<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] Quarterly Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended: September 30, 2000
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 500
Fort Lauderdale, FL 33309
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (954) 689-3100
Former name, former address, and former year, if changed since last report:
Not applicable
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 November 8, 2000, America Online Latin America, Inc. had 62,848,124 shares
of Class A Common Stock, $0.01 par value, outstanding.
<PAGE> 2
AMERICA ONLINE LATIN AMERICA, INC.
INDEX
Page
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets - September 30, 2000
and June 30, 2000 3
Consolidated Statements of Operations - Three
months ended September 30, 2000 and 1999 4
Consolidated Statements of Cash Flows - Three
months ended September 30, 2000 and 1999 5
Consolidated Statement of Changes in
Stockholders' Equity - Three months ended
September 30, 2000 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 16
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 17
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 19
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<PAGE> 3
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, June 30,
2000 - Unaudited 2000
---------------- ---------
ASSETS (In thousands, except share data)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 112,010 $ 33,321
Short-term investments 69,833 --
Trade accounts receivable, less allowances of
$363 and $300 1,390 1,286
Other receivables 8,455 2,140
Prepaid offering costs -- 3,476
Prepaid expenses and other current assets 19,786 2,285
--------- ---------
Total current assets 211,474 42,508
Property and equipment, net 9,943 8,367
Investments including available for sale securities 1,344 1,756
Product development and other intangible assets, net 1,837 1,981
Other assets -- 1,028
--------- ---------
Total assets $ 224,598 $ 55,640
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable $ 22,240 $ 13,868
Payables to affiliates 10,798 8,637
Other accrued expenses and liabilities 4,707 2,694
Deferred revenue 2,092 1,927
Accrued personnel costs 3,051 1,919
Other taxes payable 571 202
--------- ---------
Total current liabilities 43,459 29,247
--------- ---------
Long-term liabilities:
Deferred revenue 2,607 2,804
Other liabilities 516 270
--------- ---------
Total liabilities 46,582 32,321
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 500,000,000 shares authorized:
Series B and C cumulative redeemable convertible--
150,000,000 shares authorized; 101,858,334 shares of series B and
97,803,960 shares of series C issued and outstanding at
September, 30, 2000; 101,858,334 shares of each of series B and C, 1,997 2,038
issued and oustanding at June 30, 2000 ($251,040 and $241,048
liquidation value Series B and C, respectively)
Common stock, $.01 par value; 1,750,000,000 shares authorized:
Class A--1,250,000,000 shares authorized; 62,848,124 shares issued
and outstanding at September 30, 2000, no shares issued or outstanding
at June 30, 2000 629 --
Class B and C-- 250,000,000 shares authorized; no shares issued and
outstanding September 30, 2000 and June 30, 2000 -- --
Additional paid-in capital 616,534 124,940
Unearned services (241,231) --
Accumulated other comprehensive loss (2,029) (3,874)
Accumulated deficit (197,884) (99,785)
--------- ---------
Total stockholders' equity 178,016 23,319
--------- ---------
Total liabilities and stockholders' equity $ 224,598 $ 55,640
========= =========
</TABLE>
See accompanying notes
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<PAGE> 4
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------------------------------
2000 1999
------------ ------------
Unaudited Unaudited
(Dollars in thousands, except per share data)
<S> <C> <C>
Revenues:
Subscriptions $ 2,621 $ 1,129
Advertising and commerce 1,931 78
------------ ------------
Total revenues 4,552 1,207
Cost and expenses:
Cost of revenues, $3,758 and $451 from affiliates 16,473 632
Sales and marketing 76,296 44
Product development, $1,922 and $252 from affiliates 2,098 252
General and administrative, $427 and $891 from affiliates 7,990 2,488
------------ ------------
Total costs and expenses 102,857 3,416
Loss from operations (98,305) (2,209)
Other income, net 206 340
------------ ------------
