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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2000
Commission file number: 0-31010
AT&T LATIN AMERICA CORP.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 22-3687745
(State or Other Jurisdiction of Incorporation) (I.R.S. Employer Identification No.)
220 ALHAMBRA CIRCLE, CORAL GABLES, FLORIDA 33134
(Address of principal executive offices) (Zip code)
Registrant's telephone number including area code: (305) 459-6300
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
CLASS A COMMON STOCK, $0.0001 PAR VALUE PER SHARE
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 20, 2001, 43,214,758 shares of the registrant's Class A common
stock, par value $0.0001 per share, and 73,081,595 shares of the registrant's
Class B common stock, par value $0.0001 per share, were outstanding. As of March
20, 2001, the aggregate market value of the voting stock of the registrant held
by non-affiliates of the registrant based on the $2.6875 closing price for the
registrant's Class A common stock on the Nasdaq National Market on March 20,
2001 was approximately $112,000,000. Directors, executive officers and 10% or
greater shareholders are considered affiliates for purposes of this calculation
but should not necessarily be deemed affiliates for any other purpose.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our Proxy Statement for the 2001 Annual Meeting of Stockholders
to be filed within 120 days after December 31, 2000 are incorporated herein by
reference in response to Part III, Items 11 through 13, inclusive.
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FORWARD-LOOKING STATEMENTS
Some of the statements under "Management's Discussion & Analysis of
Financial Condition and Results of Operations" and elsewhere in this Annual
Report on Form 10-K are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 that are based on management's
beliefs as well as on a number of assumptions concerning future events made by,
and information currently available to, management. These statements involve
known and unknown risks, uncertainties and other factors, that may cause our
actual results, performance or achievements to be materially different from any
future results, performance or achievements expressed in or implied by the
forward-looking statements.
Forward-looking statements include but are not limited to statements and
references about the following matters:
- expectations and estimates of completion dates, construction costs,
subsequent maintenance expenses and network expansion;
- expectations and estimates as to the amount of cash requirements to
implement our growth strategy and as to our ability to obtain financing;
- expectations concerning growth and demand for communications services;
- expectations about the sources of revenues and the percentage breakdown
of sources of revenues;
- our ability to implement successfully our growth strategy and to sell
capacity on our networks; and
- future financial performance, including growth in sales and income.
In addition to matters that are described in this Annual Report on Form
10-K and the exhibits hereto, the following factors, among others, could cause
AT&T Latin America's actual results to differ materially from those expressed in
or implied by any forward-looking statements contained in this Annual Report on
Form 10-K or its exhibits:
- inaccurate forecasts of customer or market demand;
- the rate of expansion of our networks and customer base;
- changes in communications technology and/or the pricing of competitive
products and services;
- highly competitive market conditions;
- access to financing on acceptable terms and conditions;
- loss of one or more important customers;
- acquisitions by us and our ability to integrate successfully any acquired
businesses or technologies into our operations;
- changes in or developments under laws, regulations and licensing
requirements in the countries in which we operate;
- our ability to obtain and retain rights of ways and permits necessary for
the expansion and maintenance of our networks;
- volatility of our stock price; and
- changes in economic and political conditions in the countries in which we
operate.
AT&T Latin America undertakes no obligation to publicly release any updates
or revisions to any forward-looking statements, which are made as of the date of
this Annual Report on Form 10-K, to reflect events or circumstances after the
date of this Annual Report on Form 10-K.
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BUSINESS
We were organized as a Delaware corporation in October of 1999 by AT&T
Corp. We acquired our Brazilian subsidiary, AT&T do Brasil (formerly known as
Netstream), in December 1999 from our controlling shareholder, AT&T Corp., in
exchange for shares of our Class B common stock plus $10.0 million in cash. We
completed the acquisition of our Argentine subsidiary, AT&T Argentina (formerly
named Keytech LD, S.A.), in June 2000. At the time of its acquisition, AT&T
Argentina was a development stage broadband communications company in Argentina
with a limited amount of assets, consisting mainly of signal transmission
equipment. In August 2000, we completed our merger with FirstCom Corporation,
which was a U.S. publicly traded communications company with operations in
Chile, Colombia and Peru.
We provide broadband communications services to major metropolitan business
markets in Argentina, Brazil, Chile, Colombia and Peru. Broadband communications
services are communication services delivered over high speed, high capacity
transmission systems. Our communications services include data, Internet, local
and long distance voice, web hosting and managed network services. We focus
primarily on business customers with growing and diverse broadband
communications needs. These customers include multinational corporations,
financial services companies, media and content providers, technology companies,
government entities, Internet service providers and communications carriers, as
well as small and medium size businesses. We deliver our services mostly through
our own technologically advanced networks which interconnect with other third
party networks.
GROWTH STRATEGY. Our objective is to be a leading facilities-based
provider of integrated high-bandwidth communications services to businesses in
key Latin American markets in the countries where we operate. To achieve this
objective, we intend to:
- focus on business customers in major Latin American metropolitan areas;
- offer a broad portfolio of advanced business communications services
relationships;
- capitalize on our relationships with AT&T Corp. and its affiliates and
ventures;
- provide consistent and superior service levels by being a
customer-oriented organization under the AT&T brand; and
- pursue growth through our own network construction and leased facilities,
as well as selective strategic acquisitions and alliances.
Our business had the following operating characteristics as of December 31,
2000:
DECEMBER 31, 2000
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AT&T
LATIN
AMERICA
ARGENTINA BRAZIL CHILE COLOMBIA PERU TOTAL
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Network route kilometers
Metropolitan.......................... 16 734 511 1,129 1,570 3,960
Domestic (Long-haul).................. -- -- -- 1,225 -- 1,225
----- ------ ------ ------ ------ -------
Total............................ 16 734 511 2,354 1,570 5,185
Total fiber kilometers..................... 1,383 52,417 10,361 29,605 35,846 129,612
Number of buildings connected.............. 1 820 469 1,163 1,522 3,975
Ports in service........................... 32 7,002 1,495 2,814 1,424 12,767
Permanent virtual circuits active.......... 28 3,630 1,296 2,015 1,231 8,200
Number of dedicated data and Internet
customers................................ 20 816 1,148 380 1,028 3,392
Number of employees........................ 291 517 361 242 404 1,815*
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(*) Excludes 56 employees at corporate headquarters.
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NETWORKS
Our networks primarily use the asynchronous transfer mode, or ATM,
transport technology, which enables us to accommodate many different types of
information traffic systems and permits transmission of a mix of voice, data and
video. Our networks also utilize the Internet Protocol, or IP, standard to route
the traffic over the ATM transport technology. IP is an inter-networking
standard that enables communication across the large collection of networks
constituting the Internet regardless of the hardware or software used.
We prioritize the deployment of our network facilities to reach and cover
corporate office buildings, office parks and other high concentrations of
businesses and potential business customers. In doing so, we seek to maximize
our return on investment.
Our network is currently in Buenos Aires, Argentina; Sao Paulo, Rio de
Janeiro, and Belo Horizonte, Brazil; Santiago, Chile; Bogota and Cali, Colombia;
and Lima/Callao, Peru. We continue to expand our network infrastructure to cover
the most significant commercial financial and industrial areas of these cities.
We also expanded our service area in 2000 to include Brasilia, Campinas, Porto
Alegre and Curitiba, Brazil, as well as 10 additional cities in Brazil,
primarily through third party networks. We expect to focus increasingly on
revenue generation and on maximizing the efficiency of our network and
operations, rather than on expansion of our network to additional cities. We
will expand into other cities based on our judgment of the revenue and customer
opportunity and on the ability to raise additional capital resources.
Our broadband communications networks in the cities in which we have the
greatest presence consist of the following components:
- a network operations center, operating on a 24-hour/7-day basis, where we
monitor and supervise the network and service performance;
- primary, or backbone, rings with 48, 72 or 144-strand fiber optic cable
and concentration nodes (ATM switches) connected to one central node;
- numerous secondary rings of 36, 48 or 72-strand fiber optic cable and
building premise equipment (BPE) connected to a concentration node;
- for each building served, an access cable of 2 to 24-strand fiber optic
cable connecting business premise equipment with the secondary ring; and
- for each customer in a building, a fiber optic, coaxial or copper cable
connecting the customer premise equipment with the building premise
equipment.
Because our network is based on fiber optic technology and uses ATM/IP
switching and transmission technology, we are able to offer the following
benefits to our customers:
- an integrated package of voice, data and video transmission services,
from a single provider;
- high speed data transmission and the ability to increase bandwidth easily
with low incremental capital investments;
- flexibility to activate intranet, extranet and Internet services;
- an ability to accommodate flexibly the traffic demand of small, medium
and large networks, such as dial-up networks used by Internet service
providers and other complex networks used by financial institutions,
multinational corporations, universities and government entities;
- a high degree of transmission quality, with negligible error rate and
lost traffic; and
- maximum availability of the customer's internal and external networks and
externally transmitted data through features that allow the networks to
re-route automatically any transmission over the network that is held up
by faulty equipment or line damage.
Our communications equipment vendors actively participate in planning and
developing electronic equipment for use in our networks. We currently obtain ATM
equipment, optical transmission equipment, IP-
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based routers and voice switching equipment mainly from Cisco Systems Inc.,
Lucent Technologies Inc. and Nortel Networks Ltd. Optical transmission equipment
uses a technology, DWDM, or dense wave division multiplexing, that maximizes the
use of the fiber optic capacity. Because we use existing communications
technology rather than developing new technology, our research and development
expenditures are not material.
In each country, we use local contractors to install our underground and
aerial fiber network.
We interconnect the cities where our networks are by either building,
purchasing or leasing capacity. We also entered into a capacity purchase
agreement with Global Crossing Bandwidth, Inc. which provides for the
acquisition of indefeasible rights of use to high-speed transmission capacity
connecting each of the cities of Sao Paulo, Buenos Aires, Santiago and Lima to
points of presence in the United States, effective for fifteen years.
SERVICES
Our customers demand high quality, cost effective communications services
with simplified interfaces. We believe that larger and more sophisticated
customers expect us to anticipate their communications requirements and provide
customized solutions. By offering an integrated package of advanced as well as
basic services, we believe we can access a larger market, enhance customer
retention, achieve higher margins and reduce the cost of acquiring new
customers.
Our integrated portfolio of services in the countries in which we operate
falls into two principal categories, data/Internet and voice services. We also
offer web hosting and network managed services.
DATA/INTERNET SERVICES. Our data and Internet services include the
following:
- IP Data Services. Our IP data services consist of basic connection
services, such as point-to-point dedicated private lines, and private
multipoint network services, which include offering and managing
communications links among a number of locations, as wide area network
services. The basic infrastructure plus supporting services (available or
being deployed) allow us to implement different communications
applications to support a wide range of customers' needs.
- Internet Services. Our Internet services consist of dial-up and
dedicated access services offered primarily to businesses, as well as
wholesale Internet services offered to Internet service providers. Our
integrated package of wholesale Internet services allows Internet service
providers to purchase and lease their entire access infrastructure from
us.
VOICE SERVICES. Our voice services allow us to provide high quality,
reliable voice communications. Services range from the provisioning of office or
campus services to building a complete voice network covering multiple
locations. Customers can place and receive calls originating and terminating
from outside our networks through interfaces with other private networks and
with public networks.
In February 2001, we signed a regional distribution agreement with Concert,
the global venture between AT&T Corp. and British Telecommunications plc, that
allows us to distribute Concert international data services to our customers. We
expect to begin offering Concert international frame relay services by the third
quarter of 2001, which will allow us to offer to our customers private line
connections to multiple destinations around the world.
OPERATIONS BY GEOGRAPHIC AREAS AND SEGMENTS
For financial information about our segments and geographic areas, see Note
11 of our financial statements, which is included in this Annual Report on Form
10-K.
CUSTOMERS
ARGENTINA. We are developing operations in Argentina through our
subsidiary, AT&T Argentina S.A. (formerly Keytech LD), which we acquired in June
2000. At that time, AT&T Argentina served a small
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number of customers by reselling services from other communications providers.
Following market deregulation in November 2000, AT&T Argentina launched domestic
and international long distance voice services in November. As of December 31,
2000, AT&T Argentina served 20 data and Internet customers and approximately
1,750 total customers. Our customers in Argentina today include, among others,
Johnson & Johnson, Compaq, Gartner Group and 3M.
BRAZIL. Our customer base in Brazil has grown rapidly since AT&T do Brasil
(formerly Netstream) began commercial operations there in 1998. As of December
31, 2000, our Brazilian operations had 816 data and Internet customers and
approximately 850 total customers.
Our customers in Brazil today include, among others:
- the stock exchange (Bovespa) and the commodities exchange of Sao Paulo;
- numerous Brazilian and international banks, brokers, insurance companies
and other financial institutions including Banco Santander, Bank of
America, BankBoston, Barclay's Capital, Bradesco, Itau, JP Morgan, and
Unibanco;
- information and consulting businesses, including Agencia Estado,
Bloomberg, Booz Allen Hamilton, Deloitte Consulting, and Reuters;
- content providers, including AOL Brasil, IFX and Origin; and
- global and regional multinational corporations, including Olivetti, IBM,
Intel, Nokia, Fiat and Pepsico.
CHILE. As of December 31, 2000, our Chilean operations had 1,148 data and
Internet customers. We also provide domestic and international long distance
services to approximately 1,100 active business customers and more than 11,700
active residential customers. In addition, we provide casual dialing services to
approximately 170,000 non-subscriber users.
Our customers in Chile today include, among others:
- the Santiago World Trade Center;
- banking institutions, including Chase Manhattan Bank and Banco de Credito
e Inversion;
- universities, such as Pontificia Universidad Catolica de Chile,
Universidad de Santiago and Universidad Catolica de Valparaiso;
- press and media groups, such as El Mercurio, La Nacion, Canal 13 TV and
Metropolis Intercom;
- international logistics services providers, such as P&O Nedlloyd and
Reuters;
- communications carriers, including GlobalNet, Entel Chile and Manquehue;
and
- government entities, such as the Ministerio del Interior (State
Department).
COLOMBIA. As of December 31, 2000, our Colombian operations had more than
400 customers in Colombia, including 380 data and Internet customers. Our
customers in Colombia today include, among others:
- banking institutions, such as Banco Granahorrar, ABN Amro and Lloyds PBS;
- financial content providers, including Bloomberg and Bridge; and
- communications carriers such as Telecom Colombia, Global One, Impsat,
BellSouth, and Telefonica Data.
PERU. As of December 31, 2000, our Peruvian operations had 1,028 data and
Internet customers and more than 31,600 customers contracted for long distance
service.
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Our customers in Peru today include, among others:
- numerous banking institutions, including Interbank and Asbanc;
- multinational corporations, such as Swissotel;
- department stores such as Saga Falabella S.A.; and
- supermarket chains, including Santa Isabel S.A.
SALES, MARKETING AND CUSTOMER SERVICE
We seek to build collaborative, long-term relationships with our customers
by offering them a broad portfolio of communications services, by continuously
monitoring and identifying their changing communications needs and by leveraging
one or more of our services into a partnership with the customer in which we
become the single source provider of all of the customer's communications needs.
We believe that, in addition to providing our customers with good value, our
sales and marketing approach allows us to integrate our services into bundled
packages, which improves gross margins by encouraging customers to use a greater
number of, and more advanced, services. Prices charged to customers vary in
accordance with the customers' requirements based on the number of locations,
types of services, transmission rates and length of service agreements.
Our sales force is trained to emphasize our customer-focused sales and
service efforts, including our provision of 24 hour/365 day customer service
centers. Customers can contact us directly through our sales force, field
support or call center or via the Internet. We provide customer assistance, at
all hours, in either Portuguese or English in Brazil and in Spanish in the other
countries in which we operate. We also regularly solicit our customers'
assessment of our services and support through third party research in order to
understand their preferences and to enhance their overall satisfaction with us.
We have also developed and installed customer-focused software designed to
provide integrated communications services. This software permits us to present
our customers with one fully integrated monthly billing statement for local,
long distance and international voice services, data services and Internet
access, and will also permit us to include additional services, when available.
We compensate sales people by a combination of salary and commission plans.
Our sales force prioritizes target users not only by their size and potential
usage of advanced communications services, but also by their proximity to our
existing network. Our current commission structure rewards sales to existing
customers and new customers in buildings already connected to the network, as
well as customers in target buildings within a short distance of the existing
network.
Our sales force is supported by experienced engineering personnel whose
objective is to organize the efficient delivery of communications solutions to
each customer. The technical staff's role includes the proper coordination of
vendor service components, customer site preparation and installation, testing,
delivery and maintenance of the communications solution for the customer.
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REGIONAL VEHICLE AGREEMENT WITH AT&T CORP.
We entered into a "regional vehicle agreement" with AT&T Corp. at the time
of the FirstCom merger. This section describes the material terms of the
regional vehicle agreement and related provisions of our certificate of
incorporation.
Purpose
The parties defined the overall scope and nature of our operations in the
regional vehicle agreement as well as in our certificate of incorporation.
Scope
The regional vehicle agreement and the certificate of incorporation define:
- where we may operate;
- what communications services we may provide and, in some cases, to whom
those services may be provided; and
- the conditions under which AT&T Corp. and its affiliates may compete with
us.
Term
The regional vehicle agreement has an indefinite term and in general will
terminate only by mutual agreement of ourselves and AT&T Corp. However, AT&T
Corp. may terminate the regional vehicle agreement at any time after the
termination of our service mark license agreement with AT&T Corp., which license
agreement governs our use of the AT&T service mark and logo in our business.
OUR REGION
Our certificate of incorporation permits us to operate only in the
countries of South America and the Caribbean, plus Panama but excluding Cuba. In
addition, the regional vehicle agreement restricts us from operating in
Venezuela.
OUR SERVICES
Our certificate of incorporation limits our business generally to the
provision of telecommunications services. Following is a description of the
services that we are permitted to provide under the regional vehicle agreement,
as well as limitations on our services:
PERMITTED SERVICES. We may provide the following services:
- long distance;
- 1-800/toll-free;
- local voice delivered through fixed lines;
- Internet access;
- e-commerce or electronic commerce;
- fixed wireless for network connections;
- video conferencing;
- web hosting, which involves providing or managing equipment to operate an
Internet web site;
- voice over Internet Protocol, which involves the transmission of voice
over an inter-networking standard that enables communication across the
Internet regardless of the hardware or software used;
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- AT&T calling card services, and AT&T Direct(R) services, which allow
callers to access AT&T networks from points throughout the world;
- dedicated line services, which involve the leasing of network lines
expressly for connecting two or more users. These dedicated lines
establish a permanent circuit dedicated solely to the use of the
particular customer;
- switched digital services, which allow users to establish end-to-end
digital connections over shared facilities on an as-needed basis, similar
in concept to making a telephone call; and
- virtual network services, which involve a connection of customer networks
to an operator's network to create an overall capability for voice and
data services that acts functionally like a network owned or operated
exclusively by that customer.
We may also provide data services using the following protocols for
transmitting data over a communications network:
- packet X.25, an older protocol designed for transmitting data files in
pieces or "packets" over analog communications networks that were
originally designed for voice traffic;
- frame relay, a newer protocol designed for transmission of data over
digital networks in packets of varying length; and
- ATM, or asynchronous transfer mode, an even newer protocol, designed for
transmitting data in fixed-size packets or "cells" to enable networks to
accommodate many different transmission systems and permit transmission
of a mix of voice, data and video.
