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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: June 30, 2002
OR
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to __________
Commission File Number:
000-31181
AMERICA ONLINE LATIN AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 65-0963212
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
6600 N. Andrews Avenue
Suite 400
Fort Lauderdale, FL 33309
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (954) 689-3000
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 [ ]
As of August 9, 2002, America Online Latin America, Inc. had 67,070,065 shares
of class A common stock, $0.01 par value, outstanding. No shares of America
Online Latin America, Inc.'s class B common stock or class C common stock are
outstanding.
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AMERICA ONLINE LATIN AMERICA, INC.
FORM 10-Q
INDEX
Page
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PART I. FINANCIAL INFORMATION
Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................... 3
Quantitative and Qualitative Disclosures About Market Risk ............................ 20
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001............. 21
Consolidated Statements of Operations - Three and Six Months Ended June 30,
2002 and 2001 ................................................................. 22
Consolidated Statements of Changes in Stockholders' Equity - Six Months Ended
June 30, 2002 and 2001 ........................................................ 23
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2002
and 2001....................................................................... 24
Notes to Consolidated Financial Statements .................................... 25
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds ..................................... 32
Item 5. Other Matters ................................................................. 33
Item 6. Exhibits and Reports on Form 8-K .............................................. 33
Signatures ............................................................................ 34
Exhibit Index
-2-
PART I. FINANCIAL INFORMATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations (the "MD&A") as of June 30, 2002 and for the three and six
month periods ended June 30, 2002 and 2001 may not be indicative of the results
for the full year and should be read in conjunction with the sections of our
audited financial statements and notes thereto as well as our MD&A that are
included in our Annual Report on Form 10-K for the fiscal year 2001.
OVERVIEW
America Online Latin America, Inc. ("AOLA" or the "company") is one of the
leading interactive service providers in Latin America. Our goal is to become
Latin America's leader in the development of the global interactive medium that
is changing the way people communicate, stay informed, are entertained, learn,
shop and conduct business. We derive our revenues principally from member
subscriptions to our AOLA country services and we generate additional revenues
from advertising and other revenue sources. Our comprehensive online services,
which are available to subscribing members, and our interactive services are
developed on a country-by-country and regional basis and are tailored to local
interests.
The AOLA country services provide our members with easy and reliable access
to local, regional and global online communities, content and localized versions
of certain of America Online, Inc.'s ("America Online") interactive products.
Our AOLA country services seamlessly integrate the Internet, enabling members to
access and explore the Internet. We believe the AOLA country services encourage
members to participate in interactive communities through tools such as Spanish
and Portuguese versions of AOL Instant Messenger, Buddy Lists, e-mail, public
bulletin boards, online meeting rooms, conversations, chat and auditorium
events.
Our markets in Latin America are Brazil, Mexico, Argentina and Puerto Rico.
In November 1999, we concurrently launched our first AOLA country service,
America Online Brazil, and our first AOLA country Internet portal, our Brazilian
portal located at www.aol.com.br. As of August 2002, we offered our America
Online Brazil service in 237 cities in Brazil. In July 2000, we launched our
country service in Mexico, America Online Mexico, and our Mexican portal located
at www.aol.com.mx. As of August 2002, we offered our America Online Mexico
service in 58 cities in Mexico. In August 2000, we launched our country service
in Argentina, America Online Argentina, and our Argentine portal located at
www.aol.com.ar. As of August 2002, we offered our America Online Argentina
service in 22 cities in Argentina. In November 2000, we introduced our Latin
American regional portal, located at www.aola.com. As part of the ongoing
development of our service territory, we expanded into Puerto Rico under an
agreement with America Online under which America Online transferred its
economic interest in its existing subscriber base to us. We receive the economic
benefit associated with subscribers to the AOL-branded service in Puerto Rico
and include these subscribers in our member totals. Subscribers in Puerto Rico
are provided with both English and Spanish-language content through the
AOL-branded service. As of August 2002, service in Puerto Rico was offered
island-wide. In June 2001, AOL launched on its U.S. service, a "Latino" content
area targeted to U.S. Hispanics. We program, manage and receive an economic
benefit from advertising generated in this specific content area.
In June 2000, we entered into a ten-year strategic alliance with Banco
Itau, one of the largest banks in Latin America, which was providing limited
online financial services to approximately 1.4 million of its approximately
seven million customers at the time. We launched a co-branded, customized
version of our America Online Brazil service that Banco Itau began marketing to
its customers in December 2000 and Banco Itau is obligated to promote the
co-branded service as the principal means of accessing Banco Itau's interactive
financial services. As of June 30, 2002, Banco Itau reported it had
approximately nine million active customers, of which 2.3 million were
registered to use online banking services, primarily through Banco Itau's
proprietary service, as well as the AOL co-branded service. We believe that this
relationship will enable us to expand our Internet presence in Brazil by
allowing us to gain access to Banco Itau's online as well as offline customer
base.
The co-branded service is substantially the same as our AOLA country
service in terms of technology and content, except that we offer a co-branded
welcome screen for Banco Itau customers, a Banco Itau toolbar icon, a special
version of our finance channel and links that directly connect Banco Itau's
customers to its online financial services. Subscribers to the co-branded
service have access to our full line of features as provided to our general
customers, including e-mail with multiple AOL screen names, instant messaging,
Internet access, interaction with our worldwide online community and our 24-hour
customer service. Banco Itau's customers who register for the co-branded service
are currently entitled to a three-month free trial period, the length of which
may be changed in the future. Until December 2005, Banco Itau is required to
offer at least one hour of subsidized usage per month to subscribers following
the expiration of a subscriber's trial period, although Banco Itau is
responsible to us only for actual usage by the subscriber.
Banco Itau may also choose to provide its customers additional subsidized
time beyond the one hour obligation. In addition, Banco Itau is required to pay
us a nominal amount for subscribers who have not used the service during the
-3-
previous month and who are no longer in their free trial period. As of August
2002, approximately two-thirds of the subscribers to the Banco Itau co-branded
service had not used the service during the previous month. Furthermore, a
majority of the remaining Banco Itau subscribers who were not in their free
trial periods as of that date did not exceed the time subsidized by Banco Itau.
We are currently working with Banco Itau on online and offline initiatives to
encourage usage of the co-branded service and migration to our higher rate and
usage plans.
As part of our strategic alliance, Banco Itau and we established subscriber
targets for the co-branded service of 250,000 verified subscribers at December
10, 2001 and 500,000 at December 10, 2002. In addition, Banco Itau and we have
established a secondary target of a total of 1,000,000 verified subscribers at
December 10, 2002. Verified subscribers are those subscribers who have used the
co-branded service in any two of the three months preceding the December 10th
measurement date or who have first accessed the co-branded service in the month
prior to the December measurement date. Under our agreement, if the subscriber
level targets are not met, Banco Itau will be required to make a reference
payment to us. The reference payment amount for the secondary target of
1,000,000 subscribers will be decreased on a pro-rata basis, if Banco Itau meets
its 500,000 level target. Banco Itau met the subscriber target for the
co-branded service of 250,000 verified subscribers at the December 10, 2001
measurement date. We recently reached agreement with Banco Itau to change the
2002 measurement date from December 10 to December 24 to permit additional joint
review of current and future marketing activities.
In addition to attracting subscribers by offering broad geographical
coverage of our country services, we make our country services accessible to a
broader audience of potential subscribers offering multiple mechanisms by which
our members can pay us. All country services and Puerto Rico were initially
launched with credit cards as the primary subscriber payment method, except
that Brazil concurrently offered a cash payment method known as the "boleto."
The boleto is a customary form of payment in Brazil under which Brazilian banks
that we designate act as conduits for collecting the related payments. In
addition, customers of certain banks in Brazil, including customers of our
Banco Itau co-branded service, have the option of permitting direct debits from
their accounts for purposes of paying subscriber fees. In May 2001, we began to
offer cash method payment options in Mexico and Argentina. Under cash payment
alternatives, members can subscribe to our AOLA country services without using
a credit card, thus allowing us to reach a greater number of potential members.
Members in Puerto Rico may pay their subscription fees either through credit
cards or direct debit to their bank accounts. The majority of Puerto Rican
members select credit cards as their payment vehicle.
Since its introduction, the "cash payment" alternative has accounted for a
substantial majority of all new member registrations in Brazil, Mexico and
Argentina and as of August 1, 2002 represented the payment mechanism selected by
approximately 52% of our subscribers in Brazil (other than those to the Banco
Itau co-branded service), 60% of our members in Mexico and 52% of our members in
Argentina. Although we have not experienced any significant difficulties
collecting subscription fees from members using credit cards and direct debit
mechanisms, collection rates from members opting for the cash payment mechanisms
have been lower and less timely. In Brazil, Mexico and Argentina, we are taking
steps to improve the validation of registration data provided by cash payment
subscribers by requiring these subscribers to call our customer service centers
to finalize their registration. Initial results indicate this has resulted in a
reduction of the overall percentage of members who have selected the cash method
as their payment option.
As of June 2002, approximately 53% of our total subscriber base (excluding
subscribers to the Banco Itau co-branded service) has selected payment options
other than credit card or direct debit. We are taking steps to encourage
conversion of these subscribers to credit and direct debit payment options. For
instance, we offer discounts to subscribers to our AOLA country services who
choose the credit card payment option.
We consider countries in which we have launched our AOLA country services
as operational segments and internally report our operations on a
country-by-country basis. Each of our operating segments derives its revenues
through the provision of interactive services from subscription revenues and
advertising and other revenues.
CONSOLIDATED RESULTS OF OPERATIONS
Table 1 below shows the consolidated results from operations for the three
and six-month periods ended June 30, 2002 and 2001. During the quarter ended
June 30, 2002, revenues increased to $18.5 million, up $2.2 million, or 13.7%,
from the comparable prior year period. Total costs and expenses were $56.9
million, a decrease of $31.6 million, or 35.7% from the second quarter of 2001.
Our loss from operations was $38.4 million during the second quarter of 2002, a
reduction of $33.9 million, or 46.9% versus the 2001 second quarter. For the
three months ended June 30, 2002, net loss applicable to common stockholders,
after dividends to preferred stockholders, was $44.6 million, an improvement of
$29.9 million from the 2001 second quarter. Our loss per common share, both
basic and diluted, was $0.66, versus a loss of $1.11 per share in the
three-month period ended June 30, 2001.
For the six-month period ended June 30, 2002 revenues were $36.7 million,
an increase of 26.3% from the comparable prior year period. Total cost and
expenses were $128.5 million, a decrease of $59.7 million, or 31.7% from the
first half of 2001. Our loss from operations was $91.8 million, which
represented a decrease of $67.3 million, or 42.3%, from the six months ended
June 30, 2001. Our net loss applicable to common shareholders, after dividends
to preferred stockholders, during the six months ended June 30, 2002 was $102.1
million, an improvement of $61.0 million from the comparable six-month period in
2001. Our loss per common share, both basic and diluted, was $1.52, versus a
loss of $2.51 per share for the comparable prior-year period.
-4-
TABLE 1 - SELECTED OPERATING DATA
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------------------- -----------------------------------------
JUNE 30, JUNE 30, % JUNE 30, JUNE 30, %
2002 2001 CHANGE 2002 2001 CHANGE
------------ ------------ ------- ------------ ------------ --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
CONDENSED CONSOLIDATED OPERATIONS
Revenues:
Subscriptions ............................ $ 16,231 $ 11,295 43.7% $ 31,918 $ 20,973 52.2%
Advertising and other .................... 2,315 5,014 (53.8)% 4,786 8,092 (40.9)%
------------ ------------ ----- ------------ ------------ -----
18,546 16,309 13.7% 36,704 29,065 26.3%
Costs and expenses ....................... 56,942 88,562 (35.7)% 128,481 188,153 (31.7)%
------------ ------------ ----- ------------ ------------ -----
Loss from operations ..................... $ (38,396) $ (72,253) (46.9)% $ (91,777) $ (159,088) (42.3)%
------------ ------------ ----- ------------ ------------ -----
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (44,555) $ (74,466) (40.2)% $ (102,119) $ (163,127) (37.4)%
============ ============ ===== ============ ============ =====
Loss per common share, basic and diluted . $ (0.66) $ (1.11) (40.5)% $ (1.52) $ (2.51) (39.4)%
============ ============ ===== ============ ============ =====
Weighted average number of common shares
outstanding ............................ 67,070,065 67,008,114 0.1% 67,065,015 64,939,626 3.3%
============ ============ ===== ============ ============ =====
LOSS FROM OPERATIONS BY OPERATING SEGMENT:
- Brazil ................................ $ (26,212) $ (35,345) (25.8)% (55,815) $ (78,275) (28.7)%
- Mexico ................................ (7,771) (16,396) (52.6)% (24,311) (36,856) (34.0)%
- Argentina ............................. (488) (11,510) (95.8)% (2,152) (25,727) (91.6)%
- Puerto Rico ........................... 299 (2,179) (113.7)% 126 (4,566) (102.8)%
- Corporate and other ................... (4,224) (6,823) (38.1)% (9,625) (13,664) (29.6)%
------------ ------------ ----- ------------ ------------ -----
$ (38,396) $ (72,253) (46.9)% $ (91,777) $ (159,088) (42.3)%
============ ============ ===== ============ ============ =====
AS A PERCENTAGE OF TOTAL LOSS FROM
OPERATIONS:
- Brazil ................................ 68.3% 48.9% 60.8% 49.2%
- Mexico ................................ 20.2% 22.7% 26.5% 23.2%
- Argentina ............................. 1.3% 15.9% 2.3% 16.2%
- Puerto Rico ........................... (0.8)% 3.0% (0.1)% 2.9%
- Corporate and other ................... 11.0% 9.5% 10.5% 8.5%
------------ ------------ ------------ ------------
100.0% 100.0% 100.0% 100.0%
============ ============ ============ ============
Beginning in 2002, we began to implement measures designed to better target
higher-value members and to increase the efficiency of our member acquisition
efforts by focusing on targeted groups that have a greater likelihood of
becoming members who pay on a timely basis and remain subscribers to our
services for an extended period of time. We hope to achieve this by focusing
acquisition efforts on marketing channels that historically have resulted in
higher subscription rates and lower acquisition cost. The success of these
measures will depend in part on our ability to develop software tools and
support systems designed to verify billing data for new subscribers to our
country services and our ability to identify members that are most likely to pay
their subscription fees on a timely basis.
