtedness and seek immediate repayment of all outstanding amounts and accrued interest thereon.

As set forth in our condensed consolidated statement of cash flows, our operating activities provided $15.7 million in net cash flows for the first half of 2004, compared to $17.5 million provided by operating activities during the corresponding period in 2003. The decrease in cash flows from operating activities in the first half of 2004 was primarily due to our net loss during the first half of 2004 and to decreases in accrued and other liabilities. For the first half of 2004, we used $11.6 million in net cash flows from investing activities, compared to $19.7 million of net cash flows provided by investing activities during the corresponding period in 2003. This change was principally due to an increase in purchases of property, plant and equipment as compared to the prior period. During the first half of 2004, we used $1.7 million in net cash flows from financing activities. This compares to $3.7 million in net cash flows used in financing activities during the corresponding period in 2003.

At June 30, 2004, we had leased satellite capacity with average annual rental commitments of approximately $15.6 million through the year 2008 under non-cancelable agreements. The company has entered into contracts for the purchase of satellite capacity for approximately $15.0 million through 2015. In addition, at June 30, 2004, we had commitments to purchase telecommunications equipment amounting to approximately $8.0 million. Furthermore, we have 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 $3.0 million per year through 2008. 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:


Type of Obligations	2004		2005		2006		2007		2008		Thereafter		Total
	(in thousands)
Long-term debt	$	28,974	$	21,978	$	34,261	$	35,248	$	36,964	$	109,588	$	267,013
Capital lease obligations		—		48		96		96		96		48		384
Operating leases⁽¹⁾		25,343		24,013		19,151		13,251		10,856		6,550		99,164
Purchase obligations		7,962		—		—		—		—		—		7,962

Total contractual cash obligations	$	62,279	$	46,039	$	53,508	$	48,595	$	47,916	$	116,186	$	374,523

⁽¹⁾	This includes commitments for satellite capacity and terrestrial links.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The sections below highlight our exposure to interest rate and foreign exchange rate risks. 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 June 30, 2004 and assuming that the hypothetical interest rate and foreign exchange rate changes used in the analyses occurred during year 2004. 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. At June 30, 2004, our total floating rate indebtedness aggregated $11.3 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 June 30, 2004, a hypothetical 100 basis point increase in the London Interbank Offered Rate (LIBOR) would affect our annual interest cost related to our floating rate indebtedness by approximately $0.1 million annually. The fair value of financial instruments, which approximate their carrying value, have been determined using available market information and interest rates as of June 30, 2004.


	Expected Maturities at June 30,
	2004			2005			2006			2007			2008			Thereafter			Total
Senior Notes (fixed rate)	$	16,280		$	20,500		$	32,549		$	32,549		$	28,629		$	101,253		$	231,760
Avg. interest rate		8.46	%		8.46	%		8.46	%		8.46	%		8.46	%		8.46	%		8.46	%

Term Notes (fixed rate)	$	3,863		$	892		$	753		$	1,773		$	8,335		$	8,335		$	23,951
Avg. interest rate		12.78	%		12.78	%		12.78	%		12.78	%		12.78	%		12.78	%		12.78	%

Term Notes (variable rate)	$	959		$	464		$	926		$	926								$	3,275
Avg. interest rate		3.34	%		3.34	%		3.34	%		3.34	%								3.34	%

Vendor Financing (variable rate)	$	7,872		$	122		$	33											$	8,027
Avg. interest rate		10.69	%		10.69	%		10.69	%											10.69	%

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 reduce 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.

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 were 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, the Venezuelan government imposed foreign exchange and price controls during 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 also limit our ability to convert local currency into U.S. dollars and transfer funds out of Venezuela. At December 31, 2002, the bolivar traded at a rate of Bs.1,392.00 = $1.00, at December 31, 2003, it traded at a rate of Bs.1,600.00 = $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.1,600.00 = $1.00 as part of the new currency controls. We currently are receiving bolivares at the official rate in payment for our services in lieu of U.S. dollars. As a result, our holdings of bolivars at June 30, 2004 totaled Bs.16.1 billion (or $8.4 million at the official exchange rate at such date). In February 2004, the Venezuelan government further devalued its currency to Bs.1,920.00 = $1.00.