PROHIBITED SERVICES. The regional vehicle agreement limits our ability to
provide some services. We may not provide:
- mobile wireless/personal communications services;
- cable telephone or cable services, which include telephone, data and
video services, as well as Internet access, delivered through networks
typically used to deliver cable television; or
- cross-border transport services between two or more countries to
international carriers and select services involving the arrangement,
management and delivery of termination of international communications
traffic.
In addition, we may not provide solutions services, such as outsourcing
professional services and systems integration. Outsourcing professional services
include:
- providing professional services relating to network architecture
validation, implementation, operations and life cycle management, which
include confirming that a network's design works efficiently, installing
and testing network equipment and managing the need for change to the
network;
- business process consulting and migration planning and implementation,
which include planning to ensure that a customer's network properly
supports the customer's objectives and planning for and implementing
changes to that network; and
- ownership and acquisition of assets from and on behalf of customers
related to providing outsourcing professional services.
Systems integration involves:
- advising clients how best to use information technology to achieve their
ends and to reengineer business processes to make organizations work more
effectively;
- specifying, designing or building integrated business systems for or on
behalf of clients;
- managing the change to those systems for or on behalf of clients;
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- supporting, maintaining, enhancing, operating or further developing those
systems for or on behalf of clients, providing program or project
management and integration of customer-defined individual customer
solutions; and
- providing other related services required or requested by clients in
connection with the services listed above.
Systems integration services do not include the underlying capability to
provide services.
MANAGED NETWORK SERVICES. Although we may not provide solutions services,
we may provide managed network services to companies other than multinational
corporations reserved for the Concert global venture between AT&T Corp. and
British Telecom. Managed network services include providing:
- services to a customer that consist solely of providing and maintaining
the elements of a customer's wide area communications network, which is a
network connecting two or more customer sites, each of which may operate
an internal local area network;
- services to the extent relating to a customer's wide area communications
network, directly related planning, design, installation, maintenance and
ongoing support functions; and
- equipment on the customers' premises at the interface between a wide area
communications network and the remainder of the customer's networking
environment insofar as that equipment facilitates:
- the maintenance of the customer's wide area communication services;
- the recording of performance data with respect to the customer's
wide area communications services;
- the provisioning of new wide area communications services to the
customer or changes in the parameters of these services; or
- the integration of multiple wide area communications services,
excluding in the case of the first two items listed in this
paragraph any such service or equipment that materially extends
services beyond the interface described above further into the
customer's non-wide communications network.
We do not believe that this restriction on our providing managed network
services to multinational customers reserved for Concert will materially affect
our ability to implement our growth strategy.
To the extent we provide services under the AT&T Latin America brand or
other AT&T Corp. brands, there are service limitations in the service mark
license agreement with AT&T Corp., which are described below.
COMPETITION BY AT&T CORP.
The regional vehicle agreement limits the ability of AT&T Corp. and its
subsidiaries to compete with us. It also places obligations on AT&T Corp. if it
acquires our competitors with specific characteristics, as described below.
The limitations on competition and the obligations of AT&T Corp. relating
to the acquisitions of competitors discussed below do not apply to Concert or
companies related to the AT&T Global Network Services companies, AT&T Corp.'s
Liberty Media group or AT&T Corp.'s acquisition of MediaOne or to any person in
which any of those companies has an equity interest.
In addition, restrictions relating to competition with us do not apply to:
- services using assets owned or controlled by the AT&T Global Network
Services companies; or
- services provided by AT&T Corp. or its subsidiaries in connection with
providing managed network services or outsourcing professional services.
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Outsourcing professional services include the provision of professional
services relating to network architecture validation, implementation, operations
and life cycle management. These services include business process consulting,
migration planning and implementation, but not managed network services.
Outsourcing professional services also include the ownership and acquisition of
assets from and on behalf of customers related to the provision of outsourcing
professional services.
COMPETITIVE SERVICES. Except as described above, AT&T Corp. and its
existing subsidiaries may not offer customers a number of services in our region
unless they are obtained from us. These services include:
- long distance;
- 1-800/toll-free;
- local voice delivered through fixed lines;
- Internet access;
- dedicated line services, which involve the leasing of network lines
expressly for connecting two or more users. These dedicated lines
establish a permanent circuit dedicated solely to the use of the
particular customer;
- switched digital services, which allow users to establish end-to-end
digital connections over shared facilities on an as-needed basis, similar
in concept to making a telephone call; and
- virtual network services, which involve a connection of customer networks
to an operator's network to create an overall capability for voice and
data services that acts functionally like a network owned or operated
exclusively by that customer.
These services also include data services using the following protocols for
transmitting data over a communications network:
- packet X.25, an older protocol designed for transmitting data files in
pieces or "packets" over analog communications networks that were
originally designed for voice traffic;
- frame relay, a newer protocol designed for transmission of data over
digital in packets of varying length; and
- ATM, or asynchronous transfer mode, an even newer protocol designed for
transmission of data in fixed-size packets or "cells" that enable
networks to accommodate many different transmission systems and permit
transmission of a mix of voice, data and video.
REGIONAL ACQUISITIONS. AT&T Corp. and its subsidiaries may acquire our
competitors. However, except as described below, if that competitor earned more
than half of its revenues in the previous fiscal year in our region of
operations from the services described under the above heading "Competitive
Services", AT&T Corp. or its relevant subsidiary would be required either to:
- cause that competitor to cease offering those services; or
- offer to sell to us for cash at fair market value the portion of the
competitor's business that primarily relates to those services in our
region of operations.
That offer must be made within either eighteen or thirty months of the
acquisition of the competitor, depending on how much of the competitor's
business is derived from our geographic region. No offer to purchase is required
if it would:
- violate any law or a pre-existing contractual obligation of the
competitor;
- violate a contract that is binding on any material assets of the
competitor;
- result in a tax on an AT&T Corp. entity that is material in relation to
the price paid for that portion of the business; or
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- in the good faith determination of the board of directors of the relevant
AT&T Corp. entity, violate its fiduciary duties to minority shareholders
of the relevant company.
If we do not accept such an offer for a competitive business, the acquired
competitor may compete with us.
RESTRICTIONS ON OUR BUSINESS RELATED TO CONCERT
Additional restrictions on our business would apply if we and our
subsidiaries receive more than an aggregate of $150 million revenues in any year
from providing services over cross-border networks in which we have an equity
interest. The maximum revenue figure represents an amount of this type of
revenues significantly higher than our growth strategy contemplates to generate
from these services. That is because we do not expect that the cross-border
networks in which we will have an equity interest will be material.
These additional restrictions would prohibit us from offering, selling or
distributing to multinational corporations reserved for Concert by AT&T Corp.
and British Telecom, except through Concert, communication services, which
consist of:
- those services and applications, including enhanced services and
applications, that involve the transmission of voice, data, sound, music,
still and moving image or video and other elements by fixed media, or
radio or other wave signal;
- any similar or substitute service available or offered from time to time;
and
- the business of developing, designing or offering content-based
applications.
The additional restrictions would also prohibit us from:
- offering, distributing or providing to any customers select
communications services between countries that are provided or targeted
to businesses and to their employees in their capacity as employees,
except through Concert; and
- owning, operating, leasing or managing facilities predominantly used to
provide services between or among two or more countries.
SERVICE MARK LICENSE AGREEMENT WITH AT&T CORP.
AT&T Corp. has entered into a service mark license agreement with us that
became effective when the FirstCom merger was completed.
Service Marks. AT&T Corp. licenses to us service marks, including "AT&T"
and the AT&T with a fanciful globe design mark, to us for our use in the
provision of our services in our region. We may also use the "AT&T" mark as part
of our trade and corporate names so long as at least half of the licensed
services -- namely, those grossing the highest revenue -- meet service
specifications provided by AT&T Corp. We may not use any mark other than a mark
licensed by AT&T Corp. for the services described under the heading "Services"
above without AT&T Corp.'s consent.
Brand Fee. During each year of the term of the service mark license
agreement, we pay a brand-fund fee to AT&T Corp. each year equal to the greater
of $5.0 million and a designated percentage of our gross revenues. Initially the
designated percentage of gross revenues is 4%. This percentage will decrease to
3.25% in the third year of the initial term and to 2.5% in the final two years
of the initial term. The brand-fund fee is used exclusively to develop the brand
and support our communications activities in the region, including advertising
in support of the brand, staff support to develop our communications activities
and monitoring brand activities in the region through customer satisfaction
studies, market research and management of the corporate identity.
Term; Termination. The initial term of the license is until August 28,
2005. The agreement will automatically renew for an additional five years if we
are not in material default under or breach of the license agreement. AT&T Corp.
may terminate the license prior to the end of its scheduled term if AT&T Corp.
no
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longer owns shares having voting control of our company or if we misuse the
marks or otherwise materially breach our obligations under the service mark
license agreement and are not able to correct the breach in a timely fashion.
COMPETITION
The communications industry has become increasingly competitive due to
privatizations and market liberalization processes, among other factors. This
trend is expected to continue as established and new operators continue to
implement their strategies to maintain or increase their market shares and new
participants enter the market. In general, competition in communications
services is based on:
- price and pricing plans;
- the types of services offered;
- customer service;
- brand position;
- access to customer premises;
- communications quality, reliability and availability; and
- the ability to provide high quality data communication services and
technical support.
We anticipate that we will continue to experience downward pressure on
prices for our services as competition remains strong and market liberalization
continues. However, we expect that we will continue to generate revenue growth
because we believe the growth in bandwidth and service usage by our target
corporate customer segment will offset or exceed the effect of the decline in
prices over the next several years.
ARGENTINA. We believe that our principal competitors in Argentina are
Telecom Internet S.A. and Advance Telecomunicaciones S.A., which are data
transmission companies controlled by Telecom Argentina S.A. and Telefonica de
Argentina S.A. Telecom Argentina and Telefonica de Argentina are the incumbents
in northern and southern Argentina, respectively. Telecom Internet and Advance
Telecomunicaciones use the infrastructure of their incumbent owners to deliver
services to their customers. Impsat S.A., a satellite and broadband service
provider, is also a significant competitor. There is increased competition from
both the incumbent operators, as well as new market entrants, such as Diveo and
MetroRed, as a result of the liberalization of Argentina's communications market
in November 2000. AT&T Argentina, which only began providing its own services in
November 2000, does not yet have material revenues.
BRAZIL. The strongest operators in Brazil's telecommunications market are
the incumbent carriers, which are companies remaining after the break up and
privatization of Telebras, the former state-owned monopoly. These incumbents
include Embratel, the former long-distance arm of Telebras and three local
carriers, Telefonica do Brasil (formerly Telesp), Brasil Telecom (formerly Tele
Centro Sul) and Telemar (formerly Tele Norte Leste), each serving a different
geographic area. Embratel, which has operated historically as Brazil's long
distance carrier, is controlled by a consortium led by Worldcom. Brasil Telecom
is controlled by a consortium led by Telecom Italia. Embratel is the leader in
Brazil in corporate communications and data solutions. In addition, two "mirror
companies" created by the auction of mirror licenses following the Telebras
privatization provide local services over public switched networks in areas
served by the incumbent carriers. These are Vesper (mirror to Telefonica and
Telemar) and Global Village Telecom (mirror to Brasil Telecom). Intelig, a
mirror company to Embratel, provides domestic and international long distance in
Brazil. Emerging competitors in the Internet and data services markets include
MetroRed, Impsat, Pegasus and Diveo. These emerging competitors, like AT&T do
Brasil, hold specialized limited licenses.
CHILE. Chile opened its fixed local and long distance markets to
competition in 1994 and its communications market continues to be very
competitive. There are more than seven fixed local service providers (although
not all of them offer services nationwide) and about the same number of
operators in the long distance segment. Currently, five providers offer both
local and long distance services. Three of them also offer data services,
namely, Telefonica Empresas, Entel and Manquehue Net. Although somewhat new,
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Teleductos S.A is becoming increasingly competitive in the data market. We
believe that in Chile our main competitors in the data transmissions market are
Telefonica Empresas, Entel and Teleductos. In the fixed voice market, our
competitors are the former incumbents Telefonica CTC and Entel Chile.
COLOMBIA. Colombia's communications market has historically been dominated
by the incumbent long distance operator, TELECOM (Empresa Nacional de
Telecomunicaciones). TELECOM owns approximately 5% of the equity interest of our
subsidiary, AT&T Colombia. There are several companies that provide value-added
services to corporate customers, although their services are mainly
satellite-based and/or based on metropolitan networks owned by third parties. In
the metropolitan areas, specifically in Bogota, there are a limited number of
high-speed communication service providers. Notwithstanding, Teledatos, a
last-mile provider in Bogota, and Emtelco, a value-added services provider,
appear to be growing in their respective market niches. We believe that our main
competitors in data and Internet services are TELECOM and Impsat. Impsat
Colombia has strong local presence primarily servicing customers using their
satellite network and through metropolitan networks of third parties.
PERU. Telefonica del Peru, a subsidiary of Telefonica de Espana, is the
predominant operator in Peru's communications market. Telefonica del Peru was
formed by the merger in 1994 of the former incumbents, Compania Peruana de
Telefonos and ENTEL. BellSouth, formerly Tele2000, is another important
competitor that focuses primarily on cellular and public pay phone services in
Lima and other Peruvian cities. BellSouth also provides frame relay services
over its own small fiber optic loop. Frame relay services are delivered using
the frame relay transfer mode designed for transmission of data over digital
networks in packets of varying length. Our subsidiary, AT&T Peru, is second to
Telefonica del Peru in market share for voice and data transmission services
excluding wireless communications.
EMPLOYEES
As of December 31, 2000, we had a total of 1,871 employees.
We believe that our future success depends in large part on our continued
ability to attract and retain highly skilled and qualified personnel. We believe
that we offer prospective employees competitive compensation and benefits as
well as the opportunity to work with advanced technology in a high-growth
company. However, we cannot assure you that we will be able to attract and
retain an adequate number of qualified employees to meet our hiring objectives.
As is the case throughout the countries where we operate, we also regularly use
the services of contract technicians for the installation and maintenance of our
network. We believe that our relations with our employees are good.
REGULATIONS AND LICENSES
ARGENTINA. The Argentine government's liberalization of the
telecommunications sector began in 1989 with the restructuring and privatization
of ENTEL (Empresa Nacional de Telecomunicaciones), the state-owned monopoly
telecommunications operator, into two regional telecommunications service
providers. Two consortia purchased these regional incumbent providers: Telecom
Argentina (Telecom Italia and France Telecom) which operates in the northern
region of Argentina and Telefonica de Argentina (Telefonica de Espana and
financial partners) which operates in the southern region of the country. The
exclusivity in basic telephone services enjoyed by the incumbents ended in 1999
when two consortia led by Movicom (Compania de Radio Comunicaciones Moviles (a
BellSouth affiliate)) and CTI (Compania de Telefonos del Interior (a GTE Mobile
Communication International affiliate)) respectively, were authorized to offer
nationwide local and long distance services.
The national data and valued added services were not included in the
exclusivity granted to the incumbents. Consequently, any telecommunications
provider could apply for licenses to provide such services. At least eight main
companies, including Telefonica de Argentina and Telecom Argentina (through
their affiliates), Keytech LD (now AT&T Argentina) and Impsat, initiated such
operations using terrestrial and satellite-based access platforms.
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In March 1998, the Argentine government set up a plan to liberalize the
market by November 2000. In September 2000, Decree No. 764 enacted new rules on
interconnection, licensing, universal service, and spectrum administration. As
all market segments were opened, AT&T Argentina, among other companies like
Impsat, MetroRed and Diveo, were authorized to offer not only data and value
added services, but also local and long distance telephony.
Under the new interconnection regime, AT&T Argentina was able to enter into
interconnection agreements with the incumbents Telecom Argentina and Telefonica
de Argentina, on October 19, 2000 and October 24, 2000, respectively. AT&T
Argentina is in the process of negotiating agreements with other network
operators.
Further market liberalization can be expected as the regulator (the
Secretariat of Communications) gains institutional strength and continues its
efforts to design policies for the implementation of a multi-carrier system (a
system that allows end-users to select a long distance carrier of their choice
on a call-by-call or contractual basis), network unbundling and collocation,
numbering translation services (NTS), and number portability. Once fully
operative, we expect these and other regulatory changes will heighten market
competition.
BRAZIL. Brazil's telecommunications laws were significantly revised in
September 1997 when the Brazilian legislature enacted the General
Telecommunications Law and authorized the creation of ANATEL, the sector's
regulatory agency.
In 1998, the Telebras operating companies were privatized and its
fixed-line communications business was divided into three incumbent local
carriers, Telefonica (formerly Telesp), Brasil Telecom (formerly Tele Centro
Sul), Telemar (formerly Tele Norte Leste), each of which serves a different
geographic area, and Embratel, the long distance carrier.
The Brazilian government then sought to create a regulated duopoly
structure by selling at auction "mirror" licenses allowing one competitor to
provide communications services over public switched networks in each of the
three areas, and one competitor to provide long distance services (a public
switched network is a network available to all users and not dedicated to a
particular user). These "mirror companies" are Vesper (mirror in two regions,
for Telefonica and Telemar), Global Village Telecom (mirror in one region, for
Brasil Telecom) and Intelig (mirror for Embratel, in long distance services).
Under the new regulatory framework, Brazil's telecommunications services
were classified as restricted services or collective interest services. Further,
services are offered under either the public regime or the private regime.
Services offered under the public regime are highly regulated and subject to
universal service obligations. The former Telebras companies operate under this
regime. These services are provided under a concession or permission. Services
offered under the private regime, while also regulated, are not subject to
universal service requirements or price regulation. In addition, regulations
preclude any practices considered anticompetitive or predatory. Instead of
requiring a concession, as public services do, these services require an
authorization that entails the execution of an adhesion contract with ANATEL.
As currently defined, collective interest services are those that must be
provided by the service provider to any interested party, under
non-discriminatory conditions. A restricted interest service is intended for the
sole use of the service provider or of certain user groups selected by the
service provider. Collective interest service providers have the right to use
post, ducts, conduits, and rights of way that are either owned or controlled by
public telecommunications service providers. Collective service providers are
required to interconnect with other collective service providers. The rules and
regulations applicable to this relationship are defined in the General
Interconnection Rules and provide for non-discriminatory access and technical
transparency. Under the Telecommunications Services Regulations, the
interconnection between restricted interest service providers and other
restricted or collective interest service providers (such as the public fixed
network, among others) is prohibited.
Along with the privatization of the Telebras system and partial
deregulation of basic telephone services, ANATEL began issuing limited service
licenses. Limited services are provided under the private services regime. While
these licenses are national in scope they prohibit licensees from competing with
incumbents
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and their mirrors in the basic services and long-distance segments. They
essentially allow operators to provide specific data transmission services to
corporate customers by installing and using their own infrastructure.
AT&T do Brasil holds two private regime, collective-interest licenses: a
Specialized Circuit Service License and a Specialized Network Service License.
These licenses allow AT&T do Brasil to develop a nation-wide telecommunications
network through its own infrastructure or leased lines and to offer fixed
point-to-point and point-to-multipoint services as well as private network
services to a company or group of legal entities that perform specific
activities (i.e., corporate voice, data and video communications services). Both
of these licenses are international and national in scope and are for an
indeterminate period of time. AT&T do Brasil may not offer services open to
public correspondence, such as the delivery of transmissions originating and
terminating outside its network. It may, however, deliver transmissions between
points inside its own network and to and from points outside of it. Value-added
services are not subject to licenses in Brazil, so AT&T do Brasil is able to
conduct value-added services with no restrictions.