As a result of these efforts to target higher value members, we experienced
several results, including reductions in our overall sales and marketing costs
and improvements in our overall cost structure as the scope of our network and
call center support operations was made proportional to the resulting size of
our membership base. Our rate of member acquisition growth was also affected as
a result of our more targeted marketing efforts. Going forward, if our efforts
to target higher value members are successful, we would expect a decrease in the
average turnover of our membership base over time, and as a consequence, an
improved collections experience among our membership.
During the quarter ended June 30, 2002, these initiatives resulted in
significant reductions in our cost structure, particularly in telecommunications
and network expense and marketing acquisition expense. We reduced
telecommunications and network expense by resizing our network to meet lower
peak demand, which was achieved by restricting access for members who do not
make timely membership fee payments and through the termination of members who
were delinquent in their payments. The reduction in direct marketing was driven
by the implementation of recent initiatives designed to target members who have
higher probabilities of becoming and remaining paying members. Specifically,
this has resulted from a significant reduction in mass mailings of non-solicited
CD's containing our software in favor of an increased focus on acquiring members
through original equipment manufacturers (OEM) and direct customer interaction
channels.
We expect that most of the improvements in our cost structure from
implementation of these initiatives will primarily represent a one-time
adjustment to our cost structure during the quarter ended June 30, 2002. While
we expect some additional benefits going forward, we believe these will be
significantly less in absolute terms; indeed, absolute expenses should begin to
increase once our overall membership base begins to increase again as expected.
-5-
Other recent initiatives, which are focused on improved validation of
registration data from subscribers who have chosen the cash payment option with
the objective of better identifying members who are more likely to pay us, as
well as continued termination of members that are delinquent in paying us,
resulted in a 7% reduction in our ending membership base to 1.31 million at June
30, 2002 versus 1.41 million ending members at March 31, 2002. We expect growth
in our membership base to resume by the fourth quarter of 2002, although likely
at lower rates than in the past. We also expect that over the near term a
substantial percentage of our total subscribers will continue to be in free
trial periods, member retention programs or not making timely payment. Timing of
the growth in our membership base will be significantly influenced by the extent
of the success of the marketing of the Banco Itau co-branded service. As of June
30, 2002, approximately 565,000 members, or 43% of our total ending membership
base, was comprised of members of the Banco Itau co-branded service.
REVENUES
TOTAL REVENUES. As shown on Table 2 below, our total revenues consist
principally of subscription revenues as well as revenues generated from
advertising and other.
TABLE 2 - REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------------- ----------------------------------------
JUNE 30, JUNE 30, % JUNE 30, JUNE 30, %
2002 2001 CHANGE 2002 2001 CHANGE
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
REVENUES
Subscriptions .................... $ 16,231 $ 11,295 43.7% $ 31,918 $ 20,973 52.2%
Advertising and other ............ 2,315 5,014 (53.8)% 4,786 8,092 (40.9)%
--------- --------- --------- --------- --------- ---------
$ 18,546 $ 16,309 13.7% $ 36,704 $ 29,065 26.3%
========= ========= ========= ========= ========= =========
DISTRIBUTION OF REVENUES
Subscriptions .................... 87.5% 69.3% 87.0% 72.2%
Advertising and other ............ 12.5% 30.7% 13.0% 27.8%
--------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0%
========= ========= ========= =========
REVENUES BY OPERATING SEGMENT
- Brazil ........................ $ 8,319 $ 7,304 13.9% $ 16,303 $ 13,142 24.1%
- Mexico ........................ 7,066 5,710 23.7% 13,957 10,010 39.4%
- Argentina ..................... 464 2,552 (81.8)% 1,372 4,483 (69.4)%
- Puerto Rico ................... 2,648 612 332.7% 4,992 1,198 316.7%
- Corporate and other ........... 49 131 (62.6)% 80 232 (65.5)%
--------- --------- --------- --------- --------- ---------
$ 18,546 $ 16,309 13.7% $ 36,704 $ 29,065 26.3%
========= ========= ========= ========= ========= =========
AS A PERCENTAGE OF TOTAL REVENUES
- Brazil ........................ 44.9% 44.8% 44.4% 45.2%
- Mexico ........................ 38.1% 35.0% 38.0% 34.4%
- Argentina ..................... 2.5% 15.6% 3.7% 15.4%
- Puerto Rico ................... 14.3% 3.8% 13.6% 4.1%
- Corporate and other ........... 0.2% 0.8% 0.3% 0.9%
--------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0%
========= ========= ========= =========
Our total revenues for the three months ended June 30, 2002 increased to
$18.5 million, up $2.2 million or 13.7% from the three-month period ended June
30, 2001. Our total revenues for the six months ended June 30, 2002 increased to
$36.7 million, up $7.6 million or 26.3% from the comparable prior-year period.
During the three-month period ending June 30, 2002, revenues from subscriptions
to the AOLA country services and the AOL-branded service in Puerto Rico grew to
$16.2 million and accounted for 87.5% of total revenues. In the comparable
prior-year period, revenue from subscriptions was $11.3 million and represented
69.3% of total revenues. For the six-month period ended June 30, 2002,
subscription revenues were $31.9 million, and 87.0% of total revenues, compared
to $21.0 million and 72.2%, respectively, in the comparable prior-year period.
Advertising and other revenues were $2.3 million and $4.8 million, in the three
and six-month periods ended June 30, 2002, respectively, down 53.8% and 40.9%
from the comparable prior-year periods.
For the three months ended June 30, 2002, Brazil accounted for
approximately $8.3 million in revenue, or 44.9% of total company revenues. This
represented an increase of $1.0 million versus the prior year period. In
addition, Mexico, Puerto Rico and Argentina recorded $7.1 million, $2.6 million
and $0.5 million, respectively, representing 38.1%, 14.3% and 2.5%,
respectively, of total company revenue. Versus the comparable prior year period,
revenue from Mexico and Puerto Rico increased $1.4 million and $2.0 million,
respectively, while Argentina experienced a decrease of $2.1 million.
In the six months ended June 30, 2002, revenue from Brazil increased to
$16.3 million, up $3.2 million from the prior year period, while revenue from
Mexico increased $3.9 million to $14.0 million and revenue from Puerto Rico
increased $3.8 million to $5.0 million. Revenue from Argentina, however,
-6-
experienced a decrease of $3.1 million to $1.4 million versus the six months
ended June 30, 2001. In relative terms, Brazil represented 44.4% of total
revenue during the first half of 2002, while Mexico, Puerto Rico and Argentina
represented 38.0%, 13.6% and 3.7%, respectively, during this period.
SUBSCRIPTION REVENUES
Table 2A presents our subscription revenues on a segment basis for the three
and six months ended June 30, 2002 and 2001. We derive our subscription revenues
from members paying fees to subscribe to our AOLA country services and from
revenues received from America Online, Inc. ("America Online") related to
subscribers to the AOL-branded service in Puerto Rico. Subscription revenues do
not include amounts paid to us by Banco Itau on behalf of its customers for
subsidies that it chooses or is required to make. Such receipts are netted
against and recorded as a reduction of marketing expenses and thus are not
accounted for as subscriber revenues. Amounts paid directly to us by subscribers
that exceed the time subsidized by Banco Itau are included in subscription
revenues. For subscribers that have elected to pay their subscription fees with
credit cards, we begin to recognize subscription revenues when the fees become
due and are confirmed as collectible. For subscribers that pay through means
other than credit cards, we recognize subscription revenues when we receive
payment.
TABLE 2A - SUBSCRIPTION REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------------- ------------------------------------
JUNE 30, JUNE 30, % JUNE 30, JUNE 30, %
2002 2001 CHANGE 2002 2001 CHANGE
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
BY SEGMENT OF BUSINESS
- Brazil .................................... $ 6,747 $ 4,363 54.6% $ 13,238 $ 7,958 66.3%
- Mexico .................................... 6,526 4,419 47.7% 12,745 8,160 56.2%
- Argentina ................................. 392 1,831 (78.6)% 1,136 3,487 (67.4)%
- Puerto Rico ............................... 2,536 580 337.2% 4,751 1,166 307.5%
- Corporate and other ....................... 30 102 (70.6)% 48 202 (76.2)%
--------- --------- --------- --------- --------- -------
$ 16,231 $ 11,295 43.7% $ 31,918 $ 20,973 52.2%
========= ========= ========= ========= ========= =======
AS A PERCENTAGE OF TOTAL SUBSCRIPTION REVENUES
- Brazil .................................... 41.6% 38.6% 41.5% 37.9%
- Mexico .................................... 40.2% 39.1% 39.9% 38.9%
- Argentina ................................. 2.4% 16.2% 3.6% 16.6%
- Puerto Rico ............................... 15.6% 5.1% 14.9% 5.6%
- Corporate and other ....................... 0.2% 1.0% 0.1% 1.0%
--------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0%
========= ========= ========= =========
-7-
For the three months ended June 30, 2002, subscription revenues were
approximately $16.2 million, an increase of approximately $4.9 million, or
43.7%, versus the three months ended June 30, 2001. The overall increase in
subscription revenues was comprised of increases in subscription revenues from
Brazil, Mexico and Puerto Rico, partially offset by a decrease in subscription
revenues from Argentina.
The increase in Brazil, Mexico and Puerto Rico is primarily related to the
increases in the local membership base of each country service versus the
prior-year period. Reported results were negatively impacted by currency
devaluations, primarily of the Brazilian real and Argentine peso. By segment, in
U.S. dollar terms, subscription revenues for the three months ended June 30,
2002 from Brazil, Mexico and Puerto Rico increased 54.6%, 47.7% and 337.2%,
respectively, versus the prior year period. Subscription revenues from Argentina
decreased by 78.6% during the period. In local currency terms, total
subscription revenues increased 58.6% versus the prior year period. In relative
terms, for the three-month period ended June 30, 2002, Brazil and Mexico
accounted for approximately 41.6% and 40.2, respectively, of total revenues
derived from subscriptions. Puerto Rico and Argentina represented approximately
15.6% and 2.4%, respectively, of total revenue for the period.
In local currency terms, subscription revenues for the three months ended
June 30, 2002 increased approximately 68.7% in Brazil and 52.0% in Mexico versus
the prior-year period. Subscription revenue in Argentina decreased 30.7% in
local currency terms, driven by the impact of that country's economic crisis on
membership levels. Currency devaluations during the three months ended June 30,
2002 averaged 8% for the Brazilian real, 3% for the Mexican Peso and 69% for the
Argentine peso, versus the average exchange rates recorded for the prior year
period.
The small decrease of approximately $72,000 in revenues from the Corporate
and Other segment is attributable to the declining membership base of the
CompuServe Classic service, which we no longer actively promote. Revenues
related to the CompuServe service appear in the Corporate and Other segment only
for geographies where we do not have country operations.
Sequentially, subscription revenue for the second quarter of 2002 increased
$0.5 million, or 3.5%, from the three-month period ended March 31, 2002. Brazil,
Mexico and Puerto Rico recorded sequential gains in subscription revenue growth
of 4%, 5% and 14% while Argentina experienced a decrease of 47% versus the
preceding quarter. Going forward, we expect that the amount of subscriber
revenues will depend largely on our success in converting members who register
for the free trial period and in converting members of the co-branded service
currently subsidized by Banco Itau to non-subsidized service plans. We expect
revenue will also likely continue to be negatively impacted versus prior year
comparisons by the devaluation of the Latin American currencies.