Revenues from services from our Argentine operations for the three months ended June 30, 2004 and 2003 represented approximately 30.8% and 27.8% of our total net revenues from services for such periods. Revenues from services from our Brazilian operations for the three months ended June 30, 2004 and 2003 represented approximately 13.9% and 14.0% of our total net revenues from services for such periods. Our revenues from services in Venezuela accounted for 14.8% and 15.4% of our total revenues from services for the three months ended June 30, 2004 and 2003.

Item 4. Controls and Procedures

As of the end of the period covered by this report, an evaluation was carried out by the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective as of that date. There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the second quarter of 2004 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

PART II

OTHER INFORMATION

Item 1. Legal Proceedings

Not applicable.

Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Submission of Matters to a Vote of Security-Holders

On April 30, 2004, the company held its annual meeting at which (i) certain eligible security holders voted upon the election of five directors to the Company’s board of directors for a one-year term; and (ii) the common stockholders voted upon the ratification of the appointment of Deloitte & Touche LLP as independent auditors of the Company for the year ending December 31, 2004.

At the Annual Meeting, in accordance with the Company’s bylaws, two individuals (“Category Two Directors”) were elected by the initial holders of the Company’s Series A 6% Senior Guaranteed Convertible Notes due 2011 issued under the Plan (the “Initial Series A Noteholders”); and three individuals (“Category Four Directors”) were elected by the Company’s common stockholders who, under the Plan of Reorganization, received shares of our common stock in exchange for the Company’s former 13³/4% Senior Notes due 2005 and 12³/8% Senior Notes due 2008. The number of votes cast for, against or withheld and the number of abstentions and broker non-votes with respect to each matter voted upon, as applicable, is set forth below.


	For	Against/Withheld	Abstain	Broker Non-Votes
1. Election of Directors
Category Two Directors:
William Connors	37,325,730	0	*	*
Joseph Thornton	37,325,730	0	*	*
Category Four Directors:
Ted Doster	2,563,465	0	*	*
Raul Ramirez	2,563,465	0	*	*
Ignacio Troncoso	2,563,465	0	*	*
2. Ratification of the Appointment of Independent Auditors	9,126,639	0	0	0

The directors were elected by a plurality of the votes cast; therefore, votes cast in the election could not be recorded against or as an abstention, nor could broker non-votes be recorded. In accordance with the Company’s certificate of incorporation, nominees for election as Category Two Directors were elected by a plurality vote of the Initial Senior Series A Noteholders, with each Initial Senior Series A Noteholder entitled to cast a number of votes equal to the number of shares of common stock issuable upon conversion of Series A Notes issued to and held by such Initial Senior Series A Noteholder or its affiliates.

Item 5. Other Information

Not applicable.

Item 6. Exhibits and Reports on Form 8-K

(a)(1)

Exhibit Index:


Exhibit No.		Description
3.1		Restated Certificate of Incorporation of the Company (filed on March 26, 2003 as Exhibit No. 2.1 to the Company’s Amendment No. 1 to Registration Statement on Form 8-A and incorporated herein by reference).

3.2		Restated Bylaws of the Company (filed on March 26, 2003 as Exhibit No. 2.2 to the Company’s Amendment No. 1 to Registration Statement on Form 8-A and incorporated herein by reference).

4.1		Indenture for the Company’s 6% Senior Guaranteed Convertible Notes due 2011 – Series A, dated as of March 25, 2003, among the Company, The Bank of New York, as trustee and IMPSAT Argentina, as guarantor (including form of Note) (filed on April 15, 2003 as Exhibit 4.1 to the Company’s 2002 Annual Report on Form 10-K and incorporated herein by reference).

4.2		Indenture for the Company’s 6% Senior Guaranteed Convertible Notes due 2011 – Series B, dated as of March 25, 2003, among the Company, The Bank of New York, as trustee and IMPSAT Argentina, as guarantor (including form of Note) (filed on April 15, 2003 as Exhibit 4.2 to the Company’s 2002 Annual Report on Form 10-K and incorporated herein by reference).