AT&T do Brasil has not entered into interconnection agreements. However, it
has recently initiated efforts to enter into interconnection agreements with
incumbent operators. AT&T do Brasil has executed arrangements for the use of
third parties' infrastructure pursuant to "Contratos de Exploracao Industrial de
Linhas Dedicadas" with Telefonica, Telemar, Embratel, Brasil Telecom, Impsat,
Vesper, NQT, CRT, Diveo, Light Telecom, Pegasus, and other local and long
distance carriers (Embratel, Telefonica, Brasil Telecom and Telemar).
The current state of the duopoly in fixed switched public telephone
services and open competition in other telecommunications services is expected
to change on December 31, 2001, when regulatory barriers to market entry into
local and domestic and international long distance services are scheduled to be
eliminated. At that time, incumbents will be authorized to expand into other
regions if they have met the service obligations that they are required to meet
by the end of 2003. ANATEL is expected to clarify future liberalization
processes (e.g., local multipoint distribution systems (LMDS), network
unbundling) and improve the speed at which it develops and implements key
pro-competition policies.
CHILE. Chile's telecommunications industry is regulated by the
Undersecretariat of Telecommunications (SUBTEL), a unit of the Ministry of
Transportation and Telecommunications (MTT). Chile began liberalizing the
industry in the early 1980s. The General Telecommunications Law No. 18.168,
enacted in 1982, established policies to introduce competition and eliminate
restrictions on foreign investment. Telefonica CTC, currently the incumbent
telecommunications operator, and ENTEL Chile, the incumbent international long
distance operator, were privatized in the late 1980s. By 1990 the government had
relinquished its controlling stake in all state-owned telecommunications
companies.
In 1994, Chile introduced a multi-carrier system that initiated open
competition in the long distance and wireless markets. New rules related to this
carrier-selection mechanism also required that local telephone companies create
a separate legal corporate entity in order to enter the long distance market.
Also the MTT approved a tariff decree for Telefonica CTC's local service
that became effective in May 1999 and will last until 2004. Given Telefonica
CTC's dominance in local telephony, the tariff decree prevents predatory
pricing. Tariffs for non-dominant carriers in local telephony are completely
unregulated. In addition, the decree set interconnection rates for the same
period of time. Interconnection rates are cost-based and calculated using a Long
Run Incremental Cost (LRIC) model. However, Telefonica CTC has filed a petition
to overturn this decree based on the increased number of competitors entering
the local market, including mobile providers, claiming there is enough
competition to warrant lessened regulation.
SUBTEL classifies licenses and authorizations according to the type of
service. AT&T Chile (which refers to several subsidiaries of ours in Chile)
holds licenses for local, domestic long distance and international long distance
service, a license to install and operate a fiber optic network, and
authorizations for data and voice transmission services and value added services
over private line networks. Prior to 2000 our subsidiary AT&T Chile Long
Distance entered into interconnection agreements with Manquehue Telefonica,
Telefonica del Sur, Telesat, CMET, Entel Phone, Telefonica CTC Chile, Compania
Telefonica Rural, VTR Telefonica,
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Compania de Telecomunicaciones de Coyhaique, Chilesat and Entel Chile. The
latter two contracts allow AT&T Chile Long Distance to transport its domestic
long distance traffic nationwide.
The existing set of policies and regulations have made Chile one of the
more open and competitive telecommunications markets in Latin America. We expect
that SUBTEL will focus its future regulatory activity on fine-tuning the
existing regime; issuing licenses for the deployment of new service offerings
and new technologies, increasing consumer information and protection; and
ensuring that the market remains fully competitive.
COLOMBIA. In 1997, the Colombian goverment allowed new entrants into the
local market and liberalized the long distance segment. Currently, the
Telecommunications Statute (Decree 1900 of 1990) embodies the general principles
and rules applicable to the telecommunications industry in Colombia although its
applicability is subject to special laws and regulations for specific services.
The Ministry of Communications regulates the assignment of spectrum
frequencies and the infrastructure. The Commission for the Regulation of
Telecommunications, or CRT, performs most regulatory duties. The Superintendency
of Public Services is considered an enforcement agency.
In Colombia, licenses and authorizations are classified and granted
depending of the type of service. Our subsidiary AT&T Colombia holds nationwide
value added service and carrier licenses as well as a license to use LMDS fixed
wireless technology in the cities of Medellin and Bucaramanga. AT&T Colombia can
offer data and voice transmission services and value-added services through
virtual private networks, provided that voice is only permitted for "closed
user" groups.
Decree 1367 of 2000 amended Decree 558 of 1998 to authorize licensees of
long haul services to connect, not only points within the national territory,
but also a domestic point to a point outside Colombia. Decree 1367 of 2000 was
struck down by the Constitutional Court. However, the government is expected to
issue a ruling, similar to Decree 1367, which would allow long haul services
between points inside and outside Colombia.
A recent rule, Rule 336 of 2000, determined that clauses stating minimum
service periods, monetary penalties for early termination and automatic renewals
in consumer contracts are legally valid and enforceable provided that such
clauses are expressly agreed upon in a separate document signed by the client.
AT&T Colombia is adapting its contracts with clients to comply with this new
rule. On a different front, Resolution 307 of 2000, set a flat fee for dial-up
internet connections using local phone service providers.
Interconnection among certain networks is mandatory in Colombia. The
current interconnection regime establishes a series of obligations for operators
and certain interconnection rates. However, AT&T Colombia has not entered into
interconnection agreements because existing rules do not provide for the
interconnection of VAS networks. AT&T Colombia has executed carrier agreements
with Telecom (national connection), Teleglobe (Internet connection), ISA
(national connection), IMPSAT (local and national connection), Ductel (local
connection in the city of Cartagena) and Emtelco (local connection services in
ten cities).
The CRT has recently announced that it will issue a new and improved
Interconnection Rule. Furthermore, it is expected that during 2001 the CRT will
issue new rules concerning consumer protection; number portability and closer
scrutiny into business practices that limit competition. Likewise, the Ministry
of Communications has been promoting a project known as the Ley Marco de
Telecomunicaciones, or Telecommunications Framework Act. This bill, and other
probable rulings, will presumably aim at regulating integrally the
telecommunications sector, including sensitive issues such as dominant position
in the market, rules of competition, and new technologies. The final draft of
this bill may be presented to Congress during the first part of 2001 to be
debated during the remainder of the year.
PERU. The Peruvian Telecommunications Act, approved by supreme decree
N(LOGO) 013-93-TCC (1993), provides the general framework for the provision and
regulation of telecommunications services in Peru. The provision of
telecommunications services is regulated and overseen by the Ministry of
Transportation, Communications, Housing and Construction and by OSIPTEL, the
regulatory agency in charge of the supervision of private investment in the
telecommunications sector. The Telecommunications Act, the
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General Regulations (approved by supreme decree 06-94-TCC), the General Policy
Guidelines for Market Liberalization (approved by Supreme Decree 020-98-MTC),
the decrees issued by the Ministry and the regulations and decisions made by
OSIPTEL, constitute the legal and regulatory framework for the provision of
telecommunications services in Peru.
In May 1994, the Peruvian government granted concessions to provide basic
local and long distance telecommunications services to Compania Peruana de
Telefonos S.A. (CPT S.A.) and Empresa Nacional de Telecomunicaciones del Peru
S.A. (ENTEL PERU S.A.), the former local fixed telephony and long distance
telephone service incumbents, under a limited competition regime for a five-year
period. After the privatization process, that same year, Telefonica del Peru was
formed by the merger of CPT S.A. and ENTEL PERU S.A.. Under the limited
competition regime, Telefonica del Peru S.A. enjoyed an exclusivity period in
the provision of local fixed telephony and long distance carrier services. Other
services such as local carrier services, mobile services and value added
services were open to competition.
The Peruvian telecommunications market was fully liberalized in 1998, one
year before the expiration of the limited competition environment. This
deregulation was the result of the agreement between the Peruvian government and
Telefonica to modify its concession agreement and Supreme Decree N(LOGO)
020-98-MTC. Prior to the deregulation, AT&T Peru was able to provide value-added
services, including internet access. Under the new competitive landscape, AT&T
Peru was also authorized to provide local telephony and local as well as
domestic and international long distance carrier services.
Currently, the Peruvian government is reexamining existing rules and
regulations and considering the introduction of changes aiming at the
consolidation of open and free competition. New policy decisions are expected to
further develop the interconnection regime, establish effective rights regarding
essential facilities and unbundled network elements and implement number
portability in the local segment.
AT&T Peru has entered into interconnetion agreements as follows (i) with
the incumbent, Telefonica del Peru, for interconnection of long distance carrier
services provided by AT&T Peru with fixed local telephony services provided by
Telefonica del Peru (OSIPTEL Interconnection Resolution N(LOGO) 001-99), (ii)
interconnection of long distance carrier services provided by AT&T Peru with
mobile services provided by Telefonica Moviles SAC, using transit services from
Telefonica del Peru (OSIPTEL Interconnection Resolution N(LOGO) 007-2000), and
(iii) interconnection of fixed local telephony services provided by AT&T Peru
with fixed and mobile services provided by Telefonica del Peru and Telefonica
Moviles SAC (OSIPTEL Interconnection Resolution N(LOGO)006-2000).
AT&T Peru S.A. has also entered into interconnection agreements with
operators such as Bell South Mobile for all services through direct
interconnection links (agreement signed in late March; submitted for OSIPTEL's
review and approval), Bell South, for interconnection of fixed local telephony
provided by AT&T Peru and mobile services provided by BellSouth Mobile, using
transit services of Telefonica del Peru, Teleandina (interconnection contract
executed September 1, 2000, submitted for OSIPTEL'S review and approval), TIM
S.A.C. (Telecom Italia Mobile) for PSC services (Interconnection 002-2001 dated
January 11, 2001) and Nextel del Peru for fixed local telephony provided by AT&T
Peru and mobile services provided by Nextel del Peru using transit services of
Telefonica del Peru (Interconnection Resolution N(LOGO) 001-2001 dated January
8, 2001) and Nextel for all services through direct interconnection links
(agreement signed in late March; submitted for OSIPTEL's review and approval).
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EXECUTIVE OFFICERS OF AT&T LATIN AMERICA
NAME AGE POSITION
- ---- --- --------
Patricio E. Northland...................... 45 Chairman of the Board, President and Chief
Executive Officer
Carlos A. Andre............................ 39 General Manager -- AT&T do Brasil
Carlos Fernandez........................... 43 General Manager -- AT&T Chile
Carlos Ferrer.............................. 35 General Manager -- AT&T Colombia
Jose Gandullia............................. 56 General Manager -- AT&T Peru
Alejandro O. Rossi......................... 40 General Manager -- AT&T Argentina
Thomas C. Canfield......................... 45 General Counsel and Secretary
Rodrigo Garcia............................. 36 Vice President -- Network Services
Edgardo J. Lertora......................... 57 Vice President -- Corporate Communications
and Brand Strategy
Marco A. Northland......................... 42 Vice President -- Products and Business
Services
Jorge M. Rodriguez......................... 32 Vice President -- Corporate Operations
Marie Santana.............................. 50 Vice President -- Human Resources
Mickey M. Schleien......................... 40 Vice President -- Corporate Development
Marisol U. Slaton.......................... 46 Controller
Fernando Vicuna............................ 46 Chief Information Officer
The following is biographical information for our executive officers:
Patricio E. Northland has been our Chairman of the board of directors and
Chief Executive Officer since August 28, 2000, the date of the FirstCom merger.
Mr. Northland has over sixteen years of experience as an international
communications executive and entrepreneur. Mr. Northland was Chairman of the
board of directors, President and Chief Executive Officer of FirstCom from
November 1996 to August 2000. Born in Chile, Mr. Northland is a U.S. citizen. In
1991, Mr. Northland founded AmericaTel corporation, a Miami-based international
communications carrier providing satellite-based voice, data and fax
communications services to corporate customers throughout Latin America. Prior
to his involvement with AmericaTel, Mr. Northland held key management positions
with PanamSat and InetlSat. In 1996, Mr. Northland sold his interest in
AmericaTel to Entel.
Carlos A. Andre has been the General Manager of AT&T do Brasil since May
2000. Previously, from June 1995, Mr. Andre was at Oracle do Brasil Sistemas
Ltda. where he started as a Sales Director and later became Chief Executive
Officer. In August 1992, he helped launch Brazilian operations for Novell. Prior
to joining Novell, Mr. Andre helped found Unilog, a company that develops, sells
and implements human resources, logistic and administration software.
Carlos Fernandez has been General Manager of AT&T Chile since the FirstCom
merger. Prior to the merger, he was chief executive officer of FirstCom Chile
S.A. since March 1998. Prior to joining FirstCom, Mr. Fernandez had over
seventeen years of experience as an international communications executive with
IBM Chile. From 1981 to 1997, Mr. Fernandez held various positions, including,
director of IBM Chile, corporate and business affairs manager and commercial
manager.
Carlos Ferrer has been General Manager of AT&T Colombia since the FirstCom
merger. Prior to the merger, he was Chief Executive Officer -- Colombia of
FirstCom since August 1999. From August 1995 to July 1999, Mr. Ferrer worked as
Chief Operating Officer for Emtelco S.A. Prior to joining Emtelco, Mr. Ferrer
held key positions at Celsa and Empresas Publicas de Medellin.
Jose Gandullia has been General Manager of AT&T Peru since the FirstCom
merger. Prior to the merger, he was Chief Executive Officer of FirstCom -- Peru
since April 1999 and its Chief Financial Officer
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from October 1998 to April 1999. Prior to joining FirstCom, Mr. Gandullia served
as General Manager of Los Portales Consorcio Hotelero, S.A. From 1991 to 1997,
he served as Executive Director of Kong Corporate Group in Guatemala. Mr.
Gandullia has 20 years of experience in international communications, having
held management positions in the United States, Venezuela, Mexico, Peru and
Central America.
Alejandro O. Rossi has been General Manager of AT&T Argentina since the
acquisition of Keytech. He had been Chief Executive Officer of Keytech prior to
its acquisition. Prior to joining Keytech, Mr. Rossi was an assistant General
Manager at ING Barings from March 1996 to April 1998. From October 1993 to
February 1996, he was a Vice President, Investment Banking at Goldman Sachs.
Thomas C. Canfield has been our General Counsel and Secretary since the
FirstCom merger. Mr. Canfield became General Counsel of FirstCom in May 2000.
Prior to joining FirstCom, Mr. Canfield was counsel in the New York office of
Debevoise & Plimpton where he practiced for nine years in the area of
international business transactions, with emphasis in Latin America.
Rodrigo Garcia has been our Vice President of Network Services since the
FirstCom merger. Prior to the merger, he was Director of Technology of FirstCom.
From 1998 to 1999, Mr. Garcia was Engineering and Development Director of
FirstCom Networks, a subsidiary of FirstCom Chile. He was a technical manager
for Hewster Chile S.A., now known as AT&T Chile Networks S.A, from 1992 until
1998. Prior to joining FirstCom, Mr. Garcia served as telecommunications advisor
to the Department of Interior of Chile and network administrator for the
Presidency of the Republic of Chile.
Edgardo J. Lertora has been our Vice President of Corporate Communications
and Brand Strategy since the FirstCom merger. Mr. Lertora has over 25 years of
experience in sales, marketing, communications and public affairs throughout
Latin America, Asia and Africa. In 1992, Mr. Lertora joined AT&T Corp. as Public
Relations and Marketing Communications -- Vice President for Latin America and
Africa. Prior to his joining AT&T Corp., Mr. Lertora held an executive
management position at DuPont.
Marco A. Northland has been our Vice President of Products and Business
Services since the FirstCom merger. Prior to the FirstCom merger, he was
Vice-President of Product Marketing and Business Development of FirstCom since
June 1999. He previously was Vice-President -- Internet Services and Business
Development and acting Chief Executive Officer of FirstCom's Colombian
operations. In 1997, Mr. Northland founded @Phone, S.A., a start up
telecommunications/Internet company based in Lima, Peru. Prior to founding
@Phone, Mr. Northland was Vice President of Marketing, Sales and Business
Development of AmericaTel from 1991. Mr. Northland has also held executive
positions with Panamsat and Hughes Network Systems. Mr. Marco A. Northland is
the brother of Mr. Patricio E. Northland.
Jorge M. Rodriguez has been our Vice President of Corporate Operations
since March 2000. From January 1999 to February 2000, Mr. Rodriguez was the
Revenue Integrity Director of AT&T Corp. Prior to that, he held various
management positions at AT&T Corp., where he worked for more than ten years,
including as Director of Business Planning and Operations from November 1996 to
January 1998 and National Sales and Marketing Manager from October 1995 to
October 1996.
Marie Santana has been our Vice President of Human Resources since the
FirstCom merger. Prior to the FirstCom merger, she was Vice President of Human
Resources for International Operations for AT&T Corp. since July 1999. From
April 1996 to 1999, she served as Vice-President for International Human
Resources for the Caribbean, Latin America, Brazil, Mexico, Canada and
U.S.-based international employees for AT&T Corp. Prior to that, after having
held various other human resources management positions with AT&T Corp., Ms.
Santana was Director of Global Human Resources for AT&T Corp. in Mexico from
December 1994 to April 1996.
Mickey M. Schleien has been our Vice President of Corporate Development
since August 2000. Prior to that, he worked for two years as a Senior Vice
President at Lehman Brothers, as a member of the equity research department
covering telecommunications companies in Latin America. In this role, Mr.
Schleien analyzed the outlook for the companies he covered and recommended
investment strategies for the firm's institutional investors, investment banking
department, and trading operations. Mr. Schleien held a similar position at UBS
Securities from April 1996 to April 1998, as well as at Morgan Stanley and James
Capel.
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Marisol U. Slaton has been our Controller since August 2000. Prior to
joining us, Ms. Slaton was Regional Controller for the Caribbean/Latin America
Region at AT&T Corp. from April 1995 to August 2000. During her tenure with AT&T
Corp., Ms. Slaton served as Internal Auditor for the Caribbean/Latin America
region as well as the Controller for Mexico.
Fernando Vicuna has been our Chief Information Officer since the merger.
Prior to the FirstCom merger, he was Chief Information Officer at FirstCom since
January 2000. Prior to joining FirstCom, Mr. Vicuna served as Sales Manager and
Technology Advisor to management at Telco since 1994.
CHIEF FINANCIAL OFFICER NOMINEE
Nelson A. Murphy will become our Vice President and Chief Financial Officer
in April 2001. Since 2000, Mr. Murphy has been Chief Financial Officer of
Telegis Network. From 1999 to 2000 Mr. Murphy served as Financial Vice President
at AT&T Global Network Services heading their $2.5 billion and 5,600-employee
data/IP networking business unit across 80 countries. From 1997 to 1999, Mr.
Murphy served as Financial Vice President at AT&T Europe, Middle East, Africa.
From 1996 to 1997, Mr. Murphy served as Chief Financial Officer at AT&T United
Kingdom. From 1994 to 1996, Mr. Murphy served as Chief Financial Officer for the
Chief Information Officer's Organization of AT&T Consumer Communications
Services.
PROPERTIES
Our principal physical properties are our high-speed communications
networks, which include switching equipment, transmission equipment and
fiber-optic cable.
We lease our office space and network equipment locations. These leased
facilities include approximately 20,000 square feet of office space. In
addition, we believe that suitable alternative locations are available in all
areas where we currently conduct business. Most of our services are provided
through our networks or third parties' networks. Our metropolitan networks are
constructed in locations selected based on density of target customers and are
routed over public and private rights of way. Our corporate headquarters are
located at 220 Alhambra Circle, Suite 900, Coral Gables, Florida.