For the six months ended June 30, 2002, subscription revenues were
approximately $31.9 million, an increase of approximately $10.9 million, or
52.2%, versus the comparable prior-year six-month period. The increase in
reported subscription revenues was driven by increases from Brazil, Mexico and
Puerto Rico, partially offset by a decrease in subscription revenues from
Argentina. The increases in Brazil, Mexico and Puerto Rico were primarily due to
increases in the local membership of each country service versus the prior-year
period, and partially offset by negative impacts from currency devaluations. In
relative terms, Brazil and Mexico accounted for approximately 41.5% and 39.9%,
respectively, of total revenues derived from subscriptions, while Puerto Rico
and Argentina contributed approximately 14.9% and 3.6%, respectively, during the
six month period ended June 30, 2002.
By segment, in U.S. dollar terms, subscription revenues for the six months
ended June 30, 2002 from Brazil, Mexico and Puerto Rico increased 66.3%, 56.2%
and 307.5%, respectively, while declining by 67.4% for Argentina, versus the
comparable prior year period. In local currency terms, total subscription
revenues for the six months ended June 30, 2002 increased by approximately 67.5%
versus the prior-year period, driven by increases of 88.5% in Brazil and 54.2%
in Mexico. Subscription revenues in Argentina fell by 21.1% in local currency
terms from the first half of 2001.
At June 30, 2002 and December 31, 2001, we had deferred subscription
revenues of approximately $3.1 million and $2.4 million, respectively. Deferred
subscription revenues consist of fees for subscription services received or
confirmed as collectible from credit card accounts in advance of our having
earned those subscription revenues.
ADVERTISING AND OTHER REVENUES
Table 2B presents our advertising and other revenues on a segment basis for
the three and six months ended June 30, 2002 and 2001. These revenues are
principally derived from:
- advertising arrangements under which we receive fees from
advertisements displayed on our interactive services; and
-8-
Sponsorship or co-sponsorship arrangements that allow advertisers to sponsor an
area on our interactive services in exchange for a fee.
TABLE 2B - ADVERTISING AND OTHER REVENUES
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ---------------------------------
JUNE 30, JUNE 30, % JUNE 30, JUNE 30, %
2002 2001 CHANGE 2002 2001 CHANGE
-------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
BY SEGMENT OF BUSINESS
- Brazil ....................................... $ 1,572 $ 2,941 (46.5)% $ 3,065 $ 5,184 (40.9)%
- Mexico ....................................... 540 1,291 (58.2)% 1,212 1,850 (34.5)%
- Argentina .................................... 72 721 (90.0)% 236 996 (76.3)%
- Puerto Rico .................................. 112 32 250.0% 241 32 653.1%
- Corporate and other .......................... 19 29 (34.5)% 32 30 6.7%
-------- -------- -------- -------- -------- --------
$ 2,315 $ 5,014 (53.8)% $ 4,786 $ 8,092 (40.9)%
======== ======== ======== ======== ======== ========
AS A PERCENTAGE OF TOTAL ADVERTISING AND
OTHER REVENUES
- Brazil ....................................... 67.9% 58.7% 64.0% 64.1%
- Mexico ....................................... 23.3% 25.7% 25.3% 22.9%
- Argentina .................................... 3.1% 14.4% 4.9% 12.3%
- Puerto Rico .................................. 4.8% 0.6% 5.0% 0.4%
- Corporate and other .......................... 0.9% 0.6% 0.8% 0.3%
-------- -------- -------- --------
100.0% 100.0% 100.0% 100.0%
======== ======== ======== ========
For the three months ended June 30, 2002, revenue from advertising and
other was approximately $2.3 million, representing a decrease of $2.7 million,
or 53.8%, from the comparable prior-year period. Reductions in revenue from
advertising and other of $1.4 million, $0.8 million and $0.6 million were
recorded in Brazil, Mexico and Argentina, respectively, while Puerto Rico
experienced an increase of approximately $0.1 million.
Revenue from advertising and other experienced a sequential decline of $0.2
million during the second quarter of calendar year 2002, as compared to the
three months ended March 31, 2002. Performance continued to be impacted by the
worldwide recession in advertising expenditures and volatile economic conditions
across much of Latin America. We expect future advertising and other revenue to
continue at its current lower level or to decrease and to only recover along
with overall market conditions. We expect to continue deriving the substantial
majority of our revenues from subscriptions to our AOLA country services, rather
than advertising and other revenues.
Revenue from advertising and other for the six-month period ended June 30,
2002 was approximately $4.8 million, a decrease of $3.3 million, or 40.9% versus
the comparable prior-year period. Versus the prior year, reductions in revenue
from advertising and other were experienced in Brazil, Mexico and Argentina,
with decreases of $2.1 million, $0.6 million and $0.8 million, respectively.
Puerto Rico recorded an increase of approximately $0.2 million during the
six-month period. The impact of currency fluctuations on advertising and other
revenue for the three and six-months ended June 30, 2002 was not material.
During the three and six-month periods ended June 30, 2002, we had
advertising and other revenues from affiliated companies of approximately $0.3
million and $0.6 million, consisting entirely of revenues received from Banco
Itau related to advertising on our AOLA country service in Brazil. For the three
and six-month periods ended June 30, 2001, advertising and other revenues from
affiliated companies were $0.6 million and $1.7 million, respectively.
As of June 30, 2002 and December 31, 2001, we had deferred advertising and
commerce revenues of approximately $1.3 million and $1.9 million, respectively.
Deferred advertising and commerce revenues consist of payments received in
advance of our delivery of the related services and are recognized as income as
the services are delivered. The decrease in deferred advertising and other
revenue is primarily due to amortization of a long-term contract with Hollywood
Media Corp.
COSTS AND EXPENSES
As shown on Table 3 below, our total costs and expenses consist of cost of
revenues, sales and marketing, and general and administrative expenses.
-9-
TABLE 3 - COSTS AND EXPENSES
THREE MONTHS ENDED SIX MONTHS ENDED
--------------------------------- ------------------------------------
JUNE 30, JUNE 30, % JUNE 30, JUNE 30, %
2002 2001 CHANGE 2002 2001 CHANGE
------- -------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
COSTS AND EXPENSES:
Cost of revenues ........................... $26,353 $ 31,934 (17.5)% $ 58,762 $ 59,847 (1.8)%
Sales and marketing ........................ 24,123 47,910 (49.6)% 54,567 109,924 (50.4)%
General and administrative ................. 6,466 8,718 (25.8)% 15,152 18,382 (17.6)%
------- -------- --------- --------- --------- ---------
Total costs and expenses ................... $56,942 $ 88,562 (35.7)% $ 128,481 $ 188,153 (31.7)%
======= ======== ========= ========= ========= =========
AS A PERCENTAGE OF TOTAL COSTS AND EXPENSES:
Cost of revenues ........................... 46.3% 36.1% 45.7% 31.8%
Sales and marketing ........................ 42.4% 54.1% 42.5% 58.4%
General and administrative ................. 11.3% 9.8% 11.8% 9.8%
-------- --------- --------- ---------
Total costs and expenses ................... 100.0% 100.0% 100.0% 100.0%
======== ========= ========= =========
COSTS AND EXPENSES BY OPERATING SEGMENT:
- Brazil .................................. $34,531 $ 42,649 (19.0)% $ 72,118 $ 91,417 (21.1)%
- Mexico .................................. 14,837 22,105 (32.9)% 38,268 46,865 (18.3)%
- Argentina ............................... 952 14,061 (93.2)% 3,524 30,210 (88.3)%
- Puerto Rico ............................. 2,349 2,791 (15.8)% 4,866 5,764 (15.6)%
- Corporate and other ..................... 4,273 6,956 (38.6)% 9,705 13,897 (30.2)%
------- -------- --------- --------- --------- ---------
$56,942 $ 88,562 (35.7)% $ 128,481 $ 188,153 (31.7)%
======= ======== ========= ========= ========= =========
AS A PERCENTAGE OF TOTAL COSTS AND EXPENSES:
- Brazil .................................. 60.6% 48.2% 56.1% 48.6%
- Mexico .................................. 26.1% 25.0% 29.8% 24.9%
- Argentina ............................... 1.7% 15.9% 2.7% 16.1%
- Puerto Rico ............................. 4.1% 3.2% 3.8% 3.1%
- Corporate and other ..................... 7.5% 7.7% 7.6% 7.3%
-------- --------- --------- ---------
100.0% 100.0% 100.0% 100.0%
======== ========= ========= =========
DEPRECIATION AND AMORTIZATION:
- Brazil .................................. $ 723 $ 386 87.3% $ 1,432 $ 751 90.7%
- Mexico .................................. 314 275 14.2% 627 534 17.4%
- Argentina ............................... 86 139 (38.1)% 194 275 (29.5)%
- Puerto Rico ............................. 20 1 1,900.0% 31 2 1,450.0%
- Corporate and other ..................... 189 383 (50.7)% 393 633 (37.9)%
------- -------- --------- --------- --------- ---------
$ 1,332 $ 1,184 12.5% $ 2,677 $ 2,195 22.0%
======= ======== ========= ========= ========= =========
-10-
For the three months ended June 30, 2002, total costs and expenses were
$56.9 million, down 35.7% or $31.6 million from the three months ended June 30,
2001. All major cost categories experienced reductions with the most significant
contribution coming from sales and marketing expense, which decreased by
approximately $23.8 million, or 49.7% from the comparable prior-year period.
Costs of revenue experienced a decrease of $5.6 million, or 17.5%, to $26.4
million. General and administrative expense for the current quarter was $6.5
million, down $2.3 million, or 25.8%, from the comparable prior-year period.
Currency devaluations reduced reported cost and expenses by $5.4 million for the
period as compared to the same period in the prior year.
For the six-month period ended June 30, 2002, total costs and expenses were
$128.5 million, down $59.7 million or 31.7% from the comparable prior-year
period. Sales and marketing expense decreased by 50.4%, or $55.4 million, to
approximately $54.6 million for the first half of 2002. Costs of revenue
experienced a reduction of $1.1 million, or 1.8%, to $58.8 million, while
general and administrative expense decreased by $3.2 million, or 17.6%, to $15.2
million, from $18.4 million in the comparable prior-year period. Currency
devaluations reduced reported cost and expenses by $12.6 million for the period.
COST OF REVENUES
Our cost of revenues includes:
- network-related costs consisting primarily of fees paid to third
parties to carry our data over their telecommunications networks;
- fees we pay to America Online for use of their servers that run our
interactive services;
- fees we pay to America Online for technical support and training;
- fees we pay to America Online for current period product development
maintenance expense and amortization of capitalized product
development costs;
- personnel and related costs for customer support and product and
content development; and
- fees paid to content providers.
For the three months ended June 30, 2002, cost of revenues was
approximately $26.4 million and represented 46.3% of our total costs and
expenses, compared to approximately $31.9 million and 36.1% of total costs and
expenses for the three months ended June 30, 2001. The decrease of approximately
$5.6 million, or 17.5%, in cost of revenues was driven primarily by decreases in
network and telecommunications expense ($1.5 million) and member services ($2.8
million). Reductions in product development expense ($0.9 million) also
contributed to the overall improvement in cost of revenues. The improvements in
network and communications costs and member services expense are reflective of
the recent initiatives taken to focus on higher-value members and size our cost
structure to members who pay on a timely basis. As we have largely positioned
our network at the desired level, most of the improvements in this line have
been realized. Going forward, we expect our cost of revenues to stabilize in
absolute terms in the near term and increase in line with expected resumed
membership growth over the longer term. For the three months ended June 30,
2002, currency devaluations reduced reported costs of revenue by $2.9 million.
As of August 2002, our network provided coverage to 317 cities in our three
service countries. Service in Puerto Rico is available island-wide. In the near
term, we expect to maintain the number of cities in our network in Brazil,
Mexico and Argentina.
For the six months ended June 30, 2002, cost of revenues was approximately
$58.8 million, or 45.7% of our total costs and expenses, and represented an
improvement of $1.1 million, or 1.8%, over the comparable prior year period.
This compares to $59.8 million and 31.8% of total costs and expenses for the six
months ended June 30, 2001. The improvement in cost of revenues was driven
primarily by lower expense for member services ($5.2 million), product
development ($2.1 million) and content ($1.7 million), which more than offset
increased telecommunications expense. The decrease in member services and
product development costs reflect lower on-going levels in the expense items
following the post-launch period, while the reduction in content expense was
primarily due to the September 2001 work force restructuring. The increase in
network and telecommunications expense versus the prior year period was driven
by the higher membership base and expenses incurred during the first quarter of
2002 to reduce the size of our network in line with recent initiatives. Currency
devaluations reduced reported costs of revenue for the six months ended June 30,
2002 by approximately $6.0 million.
Cost of revenues paid to related parties primarily consist of payments made
or due to America Online and its affiliates for the costs of hosting, member
services and other support services for our country operations. During the three
months ended June 30, 2002 and 2001, the cost of services provided by America
Online and its affiliates was approximately $4.4 million and $5.3 million,
respectively. For the six months ended June 30, 2002 and 2001, the cost of
services provided by America Online and its affiliates was approximately $10.6
million and $10.2 million, respectively.
-11-
SALES AND MARKETING
Sales and marketing expenses consist of costs to acquire and retain our
members, operating expenses for our sales and marketing efforts and other
general marketing costs. The costs to acquire and retain our members include
direct marketing costs such as kiosks established at retail locations and the
distribution of our software on CDs to potential customers as well as the costs
of brand advertising on television and in newspapers, magazines and other media.