Loss before provision for income taxes (98,099) (1,869)
Provision for income taxes -- (103)
------------ ------------
Net loss before dividends on Series B and C preferred shares (98,099) (1,972)
Dividends on Series B and C preferred shares 2,037 --
------------ ------------
Net loss applicable to common stockholders $ (100,136) $ (1,972)
============ ============
Net loss per common share:
Basic and Diluted $ (2.93) n/a
Weighted average number of common shares:
Basic and Diluted 34,144,748 n/a
</TABLE>
See accompanying notes
-4-
<PAGE> 5
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-----------------------
2000 1999
--------- ---------
Unaudited Unaudited
Cash flows from operating activities (In thousands)
<S> <C> <C>
Net loss $ (98,099) $ (1,972)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization 711 16
Loss from investments including available-for-sale securities 1,311 --
Non-cash marketing expenses 10,799 --
Changes in assets and liabilities:
Trade accounts receivable (104) (432)
Other receivables (6,315) (74)
Prepaid expenses and other current assets (17,501) 12
Other assets 1,028 (1)
Trade accounts payable 8,372 493
Payable to affiliates 4,251 2,090
Accrued expenses and other current liabilities 2,013 196
Deferred revenue and other liabilities 214 87
Accrued personnel costs 1,132 97
Other taxes payable 369 101
--------- ---------
Total adjustments 6,280 2,585
--------- ---------
Net cash (used in) provided by operating activities (91,819) 613
Cash flows from investing activities:
Purchase of property and equipment (2,134) (856)
Purchase of short-term investments (69,833) --
Product development costs (8) (503)
--------- ---------
Net cash used in investing activities (71,975) (1,359)
--------- ---------
Cash flows from financing activities:
Proceeds from affiliates capital contributions 35,000 13,000
Proceeds from IPO net of offering costs 206,559 --
--------- ---------
Net cash provided by financing activities 241,559 13,000
--------- ---------
Effect of exchange rate changes on cash and cash equivalents 924 (108)
--------- ---------
Net increase in cash and cash equivalents 78,689 12,146
Cash and cash equivalents at beginning of period 33,321 17,716
--------- ---------
Cash and cash equivalents at end of period $ 112,010 $ 29,862
========= =========
</TABLE>
See accompanying notes
-5-
<PAGE> 6
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
-------------------------- ------------------------- paid-in
Shares Amount Shares Amount capital
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 2000 203,716,668 $ 2,038 -- $ -- $ 124,940
Stock issed in IPO and
overallotment, net of
offering costs of
$13.4 million -- -- 27,062,500 271 202,812
Stock issued for services -- -- 31,731,250 317 253,782
Preferred stock conversion (4,054,374) (41) 4,054,374 41 --
Capital contribution -- -- -- -- 35,000
Investments in available for sale
securities -- -- -- -- --
Foreign currency translation
adjustment -- -- -- -- --
Net loss -- -- -- -- --
------------ ------------ ------------ ------------ ------------
Balances at September 30, 2000
(unaudited) 199,662,294 $ 1,997 $ 62,848,124 $ 629 $ 616,534
============ ============ ============ ============ ============
</TABLE>
(RESTUBBED TABLE)
<TABLE>
<CAPTION>
Accumulated
other Comprehensive Loss
Unearned comprehensive Accumulated for the quarter ended
services* loss deficit Total September 30, 2000
------------ ------------- ------------ ------------ ---------------------
<S> <C> <C> <C> <C> <C>
Balances at June 30, 2000 $ -- $ (3,874) $ (99,785) $ 23,319
Stock issed in IPO and
overallotment, net of
offering costs of
$13.4 million -- -- -- 203,083
Stock issued for services (241,231) -- -- 12,868
Preferred stock conversion -- -- --
Capital contribution -- -- -- 35,000
Investments in available for sale
securities -- 899 -- 899 899
Foreign currency translation
adjustment -- 946 -- 946 946
Net loss -- -- (98,099 (98,099) (98,099)
------------ ------------ ------------ ------------ ------------
Balances at September 30, 2000
(unaudited) $ (241,231) $ (2,029) $ (197,884) $ 178,016 $ (96,254)
============ ============ ============ ============ ============
</TABLE>
* Unearned services includes $253.6 million associated with stock issued to
Banco Itau less related amortization through Sept. 30, 2000 of $12.6
million including $2.1 million expensed and accrued as of June 30, 2000.