LEGAL PROCEEDINGS
In the normal course of business, we are subject to proceedings, lawsuits
and other claims. These matters are subject to many uncertainties and outcomes
that are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2000. While these matters
could affect operating results of any one quarter when resolved in future
periods, it is management's opinion that after final disposition, any monetary
liability or financial impact to us would not be material to our annual
consolidated financial position or results of operations.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
AT&T LATIN AMERICA CLASS A COMMON STOCK
MARKET INFORMATION. Our Class A common stock has been listed on the Nasdaq
National Market under the symbol "ATTL" since August 29, 2000, the day after the
FirstCom merger. Prior to that time, including during a portion of the period
covered by this report, there was no public market for our Class A common stock.
Our Class B common stock is not publicly listed or traded.
The following table sets forth, for the quarters indicated, the high and
low prices of our Class A common stock, as reported by the Nasdaq National
Market.
FISCAL YEAR
ENDED
DECEMBER 31,
2000
-------------
HIGH LOW
---- ---
Third quarter (since August 29, 2000)....................... $17 3/8 $6 1/2
Fourth quarter.............................................. $ 9 1/8 $2 3/16
Holders. As of March 20, 2001, there were approximately 144 holders of
record of 43,214,758 shares of our Class A common stock outstanding, which
excludes beneficial owners of shares held in "street name." A significant number
of shares of our common stock are held in nominee name for beneficial owners.
AT&T Corp. holds all 73,081,595 outstanding shares of our Class B common stock.
Dividends. We have not declared cash dividends to holders of shares of
Class A or Class B common stock since our inception, and we do not anticipate
paying any cash dividends in the foreseeable future, but intend instead to
retain any future earnings, if any, for reinvestment in our business.
Any future determination as to the payment of cash dividends to Class A and
Class B common stockholders will be made at the discretion of our Board of
Directors and will depend upon our operating results, financial condition,
capital requirements, general business conditions and such other factors as the
Board of Directors deems relevant. In addition, the certificate of designation
for our Series B preferred stock which is owned by Global Card Holdings, a
wholly-owned subsidiary of AT&T Corp., prohibits us from paying dividends on any
common stock so long as shares of Series B preferred stock are outstanding. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
FIRSTCOM COMMON STOCK
The following table sets forth, for the quarters indicated, the high and
low prices of FirstCom common stock, as reported by the Nasdaq Small Cap Market
under the symbol "FCLX" for the periods indicated prior to the merger of
FirstCom with AT&T Latin America.
FISCAL YEAR ENDED
------------------------------
DECEMBER 31, DECEMBER 31,
1999 2000
------------- -------------
HIGH LOW HIGH LOW
----- ---- ----- ----
First quarter............................................... $ 3 1/4 $2 1/16 $39 7/16 $24 1/4
Second quarter.............................................. $ 9 3/8 $2 9/32 $34 $10 3/16
Third quarter (through August 28, 2000 for the year 2000)... $12 1/4 $7 $18 1/2 $11 5/8
Fourth quarter.............................................. $43 5/8 $9 3/8 $-- $--
RECENT SALES OF UNREGISTERED SECURITIES
In connection with the Netstream acquisition, in December 1999 AT&T Corp.,
through an affiliate, contributed $10.0 million in cash and SL Participacoes
contributed $40.0 million in cash of equity capital to
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us. On June 12, 2000, AT&T Corp. and SL Participacoes contributed an additional
$20.0 million in cash to us on a pro rata basis, in accordance with their
respective ownership percentages. In exchange for these additional cash
contributions, we issued 763,384 shares of Class B common stock to an affiliate
of AT&T Corp. and 84,820 shares of Class A common stock to SL Participacoes, and
granted each the right to receive, upon the completion of the FirstCom merger,
additional shares of the same class of common stock in accordance with their
respective ownership percentages based on the number of shares of FirstCom's
Series A convertible preferred stock that accrued between November 1, 1999, when
the FirstCom merger agreement was signed, and the completion of the merger.
On June 30, 2000, we issued an additional 1,178,689 Class A common shares
to the former stockholders of Keytech LD (now AT&T Argentina) as part of our
acquisition of Keytech.
On August 28, 2000, we completed the FirstCom merger immediately following
the approval of the merger by the FirstCom stockholders. The following
transactions, among others, were completed on that date:
- we issued to Global Card Holdings, Inc., a wholly-owned subsidiary of
AT&T Corp., 100,000 shares of the mandatorily redeemable 15% Series B
Preferred Stock, having an aggregate liquidation value of $177.1
million.;
- we issued 318,211 shares of Class B common stock to an affiliate of AT&T
Corp.; and
- we issued 35,357 shares of Class A common stock to SL Participacoes.
No underwriter was used in connection with the placement of the
above-mentioned securities.
Each of the foregoing sales of our securities were made in reliance upon
the exemption from registration provided by Section 4(2) of the Securities Act
of 1933, as amended.
SELECTED FINANCIAL DATA
We have set forth below certain selected historical financial information
relating to AT&T Latin America Corp., Netstream and FirstCom. You should refer
to the financial information included in this Annual Report on Form 10-K, our
financial statements and the financial information of Netstream and FirstCom
included in this Annual Report on Form 10-K and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
The following tables set forth selected summary consolidated financial data
for the period from (Inception) October 13, 1999 through December 31, 1999 and
for the year ended December 31, 2000, and has been derived from our audited
consolidated financial statements, which are included in this Annual Report on
Form 10-K.
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AT&T LATIN AMERICA CORP.
FOR THE PERIOD
FROM (INCEPTION)
OCTOBER 13, 1999 FOR THE YEAR
THROUGH ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenue:
Data-internet communications.............................. $ 802 $ 41,368
Voice services............................................ -- 10,867
-------- ---------
Total revenue..................................... 802 52,235
Costs of revenue............................................ 865 54,070
Selling, general and administrative expenses................ 2,164 67,695
Depreciation and amortization............................... 1,707 43,795
-------- ---------
Loss from operations................................... (3,934) (113,325)
Interest expense....................................... -- (14,797)
Interest income........................................ -- 3,037
Other (expense) income, net............................ (190) (7,531)
-------- ---------
Loss before provision for income taxes and minority
interest............................................. (4,124) (132,616)
Provision for income taxes.................................. -- (213)
Minority interest........................................... -- 497
-------- ---------
Net loss............................................... $ (4,124) $(132,332)
======== =========
Basic and diluted net loss per common share................. $ (0.05) $ (1.43)
======== =========
Weighted average common shares outstanding.................. 80,000 92,757
======== =========
DECEMBER 31,
-------------------------------------
1999 2000
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 24,223 $ 14,905
Property and equipment, net................................. 68,269 354,799
Goodwill and other intangibles, net......................... 261,345 854,530
Total assets...................................... 384,428 1,298,248
Long term debt, including short-term portion of long term
debt...................................................... 2,114 209,954
Mandatorily Redeemable 15% Series B Preferred Stock......... -- 186,205
Shareholders' equity........................................ 373,794 778,687
OTHER FINANCIAL DATA:
EBITDA (1).................................................. (2,227) (69,530)
Capital expenditures(2)..................................... 6,422 193,523
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DECEMBER 31,
-------------------------------------
1999 2000
----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CASH FLOWS DATA:
Net cash flows provided by (used in) operating activities... 17 (49,983)
Net cash flows used in investing activities................. (353,787) (128,076)
Net cash flows provided by financing activities............. 377,980 168,741
- ---------------
(1) We calculate EBITDA as operating loss plus depreciation and amortization. We
believe that EBITDA provides useful information regarding our ability to
service our debt. EBITDA should not be considered in isolation or as a
substitute for the consolidated statements of operations or the consolidated
statements of cash flows prepared in accordance with U.S. GAAP or as a
measure of profitability or liquidity. EBITDA is not a measure determined
under U.S. GAAP, an alternative to U.S. GAAP operating loss and net loss, or
a measure of liquidity or cash flows as determined under U.S. GAAP.
(2) Includes property and equipment acquired through vendor financing
arrangements of approximately $30.8 million during the year ended December
31, 2000.
The following tables set forth selected financial data for Netstream (now
AT&T do Brasil). The summary data as of December 31, 1998 and for the eleven
month period then ended, and as of September 30, 1999 and for the nine month
period then ended, are derived from Netstream financial statements. The results
of operations of Netstream have been included in the statement of operations of
AT&T Latin America subsequent to its acquisition by AT&T Latin America in
December 1999.
NETSTREAM
ELEVEN NINE
MONTHS ENDED MONTHS ENDED
DECEMBER 31, 1998(1) SEPTEMBER 30, 1999(2)
-------------------- ---------------------
(IN THOUSANDS, EXCEPT PER QUOTA DATA)
Revenue................................................. $ -- $ 395
Costs of revenue........................................ -- 1,768
Selling, general and administrative expenses............ (3,848) 9,691
Depreciation and amortization........................... -- 1,511
------- --------
Loss from operations.................................... (3,848) (12,575)
Other income (expenses), net............................ (6) (305)
------- --------
Loss before income tax benefit.......................... (3,854) (12,880)
Income tax benefit...................................... 412 879
------- --------
Net loss................................................ $(3,442) $(12,001)
======= ========
Net loss per quota (3).................................. $ (2.72) $ (5.13)
======= ========
Weighted average quotas outstanding (3)................. 1,264 2,339
======= ========
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DECEMBER 31,
--------------------------------------------
1998 1999
-------------------- ---------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............................... $ 2 $ 29
Property and equipment, net............................. 12,212 47,484
Total assets.................................. 12,980 49,793
Long term debt, including short-term portion of long
term debt............................................. 594 682
Total liabilities............................. 14,475 33,814
Quotaholders, equity interest(3)........................ (1,495) 15,979
OTHER FINANCIAL DATA:
EBITDA (4).............................................. (3,848) (11,064)
Capital expenditures.................................... 12,212 36,783
CASH FLOWS DATA:
Net cash flows (used in) provided by operating
activities............................................ (7) 27
Net cash flows used in investing activities............. 9 --
Net cash flows provided by (used in) financing
activities............................................ -- --
- ---------------
(1) Netstream was formed in February 1998.
(2) Represents the operations of Netstream up to the acquisition by AT&T Latin
America.
(3) As a Brazilian limited liability company (sociedad de responsabilidades
limitada), Netstream's capital is represented by quotas rather than shares
of capital stock.
(4) Netstream calculated EBITDA as operating loss plus depreciation and
amortization. EBITDA should not be considered in isolation or as a
substitute for the consolidated income statements or the consolidated
statements of cash flows prepared in accordance with U.S. GAAP or as a
measure of profitability or liquidity. EBITDA is not a measure determined
under U.S. GAAP, an alternative to U.S. GAAP operating loss and net loss, or
a measure of liquidity or cash flows as determined under U.S. GAAP.
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27
The following tables set forth FirstCom selected financial data. The
summary data as of December 31, 1996, 1997, 1998 and 1999 and for the years then
ended, are derived from FirstCom audited financial statements. The results of
operations of FirstCom have been included in AT&T Latin America Corp. subsequent
to its acquisition by AT&T Latin America Corp.
FIRSTCOM
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998 1999
------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENTS OF OPERATIONS DATA:
Revenue................................................ $ 652 $ 1,130 $ 18,142 $ 38,356
Cost of revenue........................................ 958 1,203 14,079 22,005
Selling, general and administrative expenses........... 3,345 4,678 12,293 26,206
Depreciation and amortization.......................... 842 1,201 2,237 10,211
Non-cash compensation and consulting expenses.......... -- 4,640 175 853
------- -------- -------- --------
Loss from operations................................... (4,493) (10,592) (10,642) (20,919)
Interest income (expense), net......................... (269) (5,206) (14,130) (20,266)
Other income (expense), net............................ -- (68) (550) (84)
------- -------- -------- --------
Loss before provision for income taxes and minority
interest............................................. (4,762) (15,866) (25,322) (41,269)
Provision for income tax expense....................... -- -- -- --
Minority interest...................................... -- -- -- --
------- -------- -------- --------
Net loss............................................... $(4,762) $(15,866) $(25,322) $(41,472)
======= ======== ======== ========
Basic and diluted net loss per share................... $ (0.32) $ (0.95) $ (1.33) $ (1.94)
======= ======== ======== ========
Weighted average shares outstanding.................... 14,796 16,668 19,084 21,354
======= ======== ======== ========
AT DECEMBER 31,
----------------------------------------
1996 1997 1998 1999
------- -------- -------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 723 $ 14,936 $ 8,892 $ 12,896
Property and equipment, net............................ 3,956 9,348 45,901 92,469
Total assets................................. 14,893 176,936 154,844 172,110
Long term debt, including short-term portion of long
term debt............................................ 248 131,982 133,913 149,109
Total liabilities............................ 2,074 145,009 148,670 166,078
Shareholders' equity (deficit)......................... 12,819 31,297 6,174 (8,700)
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------
1996 1997 1998 1999
------- -------- -------- --------
OTHER FINANCIAL DATA:
EBITDA (1), (2)........................................ (3,651) (9,391) (8,405) (10,708)
Capital expenditures................................... 1,453 2,763 34,674 33,124
CASH FLOWS DATA:
Net cash flows used in operating activities............ (3,934) (5,472) (28,389) (31,941)
Net cash flows (used in) provided by investing
activities........................................... (2,968) (69,590) 2,227 (15,948)
Net cash flows provided by financing activities........ 7,570 89,275 20,118 51,983
- ---------------
(1) These amounts reflect a non-recurring expense of $1,008 for the year ended
December 31, 1999 related to AT&T Latin America merger expenses.
(2) Firstcom calculated EBITDA as operating loss plus depreciation and
amortization. EBITDA should not be considered in isolation or as a
substitute for the consolidated income statements or the consolidated
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statements of cash flows prepared in accordance with U.S. GAAP or as a
measure of profitability or liquidity. EBITDA is not a measure determined
under U.S. GAAP, an alternative to U.S. GAAP operating loss and net loss, or
a measure of liquidity or cash flows as determined under U.S. GAAP.
SUMMARY SELECTED OPERATING INFORMATION
The following table sets forth selected unaudited operating statistics as
of December 31, 2000.
DECEMBER 31, 2000
---------------------------------------------------------
AT&T
LATIN
AMERICA
ARGENTINA BRAZIL CHILE COLOMBIA PERU TOTALS
--------- ------ ------ -------- ------ -------
Network route kilometers
Metropolitan.......................... 16 734 511 1,129 1,570 3,960
Domestic (Long-haul).................. -- -- -- 1,225 -- 1,225
----- ------ ------ ------ ------ -------
Total............................ 16 734 511 2,354 1,570 5,185
Total fiber kilometers..................... 1,383 52,417 10,361 29,605 35,846 129,612
Number of buildings connected.............. 1 820 469 1,163 1,522 3,975
Ports in service........................... 32 7,002 1,495 2,814 1,424 12,767
Permanent virtual circuits active.......... 28 3,630 1,296 2,015 1,231 8,200
Number of dedicated data and Internet
customers................................ 20 816 1,148 380 1,028 3,392
Number of employees........................ 291 517 361 242 404 1,815*
- ---------------
(*) Excludes 56 employees at corporate headquarters.
Network route kilometers. Network route kilometers are the total number of
kilometers of fiber-optic cable installed in our network. Network route
kilometers include cable laid as a backbone for the network, cable from the
backbone to a building and cable within a building to reach our customers'
hardware at its premises. A measurement in route kilometers does not take into
account the number of strands of fiber in the various fiber optic cables that
make up our network or the type of installation (e.g., underground or aerial).
Total fiber kilometers. Total fiber kilometers are network route
kilometers multiplied by the number of strands of fiber in each of the cables
that make up the network. By counting strands of fiber, a measurement in fiber
kilometers indicates the maximum capacity of our cable. For example, one route
kilometer of 144-strand fiber optic backbone cable would count as 144 fiber
kilometers, while one route kilometer of 12-strand building access cable would
count as only 12 fiber kilometers.
Buildings connected. Buildings connected represents the number of enclosed
fixed constructions of any type which are connected to our network using a
customer access circuit or a network access circuit.
Ports in service. A port in service represents a physical point of
interconnection between a customer's network and our network, regardless of the
ownership of the customer access circuit and the type of service provided using
the customer port. Typically, this interconnection is provided via a router or
other network terminating device connecting to a customer's local area network
and/or private branch exchange.
Number of permanent virtual circuits (PVCs) active. A permanent virtual
circuit represents a data connection, typically between two locations such as a
customer's headquarters and an off-site branch or other entity. We connect our
customers to their networks by deploying a port connection within or near to the
customer's premises. Each port can accommodate several permanent virtual
circuits. As a customer increases its usage of services, the customer will
obtain additional available transmission capacity on the same installed port.
The number of PVCs active represents the number of permanent virtual circuits
that have been installed and are provided directly or indirectly by us to a
customer pursuant to an executed service contract in full force and effect which
connects two extremes where customer traffic originates and/or terminates. The
demarcation of the circuit excludes customer premise equipment.
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Number of dedicated data and Internet customers. The number of customers
represents the number of legal entities identified by a unique
tax-identification number which have an effective contract with us for the
provision of data and/or Internet services.
Employees. The number of employees excludes third-party contractor
employees and agents.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
our consolidated financial statements and the related notes included elsewhere
in this Annual Report on Form 10-K. This discussion and analysis may contain
forward-looking statements that involve risks, uncertainties, and assumptions.
Our actual results may differ materially from those anticipated in these
forward-looking statements as a result of factors described under the heading
"Forward-Looking Statements" as well as other factors described in this Annual
Report on Form 10-K.
OVERVIEW
We provide broadband communications services to major metropolitan business
markets in Argentina, Brazil, Chile, Colombia and Peru. Broadband communications
services are communications services delivered over high speed, high capacity
transmission systems. Our objective is to be a leading facilities-based provider
of high bandwidth communications services to businesses in key Latin American
markets in the countries we operate. We focus primarily on business customers
with growing and diverse broadband communications needs. These customers include
multinational corporations, financial services companies, media and content
providers, technology companies, government entities, Internet service providers
and communications carriers, as well as small and medium size businesses. We
deliver our services mostly through our own technologically advanced networks
which interconnect primarily with other third party networks.
Basis of Presentation. Our financial statements reflect operations for the
period from inception (October 13, 1999) through December 31, 1999 and for the
year ended December 31, 2000. Because our historical financial information is
limited, in order to provide a meaningful presentation of our results of
operations, the following discussion and analysis presents the pro forma results
of operations of AT&T Latin America, Netstream, Keytech, and FirstCom as if the
companies had been combined as of the beginning of the periods presented.
AT&T Latin America. We were incorporated in October 1999 by AT&T Corp. The
countries in which we may operate under our certificate of incorporation and the
terms of our regional vehicle agreement with AT&T Corp. include the countries in
South America and the Caribbean plus Panama, but excluding Cuba and Venezuela.
AT&T do Brasil. We acquired our Brazilian subsidiary, Netstream, now named
AT&T do Brasil, in December 1999 from AT&T Corp., which contributed its entire
equity interest in Netstream and $10.0 million in cash to us in exchange for
shares of our Class B common stock. Immediately after the Netstream acquisition,
SL Participacoes contributed $40.0 million in cash to us in exchange for shares
of our Class A common stock that represented a 10% ownership interest at that
time.
AT&T Argentina. In June 2000, we acquired Keytech LD, now named AT&T
Argentina.