4.3		Disclosure Statement Under Chapter 11 of the Bankruptcy Code (filed on December 19, 2002 as Exhibit No. 99.2 to the Company’s Current Report on Form 8-K, and incorporated herein by reference).

4.4		Plan of Reorganization of the Company Under Chapter 11 of the Bankruptcy Code (filed on December 19, 2002 as Exhibit No. 99.3 to the Company’s Current Report on Form 8-K, and incorporated herein by reference).

4.5		Order Confirming the Company’s Plan of Reorganization Under Chapter 11 of the Bankruptcy Code dated December 16, 2002 (filed on December 19, 2002 as Exhibit 99.1 to the Company’s Current Report on Form 8-K, and incorporated herein by reference).

4.6		Registration Rights Agreement among the Company, IMPSAT Argentina and the securityholders party thereto, dated as of March 25, 2003 (filed on April 15, 2003 as Exhibit 4.6 to the Company’s 2002 Annual Report on Form 10-K and incorporated herein by reference).

4.7		Specimen Common Stock Certificate (filed on March 26, 2003 as Exhibit No. 2.6 to the Company’s Amendment No. 1 to Registration Statement on Form 8-A and incorporated herein by reference).

4.8		Warrant Agreement between the Company and The Bank of New York, as warrant agent, dated as of March 25, 2003 (including form of Warrant) (filed on April 15, 2003 as Exhibit 4.8 to the Company’s 2002 Annual Report on Form 10-K and incorporated herein by reference).

9.1		2003 Stock Incentive Plan (filed on April 15, 2003 as Exhibit 9.1 to the Company’s 2002 Annual Report on Form 10-K and incorporated herein by reference).

10.1		Amended and Restated Financing Agreement among IMPSAT Argentina, Nortel Networks Limited, and Deutsche Bank Trust Company Americas and the Lenders party thereto, dated as of March 25, 2003 (filed on April 15, 2003 as Exhibit 10.4 to the Company’s 2002 Annual Report on Form 10-K and incorporated herein by reference). In accordance with Instruction 2 to Item 601 of Regulation S-K, the following agreement was not filed as exhibits because they are substantially identical in all material respects to Exhibit 10.1: Amended and Restated Financing Agreement between IMPSAT Brazil and Nortel Networks Limited, dated as of March 25, 2003.


Exhibit No.		Description

10.2		Employment Agreement between Ricardo A. Verdaguer and the Company dated as of March 25, 2003 (filed on August 14, 2003 as Exhibit 10.5 to the Company’s second quarter 2003 Quarterly Report on Form 10Q and incorporated herein by reference).

10.3		Employment Agreement between Hector R. Alonso and the Company dated as of March 25, 2003 (filed on August 14, 2003 as Exhibit 10.6 to the Company’s second quarter 2003 Quarterly Report on Form 10Q and incorporated herein by reference).

10.4		Letter Agreement between Marcelo Girotti and the Company dated March 25, 2003 (filed on August 14, 2003 as Exhibit 10.7 to the Company’s second quarter 2003 Quarterly Report on Form 10Q and incorporated herein by reference). In accordance with Instruction 2 to Item 601 of Regulation S-K, the following agreements were not filed as exhibits because they are substantially identical in all material respects to Exhibit 10.4: Letter Agreement between Mariano Torre Gomez and the Company dated March 25, 2003; Letter Agreement between Matias Heinrich and the Company dated March 25, 2003; Letter Agreement between Alexander Rivelis and the Company dated March 25, 2003.

21.1		List of subsidiaries of the registrants (incorporated by reference to the “Business — General” section of the Company’s 2003 Annual Report on Form 10-K and incorporated herein by reference).

31.1		Certification by the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

31.2		Certification by the Company’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.1		Certification by the Company’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

32.2		Certification by the Company’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).

(a)(2) List of Schedules. All schedules for which provision is made in the applicable accounting regulations of the Commission are omitted because they are not applicable, or the information is included in the financial statements included herein.

(b) Reports on Form 8-K. None.

SIGNATURES

Pursuant to the requirements 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, in the capacity and on the date indicated.


IMPSAT Fiber Networks, Inc.

By:		/s/ Héctor Alonso
		Héctor Alonso
		Chief Financial Officer

Date: August 13, 2004