Also included in sales and marketing expense is amortization of the shares
issued to Banco Itau in consideration for its entering into a strategic
marketing alliance with us (see "Strategic Marketing Alliance" in our Annual
Report on Form 10-K for the period ended December 31, 2001, as well as Note 5 to
our unaudited consolidated financial statements).
For the three months ended June 30, 2002, sales and marketing expenses were
approximately $24.1 million, down $23.8 million from the comparable prior-year
period. During our fiscal 2002 second quarter, sales and marketing expenses
represented 42.4% of our total costs and expenses, compared to 54.1% in the 2001
second quarter. The overall reduction was driven by significant decreases in
direct marketing ($14.7 million) and brand-marketing ($9.9 million) expenses.
The decline in direct marketing was driven by the implementation of recent
initiatives designed to target members who have higher probabilities of becoming
and remaining paying members. Specifically, the lower expense has resulted from
a significant reduction in mass mailings of non-solicited CDs containing our
software and an increased focus on original equipment manufacturers (OEM) and
direct customer interaction channels (i.e. staffed kiosks in malls and other
strategic locations offering live demonstration of the country services and
immediate registration). The decrease in brand marketing is reflective of
reduced levels of spending following initial country launches and also of lower
overall competitive marketing activity in the countries.
For the 2002 and 2001 second quarters, amounts received from Banco Itau for
subsidies it pays on behalf of its members and which reduce sales and marketing
expense were $1.5 million and $0.3 million, respectively, for each of the
three-month periods ended June 30, 2002 and 2001. During each of the three-month
periods ended June 30, 2002 and 2001, the Banco Itau amortization expense was
$10.3 million.
During the three months ended June 30, 2002, currency devaluations reduced
sales and marketing expenses by approximately $2.0 million versus the prior year
period.
For the six-month period ended June 30, 2002, sales and marketing expenses
were approximately $54.6 million, down 50.4%, or $55.4 million from the
comparable prior-year period. For the fiscal 2002 first half, sales and
marketing expenses represented 42.5% of our total costs and expenses, compared
to 58.4% in the six months ended June 30, 2001. The overall reduction was driven
by significant decreases in both direct marketing and brand-marketing expense of
$27.7 million each. The declines were driven by the recent initiatives to focus
on attracting higher value members as well as decreases associated with the
post-launch environment.
Amounts received from Banco Itau for subsidies it pays on behalf of its
members were $3.0 million and $0.4 million, respectively, for the six-month
periods ended June 30, 2002 and 2001. During first half of fiscal years 2002 and
2001, the Banco Itau amortization expense was $20.6 million and $20.7 million,
respectively.
We expect to continue focusing member acquisition efforts on target
populations that have a greater likelihood of not only becoming members, but
also becoming subscribers who pay on a timely basis and remain subscribers to
our services for an extended period of time. We hope to achieve this by focusing
efforts on channels that in the past have resulted in higher subscription rates
relative to their acquisition cost. Going forward, on an absolute basis, sales
and marketing costs are expected to stabilize and remain near current levels
through the end of the year.
-12-
GENERAL AND ADMINISTRATIVE
For the three months ended June 30, 2002, our general and administrative
costs were approximately $6.5 million, down $2.3 million, or 25.8% from $8.7
million the comparable prior-year period. Results were positively impacted by
the realization of benefits associated with the work force restructuring
implemented in September 2001 and the recovery of accounts receivable previously
deemed to be uncollectible and which were subsequently received. We anticipate
that our general and administrative expenses will increase modestly during the
coming months.
For the six months ended June 30, 2002, our general and administrative
costs were approximately $15.2 million, down $3.1 million, or 17.6 % from $18.4
million in the comparable prior-year period. Results were positively impacted by
realization of benefits from our September 2001 restructuring, by the reversal
of employee bonuses in the amount of $2.5 million that were not paid, and by the
recovery of accounts receivable in the amount of $1.3 million previously deemed
to be uncollectible but which were subsequently received. This was partially
offset by $1.5 million in costs related to the pursuit of various financing
alternatives, which culminated in our recent Note Purchase Agreement with AOLTW.
For the six-month period ended June 30, 2002, approximately $1.4 million and
$0.1 million were incurred to America Online and the Cisneros Group,
respectively, for support services.
OTHER (EXPENSES)/INCOME, NET
Other income, net consists primarily of interest income and expense,
foreign currency gains and losses and realized gains and losses on investments.
For the three months ended June 30, 2002, this item consisted of net expense
totaling approximately $1.5 million, comprised primarily of interest expense
incurred on Notes issued to AOLTW in the amount of $0.9 million and foreign
exchange losses of $0.4 million. This compares with net other income of $1.9
million in the three-month period ended June 30, 2001, which was comprised
primarily of income derived from our short-term cash investments.
For the six months ended June 30, 2002, other income, net amounted to a
loss of approximately $1.0 million, comprised primarily of interest expense
incurred from the senior convertible notes issued to AOLTW. For the six months
ended June 30, 2001, other income, net was $3.7 million, which consisted
primarily of interest income.
INCOME TAXES
There was no provision or benefit for income taxes recorded during any of
the periods presented.
FINANCIAL CONDITION AND LIQUIDITY
FINANCIAL CONDITION
At June 30, 2002, we had $45.3 million of debt, $8.4 million of cash and cash
equivalents and a capital deficiency of approximately $54.0 million, compared to
$17.3 million of debt, $19.7 million of cash and cash equivalents and a capital
deficiency of $24.3 million at March 31, 2002. At December 31, 2001, we had no
debt, $46.7 million of cash and cash equivalents and $21.1 million of
shareholders' equity. The increase in debt during the second quarter of fiscal
2002 reflects the issuance of a second and third tranche of 11% senior
convertible notes to AOLTW (as more fully described in "Cash Flows and
Liquidity" below) while the decline in our cash and cash equivalents position
stems from the $38.0 million operating cash flow loss incurred in financing our
operations during the quarter ended June 30, 2002.
As shown on Table 4, as of June 30, 2002, our current assets amounted to
$24.9 million, down 60.5% versus $62.9 million at December 31, 2001. Current
liabilities decreased 24.7% to approximately $46.8 million at June 30, 2002,
from $62.1 million at December 31, 2001. The decrease in cash and cash
equivalents resulted in a decline in current assets, as explained above and in
the "Cash Flows and Liquidity" section below.
-13-
TABLE 4 - FINANCIAL CONDITION
AS OF
---------------------------------
JUNE 30, DECEMBER 31, %
2002 2001 CHANGE
-------- ----------- --------
(DOLLARS IN THOUSANDS)
Cash and cash equivalents ............... $ 8,358 $ 46,676 (82.1)%
-------- -------- ---------
Current assets .......................... $ 24,889 $ 62,943 (60.5)%
-------- -------- ---------
Total assets ............................ $ 38,944 $ 84,384 (53.8)%
-------- -------- ---------
Working capital ......................... $(21,886) $ 806 (2,815.4)%
-------- -------- ---------
Current liabilities ..................... $ 46,775 $ 62,137 (24.7)%
-------- -------- ---------
Long-term liabilities ................... $ 46,209 $ 1,124 4,011.1%
-------- -------- ---------
Stockholders' equity (capital deficiency) $(54,040) $ 21,123 (355.8)%
-------- -------- ---------
TOTAL ASSETS BREAKDOWN BY SEGMENT:
- Brazil ............................... $ 11,599 $ 14,376 (19.3)%
- Mexico ............................... 11,649 11,345 2.7%
- Argentina ............................ 3,553 9,262 (61.6)%
- Puerto Rico .......................... 267 303 (11.9)%
- Corporate and other .................. 11,876 49,098 (75.3)%
-------- -------- ---------
$ 38,944 $ 84,384 (53.8)%
======== ======== =========
CASH FLOWS AND LIQUIDITY
From inception through June 30, 2002, our operations have been financed
through capital raised from several rounds of financing, including draw-downs
from the AOLTW notes as well as our initial public offering, which was completed
on August 11, 2000. Funds raised through June 30, 2002 have totaled $611.6
million, before issuance-related expenses of $13.4 million. Prior to the initial
public offering, cash contributions by joint venture partners totaled $200.1
million, corresponding to $150.1 million by the Cisneros Group and $50.0 million
by America Online. Subsequently, our initial public offering generated total
proceeds of $216.2 million prior to issuance-related expenses, and including
partial exercise of the over-allotment option by the underwriters. An additional
round of financing took place in March 2001, pursuant to which we raised $150
million through the sale of stock to America Online, the Cisneros Group and
Banco Itau.
In order to fund our operating and cash requirements into early 2003, on
March 8, 2002, we entered into a Note Purchase Agreement with AOLTW, the parent
company of America Online, which is one of our principal stockholders. Under the
note purchase agreement, AOLTW has agreed to make available to us, subject to
standard borrowing conditions, up to $160 million prior to December 31, 2002 in
exchange for senior convertible notes of AOLA due in March of 2007. The senior
convertible notes will bear interest at the rate of 11% per annum, payable
quarterly. We issued an initial note in the principal amount of $17.3 million to
AOLTW on March 11, 2002. Subsequently, we issued additional notes in the
principal amounts of $13.0 on April 23, 2002, $15.0 million on May 28, 2002 and
$13.0 million on July 10, 2002.
The senior convertible notes are convertible into series B preferred stock,
which is the series of preferred stock currently owned by America Online. The
initial conversion price, subject to adjustment, is $3.624 per share (a premium
of 20% to the closing trading price of our class A common stock of $3.020 on
March 8, 2002). The senior convertible notes will be convertible at any time at
the option of the holder, and will be redeemable by AOLA at any time after 18
months, subject to the holder's right to convert the senior convertible notes
into preferred stock.
-14-
In addition, the senior convertible notes are required to be repaid prior
to maturity, at the option of the holder, in the event of significant asset
sales or if we raise additional debt or equity funds. Interest will be payable
either in cash or preferred stock (or under certain limited conditions,
additional senior convertible notes) at our option. If interest is paid in
shares, the price per share is to be determined based on the average closing
price of the class A common stock for the twenty trading dates prior to the date
of payment. We made our first interest payment in the amount of approximately
$1.0 million to AOLTW on July 1, 2002, covering the period from March 11 through
June 30, 2002. Although at the time we entered into the Note Purchase Agreement,
we had expected to exercise our option to make the interest payment through the
issuance of additional shares, on this occasion we elected to make a cash
payment in order to avoid the dilution that would have occurred by issuing
shares at the then current market price of approximately $0.70 per share. We
will assess the overall market situation at the time of each quarterly interest
payment before determining whether future interest payments will be made in cash
or through the issuance of additional shares. Interest payments on the notes
could total approximately $85 million, depending on the exact timing of the
drawdowns, over the life of the notes that mature in March 2007. Depending on
market conditions at the time, a decision to pay the interest on the notes
through the issuance of additional shares could result in additional significant
dilution to existing stockholders.
We continue to anticipate that the cash on hand and the cash to be raised
through the issuance of the senior convertible notes to AOLTW will be sufficient
to fund operations into early 2003, based upon our current operating budget. The
projected spending is comprised primarily of discretionary items that could be
adjusted, when or if necessary. We expect that additional financing will be
required before we become cash self-sufficient. In order to fund our cash needs
in the remainder of 2003, we will seek to sell additional equity or debt
securities or to enter into credit facilities. We cannot assure that such
funding will be obtained on favorable terms, if at all, or that the holders of
the senior convertible notes will not exercise their option to require the
proceeds of any such financing to be used to repay the senior convertible notes.
As exhibited in Table 5 below, during the six months ended June 30, 2002,
our operations required $81.8 million to fund operating activities and $1.1
million to fund capital expenditures. This was financed primarily through a
reduction in our cash and cash equivalents balances and through the issuance of
$45.3 million in senior convertible notes to AOLTW, which are part of the $160
million Note Purchase Agreement recently completed with AOLTW. In the comparable
prior-year period, our operating activities required $127.3 million while
capital expenditures amounted to $4.4 million. This was financed principally
through reductions in our cash and cash equivalents balances and the sale of
short-term investments. We completed the quarter ended June 30, 2002 with
approximately $8.4 million in cash on hand.
TABLE 5 - CASH FLOWS & LIQUIDITY
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30, %
2002 2001 CHANGE
-------- --------- -----
(DOLIARS IN THOUSANDS)
CONDENSED CASH FLOW STATEMENT:
Cash and cash equivalents, beginning of period $ 46,676 $ 63,509 (26.5)%
-------- --------- ------
Cash flow (used) provided by:
Operating activities ....................... (81,826) $(127,292) (35.7)%
Investing activities ....................... (1,126) 64,947 (101.7)%
Financing activities ....................... 45,340 105,474 (57.0)%
Effect of exchange rate changes on cash
and cash equivalents ...................... (706) (1,065) (33.7)%
-------- --------- ------
Net (decrease) increase in cash and
cash equivalents ......................... (38,318) 42,064 (191.1)%
-------- --------- ------
Cash and cash equivalents, end of period ..... $ 8,358 $ 105,573 (92.1)%
======== ========= ======
-15-
CAPITAL SPENDING
As set forth in Table 6, our overall capital spending for the three months
ended June 30, 2002 was $0.6 million, a decrease of 69.4% versus the level of
capital spending of $1.9 million undertaken in the comparable prior-year period.