SEE ACCOMPANYING NOTES
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<PAGE> 7
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited consolidated financial statements, which
include the accounts of America Online Latin America, Inc. ("AOL-LA" or the
"Company") and its wholly owned subsidiaries, have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments, consisting only of normal
recurring accruals considered necessary for a fair presentation, have been
included in the accompanying unaudited financial statements. All significant
intercompany transactions and balances have been eliminated in consolidation.
Operating results for the three months ended September 30, 2000 are not
necessarily indicative of the results that may be expected for the full year
ending June 30, 2001. For further information, refer to the consolidated
financial statements and notes thereto, included in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2000.
On August 11, 2000, the Company completed the initial public offering
("IPO") of 25,000,000 shares of its class A common stock raising approximately
$187.5 million in net proceeds. In September 2000, the Company's underwriters
exercised a portion of the over-allotment option for an additional 2,062,500
shares, raising approximately $15.6 million in net proceeds. Also, prior to
consummation of the Company's IPO, it completed a corporate reorganization more
fully described in Note 1 of the Company's fiscal 2000 10-K.
The Company began operations in December 1998 at which time it acquired
America Online, Inc.'s (AOL's) Latin American CompuServe Classic subscribers.
The first AOL-LA online service and portal was launched in Brazil in November
1999, a second country service and portal was launched in Mexico in July 2000,
and a third country service and portal was launched in Argentina in August 2000.
Prior to the Company's August 2000 IPO, the Company was privately held.
Note 2. Recent Accounting Pronouncements
In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation" ("FIN 44"), which
contains rules designed to clarify the application of APB 25. FIN 44 was
effective on July 1, 2000 and the Company adopted it at that time. The Company's
adoption of FIN 44 was not material to the earnings and financial position of
the Company.
The FASB recently issued Statement No. 137, "Accounting for Derivative
Instruments and Hedging Activities-Deferral of Effective Date of FASB Statement
No. 133". The Statement deferred for one year the effective date of FASB
Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities". The rule applies to all fiscal quarters of all fiscal years
beginning after June 15, 2000. SFAS No. 133 requires that the Company recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of
derivatives will either be offset against the change in fair value of the hedged
assets, liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of a derivative's change in fair value will be immediately
recognized in earnings. Certain of the Company's holdings of equity instruments
have been deemed derivatives pursuant to the criteria established in SFAS 133.
The adoption of SFAS 133 by the Company during the quarter ended September 30,
2000 resulted in the Company recognizing a loss of $1.3 million during the
quarter which is included in other income, net.
-7-
<PAGE> 8
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB 101"), which clarifies certain existing accounting principles for the
timing of revenue recognition and its classification in the financial
statements. The SEC delayed the required implementation date of SAB 101 by
issuing Staff Accounting Bulletins No. 101A, "Amendment: Revenue Recognition in
Financial Statements" and 101B, "Second Amendment: Revenue Recognition in
Financial Statements" in March and June 2000, respectively. As a result, the SAB
101 will not be effective for the Company until the quarter ended June 30, 2001.
The Company believes the adoption of SAB 101 will not be material to the
earnings and financial position of the Company.
Note 3. Loss Per Share
The Company had no common stock issued and outstanding in 1999.