FirstCom. In August 2000, we completed our merger with FirstCom, which had
operations in Chile, Colombia and Peru. In the merger, the holders of FirstCom
common shares and Series A convertible preferred shares received one share of
our Class A common stock in exchange for each share of FirstCom.
RESULTS OF OPERATIONS
The following table includes a summary of actual and pro forma results of
operations for the periods indicated below. Pro forma results are presented to
show our results of operations giving effect to the FirstCom merger and the
Netstream and Keytech acquisitions as if the transactions had been completed as
of the beginning of the periods presented (in thousands). The pro forma
financial information is presented for
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informational purposes only and is not necessarily indicative of the future
results of operations or financial position of AT&T Latin America or the results
of operations or financial position of AT&T Latin America that would have been
achieved had the acquisition occurred at the beginning of the periods presented.
AT&T LATIN AMERICA CORP.
ACTUAL AND PRO FORMA RESULTS OF OPERATIONS
ACTUAL RESULTS PRO FORMA RESULTS
------------------------------------- -------------------------------------
FOR THE PERIOD
FROM (INCEPTION)
OCTOBER 13, 1999 FOR THE YEAR FOR THE YEAR FOR THE YEAR
THROUGH ENDED ENDED ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ----------------- ----------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Revenue........................ $ 802 $ 52,235 $ 40,918 $ 89,247
Cost of revenue................ 865 54,070 28,872 73,470
Selling, general and
administrative expenses...... 2,164 67,695 37,985 107,949
Depreciation and
amortization................. 1,707 43,795 59,521 75,115
-------------- --------------- --------------- --------------
Loss from operations........... (3,934) (113,325) (85,460) (167,287)
Other income (expense), net.... (190) (19,291) (26,397) (39,310)
-------------- --------------- --------------- --------------
Loss before provision for
income taxes and minority
interest..................... (4,124) (132,616) (111,857) (206,597)
Provision for income taxes..... -- (213) 170 356
Minority interest.............. -- 497 33 (717)
-------------- --------------- --------------- --------------
Net loss....................... $(4,124) $(132,332) $(112,060) $(206,236)
-------------- --------------- --------------- --------------
-------------- --------------- --------------- --------------
Basic and diluted net loss per
share........................ $ (0.05) $ (1.43) $ (0.97) $ (1.77)
-------------- --------------- --------------- --------------
-------------- --------------- --------------- --------------
Weighted average shares
outstanding.................. 80,000 92,757 116,096 116,296
-------------- --------------- --------------- --------------
-------------- --------------- --------------- --------------
The following table includes selected pro forma revenue by country and the
pro forma operating loss in dollars and as percentage of revenue (in thousands):
DECEMBER 31,
------------------------------------------
1999 % 2000 %
-------- ------ --------- -------
(UNAUDITED)
Revenue
Argentina....................................... $ 569 1.3% $ 802 0.9%
Brazil.......................................... 1,993 4.9% 27,961 31.3%
Chile........................................... 28,464 69.6% 32,629 36.6%
Colombia........................................ 7,197 17.6% 9,202 10.3%
Peru............................................ 2,695 6.6% 18,653 20.9%
-------- ------ --------- -------
Total revenue........................... 40,918 100.0% 89,247 100.0%
Cost of revenue................................... 28,872 70.6% 73,470 82.3%
General and administrative expenses............... 37,985 92.8% 107,949 120.4%
Depreciation and amortization..................... 59,521 145.5% 75,115 84.2%
-------- ------ --------- -------
Total operating loss.................... $(85,460) (208.9%) $(167,287) (187.4%)
-------- ------ --------- -------
-------- ------ --------- -------
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Pro Forma Year Ended December 31, 2000 compared to Pro Forma Year Ended
December 31, 1999
DECEMBER 31, CHANGE
----------------- ---------------
1999 2000 $ %
------- ------- ------- -----
(UNAUDITED)
PRO FORMA REVENUE
Data-internet services.................................... $16,468 $53,523 $37,055 225.0%
Voice services............................................ 24,450 35,724 11,274 46.1%
------- ------- -------
Total revenue..................................... $40,918 $89,247 $48,329 118.1%
======= ======= =======
Revenue. On a pro forma basis, revenue for the year ended December 31,
2000 was $89.2 million, compared to $40.9 million for the same period in 1999,
representing an increase of $48.3 million or 118.1%. This increase in revenue
was mainly generated in Brazil and Peru, which combined accounted for $41.9
million or 86.7% of the total revenue increase. The revenue increases in Brazil
and Peru were due mainly to the beginning stages of their operations during most
of the year ended December 31, 1999, when compared to their operations during
the year ended December 31, 2000. Revenue in Colombia and Chile increased at
slower pace than Brazil and Peru mainly due to the relatively more developed
operations we have in Chile and Colombia. It is expected that our revenue growth
will be relatively greater, in percentage terms, in Brazil, Peru and Argentina,
than revenue growth in Chile and Colombia, due mainly to the relatively earlier
stages of our operations in Brazil, Peru and Argentina. Our metropolitan
networks in Argentina are in an early development stage and do not yet generate
material revenue from customers.
On a pro forma basis, the fastest growing operating segment is our
data-internet services, which grew from $16.5 million during the year ended
December 31, 1999, to $53.5 million for the same period in 2000, representing an
increase of $37.1 million or 225.0%. The increase in our data-internet services
was mainly due to an increase in our customer base and the increased demand for
bandwidth by our existing business customers.
Pro forma data-internet services accounted for 60% of our revenue in 2000.
We anticipate that over the long-term, the majority of our revenues will be
generated from our data-internet services.
Pro forma voice services grew from $24.5 million during the year ended
December 31, 1999, to $35.7 million for the same period in 2000, representing an
increase of $11.3 million or 46.1%. The increase in our voice services was
mainly due to increased demand in Chile and Peru.
Costs of Revenue. On a pro forma basis, costs of revenue were $73.5
million for the year ended December 31, 2000, compared to $28.9 million for the
same period in 1999, representing an increase of $44.6 million or 154.5%. Costs
of revenue consist of leased line costs, maintenance costs, network and
operating system costs, including labor and other direct costs. We expect costs
of revenue to continue to increase in absolute terms as we continue to add
capacity to our networks and build or lease additional networks. However, we
expect to continue to increase our service offerings over our existing network
capacity as well as to obtain better pricing from third party network providers,
resulting in gross margin improvement for 2001.
Selling, General and Administrative Expenses. On a pro forma basis,
selling, general and administrative expenses were $107.9 million during the year
ended December 31, 2000, compared to $38.0 million for the same period in 1999,
representing an increase of $70.0 million or 184.2%. The increase in selling,
general and administrative expenses resulted primarily from an increase in
headcount and higher marketing and advertising expenses. We anticipate that
selling, general and administrative expenses will continue to increase in future
periods to the extent that we continue to experience growth and to expand our
service offerings. Selling, general and administrative expenses are comprised
primarily of compensation, professional fees, travel expenses, marketing, office
space and indirect labor expenses.
Depreciation and Amortization. On a pro forma basis, depreciation and
amortization was $75.1 million during the year ended December 31, 2000, compared
to $59.5 million for the same period in 1999, representing an increase of $15.6
million or 26.2%. Depreciation and amortization include amortization of goodwill
and other intangible assets related to the acquisitions of FirstCom, Netstream
and Keytech. We
30
32
expect that depreciation and amortization will continue to increase as we
continue to invest in the installation and expansion of our networks and explore
future acquisitions.
Other Income (Expense), net. On a pro forma basis, other income (expense),
net was $39.3 million of expense during the year ended December 31, 2000,
compared to $26.4 million of expense during the same period in 1999,
representing an increase of $12.9 million or 48.8% mainly due to increased
interest expense. Other income (expense), net is mainly comprised of dividends
relating to our Mandatorily Redeemable 15% Series B Preferred Stock and interest
expense related to our credit facilities from AT&T Corp.
Net Loss. On a pro forma basis, net loss was $206.2 million during the
year ended December 31, 2000, compared to $112.1 million for the same period in
1999, representing an increase of $94.1 million or 83.9%. We expect to continue
to incur net losses in the next several years, because the total of our
operating expenses, interest expense and non-cash expenses (primarily
depreciation and amortization) will continue to exceed our revenues as we
continue to invest in the installation and expansion of our networks in the
existing countries we operate and beyond, as well as in the addition of key
personnel to support our expected growth.
LIQUIDITY AND CAPITAL RESOURCES
Our primary liquidity needs are for working capital, capital expenditures
and debt service. Our primary sources of liquidity are credit facilities from
our major stockholder, revenue and various financing arrangements with equipment
vendors and from local Latin American credit markets. The consolidated financial
statements have been prepared on a basis which contemplates the realization of
assets and the satisfaction of liabilities and commitments in the normal course
of business.
Our business is capital intensive and, as such, has required and will
continue to require substantial capital investment. We are building a high
capacity network in the countries in which we operate and are primarily focused
on data-internet and voice communications services, the fastest growing segments
of the communications market. This strategy initially increases our level of
capital expenditures and operating losses and requires us to make a substantial
portion of our capital investments before we realize significant revenue from
them. These capital expenditures, together with the associated initial operating
expenses, will continue to result in negative cash flow unless and until we are
able to establish an adequate customer base. After the initial planned build-out
of our networks, our capital expenditures will become more closely related to
revenue growth. We believe that this long-term strategy will enhance our
financial performance by increasing the capacity of, and traffic flow over, our
networks.
We have incurred net losses of approximately $4.1 million and $132.3
million, from the period from inception (October 13, 1999) through December 31,
1999 and for the year ended December 31, 2000, respectively, and at December 31,
2000 we had a working capital deficit of $153.3 million. We expect to continue
incurring operating losses and generate negative cash flows from operations for
the next several years as we expand our existing communications networks and
develop new networks and services.
CAPITAL USES
During the year ended December 31, 2000, our net cash decreased by $9.3
million. The decrease in cash reflected cash used in operating activities of
$50.0 million and cash used in investing activities of $128.1 million, partially
offset by cash provided by financing activities of $168.7 million. Our uses of
cash in operating activities are due mainly to net loss, the uses of cash in
investing activities reflect our continued emphasis on purchases of property and
equipment to build-out networks used to provide services.
We expect to continue to make capital expenditures during 2001 and
thereafter relating to our existing and planned network development and
operations. These expenditures may include the purchase and installation of
fiber optic cable and electronic equipment, including switches, routers, servers
and other data transmission equipment, to expand existing networks and develop
new networks, including the connection of new buildings; and developing and
implementing our integrated regional information technology platform.
During 2001, we expect that capital expenditures will range from $200.0
million to $220.0 million.
31
33
In addition, we expect to use capital resources to fund operating losses
and working capital. We also expect interest expense to increase in the near
term as a result of increased amounts outstanding under our facilities from AT&T
Corp. and expected usage of our planned equipment vendor financing.
Our strategic plan also calls for expansion into additional market areas
within our designated region. This expansion may require significant additional
capital for potential acquisitions of businesses or assets, design development
and construction of new networks, the funding of operating losses and working
capital during the start-up phase of each market.
In August 2000, we entered into a capacity purchase agreement with Global
Crossing Bandwidth, Inc. which was amended in late March 2001. The agreement
with Global Crossing provides for the acquisition of indefeasible rights of use
to high-speed transmission capacity connecting each of the cities of Sao Paulo,
Buenos Aires, Santiago and Lima to our point of presence in the United States,
effective for fifteen years. The agreement calls for an initial purchase
commitment of $33.9 million for traffic connection over the course of 2001.
Additionally, there is an initial annual maintenance cost of approximately $1.7
million, subject to escalation at 3% per year, compounded annually.
At December 31, 2000, AT&T Argentina had commitments for capital
expenditures relating to network construction and equipment of approximately
$85.0 million under multi-year contracts.
CAPITAL RESOURCES
As of December 31, 2000 we had cash and cash equivalents of $14.9 million.
As of December 31, 2000 our $100.0 million credit facility from AT&T Corp. was
fully drawn, and we had $159.1 million available under our $200.0 million
subordinated credit facility from AT&T Corp. Advances from these credit
facilities, as of December 31, 2000, have been used for capital expenditures,
the purchase of additional capacity from Global Crossing and working capital. As
of March 22, 2001, $47.3 million was available under our subordinated credit
facility with AT&T Corp. Interest on the $100.0 million facility is payable
quarterly at a rate of LIBOR plus 3.75%. For the $200.0 million subordinated
credit facility interest is payable at a rate of LIBOR plus 6.0%. At our option,
interest on the subordinated credit facility may be accrued and capitalized
until the end of 2003.
Local Bank Facilities
During 2000, we entered into various import financing loans with Dresdner
Bank in Brazil with principal amounts of approximately $6.7 million at an
interest rate of LIBOR plus 0.8% for one year. The weighted average rate for
2000 was approximately 7.6%.
We also entered into short-term agreements with Banco Bilbao Vizcaya in
Brazil for a total of $3.5 million. Of this amount, $1.4 million is at an
interest rate of LIBOR plus 0.8% for one year. The remaining $2.1 million is at
a rate of 9.6% for one year. The weighted average rate for 2000 was
approximately 8.9%.
During August 2000, we also entered into a short-term agreement with the
Bank of Boston in Brazil with a principal amount of $1.6 million, at a fixed
interest rate of 9.5% for one year.
In addition, AT&T Colombia had loans of $9.0 million, at an average
interest rate equal to 19.3% minus the Colombian peso interest rate, which
average rate was 12.2% during 2000.
AT&T do Brasil also has various other bank facilities with an aggregate
amount outstanding of approximately $15.1 million with fixed interest rates
ranging from 7.3% to 8.5%.
AT&T Peru and AT&T Chile have various other bank facilities with an
aggregate amount outstanding of approximately $1.6 million with fixed and
variable interest rates ranging from 8.1% to 19.5%.
Equipment Vendor Financing Commitments. During March 2001, we received
commitment letters from our major equipment vendors, Cisco Systems Inc., Lucent
Technologies Inc. and Nortel Networks Ltd. to provide an initial tranche of
approximately $300.0 million under a secured long-term floating-rate credit
facility. The facility will finance our purchases of electronic equipment and
related services, software and
32
34
integration. We expect to close the facility by the third quarter of 2001. The
vendors' commitments and the closing of the facility are subject to customary
conditions, including completion of the vendors' due diligence on our operations
and business plans, effectiveness of our licenses and permits, regulatory
approvals and the absence of material adverse changes. The facility will be
secured by a first priority security interest in favor of the lenders over most
of our material assets, including the shares of capital stock we own in our
operating subsidiaries.
Liquidity Assessment
We estimate capital requirements of approximately $510.0 million from the
beginning of 2001 through the first half of 2002. Our capital requirements will
be utilized to develop and expand communications networks and services and fund
working capital needs, operating losses and debt service obligations. We expect
that capital expenditures and debt service obligations will increase in the
future in connection with these capital requirements. We expect that our
external funding needs to implement our growth strategy will continue through
2004.
As part of our business strategy, we intend to continue to evaluate
potential acquisitions, joint ventures and strategic alliances in companies that
own networks or that provide services that complement our existing businesses.
New sources of capital, such as credit facilities and other borrowings and
additional debt and equity issuances, may be necessary to fund any material
acquisitions or similar strategic investments.
Our cash needs in the next several years will be affected by several
factors, including, but not limited to:
- the amount of cash expected to be used in our operations;
- our ability to increase revenue;
- our ability to manage and contain costs associated with the expected
growth;
- whether we change our plans for building and expanding our networks; and
- whether we use cash, issue common stock or increase our debt to complete
acquisitions and ventures beyond those currently anticipated.
We expect to fund our 2001 capital requirements with borrowing capacity
under our subordinated credit facility with AT&T Corp., anticipated proceeds
from our planned equipment vendor financing and other financial support from
AT&T Corp., as necessary. We cannot assure that we will be able to consummate
these proposed transactions or otherwise obtain the anticipated cash needed to
fund our business plan, or obtain such funding on a timely basis, on acceptable
terms and conditions or at all. Our inability to consummate one or more of these
proposed transactions or otherwise to obtain the anticipated cash needed to fund
our business plan would affect our time to market and our ability to carry out
our growth strategy and could materially adversely affect our results of
operations.
Seasonality
We believe that our core operations are not subject to significant
seasonality changes.
Impact of Inflation
Inflation in the countries in which we operate may affect our business
through increased labor costs and increases in the cost of third-party
communications capacity and other third-party services. We have not experienced
significant increases in these costs to date. In addition to the effect of
inflation, competition for qualified personnel could increase labor costs for us
in the future. Our international operations may, at times in the future, expose
our business to high inflation in certain foreign countries. We generated
approximately 100% of our total revenue from international operations that are
susceptible to currency fluctuations. The likelihood and extent of currency
depreciation in Latin America, and deteriorating economic conditions in Latin
American countries and the resulting impact on our results of operations,
financial position and cash flows cannot now be determined.
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35
Our customer contracts in Brazil provide for payment in local currency and
are generally indexed to various inflation indicators specific to Brazil.
EFFECTS OF NEW ACCOUNTING STANDARDS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities" was issued. SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Pursuant to SFAS No. 133, changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 133,
as amended, is effective for us beginning January 1, 2001. On January 1, 2001,
we are recording a cumulative effect of an accounting change, net of applicable
income taxes, of $0.5 million of income, primarily attributable to fair value
adjustment of debt instruments.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Our operations are exposed to market risks principally from fluctuations in
foreign currency exchange rates and interest rates. We seek to minimize these
risks through our regular operating and financing activities and when considered
appropriate, through the use of derivative financial instruments. Our policy is
to not use financial instruments for trading or other speculative purposes.
Exposure to Foreign Currency Exchange Rates. Our primary foreign currency
exchange risk relates to our operations in Latin America, which operate in
currencies other than U.S. Dollars. We sell our services and incur certain
expenses in foreign currencies, which subjects us to foreign currency exchange
risk. We do not expect that the impact of fluctuations in the foreign currency
exchange rate on our foreign currency denominated revenues and expenses to
materially affect our results of operations due primarily to the natural hedges
which are expected to exist within our operations. However, management will
continue to monitor such items to determine if any actions, such as the issuance
of additional foreign currency denominated debt or other financial instruments,
would be warranted to reduce such risk.
At December 31, 2000, our foreign currency forward contracts which hedge
certain Brazilian activities had notional amounts of $54.8 million, maturing in
various dates through October 2002. The fair value of these contracts was $55.7
million at December 31, 2000. Based upon a 10% strengthening or weakening of the
U.S. dollar compared to the Brazilian Reais, assuming no changes in comparative
interest rates, the estimated fair value of these contracts would decrease or
increase by $5.6 million which would be offset by a decrease or increase of $5.6
million in the U.S. dollar value of the related foreign currency resulting in no
net dollar impact to us.
Management considers its operations in foreign subsidiaries and affiliates
to be long-term in nature and, accordingly, does not typically manage its
related foreign currency exchange rate risk through the use of derivative
financial instruments, except as for known transaction exposures.
Exposure to Interest Rates. At December 31, 2000, our long-term debt had a
carrying value of $209.9 million. Based upon a hypothetical 10% decrease or
increase in the period end market interest rate, the fair value of this
liability would increase or decrease by approximately $20.9 million. This
hypothetical amount is determined by considering the impact of the hypothetical
interest rates on our existing debt. This analysis does not consider the effects
of the changes in the level of overall economic activity that could exist in
such environments.
Currently, we do not use interest rates swaps to fix the interest cost over
the short term. We will continue to monitor our exposure to interest rates to
determine if any actions, such as the interest rates swaps agreements would be
warranted to reduce our interest rates risk.