The decline in capital spending was primarily due to the absence of spending on
office leasehold improvements and member service center projects which were in
progress and completed during calendar 2001, and a significant reduction of
spending on product development following the initial localization of our
software in our service countries.
Capital spending during the six months ended June 30, 2002 was $1.1
million, and represented a decrease of 74.5% versus the first half of fiscal
2001. The decline in capital spending was primarily due to the completion of
investment in office and member service center projects during calendar 2001 and
the completion of localization projects related to our software clients.
TABLE 6 -CAPITAL SPENDING
QUARTER ENDED SIX MONTHS ENDED
-------------------------------- -------------------------------------
JUNE 30, JUNE 30, % JUNE 30, JUNE 30, %
2002 2001 CHANGE 2002 2001 CHANGE
------ ------- -------- ------- ------- ----------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
CAPITAL SPENDING BY SEGMENT:
- Brazil .................. $ 217 $ 754 (71.2)% $ 613 $ 1,427 (57.0)%
- Mexico .................. 115 51 125.5% 146 107 36.4%
- Argentina ............... -- 30 (100.0)% 7 72 (90.3)%
- Puerto Rico ............. 10 15 (33.3)% 16 38 (57.9)%
- Corporate and other ..... 226 1,005 (77.5)% 344 2,766 (87.6)%
------ ------- ----- ------ ------- -----
$ 568 $ 1,855 (69.4)% $1,126 $ 4,410 (74.5)%
====== ======= ===== ====== ======= =====
CAPITALIZATION
As displayed in Table 7 below, at June 30, 2002, we had 67,070,065 shares
of class A common stock outstanding (67,065,015 average weighted shares for the
six-month period ended June 30, 2002).
TABLE 7 - CAPITAL (PERIOD END BALANCES)
AS OF
-----------------------------------------------
JUNE 30, DECEMBER 31, %
2002 2001 CHANGE
------------- ------------- -------
(In thousands, except share amounts)
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Preferred Stock, Common Stock and additional
paid-in capital .......................... $ 803,850 $ 803,659 0.02%
Accumulated deficit ........................ (682,827) (590,011) 15.73%
Other, mainly unearned services ............ (175,063) (192,525) (9.07)%
------------- ------------- -------
$ (54,040) $ 21,123 (355.83)%
============= ============= =======
SHARES OUTSTANDING OR AVAILABLE
FOR ISSUANCE:
Series B Preferred Stock ................... 116,010,456 116,010,456 --%
Series C Preferred Stock ................... 111,413,994 111,413,994 --%
Class A Common Stock ....................... 67,070,065 67,054,714 0.02%
------------- ------------- -------
294,494,515 294,479,164 0.01%
AOL Warrant ................................ 16,541,250 16,541,250 --%
AOLTW Senior Convertible Note .............. 12,500,000 -- 100.00%
Stock Options .............................. 16,929,898 15,834,257 6.92%
------------- ------------- -------
340,465,663 326,854,671 4.16%
============= ============= =======
-16-
We had anti-dilutive securities, all of which are convertible or
exercisable into shares of our class A common stock, consisting of options to
purchase 16,929,898 shares of our class A common stock, a warrant issued to AOL
for 16,541,250 shares, our series B preferred stock (116,010,456 shares), our
series C preferred stock (111,413,994 shares), and the $45.3 million of senior
convertible notes issued to AOLTW through June 30, 2002 (12,500,000 shares).
If all of these anti-dilutive securities were converted or exercised, an
additional 273,395,598 weighted average shares of class A common stock would
have been outstanding during the three months ended June 30, 2002. We refer to
these securities as anti-dilutive securities because if they were exercised or
converted into shares of class A common stock, they would decrease our basic and
diluted loss per share as calculated under Generally Accepted Accounting
Principles in the United States ("US GAAP"). In accordance with US GAAP, the
potential effect of these anti-dilutive securities, which are or will all be
convertible or exercisable into class A common stock, was not included in the
calculation of loss per share.
Our class A common stock is traded on the National Association of
Securities Dealers Automated Quotation (NASDAQ) SmallCap Market under the symbol
AOLA. On June 21, 2002, we received approval from the NASDAQ to transfer our
listing from the NASDAQ's National Market to the SmallCap Market. The NASDAQ
SmallCap Market operates under the same NASDAQ trading rules and uses the same
electronic, screen-based dealer market as the NASDAQ National Market. The move
to the SmallCap Market was necessitated by the fact that our stockholders'
equity position turned deficient at the end of the quarter ended March 31, 2002,
combined with the fact that our current share price was below minimum
requirements for continued listing on the NASDAQ National Market. Our
stockholders' equity position became deficient as a result of our financing
strategy under which we entered into the Note Purchase Agreement with AOLTW in
order to minimize dilution to our current common shareholders.
On July 29, 2002, we received a letter from Nasdaq stating that our class A
common stock did not comply with the $35 million market capitalization
requirement for continued listing on the Nasdaq SmallCap Market (Marketplace
Rule 4310(c)(2)(B)(ii)). In order for our class A common stock to continue to be
listed on the Nasdaq SmallCap Market, the market value of the class A common
stock must be $35 million or more for a minimum of ten consecutive business days
on or before August 28, 2002. If we do not comply with this requirement by
August 28, 2002, we intend to request a hearing before a Nasdaq Listing
Qualification Panel to appeal this issue. We have also received a separate
letter from Nasdaq stating that our class A common stock is not in compliance
with the minimum bid price requirement for continued listing on the Nasdaq
SmallCap Market (Marketplace Rule 4310(c)(4)). In order for our class A common
stock to continue to be listed on the Nasdaq SmallCap Market, the closing bid
price of the class A common stock must be $1.00 or more for a minimum of ten
consecutive business days on or before January 13, 2003. If we do not comply
with this requirement by January 13, 2003, we intend to request a hearing before
a Nasdaq Listing Qualification Panel to appeal this issue. We do not expect to
be able to comply with the required market capitalization of $35 million by the
August 28, 2002 deadline and therefore will be subject to delisting from the
Nasdaq SmallCap Market. In the event we are delisted from the Nasdaq SmallCap
Market, we would expect our class A common stock to begin trading on the
Over-the-Counter Bulletin Board (OTCBB).
CRITICAL ACCOUNTING POLICIES
The Securities and Exchange Commission has recently issued Financial
Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical
Accounting Policies" ("FRR 60"), suggesting that companies provide additional
disclosure and commentary on those accounting policies considered most critical.
FRR 60 considers an accounting policy to be critical if it is important to a
company's financial condition and results, and requires significant judgment and
estimates on the part of management in its application. We believe the following
represent our critical accounting policies as contemplated by FRR 60. For a
summary of all our significant accounting policies, including the critical
accounting policies discussed below, see Note 2 to the consolidated financial
statements in our 2001 Annual Report on Form 10-K.
REVENUE RECOGNITION
For subscribers in Brazil, Mexico and Argentina that have elected to pay
their subscription fees with credit or debit cards, or through direct debit from
bank accounts, we begin to recognize subscription revenues when the fees become
due and are confirmed as collectible. For subscribers in these countries who pay
their subscription fees through cash payment mechanisms such as boletos, we do
not recognize subscription revenues until the cash payment is received. The vast
majority of subscribers to the AOL-branded service in Puerto Rico pay their
subscription fees by credit card or direct debit to their bank accounts. Revenue
from subscribers in Puerto Rico, which is received directly from America Online,
is recognized on a gross basis when the fees become due. Were we to begin to
recognize fees from subscribers choosing cash payment options as revenue when
they become due, our subscriber revenues and bad debt expense would be greater
than currently reported. As we gain additional experience with the
collectibility of our cash accounts receivable, we may begin to recognize
revenue when the fees become due.
Under our strategic alliance with Banco Itau, until December 2005, Banco
Itau is required to offer at least one hour of subsidized usage per month to
subscribers of the co-branded service following the expiration of a subscriber's
-17-
trial period. Banco Itau may also choose to provide its customers additional
subsidized time beyond the one-hour obligation. In addition, Banco Itau is
required to pay us a nominal amount for subscribers who have not used the
service during the previous month and who were beyond their free trial period.
We record amounts paid to us by Banco Itau on behalf of its customers for
subsidies, which it chooses or is required to make, as a reduction of marketing
expenses and not as subscriber revenues. Amounts paid directly to us by
subscribers that exceed the time subsidized by Banco Itau are included in
subscription revenues. Were we to recognize payments from Banco Itau as
revenues, our subscriber revenues and sales and marketing expense would be
higher than currently reported.
VALUATION OF ACCOUNTS RECEIVABLE - RESERVE FOR BAD DEBT
We estimate that the carrying amount of our trade accounts receivable,
which are primarily from subscriber fees and advertising and other, approximate
their fair market value. This requires us to estimate the portion of accounts
receivable that will ultimately be written off as uncollectible.
For this purpose, management maintains an allowance to provide for
estimated credit losses and has the responsibility for determining that the
reserve is adequate for probable and inherent losses relating to trade
receivables at each reporting date. Although allowances for potential credit
losses are determined based on historical experience, current evaluation of the
composition of accounts receivable and expected credit trends, our short
operating history makes prediction of actual credit losses difficult. To the
extent actual credit losses differ from our estimates of uncollectible accounts,
such amounts as are eventually collected will be adjusted to income in the
period actually collected.
As of June 30, 2002, we had a value-added tax (VAT) receivable from the
Argentine government of approximately $3.0 million. This receivable, which arose
in the normal conduct of our business, will be recovered as we make sales in
Argentina and make collections from our customers. Given current economic
conditions in Argentina, the period of collection could exceed two years. Were
the government in Argentina to dishonor its VAT obligation, or force its
exchange for securities of lower value, this could result in an impairment of
the value of our VAT asset. To date, we have not established any valuation
allowances for this asset.
PROPERTY AND EQUIPMENT - RESERVE FOR LEASE ABANDONMENT
Property and equipment, including leasehold improvements, are carried at
cost less accumulated depreciation. Depreciation or amortization is provided
using the straight-line method over the estimated useful life of each type of
asset. Amortization of leasehold improvements is computed using the
straight-line method over the terms of the leases or estimated useful lives of
the improvements, whichever are shorter. Long-lived assets and identifiable
intangibles related to those assets to be held and used are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In connection with the
abandonment of leased facilities at our Fort Lauderdale offices, we incurred a
charge of approximately $500,000 during the year ended December 31, 2001 for the
impairment of leasehold improvements and furniture, and established an accrual
related to the future lease commitments for the facilities that are not expected
to be utilized going forward of approximately $900,000. This will have the
effect of reducing reported rent expense and amortization expense of leasehold
improvements and furniture going forward.
DEFERRED TAX ASSETS
Deferred income tax assets and liabilities are determined based on the
difference between financial reporting and the tax bases of assets and
liabilities. We measure these taxes using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse. Given our
history of operating losses, we have significant tax loss carry forward assets,
which we have fully reserved to reduce their carrying value to zero. In the
event we were to determine that such assets would eventually be utilized, we
would reverse the related valuation allowances and recognize a benefit related
to these assets.
NON-AUDIT SERVICES TO BE PERFORMED BY OUR INDEPENDENT AUDITORS
We anticipate that our independent auditors, Ernst & Young LLP, will
perform the following types of non-audit services during the course of this
fiscal year:
o Tax advisory services
o Audit-related services
We intend to seek approval by the Audit Committee of our Board of Directors
for these non-audit services.
-18-
FORWARD LOOKING STATEMENTS
This report and other oral and written statements made by us to the public
contain forward-looking statements within the meaning of the "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are based on management's current expectations or
beliefs and are subject to a number of factors and uncertainties that could
cause actual results to differ materially from those described in the
forward-looking statements. Such statements address the following subjects:
plans for future size of our network, efforts to target higher-value members and
the results of those efforts,future membership levels and the composition of our
membership base, future revenues, future advertising and marketing efforts, the
benefits we expect to receive from our strategic alliance with Banco Itau,
results of initiatives with Banco Itau to encourage usage of the co-branded
service, future cost of revenues, sales and marketing costs and other expenses,
our expectation that cash on hand together with the issuance of our 11% senior
convertible notes to AOLTW will be sufficient to fund our operations into early
2003, our intention to request hearings with a Nasdaq Listing Qualification
Panel, the form of future interest payments on our 11% senior convertible notes,
future financing requirements and expected improvements in validation of
registration data provided by cash members. These forward-looking statements are
subject to a number of risks and uncertainties, which are described in our
Annual Report on Form 10-K for the period ended December 31, 2001, and from time
to time in other reports we file with the SEC, as well as the following risks
and uncertainties: our limited cash position, the possible election not to
request hearings with a Nasdaq Listing Qualification Panel, which would result
in the immediate delisting of the class A common stock, the market price of our
class A common stock, the impact our continued losses will have on our ability
to finance our operations, our limited operating history, uncertainty relating
to our ability to convert our subscribers into paying subscribers, uncertainty
regarding the success of our targeted marketing initiatives and technology
designed to improve validation, the actions of our competitors, the success of
the marketing of the Banco Itau co-branded service, exchange rate fluctuations
in Latin America, our ability to convert members of the Banco Itau co-branded
service to non-subsidized service plans and our ability to penetrate our
markets. Actual results could differ materially from those described in the
forward-looking statements.
-19-
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our reporting currency is the U.S. dollar. However, most of our revenues
are received in the currencies of the countries in which we offer our
interactive services. The currencies of many Latin American countries, including
Brazil, Mexico, and Argentina, have experienced substantial volatility and
devaluation in the past. The Argentine peso has depreciated approximately 69%
from December 31, 2001 to June 30, 2002, while the Brazilian real has devalued
by approximately 18% during the same period. If the currencies of the countries
in which we operate depreciate and we do not increase our prices, our revenues
from our services will decline in U.S. dollar terms. Due to our constantly
changing currency exposure and the potential substantial volatility of currency
exchange rates, we cannot predict the effect of exchange rate fluctuations on
our business. However, we believe that to the extent that we have substantial
expenses in excess of revenues in each of our principal currencies, our exposure
to currency fluctuations will be reduced. Therefore, to date, we have not tried
to limit our exposure to exchange rate fluctuations by using foreign currency
forward exchange contracts as a vehicle for hedging. Our business may be
adversely affected as a result of foreign currency exchange rate fluctuations if
we fail to enter into economic hedging transactions. Future currency exchange
losses may be increased if we become subject to exchange control regulations
restricting our ability to convert local currencies into U.S. dollars.
A portion of our operations is based in Argentina and conducted in
Argentine pesos. Despite the recent large devaluation of the Argentine peso,
recent developments in Argentina's economic and political arenas suggest a
continued risk of further currency devaluation. In addition, Argentina is
continuing to consider various fiscal initiatives as a means of addressing its
troubled economy. In response to the current economic volatility in Argentina,
we have curtailed marketing activities in that country to limit our exposure and
direct resources towards other geographies with greater potential at present. As
of June 30, 2002, we had total assets in Argentina totaling approximately $3.6
million, of which approximately $3.0 million is related to a local-currency
denominated VAT receivable from the Argentine government. The short-term portion
of the VAT receivable, which is equal to $0.3 million, is classified under other
receivables in Current Assets while the long-term portion, which is equal to
$2.7 million, is classified under Other Assets in the Consolidated Balance Sheet
at June 30, 2002. This VAT receivable is not subject to expiration.
To date, our results of operations have not been impacted by material
inflation in the U.S. or in the countries that comprise Latin America, other
than in Argentina where consumer inflation in the twelve-month period ended June
30, 2002 reached almost 30%. The recent significant devaluation of the Argentine
peso threatens to further increase the rate of inflation in that country during
fiscal 2002 and beyond. Should inflation in Argentina or in any of our countries
surpass a cumulative 100% within a three-year period, we would adopt
hyperinflationary accounting methodology for that country in accordance with the
requirements of U.S. GAAP.
We are exposed to market risk as it relates to changes in the market value
of our investments. As of June 30, 2002, we had no material investments in
marketable securities.
-20-
FINANCIAL STATEMENTS
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
AS OF
---------------------------
JUNE 30, DECEMBER 31,
2002 2001
--------- -----------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash ........................................................................... $ 7,724 $ 45,636
Short-term money market investments ............................................ 634 1,040
--------- ---------
Total cash and cash equivalents .............................................. 8,358 46,676
Trade accounts receivable, less allowances of $552 (December 31, 2001 - $1,979). 5,102 6,144
Other receivables .............................................................. 4,407 4,713
Prepaid expenses and other current assets ...................................... 7,022 5,410
--------- ---------
Total current assets ......................................................... 24,889 62,943
Property and equipment, net .................................................... 8,862 11,958
Investments, including securities available-for-sale (at fair value) ........... 458 1,361
Product development and other intangible assets, net ........................... 600 988
Other assets ................................................................... 4,135 7,134
--------- ---------
TOTAL ASSETS .............................................................. $ 38,944 $ 84,384
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Trade accounts payable ......................................................... $ 12,836 $ 18,114
Payables to affiliates ......................................................... 14,098 15,198
Other accrued expenses and liabilities ......................................... 9,084 14,570
Deferred revenue ............................................................... 4,187 3,656
Accrued personnel costs ........................................................ 4,733 9,004
Other taxes payable ............................................................ 1,837 1,595
--------- ---------
Total current liabilities .................................................... 46,775 62,137
Deferred revenue ............................................................... 211 692
Other non-current liabilities .................................................. 698 432
Senior convertible notes ....................................................... 45,300 --
--------- ---------
Total liabilities ......................................................... 92,984 63,261
COMMITMENTS AND CONTIGENCIES
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Preferred stock, $.01 par value; 500,000,000 shares authorized:
Series B and C cumulative redeemable convertible; 150,000,000 shares
authorized each:
Series B -- $332,670 liquidation value; issued and outstanding shares -
116,010,456 (December 1,160001 - 116,010,1,160 1,160 1,160
Series C -- $319,534 liquidation value; issued and outstanding shares -
111,413,994 (December 1,114001 - 111,413,1,114 1,114 1,114
Series D and E cumulative redeemable convertible; 25,000,000 shares
authorized each; none issued or outstanding ............................... -- --
--------- ---------
2,274 2,274
Common stock, $.01 par value; 1,750,000,000 shares authorized:
Class A--1,250,000,000 shares authorized; issued and outstanding shares -
67,070,065 (December 31, 2671 - 67,054,714) .................................... 671 671
Class B and C -- 250,000,000 shares authorized each; none issued
and outstanding ........................................................... -- --
--------- ---------
671 671
Additional paid-in capital ..................................................... 800,905 800,714
Unearned services .............................................................. (168,441) (189,191)
Accumulated other comprehensive loss ........................................... (6,622) (3,334)
Accumulated deficit ............................................................ (682,827) (590,011)
--------- ---------
Total stockholders' equity (capital deficiency) ........................... (54,040) 21,123
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY) ........... $ 38,944 $ 84,384
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
-21-
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS -- (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001 (IN THOUSANDS, EXCEPT
SHARE AND PER SHARE AMOUNTS)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- -----------------------------
2002 2001 2002 2001
------------ ------------ ------------ ------------
REVENUES:
Subscriptions ............................................ $ 16,231 $ 11,295 $ 31,918 $ 20,973
Advertising and other .................................... 2,315 5,014 4,786 8,092
------------ ------------ ------------ ------------
Total revenues ......................................... 18,546 16,309 36,704 29,065
COSTS AND EXPENSES:
Cost of revenues ......................................... 26,353 31,934 58,762 59,847
Sales and marketing ...................................... 24,123 47,910 54,567 109,924
General and administrative ............................... 6,466 8,718 15,152 18,382
------------ ------------ ------------ ------------
Total costs and expenses ............................... 56,942 88,562 128,481 188,153
Loss from operations ..................................... (38,396) (72,253) (91,777) (159,088)
Other (expenses) income, net ............................. (1,508) 1,888 (1,039) 3,736
------------ ------------ ------------ ------------
Loss before income taxes ................................. (39,904) (70,365) (92,816) (155,352)
Income taxes ............................................. -- -- -- --
------------ ------------ ------------ ------------
Net loss ................................................. (39,904) (70,365) (92,816) (155,352)
Less: Dividends on Series B and C preferred shares ....... 4,651 4,101 9,303 7,775
------------ ------------ ------------ ------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS ............... $ (44,555) $ (74,466) $ (102,119) $ (163,127)
============ ============ ============ ============
Loss per common share, basic and diluted ................. $ (0.66) $ (1.11) $ (1.52) $ (2.51)
============ ============ ============ ============
Weighted average number of common shares outstanding ..... 67,070,065 67,008,114 67,065,015 64,939,626
============ ============ ============ ============
SUPPLEMENTAL RELATED PARTIES DISCLOURE:
Transactions with affiliated parties are reflected in the
consolidated statements of operations as follows:
REVENUES:
Subscriptions ............................................ $ -- $ -- $ -- $ --
Advertising and commerce ................................. 252 539 618 1,671
------------ ------------ ------------ ------------
Total revenues ......................................... $ 252 $ 539 $ 618 $ 1,671
============ ============ ============ ============
COSTS AND EXPENSES:
Cost of revenues ......................................... $ 4,395 $ 5,308 $ 10,580 $ 10,245
Sales and marketing ...................................... (221) -- (148) 290
General and administrative ............................... (138) 406 1,505 873
------------ ------------ ------------ ------------
Total costs and expenses ............................... $ 4,036 $ 5,714 $ 11,937 $ 11,408
============ ============ ============ ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
-22-
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY -- (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
--------------------------------------------------------
JUNE 30, 2002 JUNE 30, 2001
------------------------- -------------------------
SHARES DOLLARS SHARES DOLLARS
----------- --------- ----------- ---------
PREFERRED STOCK- SERIES B:
Balance at beginning of period .................. 116,010,456 $ 1,160 101,858,334 $ 1,019
Stock issued in Private Placement ............... -- -- 9,434,748 94
----------- --------- ----------- ---------
Balance at end of period ...................... 116,010,456 1,160 111,293,082 1,113
PREFERRED STOCK- SERIES C:
Balance at beginning of period .................. 111,413,994 1,114 97,803,960 978
Stock issued in Private Placement ............... -- -- 9,073,356 91
----------- --------- ----------- ---------
Balance at end of period ...................... 111,413,994 1,114 106,877,316 1,069
COMMON STOCK - CLASS A:
Balance at beginning of period .................. 67,054,714 671 62,848,124 629
Stock issued in Private Placement ............... -- -- 4,237,840 42
Return of stock in escrow ....................... -- -- (31,250) --
Stock options exercised ......................... 15,351 -- -- --
----------- --------- ----------- ---------
Balance at end of period ..................... 67,070,065 671 67,054,714 671
ADDITIONAL PAID-IN CAPITAL:
Balance at beginning of period .................. 800,714 651,491
Stock options exercised ......................... 40 --
Stock issued in Private Placement, net of
$1,147 in offering costs ...................... -- 105,247
Return of stock in escrow ....................... -- (216)
Stock based compensation ........................ 151 210
--------- ---------
Balance at end of period ...................... 800,905 756,732
UNEARNED SERVICES:
Balance at beginning of period .................. (189,191) (230,671)
Return of stock in escrow ....................... -- 216
Non-cash marketing expense amortization (Note 5) 20,750 20,750
--------- ---------
Balance at end of period ...................... (168,441) (209,705)
ACCUMULATED DEFICIT AND ACCUMULATED OTHER
COMPREHENSIVE LOSS, NET OF DEFERRED TAXES:
Balance at beginning of period
Accumulated deficit ........................... (590,011) (299,696)
Accumulated other comprehensive loss
(net of deferred taxes) ..................... (3,334) 71
--------- ---------
(593,345) (299,625)
Net loss ........................................ (92,816) (155,352)
Foreign currency translation adjustment ......... (2,743) 56
Net unrealized loss from investments ............ (545) 825
--------- ---------
Comprehensive loss ............................ (96,104) $(154,471)
--------- ---------
Balance at end of period ...................... (689,449) (454,096)
--------- ---------
TOTAL STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
AT END OF PERIOD .......................... 294,494,515 $ (54,040) 285,225,112 $ 95,784
============ ========= ============ =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
-23-
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(IN THOUSANDS)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
----------------------
2002 2001
-------- ---------
OPERATING ACTIVITIES
Net loss .................................................................. $(92,816) $(155,352)
Adjustments to reconcile net loss to net cash used in operating activities:
(Benefit) provision for uncollectible accounts .......................... (1,337) 665
Depreciation and amortization .......................................... 2,677 2,195
Loss (gain) from investment securities .................................. 242 (267)
Non-cash marketing expense (Note 5) ..................................... 20,752 20,878
Non-cash stock based compensation expense ............................... 151 210
Changes in operating assets and liabilities:
Trade accounts receivable ............................................... 812 (4,317)
Other operating assets .................................................. (1,312) (2,695)
Operating liabilities ................................................... (11,953) 9,672
Deferred revenues ....................................................... (200) (345)
Payables to affiliates .................................................. 1,158 2,064
-------- ---------
Net cash used in operating activities ..................................... (81,826) (127,292)
-------- ---------
INVESTING ACTIVITIES
Capital spending .......................................................... (1,126) (4,410)
Proceeds from sale of short-term investments .............................. -- 69,357
-------- ---------
Net cash (used in) provided by investing activities ....................... (1,126) 64,947
-------- ---------
FINANCING ACTIVITIES
Proceeds from issuance of senior convertible note (Note 4) ................ 45,300 --
Proceeds from affiliate capital contributions ............................. -- 106,621
Proceeds from stock options exercised ..................................... 40 --
Offering costs incurred during the period ................................. -- (1,147)
-------- ---------
Net cash provided by financing activities ................................. 45,340 105,474
-------- ---------
Effect of exchange rate changes on cash and cash equivalents .............. (706) (1,065)
-------- ---------
Net (decrease) increase in cash and cash equivalents ...................... (38,318) 42,064
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD ........................... 46,676 63,509
-------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD ................................. $ 8,358 $ 105,573
======== =========
SUPPLEMENTAL CASH FLOW DISCLOSURE
Income taxes paid ......................................................... $ -- $ --
======== =========
Interest paid ............................................................. $ -- $ --
======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS.