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36
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................... 36
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... 37
Consolidated Statements of Operations for the period from
(Inception) October 13, 1999 through December 31, 1999 and
for the year ended December 31, 2000...................... 38
Consolidated Statements of Changes in Stockholders' Equity
for the period from (Inception) October 13, 1999 through
December 31, 2000......................................... 39
Consolidated Statements of Cash Flows for the period from
(Inception) October 13, 1999 through December 31, 1999 and
for the year ended December 31, 2000...................... 40
Notes to Consolidated Financial Statements.................. 42
35
37
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
AT&T Latin America Corp.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of AT&T
Latin America Corp. and its subsidiaries (the "Company") at December 31, 2000,
and December 31, 1999, and the results of their operations and their cash flows
for the year ended December 31, 2000 and for the period from inception (October
13, 1999) through December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Miami, Florida
March 21, 2001
36
38
AT&T LATIN AMERICA CORP.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
---------------------
1999 2000
-------- ----------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 24,223 $ 14,905
Short-term investments.................................... 27,078 --
Accounts receivable, net of $793 of allowance for bad
debts
at December 31, 2000................................... 1,286 15,934
Recoverable taxes......................................... 2,109 17,028
Prepaid expenses and other current assets................. 118 25,748
-------- ----------
Total current assets.............................. 54,814 73,615
Property and equipment, net................................. 68,269 354,799
Goodwill and other intangible assets, net................... 261,345 854,530
Other assets................................................ -- 15,304
-------- ----------
Total assets...................................... $384,428 $1,298,248
======== ==========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of debt................................ $ 1,731 $ 111,712
Accounts payable and accrued expenses..................... 6,735 106,156
Other current liabilities................................. 161 9,050
-------- ----------
Total current liabilities......................... 8,627 226,918
Long-term debt.............................................. 383 98,242
Other liabilities........................................... 1,624 5,853
-------- ----------
Total liabilities................................. 10,634 331,013
-------- ----------
Minority interest........................................... -- 2,343
-------- ----------
Commitments and contingencies (Note 12)..................... -- --
-------- ----------
Mandatorily Redeemable 15% Series B Preferred Stock......... -- 186,205
-------- ----------
Stockholders' equity:
Common stock.............................................. -- 11
Additional paid in capital................................ 376,566 915,035
Accumulated deficit....................................... (4,124) (136,456)
Accumulated other comprehensive income.................... 1,352 808
Stockholder loan.......................................... -- (711)
-------- ----------
Total stockholders' equity........................ 373,794 778,687
-------- ----------
Total liabilities, mandatorily redeemable
preferred stock
and stockholders' equity........................ $384,428 $1,298,248
======== ==========
The accompanying footnotes are an integral part of these consolidated financial
statements.
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39
AT&T LATIN AMERICA CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE PERIOD
FROM (INCEPTION)
OCTOBER 13, 1999 FOR THE YEAR
THROUGH ENDED
DECEMBER 31, 1999 DECEMBER 31, 2000
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenue:
Data-internet services.................................... $ 802 $ 41,368
Voice services............................................ -- 10,867
------- ---------
Total revenue..................................... 802 52,235
Costs of revenue............................................ 865 54,070
Selling, general and administrative expenses................ 2,164 67,695
Depreciation and amortization............................... 1,707 43,795
------- ---------
Loss from operations................................... (3,934) (113,325)
Interest expense............................................ -- (14,797)
Interest income............................................. -- 3,037
Other (expense) income, net................................. (190) (7,531)
------- ---------
Loss before provision for income taxes and minority
interest............................................. (4,124) (132,616)
Provision for income taxes.................................. -- (213)
Minority interest........................................... -- 497
------- ---------
Net loss............................................... $(4,124) $(132,332)
======= =========
Basic and diluted net loss per common share................. $ (0.05) $ (1.43)
======= =========
Weighted average common shares outstanding.................. 80,000 92,757
======= =========
The accompanying footnotes are an integral part of these consolidated financial
statements.
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40
AT&T LATIN AMERICA CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
OTHER
COMMON STOCK ADDITIONAL COMPREHENSIVE TOTAL
---------------- PAID IN ACCUMULATED INCOME STOCKHOLDER STOCKHOLDER'S
STOCK AMOUNT CAPITAL DEFICIT (LOSS) LOAN EQUITY
------- ------ ---------- ----------- ------------- ----------- -------------
Stock issued at inception, October
13, 1999........................ 1 $-- $ -- $ -- $ -- $ -- $ --
Capital addition.................. 39 -- 376,566 376,566
Net loss.......................... (4,124) (4,124)
Foreign currency translation
adjustments..................... 1,352 1,352
------- --- --------- --------- ------ ----- ---------
Balance December 31, 1999......... 40 -- 376,566 (4,124) 1,352 -- 373,794
2000:1 stock split................ 79,960 8 (8) --
Stock issued for acquisitions..... 34,894 3 518,027 518,030
Stockholder loan.................. (711) (711)
Stock issued for cash............. 1,202 -- 20,000 20,000
Stock issued for stock options
exercised....................... 200 -- 450 450
Net loss.......................... (132,332) (132,332)
Foreign currency translation
adjustments..................... (544) (544)
------- --- --------- --------- ------ ----- ---------
Balance December 31, 2000......... 116,296 $11 $ 915,035 $(136,456) $ 808 $(711) $ 778,687
======= === ========= ========= ====== ===== =========
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
(LOSS), NET
-------------
Stock issued at inception, October
13, 1999........................ $ --
Capital addition..................
Net loss.......................... (4,124)
Foreign currency translation
adjustments..................... 1,352
---------
Balance December 31, 1999......... (2,772)
2000:1 stock split................
Stock issued for acquisitions.....
Stockholder loan..................
Stock issued for cash.............
Stock issued for stock options
exercised.......................
Net loss.......................... (132,332)
Foreign currency translation
adjustments..................... (544)
---------
Balance December 31, 2000......... $(135,648)
=========
The accompanying footnotes are an integral part of these consolidated financial
statements.
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41
AT&T LATIN AMERICA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD
FROM
(INCEPTION)
OCTOBER 13, 1999
THROUGH FOR THE YEAR
DECEMBER 31, ENDED
1999 DECEMBER 31, 2000
---------------- -----------------
(IN THOUSANDS)
Cash flows from operating activities:
Net loss.................................................. $ (4,124) $(132,332)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................ 1,707 43,795
Allowance for bad debt............................... -- 793
Unrealized foreign exchange loss..................... -- (544)
Minority interest.................................... -- (497)
Deferred income taxes................................ -- (1,959)
Preferred stock accretion............................ -- 9,098
Changes in assets and liabilities net of effect of
acquisitions:
Accounts receivable............................... (415) 317
Recoverable taxes................................. -- (14,622)
Prepaid and other assets.......................... (93) (17,868)
Other assets...................................... -- (12,842)
Accounts payable and accrued expenses............. 3,164 77,374
Other current liabilities......................... (222) (696)
--------- ---------
Net cash provided by (used in) operating activities......... 17 (49,983)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment........................ (6,422) (162,709)
Investment in (redemption of) short-term securities....... (27,078) 27,078
Cash acquired from acquisitions........................... -- 22,557
Cash paid for acquisitions, including acquisition
expenses............................................... (320,287) (15,002)
--------- ---------
Net cash used in investing activities....................... (353,787) (128,076)
--------- ---------
Cash flows from financing:
Proceeds (repayments) of debt, net........................ 1,414 18,600
Proceeds from revolving line of credit.................... -- 140,900
Proceeds from issuance of preferred stock................. -- 177,107
Proceeds from issuance of common stock.................... 376,566 20,000
Proceeds from issuance of common stock under stock option
plans.................................................. -- 450
Loans to stockholder...................................... -- (711)
Redemption of Senior Notes................................ -- (187,605)
--------- ---------
Net cash provided by financing activities................... 377,980 168,741
--------- ---------
Net increase (decrease) in cash and cash equivalents........ 24,210 (9,318)
Cash and cash equivalents, beginning of period.............. 13 24,223
--------- ---------
Cash and cash equivalents, end of period.................... $ 24,223 $ 14,905
========= =========
The accompanying footnotes are an integral part of these consolidated financial
statements.
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AT&T LATIN AMERICA CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During 2000, we acquired property and equipment through vendor financing
arrangements for approximately $30.8 million.
Acquisition of Netstream Telecom Ltda., Keytech LD S.A. and FirstCom
In December 1999 we acquired 100% of the equity interests in Netstream
Telecom Ltda., in June 2000 we acquired 100% of the equity interests of Keytech
LD S.A. and in August 2000 we completed our merger with FirstCom Corporation, in
transactions accounted for as purchases. The aggregate fair value of net assets
acquired in, and the aggregate consideration paid for, these acquisitions, were
as follows:
1999 2000
-------- --------
(IN THOUSANDS)
Fair value of net assets acquired
Service contracts and work force acquired................. $ 4,900 $ 26,000
Accounts receivable....................................... -- 15,758
Prepaid and other current assets.......................... -- 8,059
Property and equipment.................................... 61,000 110,557
Other assets.............................................. -- 15,643
-------- --------
Fair value of non-cash assets acquired............ 65,900 176,017
-------- --------
Long term debt, including current maturities of debt...... -- 155,954
Accounts payable and accrued expenses..................... 1,000 33,549
Deferred taxes............................................ -- 2,436
Other liabilities......................................... -- 4,925
Minority interest......................................... -- 2,840
-------- --------
Fair value of liabilities assumed................. 1,000 199,704
-------- --------
Fair value of net assets acquired (liabilities assumed),
excluding cash acquired................................... 64,900 (23,687)
Cash acquired............................................... -- 22,557
-------- --------
Fair value of net assets acquired (liabilities
assumed)........................................ $ 64,900 $ (1,130)
======== ========
The following is a reconciliation of the purchase prices and costs
associated with the acquisitions over the estimated fair value of net assets
acquired/liabilities assumed allocated to goodwill:
Purchase price, including transactions costs................ $323,210 $594,266
Fair value of net (assets acquired) liabilities assumed..... (64,900) 1,130
-------- --------
Amount allocated to goodwill................................ $258,310 $595,396
======== ========
The accompanying footnotes are an integral part of these consolidated financial
statements.
41
43
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 2000
NOTE 1 -- NATURE OF THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
AT&T Latin America Corp. ("We," the "Company" or "ATTLA") was incorporated
on October 13, 1999, organized under the laws of the State of Delaware. We
provide broadband communications services to major metropolitan business markets
in Argentina, Brazil, Chile, Colombia and Peru. We deliver our services through
our own technologically advanced networks which interconnect with other third
party networks. Our communication services include data, Internet, local and
long distance voice, web hosting and managed network services.
A summary of the significant accounting policies followed in the
preparation of the accompanying consolidated financial statements is presented
below:
Management's estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires us 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. The more significant estimates relate to the useful
lives of property and equipment and the realization of intangible assets. Actual
results could differ from those estimates.
Principles of consolidation. The consolidated financial statements include
AT&T Latin America Corp. and its subsidiaries. All material intercompany
accounts and transactions have been eliminated. Certain prior year amounts have
been reclassified to conform to the current presentation.
The consolidated financial statements for the year ended December 31, 1999
include the results of AT&T do Brasil (formerly known as Netstream) for the
period from December 8, 1999 through December 31, 1999. The consolidated
financial statements for the year ended December 31, 2000 include the results of
AT&T do Brasil for the year ended December 31, 2000, the results of AT&T
Argentina (formerly known as Keytech) for the period from July 1, 2000 through
December 31, 2000, and the results of FirstCom Corporation (now known as
Frantis, Inc.) for the period from September 1, 2000 through December 31, 2000.
Comprehensive income. As reflected in the consolidated statement of
changes in stockholders' equity, comprehensive income is a measure of net income
and all other changes in equity that result from transactions other than with
stockholders. Comprehensive income consists of net income and foreign currency
translation adjustments.
Foreign currency translation and transactions. We operate in various Latin
American countries, which are subject to political, monetary, economic and
regulatory risks. For foreign subsidiaries using local currency as their
functional currency, assets and liabilities are translated into U.S. dollars at
exchange rates in effect at the end of the reporting period. Translation
adjustments resulting from this process are reported in accumulated other
comprehensive income (loss) within stockholders' equity. Revenues and expenses
of these foreign subsidiaries and affiliates are translated at weighted average
exchange rates for the period. Exchange gains and losses arising from
transactions denominated in a currency other than the functional currency of the
entity involved are included in income.
Derivative Instruments. We use derivative instruments, principally forward
contracts, to enhance our ability to manage certain risks related to foreign
currency exchange rates which exist as part of our ongoing business operations.
Our most significant contracts are to buy U.S. dollars with forward contracts
entered into to fix the local currency cost of our U.S. dollar-denominated
import financing, as well as to contracts to fix the cost in foreign currency of
certain of our U.S. dollar-denominated debt in Brazil. Changes in the market
value and any discounts or premiums on these forward foreign currency contracts
are recorded at maturity, which coincides with the dates when the related
foreign currency payments are to be made, with any resulting gain or loss
included in the cost of the equipment or interest expense, respectively.
42
44
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In June 1998, the Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," was issued.
SFAS No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Pursuant to SFAS No. 133, changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 133,
as amended, is effective beginning January 1, 2001. On January 1, 2001, we are
recording a cumulative effect of an accounting change, net of applicable income
taxes, of $0.5 million of income primarily attributable to fair value adjustment
of debt instruments.
As of December 31, 2000, we have entered into hedging contracts to cover
$10.2 million of import financing and $44.7 million due under the credit
facilities. The designated risk being hedged is the risk of changes in the net
present value of functional currency equivalent cash flows, on a forward rate
basis, attributable to changes in the U.S. dollar/Brazilian Reais foreign
currency exchange rate.
Revenue recognition. We recognize data-internet services revenue when the
services are provided in accordance with contract terms. We recognize voice
services revenue based upon minutes of traffic processed or when services are
provided. In October 2000, we adopted the Staff Accounting Bulletin No. 101
("SAB No. 101"), "Revenue Recognition in Financial Statements." Our revenue
recognition policies before the adoption of the SAB No. 101 were in conformity
with SAB No. 101.
Loss per share. Basic loss per common share is computed by dividing income
(loss) available to common stockholders by the weighted average number of
outstanding shares of Class A and Class B common stock. Diluted earnings per
common share include the dilutive effect of stock options using the treasury
stock method. Any difference between basic and diluted weighted average common
shares outstanding used to calculate basic and diluted earnings per share
relates to stock options assumed exercised under the treasury method of
accounting. Potentially dilutive shares as of December 31, 2000 of approximately
7,652,318 were not included in the diluted per share calculation because their
effects would be anti-dilutive due to the loss incurred by us. Accordingly, for
2000, diluted net loss per common share is the same as basic net loss per common
share. No stock options were outstanding during 1999.
Cash and cash equivalents. Cash and cash equivalents include cash on
deposit and securities held by major financial institutions with favorable
credit ratings, with original maturities of three months or less.
Credit risk. As part of its ongoing control procedures, we monitor
concentrations of credit risk associated with financial institutions with which
we conduct business. Credit risk, including counterparty non-performance under
derivative instruments, is considered minimal as the Company only deals with
large well-established financial institutions.
Property and equipment. Property and equipment are recorded at cost.
Construction, engineering and labor costs directly related to the development of
our networks are capitalized. We begin depreciating these costs when the
networks become commercially operational. Depreciation and amortization are
computed using the straight-line method over the estimated useful lives of the
respective assets. Expenditures for repairs and maintenance are charged to
expense as incurred. Expenditures for betterments and major improvements are
capitalized.
Goodwill and other intangibles. Assets and liabilities acquired in
connection with business combinations accounted for under the purchase method
are recorded at their respective estimated fair values. Goodwill represents the
excess of the purchase price over the estimated fair value of net assets
acquired, including the recognition of applicable deferred taxes, and is
amortized on a straight-line basis over a period of 20 years. Other intangible
assets represent the fair value of service contracts and work forces acquired,
and are amortized on a straight-line basis over a period of 3 to 5 years. At
December 31, 1999 and 2000, we had recorded goodwill and other intangible assets
of $261.3 million and $854.5 million, respectively (net of accumulated
amortization of $1.2 million in 1999 and $30.1 million in 2000).
43
45
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We review long-lived assets, identifiable intangibles and goodwill and
record an impairment whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be fully recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of the assets to future undiscounted net cash flows expected to be generated by
the assets. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets or expected future cash flows on an
undiscounted basis.
Income taxes. We record income taxes using the accrual basis of accounting
for deferred income taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequence of temporary
differences between the financial statement and income tax bases of our assets
and liabilities. A valuation allowance is established when it is more likely
than not that any or all of the deferred tax assets will not be realized.
Stock based compensation. We adopted the disclosure-only provisions of
Statement of Financial Accounting Standard No. 123, "Accounting for Stock Based
Compensation" ("SFAS 123") and retained the intrinsic value method of accounting
for such stock based compensation.
Advertising and Promotional Expenses. Advertising and promotional expenses
are charged to operations as incurred. For the period from inception October 13,
1999 through December 31, 1999, the Company incurred $0.1 million of advertising
and promotional expense. Advertising and promotional expense for the year ended
December 31, 2000 was $15.3 million.
Fair value of financial instruments. We estimate the fair market value of
financial instruments through the use of public market prices, quotes from
financial institutions and other available information. Judgment is required in
interpreting data to develop estimates of market value and, accordingly, amounts
are not necessarily indicative of the amounts that we could realize in a current
market exchange. Our short-term financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable and other liabilities,
consist primarily of instruments without extended maturities, the fair value of
which, based on management's estimates, equaled their carrying values. Our
mandatorily redeemable 15% Series B Preferred Stock is carried at its
liquidation value of $186.2 million at December 31, 2000, which includes $9.1
million of accrued preferred dividends.
NOTE 2 -- LIQUIDITY
The consolidated financial statements have been prepared on a basis which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. We have incurred net losses of
approximately $4.1 million and $132.3 million, from the period from inception
(October 13, 1999) through December 31, 1999 and for the year ended December 31,
2000, respectively, and at December 31, 2000 we had a working capital deficit of
$153.3 million.
Our business is capital-intensive and, as such, has required and will
continue to require substantial capital investment. We are building a high
capacity network in the countries in which we operate and are primarily focused
on data-internet services, the fastest growing segments of the communications
market. This strategy initially increases our level of capital expenditures and
operating losses and requires us to make a substantial portion of our capital
investments before we realize any revenue from them. These capital expenditures,
together with the associated initial operating expenses, will continue to result
in negative cash flow unless and until we are able to establish an adequate
customer base. After the initial planned build-out of our networks, our capital
expenditures will become more closely related to revenue growth. We believe that
this long-term strategy will enhance our financial performance by increasing the
capacity of, and traffic flow over, our networks.
44
46
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We expect to continue incurring operating losses and generate negative cash
flows from operations for the next several years as we expand our existing
communications networks and develop new networks and services. We expect to fund
our 2001 capital requirements and working capital needs with borrowing capacity
under our subordinated credit facility with AT&T Corp., anticipated proceeds
from our planned equipment vendor financing and other financial support from
AT&T Corp, as necessary.
Although we believe that our funding plan previously mentioned in this note
and the available borrowing capacity under the current credit facilities with
AT&T Corp. will be sufficient to support working capital needs, capital
expenditures and debt service for the next twelve months, there is no assurance
that we will be able to consummate these proposed transactions or otherwise
obtain the anticipated cash needed to fund our business plan, or obtain such
funding on a timely basis, on acceptable terms and conditions or at all. Our
inability to consummate the proposed transactions or otherwise obtain the
anticipated cash needed to fund our business plan would affect our time to
market and our ability to carry out our growth strategy and could materially
adversely affect our results of operations.