-24-
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-- UNAUDITED --
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements are unaudited but, in
the opinion of management, contain all of the adjustments (including those of a
normal recurring nature) considered necessary to present fairly the financial
position and the results of operations and cash flows for the periods presented
in conformity with accounting principles generally accepted in the United States
applicable to interim periods.
Preparing financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue,
and expenses. Examples include, but are not limited to, provisions for bad debt,
and the lives of product development costs. Actual results may differ from these
estimates. Interim results are not necessarily indicative of results for a full
year.
The information included in this Form 10-Q should be read in conjunction
with Management's Discussion and Analysis and financial statements and notes
thereto included in the 2001 America Online Latin America, Inc. ("AOLA" or the
"Company") Annual Report on Form 10-K, which summarizes the significant
accounting policies used in determining the financial position, cash flows and
results of operations of AOLA's business segments. Certain reclassifications
have been made for consistent presentation.
NOTE 2 - BACKGROUND AND ORGANIZATION
AOLA began operations in December 1998. Also in December 1998, AOLA
acquired America Online Inc.'s ("AOL") Latin American CompuServe Classic
subscribers. AOLA launched its first online service and portal in Brazil in
November 1999. The Mexico and Argentina country services and portals were
launched in July 2000 and August 2000, respectively. Under an agreement with
AOL, AOLA also provides certain Spanish language content to AOL's subscribers in
Puerto Rico and markets the AOL brand service in Puerto Rico.
AOLA's family of AOL-branded interactive services includes the AOLA country
services, its comprehensive online services that are available to subscribing
members, the AOLA country Internet portals and the Latin American regional
Internet portal. AOLA's interactive services are developed on a
country-by-country and regional basis and are tailored to local interests. AOLA
derives its revenues principally from member subscriptions to its AOLA country
services and is building its online service member base and portal user base to
generate additional revenues from advertising and commerce. AOLA currently has
the exclusive right to offer AOL-branded PC-based online services in Latin
America. Under its license agreement with AOL, it also has the exclusive right
to offer AOL-branded TV-based online services in Latin America if AOL develops
these services. AOLA also has the exclusive right to offer in Latin America any
AOL-branded wireless-based online services developed by AOL for commercial
launch on or before August 7, 2004. AOLA also has the right in Latin America to
promote AOL's ICQ service, which features leading, real-time communications
software and an associated portal.
On August 11, 2000, AOLA completed its initial public offering ("IPO") of
25,000,000 shares of its class A common stock, raising approximately $187.4
million in net proceeds. In September 2000, the underwriters of the IPO
exercised a portion of their over-allotment option and purchased an additional
2,062,500 shares of class A common stock, raising approximately $15.6 million in
additional net proceeds. Also, prior to the consummation of AOLA's IPO, it
completed a corporate reorganization which is more fully described in Note 1 to
the audited consolidated financial statements included in AOLA's 2001 Annual
Report on Form 10-K. Prior to AOLA's August 2000 IPO, the Company was privately
held.
During fiscal year 2001, AOLA's principal stockholders, AOL, members of the
Cisneros Group of Companies (the "Cisneros Group") and Banco Itau, S.A. - Cayman
Branch ("Banco Itau"), signed a stock purchase agreement under which they agreed
to provide an aggregate of $150.0 million in additional capital.
-25-
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-- UNAUDITED --
On March 8, 2002, as more fully described on Note 4, AOLA entered into a
financing agreement (the "Note Purchase Agreement") with AOL Time Warner, Inc.
("AOLTW"), the parent of AOL, under which it will provide up to $160.0 million
in additional financing (See Note 4). Through June 30, 2002, AOLA has sold three
tranches of senior convertible notes totaling $45.3 million to AOLTW.
From inception through June 30, 2002, AOLA's operations have been financed
through capital contributed by the Cisneros Group ($213.9 million), AOL ($116.3
million) and Banco Itau ($19.9 million), as well as through the proceeds
generated by AOLA's IPO and the exercise of the over-allotment option. Net
proceeds generated by the IPO and the over-allotment option (approximately
$203.0 million) were used in their entirety for working capital purposes and to
fund the losses generated by AOLA's operations prior to June 30, 2002.
NOTE 3 - LOSS PER COMMON SHARE
The following table presents the calculation of basic and diluted net
income per share for the period indicated (in thousands, except per share
amounts):
(UNAUDITED) (UNAUDITED)
---------------------- -----------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
2002 2001 2002 2001
-------- -------- --------- ---------
Net loss ........................................... $(39,904) $(70,365) $ (92,816) $(155,352)
Less: Dividends on Series B and C preferred shares . 4,651 4,101 9,303 7,775
-------- -------- --------- ---------
Net loss applicable to common stockholders ......... (44,555) (74,466) (102,119) (163,127)
Weighted average number of common shares outstanding 67,070 67,008 67,065 64,940
-------- -------- --------- ---------
LOSS PER COMMON SHARE, BASIC AND DILUTED ........... $ (0.66) $ (1.11) $ (1.52) $ (2.51)
======== ======== ========= =========
AOLA has the right to redeem the preferred stock by issuing common
stock. There is no difference between AOLA's basic and diluted loss per share
since the effect of any contingently issuable common stock on loss per share is
anti-dilutive. Potential anti-dilutive securities for the six months ended June
30, 2002 and 2001 are set forth on the table below:
(UNAUDITED)
--------------------------
SIX MONTHS ENNDED
JUNE 30,
--------------------------
2002 2001
----------- -----------
Series B Preferred Stock .... 116,010,456 111,293,082
Series C Preferred Stock .... 111,413,994 106,877,316
AOL Warrant ................. 16,541,250 16,541,250
AOLTW Senior Convertible Note 12,500,000 --
Stock Options ............... 16,929,898 16,017,534
----------- -----------
273,395,598 250,729,182
=========== ===========
-26-
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-- UNAUDITED --
NOTE 4 - 11% SENIOR CONVERTIBLE NOTES
In order to fund AOLA's fiscal 2002 operating and cash requirements, on
March 8, 2002 AOLA entered into the Note Purchase Agreement with AOLTW pursuant
to which AOLTW has agreed to make available to AOLA, subject to standard
borrowing conditions, up to $160 million in exchange for AOLA 11% senior
convertible notes due in 2007 (the "Notes").
The Notes are convertible into Series B Redeemable Convertible Preferred
Stock ("Series B Stock"), which is the series of preferred stock currently held
by America Online. The initial conversion price, subject to adjustment, is
$3.624 per share (a premium of 20% to the closing trading price of AOLA's class
A common stock on March 8, 2002). The Notes will be convertible at any time at
the option of the holder, and will be redeemable by AOLA at any time after 18
months, subject to the holders' right to convert the indebtedness into preferred
stock. In addition, the Notes are required to be repaid, at the option of the
holder, in the event of significant asset sales or AOLA raises additional debt
or equity funds.
If the entire $160 million principal amount of the Notes were to be
converted by AOLTW, an additional 44,150,110 shares of Series B Stock would be
issued to AOLTW, increasing its economic ownership in the company to 50.9%, and
its relative voting strength to 57.6%, assuming conversion of a warrant held by
AOL (the "AOL Warrant") that is immediately exercisable to purchase
approximately 16.5 million shares of any combination of AOLA's Series B Stock,
Class B Common Stock or Class A Common Stock. The conversion of the Notes, the
payment of dividends and interest in additional shares of voting stock and the
exercise of the Warrant will each result in AOLTW and its affiliates holding
more than 50% of the outstanding voting stock of AOLA, but would not alter other
corporate governance provisions or result in a change of control.
Interest on the Notes is due quarterly and is payable either in cash or
preferred stock at AOLA's option. In the event that interest is paid in shares,
the price per share is to be determined based on the average closing price of
AOLA's class A common stock for the twenty trading dates prior to the date of
payment. Interest payments on the Notes, which mature in March 2007, could total
approximately $85 million, depending on the exact timing of the drawdowns.
Through June 30, 2002, AOLA has issued three tranches of Notes under the Note
Purchase Agreement, totalling $45.3 million principal amount. The first
installment of interest on the Notes which covered the period from March 11
through June 30, 2002, was paid to AOLTW in cash on July 1, 2002 in the amount
of $1.0 million. Although at the time AOLA entered into the Note Purchase
Agreement, AOLA had expected to exercise its option to make the interest payment
through the issuance of additional shares, on this occasion AOLA elected to make
a cash payment in order to avoid the dilution that would have occurred by
issuing shares at the then current market price of approximately $0.70 per
share. AOLA will assess the overall market situation at the time of each
quarterly interest payment before determining whether future interest payments
will be made in cash or through the issuance of additional shares.
-27-
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-- UNAUDITED --
NOTE 5 - BANCO ITAU MARKETING STRATEGIC ALLIANCE
On June 12, 2000, AOLA entered into a ten-year strategic marketing alliance
with Banco Itau, one of the largest banks in Latin America, which at that time
had approximately 7.4 million customers and 1.4 million users of its interactive
financial services. AOLA has created a customized co-branded version of the
America Online Brazil service that Banco Itau markets to its customers. On
August 11, 2000, AOLA issued an aggregate of 31,700,000 shares of class A common
stock to Banco Itau and one of its affiliates, in exchange for Banco Itau's
commitment to various subscriber membership and revenue levels during the first
five years of the alliance. The shares were valued at approximately $253.6
million, based on the $8.00 per share initial public offering price.
In return for the consideration received for entering into the strategic
marketing agreement, Banco Itau agreed to achieve certain subscriber and revenue
targets in the first five years of the agreement. In the event these performance
targets are not met, Banco Itau could be liable for payments to AOLA. The
maximum amount of such payments is $164.8 million. Banco Itau has provided
promissory notes that secure any potential payments due to AOLA. The unamortized
cost of this agreement was recorded as a contra-equity account and captioned as
"Unearned Services" in the accompanying consolidated statement of changes in
stockholders' equity upon issuance of the shares to Banco Itau.
As there are potential specific payments related to performance targets in
the first five years of the agreement, AOLA is expensing $164.8 million of the
cost on a straight-line basis over that period and the remaining balance of the
cost, $88.8 million, on a straight-line basis over the ten-year term of the
agreement. The amortization of the unearned service related to the Banco Itau
strategic alliance for the second quarter and six months ended June 30, 2002
amounted to $10.2 million (2001 - $10.3 million) and $20.8 million (2001 - $20.9
million), respectively. These expenses are included in the accompanying
consolidated statements of operations as part of sales and marketing expenses.
In addition, under the aforementioned strategic alliance, Banco Itau is
required to offer at least one hour of subsidized usage per month to subscribers
of the co-branded service following the expiration of a subscriber's trial
period. Banco Itau may also choose to provide its customers additional
subsidized time beyond the one hour obligation. Moreover, Banco Itau is required
to pay AOLA a nominal amount for subscribers who have not used the service
during the previous month and who were beyond their free trial period. AOLA
record amounts received from Banco Itau on behalf of its customers for
subsidies, which it chooses or is required to make as a reduction of marketing
expenses and not as subscriber revenues. For the second quarter and six months
ended June 30, 2002, these payments amounted to $1.5 million (2001 - $0.3
million) and $3 million (2001 - $0.4 million), respectively. Amounts paid
directly to AOLA by subscribers that exceed the time subsidized by Banco Itau
are included in subscription revenues. For the second quarter and six months
ended June 30, 2002, these totaled $1.1 million (2001 - $0) and $1.8 million
(2001-$0), respectively.
NOTE 6 - LEGAL PROCEEDINGS
On December 28, 1999, ADEC, a non-governmental, private consumer protection
association, filed a complaint against AOLA in the Brazilian State of Rio de
Janeiro seeking monetary damages and a preliminary restraining order. ADEC is
seeking R$10.0 million, or approximately U.S. $3.2 million, in damages on behalf
of consumers who have allegedly complained about the installation of the America
Online Brazil software on their PCs. The preliminary restraining order would
have required AOLA to stop distributing CD software in Brazil, to collect CD
software already distributed, and to publish an injunction in newspapers of
significant circulation. While ADEC obtained the order, AOLA was successful in
having it revoked and ADEC later lost an appeal of the revocation. At ADEC's
request, the court allowed the publication of a general public summons inviting
consumers to join ADEC as plaintiffs, which gave potential plaintiffs a
thirty-day period to join the action. The case is currently suspended by an
appeal filed by AOLA in which it asks the appellate court of the State of Rio de
Janeiro to review the lower court's decision to appoint an independent expert
witness to gather further evidence on the CD software and also to review some
preliminary arguments raised by AOLA in its response to this lawsuit that were
rejected by the lower court. Although AOLA believes that ADEC's claims are
without merit and will continue to contest them vigorously, AOLA may not be
successful in defeating ADEC's claims. If AOLA is unsuccessful in contesting
these claims, ADEC's claims could have a material adverse effect on AOLA's
results of operations and financial position.
-28-
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-- UNAUDITED --
NOTE 7 - SEGMENT INFORMATION
AOLA considers markets in which it has launched its AOLA services as
operational segments and reports its operations on a country-by-country basis.
In determining operating segments, AOLA internally reviewed the current
management structure that reports to the chief operating decision-maker ("CODM")
and analyzed the reports received by the CODM in order to allocate resources and
measure performance.
Each of AOLA's operating segments derives its revenues from interactive
services through subscription revenues and advertising, commerce and other
revenues. Interactive services consist of the delivery of AOLA's interactive
products, including the AOLA country services and portals. The accounting
policies of the business segments are the same as those described in the summary
of significant accounting policies in our 2001 Annual Report on Form 10-K. The
table below presents a reconciliation of the combined segment information to
AOLA's reported revenues and operating loss as included in the Consolidated
Statement of Operations for the periods indicated (in thousands):
(UNAUDITED) (UNAUDITED)
--------------------- -----------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- -----------------------
2002 2001 2002 2001
-------- -------- --------- ---------
REVENUES BREAKDOWN:
SUBSCRIPTIONS
- Brazil ............ $ 6,747 $ 4,363 $ 13,238 $ 7,958
- Mexico ............ 6,526 4,419 12,745 8,160
- Argentina ......... 392 1,831 1,136 3,487
- Puerto Rico ....... 2,536 580 4,751 1,166
- Corporate and other 30 102 48 202
-------- -------- --------- ---------
16,231 11,295 31,918 20,973
ADVERTISING AND OTHER
- Brazil ............ 1,572 2,941 3,065 5,184
- Mexico ............ 540 1,291 1,212 1,850
- Argentina ......... 72 721 236 996
- Puerto Rico ....... 112 32 241 32
- Corporate and other 19 29 32 30
-------- -------- --------- ---------
2,315 5,014 4,786 8,092
TOTAL
- Brazil ............ 8,319 7,304 16,303 13,142
- Mexico ............ 7,066 5,710 13,957 10,010
- Argentina ......... 464 2,552 1,372 4,483
- Puerto Rico ....... 2,648 612 4,992 1,198
- Corporate and other 49 131 80 232
-------- -------- --------- ---------
$ 18,546 $ 16,309 $ 36,704 $ 29,065
======== ======== ========= =========
LOSS FROM OPERATIONS
- Brazil ............ $(26,212) $(35,345) $ (55,815) $ (78,275)
- Mexico ............ (7,771) (16,396) (24,311) (36,856)
- Argentina ......... (488) (11,510) (2,152) (25,727)
- Puerto Rico ....... 299 (2,179) 126 (4,566)
- Corporate and other (4,224) (6,823) (9,625) (13,664)
-------- -------- --------- ---------
$(38,396) $(72,253) $ (91,777) $(159,088)
======== ======== ========= =========
-29-
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-- UNAUDITED --
The following table presents a reconciliation of reportable segment assets
and long-lived assets to the consolidated financial statement totals for the
dates indicated (in thousands):
------------------------
JUNE 30, DECEMBER 31,
2002 2001
-------- --------
(UNAUDITED)
TOTAL ASSETS
- Brazil ............ $ 11,599 $ 14,316
- Mexico ............ 11,649 11,345
- Argentina ......... 3,553 9,262
- Puerto Rico ....... 267 303
- Corporate and other 11,876 49,098
-------- --------
$ 38,944 $ 84,384
======== ========
LONG-LIVED ASSETS
- Brazil ............ $ 3,618 $ 4,756
- Mexico ............ 1,676 2,119
- Argentina ......... 333 958
- Puerto Rico ....... 77 56
- Corporate and other 3,158 4,069
-------- --------
$ 8,862 $ 11,958
======== ========
The following table presents AOLA's depreciation and amortization and
capital spending on a segment basis for the periods indicated (in thousands):
(UNAUDITED) (UNAUDITED)
---------------- ----------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------- ----------------
2002 2001 2002 2001
------ ------ ------ ------
DEPRECIATION AND AMORTIZATION
- Brazil ................... $ 723 $ 386 $1,432 $ 751
- Mexico ................... 314 275 627 534
- Argentina ................ 86 139 194 275
- Puerto Rico .............. 20 1 31 2
- Corporate and other ...... 189 383 393 633
------ ------ ------ ------
$1,332 $1,184 $2,677 $2,195
====== ====== ====== ======
CAPITAL SPENDING
- Brazil ................... $ 217 $ 754 $ 613 $1,427
- Mexico ................... 115 51 146 107
- Argentina ................ -- 30 7 72
- Puerto Rico .............. 10 15 16 38
- Corporate and other ...... 226 1,005 344 2,766
------ ------ ------ ------
$ 568 $1,855 $1,126 $4,410
====== ====== ====== ======
-30-
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
-- UNAUDITED --
NOTE 8 - SUBSEQUENT EVENTS
On July 10, 2002 and August 12, 2002, AOLA issued its fourth and fifth
senior convertible Notes under the Note Purchase Agreement, which AOLTW
purchased at par value $13.0 million principal amount at each date. The
potential anti-dilutive securities arising from this draw down is an additional
7,174,392 shares of Series B preferred stock. In addition, subsequent to the end
of quarter, AOLA paid in cash its first installment of interest on the senior
notes outstanding. The amount paid totaled approximately $1.0 million.
-31-
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
On March 8, 2002, the Registrant entered into a Note Purchase Agreement
with AOL Time Warner Inc. ("AOLTW"). Under the Note Purchase Agreement, AOLTW
agreed to purchase from the Registrant, prior to December 31, 2002 and subject
to standard borrowing conditions, up to $160 million of the Registrant's senior
convertible notes due in March of 2007. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a description of this financing. The senior convertible
notes bear an annual coupon of 11%, payable quarterly. The senior
convertible notes are exchangeable for the Registrant's series B redeemable
convertible preferred stock, $.01 par value per. The series B preferred stock
has ten votes per share and special governance rights. Shares of series B
preferred stock are convertible into shares of the Registrant's class B common
stock, $.01 par value per share ("class B common stock"), which can be converted
into the Registrant's class A common stock, $.01 par value per share ("class A
common stock"), at any time on a one-for-one basis.
The class A common stock has only one vote per share and no special
governance rights. On each of March 11, 2002, April 23, May 28, July 10 and
August 12, 2002, the Registrant sold senior convertible notes to AOLTW for $17.3
million, $13.0 million, $15.0 million, $13.0 million and $13.0 million,
respectively, in principal amount. The initial conversion price, subject to
adjustment, is $3.624 per share. The Registrant used the proceeds from these
sales for working capital purposes.
The offer and sale of the senior convertible notes was made in reliance
upon an exemption from the registration provisions of the Securities Act of
1933, as amended (the "Securities Act"), as set forth in Section 4(2) relating
to sales by an issuer not involving any public offering. The offer and sale was
made only to "accredited investors," as such term is defined in Regulation D
under the Securities Act, and the Registrant did not engage in any general
solicitation or make any advertisement with respect to the offer and sale of the
senior convertible notes. All of the senior convertible notes sold in the
private placement are restricted securities for purposes of the Securities Act.
-32-
ITEM 5. OTHER MATTERS
Our class A common stock is traded on the National Association of
Securities Dealers Automated Quotation (NASDAQ) SmallCap Market under the symbol
AOLA. On June 21, 2002, we received approval from the NASDAQ to transfer our
listing from the NASDAQ's National Market to the SmallCap Market. The NASDAQ
SmallCap Market operates under the same NASDAQ trading rules and uses the same
electronic, screen-based dealer market as the NASDAQ National Market. The move
to the SmallCap Market was necessitated by the fact that our stockholders'
equity position turned deficient at the end of the quarter ended March 31, 2002,
combined with the fact that our current share price was below minimum
requirements for continued listing on the NASDAQ National Market. Our
stockholders' equity position became deficient as a result of our financing
strategy under which we entered into the Note Purchase Agreement with AOLTW in
order to minimize dilution to our current common shareholders.
On July 29, 2002, we received a letter from Nasdaq stating that our class A
common stock did not comply with the $35 million market capitalization
requirement for continued listing on the Nasdaq SmallCap Market (Marketplace
Rule 4310(c)(2)(B)(ii)). In order for our class A common stock to continue to be
listed on the Nasdaq SmallCap Market, the market value of the class A common
stock must be $35 million or more for a minimum of ten consecutive business days
on or before August 28, 2002. If we do not comply with this requirement by
August 28, 2002, we intend to request a hearing before a Nasdaq Listing
Qualification Panel to appeal this issue. We have also received a separate
letter from Nasdaq stating that our class A common stock is not in compliance
with the minimum bid price requirement for continued listing on the Nasdaq
SmallCap Market (Marketplace Rule 4310(c)(4)). In order for our class A common
stock to continue to be listed on the Nasdaq SmallCap Market, the closing bid
price of the class A common stock must be $1.00 or more for a minimum of ten
consecutive business days on or before January 13, 2003. If we do not comply
with this requirement by January 13, 2003, we intend to request a hearing before
a Nasdaq Listing Qualification Panel to appeal this issue. We do not expect to
be able to comply with the required market capitalization of $35 million by the
August 28, 2002 deadline and therefore will be subject to delisting from the
Nasdaq SmallCap Market. In the event we are delisted from the Nasdaq SmallCap
Market, we would expect our class A common stock to begin trading on the
Over-the-Counter Bulletin Board (OTCBB).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
EXHIBIT 3.1 Fourth Restated Certificate of Incorporation
of America Online Latin America, Inc.
EXHIBIT 3.2 Amended and Restated By-laws of America
Online Latin America, Inc.
-33-
EXHIBIT 10.1+ Amendment #7 to Master Agreement for Value
Added Services (BRAZIL) by and between AOL
Brasil LTDA., and EMPRESA BRASILEIRA DE
TELECOMUNICACOES S.A. - EMBRATEL
EXHIBIT 10.2+ Amendment #9 to Master Agreement for Value
Added Services (BRAZIL) by and between AOL
Brasil LTDA., and EMPRESA BRASILEIRA DE
TELECOMUNICACOES S.A. - EMBRATEL
EXHIBIT 10.3+ Amendment #10 to Master Agreement for Value
Added Services (BRAZIL) by and between AOL
Brasil LTDA., and EMPRESA BRASILEIRA DE
TELECOMUNICACOES S.A. - EMBRATEL
EXHIBIT 10.4+ Amendment #11 to Master Agreement for Value
Added Services (BRAZIL) by and between AOL
Brasil LTDA., and EMPRESA BRASILEIRA DE
TELECOMUNICACOES S.A. - EMBRATEL
EXHIBIT 10.5 Separation Agreement and Release of Claims
between America Online Latin America, Inc.
and Eric Hoyt.
+ Confidential treatment has been requested for portions of this exhibit.
These portions have been omitted and filed separately with the
Securities and Exchange Commission.
(b) Reports on Form 8-K
NONE
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMERICA ONLINE LATIN AMERICA, INC.
/s/ Javier Aguirre
DATE: August 14, 2002 ------------------------------------
Javier Aguirre
Chief Financial Officer
Principal Financial Officer
-34-
EXHIBIT INDEX
EXHIBIT 3.1 Fourth Restated Certificate of Incorporation
of America Online Latin America, Inc.
EXHIBIT 3.2 Amended and Restated By-laws of America
Online Latin America, Inc.
EXHIBIT 10.1+ Amendment #7 to Master Agreement for Value
Added Services (BRAZIL) by and between AOL
Brasil LTDA., and EMPRESA BRASILEIRA DE
TELECOMUNICACOES S.A. - EMBRATEL
EXHIBIT 10.2+ Amendment #9 to Master Agreement for Value
Added Services (BRAZIL) by and between AOL
Brasil LTDA., and EMPRESA BRASILEIRA DE
TELECOMUNICACOES S.A. - EMBRATEL
EXHIBIT 10.3+ Amendment #10 to Master Agreement for Value
Added Services (BRAZIL) by and between AOL
Brasil LTDA., and EMPRESA BRASILEIRA DE
TELECOMUNICACOES S.A. - EMBRATEL
EXHIBIT 10.4+ Amendment #11 to Master Agreement for Value
Added Services (BRAZIL) by and between AOL
Brasil LTDA., and EMPRESA BRASILEIRA DE
TELECOMUNICACOES S.A. - EMBRATEL
EXHIBIT 10.5 Separation Agreement and Release of Claims
between America Online Latin America, Inc.
and Eric Hoyt.
+ Confidential treatment has been requested for portions of this exhibit.
These portions have been omitted and filed separately with the
Securities and Exchange Commission.