NOTE 3 -- INVESTING ACTIVITIES
On August 20, 1999, an indirect wholly owned subsidiary of AT&T Corp.
entered into an agreement to acquire 100% of the capital of Netstream. Netstream
was originally formed in February 1998 as a division of Promon Tecnologia S.A.,
a Brazilian engineering company. The Netstream division of Promon primarily
consisted of certain general and administrative costs incurred in connection
with the commencement of operations. Netstream, as a separate entity, was formed
on July 14, 1998 as a wholly owned subsidiary of Promon, and the Netstream
division of Promon was subsequently transferred. Promon and other affiliated
companies provided various financing and management services for Netstream.
Netstream was a development stage company until May 1999, when it began
providing services in Brazil's two largest cities, Rio de Janeiro and Sao Paulo.
The Netstream acquisition closed on December 8, 1999 when AT&T Corp.
acquired 100% of the issued and outstanding capital stock of Netstream, now
known as AT&T do Brasil, for $320.0 million in cash, which included settlement
of outstanding balances due to Promon and other Promon affiliates. At the
closing of the Netstream acquisition, AT&T Corp. contributed its entire equity
interest in Netstream and $10.0 million in cash to us in consideration of all of
our outstanding Class B common stock. Immediately after the Netstream
acquisition, SL Participacoes, an affiliate of Promon Ltda., contributed $40.0
million in cash to us in exchange for shares of our Class A common stock,
representing a 10% interest in our company.
We accounted for the acquisition under the purchase method of accounting
for financial reporting purposes. Accordingly, the purchase price of $323.2
million has been allocated to the identifiable assets and liabilities based on
fair values at the acquisition date. The excess of the purchase price over the
value of the identifiable net assets in the amount of $258.3 million and $4.9
million has been classified as goodwill and other intangibles, respectively.
Goodwill is amortized on a straight-line basis over a twenty-year period. The
other intangible assets represent the fair value of existing service contracts
and the fair value of the work force acquired. Other intangibles are amortized
on a straight-line basis over a three-year period.
On June 30, 2000, we completed the acquisition of Keytech LD S.A. (now
known as AT&T Argentina). We acquired all of the capital stock of Keytech in
exchange for 1,178,689 shares of our Class A common stock, plus $5.2 million in
cash. The Keytech acquisition also provides for a contingent purchase price of
up to $1.5 million one year after the acquisition, if certain operational
milestones are reached. We have accounted for the acquisition of Keytech in
accordance with the purchase method for business combinations. We have recorded
$32.0 million of goodwill which represents the excess of the purchase price over
the fair value of the net assets acquired. The resulting goodwill is being
amortized over a twenty-year period.
45
47
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On August 28, 2000, we completed our merger with FirstCom. Immediately
prior to the merger, all paid-in-kind dividends payable on FirstCom's Series A
convertible preferred stock were accelerated and the holders of that stock
converted all of their shares into common stock of FirstCom. In the merger, each
holder of FirstCom common stock, including the former holders of FirstCom's
Series A convertible preferred stock, received one share of Class A common stock
of AT&T Latin America for each share of FirstCom common stock they owned,
resulting in an aggregate issuance of 33,715,892 shares, or approximately 29% of
our outstanding capital at that time. In addition, for each option or warrant to
purchase FirstCom common stock, holders received one option or warrant to
purchase a share of AT&T Latin America Class A common stock.
We have accounted for the FirstCom merger in accordance with the purchase
method for business combinations. Accordingly, the purchase price of $563.3
million has been allocated to the identifiable assets and liabilities based on
fair values at the acquisition date. The excess of the purchase price over the
fair value of the identifiable net assets in the amount of $563.4 million and
$26.0 million has been classified as goodwill and other intangibles,
respectively. Goodwill is amortized on a straight-line basis over a twenty-year
period. Other intangible assets represent the fair value of the existing service
contracts in Chile, Peru and Colombia. Other intangibles are amortized on a
straight-line basis over a five-year period.
The most significant adjustments to the balance sheets resulting from each
of the acquisitions described in this note are disclosed in the supplemental
disclosure of non-cash investing and financing activities in the accompanying
consolidated statements of cash flows.
The following table states, for the periods presented, our unaudited pro
forma results of operations as if the merger with Netstream, Keytech and
FirstCom had been completed as of the beginning of the periods presented (in
thousands):
1999 2000
--------- ---------
Revenue..................................................... $ 40,918 $ 89,247
========= =========
Operating loss.............................................. $ (85,460) $(167,287)
========= =========
Net loss.................................................... $(112,060) $(206,236)
========= =========
Basic and diluted loss per common share..................... $ (0.97) $ (1.77)
========= =========
These results are presented for informational purposes only and are not
necessarily indicative of our future results of operations or financial position
or our results of operations or financial position that would have been achieved
had the acquisition actually occurred as of the beginning of the periods
presented.
46
48
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following as of December 31,
1999 and 2000 (in thousands):
ESTIMATED
USEFUL LIVES
1999 2000 (IN YEARS)
------- -------- ------------
Switching equipment......................................... $ 2,221 $ 74,384 5
Transmission equipment...................................... 24,243 95,363 7
Cables...................................................... 2,352 37,491 10
Underground installation.................................... 19,821 82,481 25
Construction in progress.................................... 5,368 20,600 --
Office equipment, furniture, vehicles and other............. 17,311 63,940 3 to 10
------- --------
71,316 374,259
Less: Accumulated depreciation.............................. (3,047) (19,460)
------- --------
$68,269 $354,799
======= ========
Depreciation expense related to the property and equipment was $0.5 million
for the period from inception (October 13, 1999) through December 31, 1999 and
$17.6 million for the year ended December 31, 2000.
NOTE 5 -- DEBT
Debt is comprised of the following at December 31, (in thousands):
1999 2000
------- --------
Revolving credit facility, at LIBOR plus 3.75% (10.21% to
10.55% at
December 31, 2000)........................................ $ -- $100,000
Subordinated credit facility, at LIBOR plus 6.00% (12.52% to
12.75% at December 31, 2000).............................. -- 40,900
Notes payable for equipment, at interest rates from 0% to
LIBOR plus 5.50% due in instalments through 2005.......... -- 31,514
Other bank facilities, rates ranging from fixed rates of
8.00% to 9.50%, to variable rates of LIBOR plus 0.5% to
LIBOR plus 0.8%, due in instalments through 2002.......... 2,114 37,540
------- --------
Total debt.................................................. 2,114 209,954
Less current maturities..................................... (1,731) (111,712)
------- --------
Long-term debt.............................................. $ 383 $ 98,242
======= ========
REVOLVING AND SUBORDINATED CREDIT FACILITIES
Global Card Holdings, a wholly-owned subsidiary of AT&T Corp., and AT&T
Corp. have provided us with two credit facilities with up to an aggregate amount
of $300.0 million available. Amounts outstanding under the $100.0 million
revolving credit facility ($100.0 million outstanding as of December 31, 2000)
mature on August 28, 2002, except for drawdowns made by AT&T do Brasil, which
are due within approximately 3 months after disbursement, but will be
automatically renewed subject to prepayment requirements in the revolving credit
facility agreement. Amounts outstanding under the $200.0 million subordinated
credit facility ($40.9 million outstanding as of December 31, 2000) mature on
December 1, 2008, except for drawdowns made by AT&T do Brasil, which are due
within approximately 3 to 6 months after disbursement, but will be automatically
renewed subject to prepayment requirements in the subordinated note agreement.
Both credit facilities contain restrictions on permitted capital expenditures,
payment of dividends, incurring additional debt, liens on or the disposal of
assets without prior consent of the lender and require
47
49
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
prepayment upon certain issuances of debt and equity by ATTLA. We had $159.1
million available under the $200.0 million revolving facility at December 31,
2000.
The $100 million credit facility is unsecured; however, the lender may
require us to pledge the shares of our operating subsidiaries and their assets.
Interest under the credit facility accrues at a rate based on LIBOR plus 3.75%.
As of December 31, 2000, the weighted average rate was 10.47%. Interest under
the $200 million subordinated credit facility accrues at a rate based on LIBOR
plus 6.00%. As of December 31, 2000, the weighted average rate was 12.62%. Under
the $200.0 million subordinated credit facility we are permitted to defer
payment of interest until December 31, 2003.
NOTES PAYABLE FOR EQUIPMENT
In November 1998, a subsidiary of FirstCom (which we acquired in the
FirstCom merger) entered into a vendor financing agreement with one of its
equipment vendors. The terms of the vendor financing, as amended provides for a
maximum financing amount of $29.5 million with draws available through December
31, 2000, interest rate of LIBOR plus 5.5% and repayable in 20 consecutive
quarterly principal and interest payments from the date of the draw. The vendor
financing is collateralized by the equipment being financed. As of December 31,
2000, there was approximately $10.1 million outstanding under this vendor
financing with a weighted average interest rate of 11.89%.
In August 2000, we entered into a short-term vendor financing agreement
providing for a maximum financing of $30.0 million, maturing on April 9, 2001.
The short-term vendor agreement bears interest at LIBOR plus 5.5%. As of
December 31, 2000, we had $16.8 million outstanding under this agreement with a
weighted average interest rate of 11.91%.
In October 2000, we entered into a short-term vendor financing agreement
providing for a maximum financing of $13.2 million, maturing on December 31,
2000. The short-term vendor agreement bears no interest. As of December 31,
2000, we had $4.7 million outstanding. Payment due under this agreement was
extended through March 30, 2001.
OTHER BANK FACILITIES
During 2000, we entered into various import financing loans with Dresdner
Bank in Brazil with principal amounts of approximately $6.7 million at an
interest rate of LIBOR plus 0.8% for one year. The weighted average rate for
2000 was approximately 7.6%.
We also entered into short-term agreements with Banco Bilbao Vizcaya in
Brazil for a total of $3.5 million. Of this amount, $1.4 million is at an
interest rate of LIBOR plus 0.8% for one year. The remaining $2.1 million is at
a rate of 9.6% for one year. The weighted average rate for 2000 was
approximately 8.9%.
During August 2000, we also entered into a short-term agreement with the
Bank of Boston in Brazil with a principal amount of $1.6 million, at a fixed
interest rate of 9.5% for one year.
In addition, AT&T Colombia had loans of $9.0 million, at an average
interest rate equal to 19.3% minus the Colombian peso interest rate, which
average rate was 12.2% during 2000.
AT&T do Brasil also has various other bank facilities with an aggregate
amount outstanding of approximately $15.1 million with fixed interest rates
ranging from 7.3% to 8.5%.
AT&T Peru and AT&T Chile have various other bank facilities with an
aggregate amount outstanding of approximately $1.6 million with fixed and
variable interest rates ranging from 8.1% to 19.5%.
48
50
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 2000, debt matures as follows (in thousands):
2001........................................................ $111,712
2002........................................................ 66,320
2003........................................................ 2,371
2004........................................................ 2,371
Thereafter (through 2008)................................... 27,180
--------
$209,954
========
NOTE 6 -- REDEEMABLE PREFERRED STOCK
As permitted under the FirstCom merger agreement, prior to the merger we
required FirstCom to make a tender offer and consent solicitation related to the
FirstCom 14% senior notes that were due in 2007. The notes had a face value of
$150.0 million. This tender offer and consent solicitation was completed on
August 28, 2000 immediately after the completion of the FirstCom merger. Holders
of 100% of the aggregate outstanding principal amount of the senior notes
tendered their notes and gave their consent to the consent solicitation.
On August 28, 2000, we financed the tender offer through the issuance of
100,000 shares to Global Card Holdings, Inc., a wholly-owned subsidiary of AT&T
Corp., of our non-voting, non-convertible and non-participating mandatorily
redeemable 15% Series B Preferred Stock having an aggregate liquidation value as
of December 31, 2000 of $186.2 million. The shares of mandatorily redeemable 15%
Series B Preferred Stock entitle Global Card Holdings to receive dividends at an
annual rate of 15%, payable semi-annually. Either Global Card Holdings or we may
redeem all of the mandatorily reedemable 15% Series B Preferred Stock at any
time after August 28, 2004 at a redemption price equal to the liquidation value.
The accompanying statement of operations for the year ended December 31, 2000
includes $9.1 million recorded as interest expense related to the dividend on
our Mandatorily Redeemable 15% Series B Preferred Stock.
NOTE 7 -- CAPITAL STOCK
We are authorized to issue 460,000,000 shares of capital stock, consisting
of 300,000,000 shares of Class A common stock, par value $0.0001 per share,
150,000,000 shares of Class B common stock, par value $0.0001 per share, and
10,000,000 shares of preferred stock, par value $.0001 per share. At December
31, 1999 and 2000, approximately 8,000,000 and 43,214,758 shares, respectively,
of Class A common stock were issued and outstanding. At December 31, 1999 and
2000, approximately 72,000,000 and 73,081,595 shares, respectively, of Class B
common stock were issued and outstanding. At December 31, 2000, we had 100,000
shares of the Mandatorily Redeemable 15% Series B Preferred Stock issued and
outstanding.
On June 12, 2000, our stockholders agreed to an amendment of our Amended
and Restated Certificate of Incorporation, providing for a stock split of each
outstanding share of Class A and Class B common stock into 2,000 shares of the
same class. Accordingly, all per share amounts shown in the accompanying
consolidated financial statements and notes has been retroactively restated to
reflect the stock split. This amendment resulted in the reclassification of (a)
36,000 shares of Class B common stock held by ATTLA Holding Corp., a
wholly-owned subsidiary of AT&T Corp., into 72,000,000 shares of Class B common
stock and (b) 4,000 shares of Class A common stock held by SL Participacoes, an
affiliate of Promon Ltda., which is the prior owner of Netstream Ltda. (now
called AT&T do Brasil), into 8,000,000 shares of Class A common stock. This
stock split was made in order to accommodate the issuance to FirstCom
stockholders of one share of AT&T Latin America Class A common stock for each
outstanding share of FirstCom common stock upon the closing of the FirstCom
merger.
Additionally, as a condition to the FirstCom merger, we were to receive a
total of $70.0 million in cash equity contributions from our stockholders.
Accordingly, in connection with the Netstream acquisition, in
49
51
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 1999 ATTLA Holding Corp. contributed in cash $10.0 million and SL
Participacoes contributed in cash $40.0 million of equity capital to AT&T Latin
America. On June 12, 2000, AT&T Corp. and SL Participacoes contributed an
additional $20.0 million in cash to us on a pro rata basis, in accordance with
their respective ownership percentages. In exchange for these additional cash
contributions, we issued 763,384 shares of Class B common stock to ATTLA Holding
Corp. and 84,820 shares of Class A common stock to SL Participacoes, and granted
each the right to receive, upon the completion of the FirstCom merger,
additional shares of the same class of common stock in accordance with their
respective ownership percentages based on the number of shares of FirstCom's
Series A convertible preferred stock that accrued between November 1, 1999, when
the FirstCom merger agreement was signed, and the completion of the merger.
On June 30, 2000, we issued an additional 1,178,689 Class A common shares
to the former stockholders of Keytech LD, S.A. as part of the acquisition of
Keytech.
On August 28, 2000, we completed the FirstCom merger immediately following
the approval of the merger by the FirstCom stockholders. The following
transactions were completed on that date:
- each of the 33,715,892 outstanding shares of FirstCom common stock was
exchanged for one share of Class A common stock of AT&T Latin America;
- each outstanding option and warrant to purchase one share of FirstCom
common stock was exchanged for an option or warrant to purchase one share
of AT&T Latin America Class A common stock;
- we issued to Global Card Holdings, Inc., a wholly-owned subsidiary of
AT&T Corp., 100,000 shares of the mandatorily redeemable 15% Series B
Preferred Stock, having an aggregate liquidation value of $177.1 million.
These funds, together with an additional $10.5 million from a restricted
investments account, were used to fund the purchase of all outstanding
FirstCom 14% senior notes in connection with the tender offer and consent
solicitation for the notes for an aggregate total purchase price of
$187.6 million;
- we issued 318,211 shares of Class B common stock to ATTLA Holding Corp.;
and
- we issued 35,357 shares of Class A common stock to SL Participacoes.
NOTE 8 -- STOCK OPTION PLANS
Our board of directors approved our 2000 Long Term Incentive Plan after the
FirstCom merger (the "2000 Plan"). The board of directors has authorized the
issuance of options for the purchase of shares of our Class A common stock in an
aggregate amount of 17,444,452, or 15% of our total outstanding capital stock at
the time the FirstCom merger was completed. Typically, options under this plan
are granted at fair market value at the date of grant, vest between three to
five years and terminate no later than 10 years from the date of grant. Under
this plan there were approximately 14,105,952 options available for grant at
December 31, 2000.
With the acquisition of FirstCom, we assumed the outstanding stock options
under FirstCom's plan, which amounted to approximately 8,432,166 options as of
August 28, 2000.
50
52
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of all stock option transactions, including the
assumed options from FirstCom:
WEIGHTED
AVERAGE
STOCK OPTIONS EXERCISE PRICE
------------- --------------
Outstanding December 31, 1999............................... -- $ --
Options assumed in acquisition............................ 8,432,166 5.97
Options granted........................................... 3,338,500 16.06
Options exercised......................................... 200,000 2.25
Canceled.................................................. -- --
---------- ------
Outstanding December 31, 2000............................... 11,570,666 $ 8.95
========== ======
The weighted average fair value of options outstanding as of December 31,
2000, was $12.55. As of December 31, 2000, there were 5,257,079 shares vested
with a weighted average exercise price of $3.42.
The following table summarizes information about stock options outstanding
at December 31, 2000:
STOCK OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------
WEIGHTED
NUMBER OF AVERAGE WEIGHTED WEIGHTED
STOCK REMAINING AVERAGE NUMBER OF AVERAGE
OPTIONS CONTRACTUAL EXERCISE STOCK EXERCISE
EXERCISE PRICE OUTSTANDING LIFE PRICE OPTIONS PRICE
-------------- ------------- ----------- -------- --------- --------
$ 0.01-$ 1.74................................. 853,333 6.6 $ 1.39 853,333 $ 1.39
$ 1.74-$ 3.48................................. 2,951,833 6.5 2.40 2,889,333 2.39
$ 3.49-$ 5.23................................. 924,500 7.0 4.36 826,500 4.36
$ 5.24-$ 6.97................................. 375,500 8.5 6.07 161,250 5.77
$ 6.98-$ 8.72................................. 232,000 8.0 7.92 100,000 8.00
$ 8.73-$10.46................................. 397,500 7.3 9.84 161,663 9.86
$10.47-$12.21................................. 2,635,000 8.7 10.77 260,000 11.18
$12.22-$13.95................................. 65,000 9.1 13.62 5,000 13.21
$13.96-$17.44................................. 3,136,000 9.5 17.19 -- --
---------- -------- ------ --------- ------
11,570,666 8.0 $ 8.95 5,257,079 $ 3.42
========== ======== ====== ========= ======
We adopted the disclosure-only provisions of SFAS 123 and retained the
intrinsic value method of accounting for such stock based compensation.
Therefore, no compensation cost has been recognized. All options granted during
2000 were granted at fair market value at the date of the grant.
We have reflected below the 1999 and 2000 earnings as if compensation
expense, relative to the fair value of the options granted, had been recorded
under the provisions of SFAS 123. The fair value of each option grant was
estimated using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1999 and 2000: a five and six year expected life
for 1999 and 2000, respectively; volatility factors of
51
53
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
90.0% and 97.6%, respectively; risk-free interest rates of 6.0% and 5.9%,
respectively; no dividend payments for 1999 and 2000; and an expected annual
turn-over of 10% for 1999 and 2000.
1999 2000
------- ---------
Net loss:
As reported............................................... $(4,124) $(132,332)
======= =========
Pro forma................................................. $(4,124) $(141,625)
======= =========
Basic and diluted loss per share:
As reported............................................... $ (0.05) $ (1.43)
Pro Forma................................................. $ (0.05) $ (1.53)
NOTE 9 -- INCOME TAXES
The provision (benefit) for income taxes during 1999 was $0.01 million. The
tax provision for the year ended December 31, 2000 had no impact on our
operations.
The tax effects of significant items comprising our net deferred tax
liability as of December 31, 1999 and December 31, 2000 are as follows (in
thousands):
1999 2000
-------- -------
Deferred tax assets:
Net operating losses...................................... 1,771 63,327
Bad debts................................................. -- 1,281
Pre-operating expenses.................................... 4,489 4,489
Non-cash compensation..................................... -- 567
Other..................................................... 78 291
Valuation allowance....................................... (6,187) (69,392)
-------- -------
Total deferred tax assets......................... 151 563
-------- -------
Deferred tax liabilities:
Property and equipment.................................... -- (2,638)
Intangible assets......................................... (1,775) (1,913)
Other..................................................... -- (72)
-------- -------
Total deferred tax liabilities.................... (1,775) (4,623)
-------- -------
Net deferred tax asset (liabilities)........................ (1,624) (4,060)
======== =======
SFAS No. 109 requires a valuation allowance to reduce deferred tax assets
if, based on the weight of the available evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. In
determining the need for a valuation allowance, SFAS No. 109 requires an
assessment of all available evidence both positive and negative. Management has
determined that a $6.2 million and a $69.4 million valuation allowance is
necessary at December 31, 1999 and 2000, respectively. A significant portion of
the deferred tax assets is related to net operating loss carryforwards. Because
we operate in multiple off shore jurisdictions, we considered the need for a
valuation allowance on a country by country basis.
52
54
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The U.S. Federal tax rate reconciles to the worldwide effective tax rate as
follows:
1999 2000
----- -----
U.S. statutory federal rate applied to pretax income........ (34.0%) (35.0%)
State taxes, net of federal income taxes.................... -- (3.0%)
Goodwill amortization....................................... 8.8% 3.1%
Preferred stock dividend accretion.......................... -- 2.4%
Unutilized foreign losses................................... 24.8% --
Valuation allowance......................................... -- 32.5%
Other....................................................... 0.1% --
----- -----
(0.3%) 0.0%
----- -----
----- -----
For the year ended December 31, 2000, the effective income tax rate varies
from the statutory U.S. federal income tax rate as a result of the need for a
valuation allowance.
At December 31, 2000, we have U.S. federal and state net operating loss
carryforwards of approximately $83.0 million expiring through 2020.
We have foreign net operating loss carryforwards of approximately $5.4
million and $80.0 million at December 31, 1999 and 2000 respectively, which have
no expiration date. At December 31, 2000 we also have $18.0 million of foreign
net operating loss carryforwards expiring through 2005.
In connection with the FirstCom merger, we acquired certain U.S. federal
and state net operating loss carryforwards and certain foreign net operating
loss carryforwards which are subject to a full valuation allowance. If, in the
future, the realization of these acquired net operating loss carryforwards
becomes more likely than not, any reduction of the associated valuation
allowance will be allocated to purchased intangibles.
During 2000, we completed acquisitions that included certain changes in the
ownership of the target company's stock. The Internal Revenue Code restricts the
amount of future income that may be offset by the net operating losses and
credits incurred prior to an ownership change. In addition, the target company
had net operating loss limitations that arose from transactions they had entered
into in prior years which further limits the utilization of net operating
losses.
NOTE 10 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Service Mark License Agreement with AT&T Corp. AT&T Corp. has entered into
a service mark license agreement with us. The service mark agreement provides
for AT&T Corp. to license service marks, including "AT&T" and the AT&T with a
fanciful globe design mark, to us for our use. We may also use the "AT&T" mark
as part of our trade and corporate names so long as at least half of the
licensed services meet service specifications provided by AT&T Corp.
During the term of the service mark license agreement, we will pay a fee to
AT&T Corp. every six months equal to the greater of $2.5 million and a
designated percentage of our gross revenues. Initially the designated percentage
of gross revenues is 4%. This percentage will decrease to 3.25% in the third
year of the initial term and to 2.5% in the final two years of the initial term.
As of December 31, 2000, we have recorded approximately $1.5 million due to AT&T
Corp. related to the service mark license agreement.
The initial term of the license ends on August 28, 2005. The agreement will
automatically renew for an additional five years if we are not in material
default under or breach of the license agreement. AT&T Corp. may terminate the
license prior to the end of its scheduled term if AT&T Corp. no longer owns
shares having voting control of our company or if we misuse the marks or
otherwise materially breach our obligations under the service mark license
agreement and are not able to correct the breach in a timely fashion.
53
55
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Credit Facility. AT&T Corp and a wholly-owned subsidiary of AT&T Corp.
have provided us with two facilities of up to $300.0 million principal amount.
See Note 5.
Other. As of December 31, 2000, we included in accounts payable the amount
of $7.4 million for services provided by and paid by AT&T Corp. on behalf of us.
The amount owed bears no interest and does not have a specific due date. We also
have recorded $1.4 million of reimbursable expenditures from AT&T Corp. related
to brand expenses.
Stockholder Loan. During December 2000, we loaned approximately $0.7
million to Mr. Northland, our President and Chief Executive Officer. Subsequent
to year-end, we advanced an additional $8.8 million. The amounts loaned to Mr.
Northland represented a refinancing of a loan extended initially by FirstCom to
finance Mr. Northland's purchase of 800,000 restricted common shares of FirstCom
prior to the FirstCom merger.
NOTE 11 -- OPERATIONS BY GEOGRAPHIC AREAS AND SEGMENTS
We currently derive a substantial portion of our revenue from data-internet
services. For the years ended December 31, 1999 and 2000, approximately 100.0%
and 79.1%, respectively, were generated from data-internet services. No single
customer or group of customers accounted for more that 10% of total revenue.
Our operations consist of two segments: data-internet and voice services.
Data-internet Services. Our data-internet services include basic
connection services, such as point-to-point dedicated private lines, and private
multipoint network services, which consist of offering and managing
communications links among a number of locations, as wide area network services.
The basic infrastructure, plus supporting services (available or being deployed)
allows us to implement different communications applications to support a wide
range of customers' needs. The availability of bandwidth and reliability of the
services allow customers to utilize additional value-added services, such as
video conferencing. Our Internet services consist of dial-up and dedicated
access services offered primarily to businesses, as well as wholesale Internet
services offered to Internet service providers. Our integrated package of
wholesale Internet services allow Internet service providers to purchase and
lease their entire access infrastructure from us.
Voice Services. Our voice services include a range of services that allow
us to provide high quality, reliable voice communications. Services range from
the provisioning of office or campus services, to building a complete voice
network covering multiple locations. Through interfaces with other private and
public networks, customers can place and receive calls originating and
terminating from outside our networks.
54
56
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth, for 1999 and 2000, certain information
about segment results of operations and segment assets (in thousands):
1999 ARGENTINA BRAZIL CHILE COLOMBIA PERU OTHER(1)
- ---- --------- -------- -------- -------- ------- --------
REVENUE:
Data-internet services......................... $ -- $ 802 $ -- $ -- $ -- $ --
Voice services................................. -- -- -- -- -- --
-------- -------- -------- ------- ------- --------
TOTAL REVENUE......................... -- 802 -- -- -- --
Cost of revenue................................ -- 865 -- -- -- --
Depreciation and amortization.................. -- 512 -- -- -- 1,195
Selling, general & administrative.............. -- 874 -- -- -- 1,290
-------- -------- -------- ------- ------- --------
Operating loss................................. $ -- $ (1,449) $ -- $ -- $ -- $ (2,485)
======== ======== ======== ======= ======= ========
Total assets.......................... $ -- $106,016 $ -- $ -- $ -- $278,412
Capital expenditures........................... $ -- $ 6,422 $ -- $ -- $ -- $ --
2000 ARGENTINA BRAZIL CHILE COLOMBIA PERU OTHER(1)
- ---- --------- -------- -------- -------- ------- --------
REVENUE:
Data-internet services....................... $ 475 $ 25,505 $ 8,830 $ 3,465 $ 3,093 $ --
Voice services............................... 43 2,456 3,357 -- 5,011 --
-------- -------- -------- ------- ------- --------
TOTAL REVENUE......................... 518 27,961 12,187 3,465 8,104 --
Cost of revenue................................ 2,219 37,540 8,791 1,741 4,304 (525)
Depreciation and amortization.................. 713 25,713 1,738 1,446 2,137 12,048
Selling , general & administrative............. 9,437 28,348 5,425 5,649 6,596 11,760
-------- -------- -------- ------- ------- --------
Operating loss................................. $(11,851) $(63,640) $ (3,767) $(5,371) $(4,933) $(23,283)
======== ======== ======== ======= ======= ========
Total assets.......................... $ 93,568 $421,582 $ 44,261 $45,504 $85,846 $607,487
Capital expenditures (2)....................... $ 71,591 $ 94,030 $ 6,533 $ 3,988 $16,795 $ 576
- ---------------
(1) Consists primarily of corporate operations.
(2) Includes property and equipment acquired through vendor financing
arrangements of approximately $30.8 million in 2000.
There are no significant transfers between geographic areas and segments.
Operating loss consists of revenue less operating expenses and does not include
interest expense, interest income and other income (expense), minority interest
and income taxes. Total assets are those assets used in our operations in each
geographic area. Corporate assets primarily include cash and cash equivalents,
property and equipment and intangible assets.
NOTE 12 -- COMMITMENTS AND CONTINGENCIES
We have operating lease agreements for our premises and equipment that
expire on various dates through 2008. Amounts due under the operating agreements
are subject to increases in accordance with their terms. Rent expense for the
period October 31, 1999 through December 31, 1999 was $0.1 million and $4.3
million for the year ended December 31, 2000.
Operating leases include minimum obligation on fines for interruption on
leased line contracts, signed with several telecommunications companies in
Brazil. These contracts expire within a range of 1 to 3 years, and the fines
vary up to 50% of the total payments until the end of the contract.
In August 2000, we entered into a capacity purchase agreement with Global
Crossing Bandwidth, Inc. The agreement with Global Crossing provides for the
acquisition of indefeasible rights of use to transmission capacity, effective
for fifteen years. The agreement calls for an initial purchase commitment of
$33.9 million for traffic connection over the course of 2001, with an additional
$14.0 million of additional capacity, subject
55
57
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to certain discounts, to be purchased within two years. Additionally, there is
an initial annual maintenance cost of $1.7 million, subject to escalation of 3%
per year, compounded annually.
Minimum future lease payments under non-cancelable operating leases,
including the capacity purchase agreement, in effect at December 31, 2000 were
as follows (in thousands):
2001........................................................ $ 25,874
2002........................................................ 10,957
2003........................................................ 24,775
2004........................................................ 9,695
Thereafter (through 2015)................................... 40,695
--------
$111,996
========
At December 31, 2000, AT&T Argentina had commitments for capital
expenditures relating to network construction and equipment of approximately
$85.0 million under multi-year contracts.
In the normal course of business, we are subject to proceedings, lawsuits
and other claims. These matters are subject to many uncertainties and outcomes
that are not predictable with assurance. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or financial
impact with respect to these matters at December 31, 2000. While these matters
could affect operating results of any one quarter when resolved in future
periods, it is management's opinion that after final disposition, any monetary
liability or financial impact to us would not be material to our annual
consolidated financial position or results of operations.
In accordance with the legislation in force in Brazil, tax registers
related to federal, state and municipal taxes are subject to examination by the
respective tax authorities from 5 to 30 years.
Our current and future operations and investments in certain foreign
countries are generally subject to the risks of political, economic or social
instability, including the possibility of expropriation, confiscatory taxation,
hyper-inflation or other adverse regulatory or legislative developments, or
limitations on the repatriation of investment income, capital and other assets.
We cannot predict whether any of such factors will occur in the future or the
extent to which such factors would have a material adverse effect on our
international operations.
NOTE 13 -- NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," was issued. SFAS
No. 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. Pursuant to SFAS No. 133, changes in the fair value
of derivatives are recorded each period in current earnings or other
comprehensive income depending on whether a derivative is designated as part of
a hedge transaction and, if it is, the type of hedge transaction. SFAS No. 133,
as amended, is effective for us beginning January 1, 2001. On January 1, 2001,
we are recording a cumulative effect of an accounting change, net of applicable
income taxes, of $0.5 million of income primarily attributable to fair value
adjustment of debt instruments.
56
58
AT&T LATIN AMERICA CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 14 -- QUARTERLY INFORMATION (UNAUDITED)
The following table presents unaudited quarterly operating results for the
period from (inception) October 13, 1999 through December 31, 1999 and for the
year ended December 31, 2000. We believe that all necessary adjustments have
been included in the amounts stated below to present fairly the quarterly
results when read in conjunction with the Consolidated Financial Statements and
Notes therefore for the period presented.
1999
QUARTER ENDED 2000 QUARTER ENDED
------------- -------------------------------------------
DEC 31 MAR 31 JUN 30 SEP 30 DEC 31
------------- -------- ------- -------- --------
Revenue............................ $ 802 $ 4,364 $ 6,145 $ 14,796 $ 26,930
Gross margins...................... $ (63) $ (2,557) $ 709 $ (1,294) $ 2,371
Operating loss..................... $(3,934) $(12,949) $(9,203) $(26,923) $(64,250)
======= ======== ======= ======== ========
Net loss........................... $(4,124) $(11,217) $(9,405) $(27,628) $(84,082)
======= ======== ======= ======== ========
57
59
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
PART III
Information regarding executive officers required by Item 401 of Regulation
S-K is furnished in a separate disclosure in Part I of this Annual Report on
Form 10-K. The other information required by Items 10 through 13 will be
included in our Proxy Statement for the 2001 Annual Meeting of Stockholders to
be filed within 120 days after December 31, 2000, which information is
incorporated in this Annual Report on Form 10-K by reference.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) INDEX TO FINANCIAL STATEMENTS
Please see page 35 of this Annual Report on Form 10-K for the index to
financial statements.
(B) REPORTS ON FORM 8-K
No reports were filed during the last quarter of fiscal 2000.
58
60
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act, as amended the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Coral Gables, Florida
on April 2, 2001.
AT&T Latin America Corp.
By: /s/ PATRICIO E. NORTHLAND
------------------------------------
Name: Patricio E. Northland*
Title: Director, President and CEO
(Principal Executive Officer)
By: /s/ MARISOL U. SLATON
------------------------------------
Name: Marisol U. Slaton
Title: Controller
(Principal Accounting and Financial
Officer)
- ---------------
* As President and CEO, as Director and as attorney-in-fact for Messrs. Ames,
Dwyer, Haigh, Kleinman, Montoya, Murray, Petrillo and Weis.
59
61
POWER OF ATTORNEY
Each person whose signature appears below hereby authorizes, constitutes
and appoints Marisol Slaton, Thomas C. Canfield and Patricio E. Northland or any
of them, as such person's attorney-in-fact, with full power of substitution and
resubstitution, to sign and file on such person's behalf individually and in
each capacity stated below AT&T Latin America's Annual Report on Form 10-K, any
and all amendments to this report, as fully as such person could do in person,
hereby ratifying and confirming all that such attorney-in-fact, or his
substitutes, may lawfully do or cause to be done by virtue hereof.
Each of the undersigned has signed this power of attorney as of this 2nd
day of April, 2001.
/s/ PATRICIO E. NORTHLAND
--------------------------------------
Patricio E. Northland
Chairman, President and CEO
(principal executive officer)
/s/ MARISOL U. SLATON
--------------------------------------
Marisol U. Slaton
Controller (principal accounting
and financial officer)
/s/ GARY A. AMES
--------------------------------------
Gary A. Ames
Director
/s/ EDWARD A. DWYER
--------------------------------------
Edward A. Dwyer
Director
/s/ JOHN A. HAIGH
--------------------------------------
John A. Haigh
Director
/s/ DAVID C. KLEINMAN
--------------------------------------
David C. Kleinman
Director
/s/ JORGE P. MONTOYA
--------------------------------------
Jorge P. Montoya
Director
/s/ TIMOTHY L. MURRAY
--------------------------------------
Timothy L. Murray
Director
/s/ JOHN C. PETRILLO
--------------------------------------
John C. Petrillo
Director
/s/ GERARD W. WEIS
--------------------------------------
Gerard W. Weis
Director
60
62
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 Amended and Restated Certificate of Incorporation of AT&T
Latin America Corp.
3.2 Amended and Restated Bylaws of AT&T Latin America Corp.
4.1 Amended and Restated Certificate of Incorporation of AT&T
Latin America Corp. (See Exhibit 3.1)
4.2 Amended and Restated By-laws of AT&T Latin America Corp.
(See Exhibit 3.2)
4.3 Credit Facility Agreement among Global Card Holdings Inc.,
AT&T Latin America Corp., AT&T Argentina S.A., AT&T Peru S.A
and AT&T do Brasil S.A. (formerly AT&T do Brasil Ltda.)
4.4 Amended and Restated Subordinated Note Agreement, dated as
of January 30, 2001, among Global Card Holdings Inc., AT&T
Corp., AT&T Latin America Corp., AT&T Argentina S.A., AT&T
Peru S.A and AT&T do Brasil S.A.
*4.5 Certificate of designation of shares of 15% Series B
preferred stock of AT&T Latin America Corp
10.1 Regional Vehicle Agreement, dated August 28, 2000, between
AT&T Latin America Corp. and AT&T Corp.
*10.2 Service Mark License Agreement, dated November 18, 1999,
between AT&T Latin America Corp. and AT&T Corp.
*10.3 Employment Agreement, dated as of November 1, 1999, between
AT&T Latin America Corp. (formerly Kiri Inc.), FirstCom
Corporation and Patricio E. Northland.
*10.4 Employment Agreement, dated March 15, 2000, between AT&T do
Brasil S.A. (formerly Netstream Telecom Ltda.), Carlos Andre
and AT&T Latin America Corp. (formerly Kiri Inc.), as
supplemented on March 15, 2000, with English translation.
*10.5 Employment Agreement, dated as of May 15, 2000, between AT&T
Latin America Corp. (as successor to FirstCom Corporation)
and Thomas C. Canfield.
*10.6 Employment Agreement, dated as of June 30, 2000, between
AT&T Latin America Corp. and Alejandro Rossi.
10.7 Employment Agreement, dated as of June 26, 2000, between
AT&T Latin America Corp. and Marco Northland.
*10.8 Letter from AT&T Corp., indirect majority shareholder of
AT&T Latin America Corp., with respect to form of AT&T Latin
America 2000 Long Term Incentive Plan.
10.9 AT&T Latin America 2000 Long Term Incentive Program.
21.1 Subsidiaries of AT&T Latin America Corp.
24.1 Powers of Attorney (included with signature page).
- ---------------
* Incorporated by reference to AT&T Latin America's Registration Statement on
Form S-4, dated July 27, 2000 (Registration #333-42176).
61