Therefore, loss per share information is not presented for the three months
ended September 30, 1999. For the three months ended September 30, 2000, the
basic loss per share calculation does not include any accretion to liquidation
value of the Company's Series B and C preferred stock since the Company
currently does not have the intent to redeem the Series B and C preferred stock
for cash. The following table sets forth the computation of basic loss per share
for the three months ended September 30, 2000:
Three Months Ended
September 30, 2000
------------------
(Dollars in thousands, except per share data)
Basic and diluted loss per share:
Net loss applicable to
common stockholders $ (100,136)
Weighted average shares outstanding 34,144,748
Basic and diluted loss per share $ (2.93)
============
There is no difference between basic and diluted loss per share since
the effect of any contingently issuable common stock on loss per share is
anti-dilutive. The anti-dilutive securities for the three months ended September
30, 2000 consisted of the stock options (9,284,235 shares), the AOL warrant
(16,541,250 shares) and the Series B and C preferred stock (199,662,294 shares).
Note 4. Comprehensive Loss
For the three months ended September 30, 2000 and 1999, comprehensive
loss was $96.3 million and $2.1 million, respectively. The difference between
net loss and comprehensive loss for each period presented is due to net
unrealized gains or losses on available-for-sale securities and unrealized
foreign currency translation gains and losses.
Note 5. Segment Information
The Company operates in a single business segment, interactive
services. Interactive services consists of the delivery of the Company's
interactive products, including the AOL-LA country services and portals and
CompuServe services. Delivery of interactive services by the Company is in its
start-up phase with launches in Brazil (November 1999), Mexico (July 2000), and
Argentina (August 2000). The Company's corporate headquarters are located in
Fort Lauderdale, Florida, USA. As the Company expands its operations throughout
the Latin America region, management expects to move toward a geographic
approach to segment reporting.
-8-
<PAGE> 9
Note 6. Legal Proceedings
On December 28, 1999, ADEC, a non-governmental, private consumer
protection association, filed a complaint against the Company 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. $5.4 million, in
damages on behalf of consumers who have allegedly complained about the
installation of the Company's America Online Brazil software on their PCs. The
preliminary restraining order would have required the Company to stop
distributing its CD software in Brazil, the collection of products already
distributed, and publication of an injunction in newspapers of significant
circulation. While ADEC obtained the order, the Company 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 a thirty-day period to join the action.
The thirty-day period has run and the Company is unaware of any consumer filing
a notice to join the action. Although the Company believes that ADEC's claims
are without merit and will continue to contest them vigorously, the Company may
not be successful in defeating its claims. If the Company is unsuccessful,
ADEC's claims could have a material adverse effect on the Company's business.
-9-
<PAGE> 10
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
America Online Latin America, Inc. ("AOL-LA", we, us or the "Company")
seeks 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. Our family of AOL-branded
interactive services will include the AOL-LA country services, our comprehensive
online services which will be available to subscribing members, and the AOL-LA
country Internet portals and our Latin American regional Internet portal.
Our interactive services are being developed on a country-by-country
and regional basis and are being tailored to local interests. We expect to
derive our revenues principally from member subscriptions to our AOL-LA country
services and will seek to build our online service member base and portal user
base to generate additional revenues from advertising and commerce.
Our three core target markets in Latin America are Brazil, Mexico and
Argentina. In November 1999, we concurrently launched our first AOL-LA country
service, America Online Brazil, and our first AOL-LA country Internet portal,
our Brazilian portal at www.americaonline.com.br. As of September 30, 2000, our
network provided for access to our America Online Brazil service in 40 cities in
Brazil. In July 2000, we launched our country service in Mexico, America Online
Mexico, and our Mexican portal at www.americaonline.com.mx. We currently offer
our America Online Mexico service in Mexico City, Guadalajara, Monterrey,
Toluca, Queretaro, Cuernavaca and Puebla. In August 2000, we launched our
country service in Argentina, America Online Argentina, and our Argentina portal
at www.americaonline.com.ar. We currently offer our America Online Argentina
service in Buenos Aires, Cordoba, Rosario and Mendoza. We plan to continue to
expand our network in Brazil, Mexico and Argentina as well as introduce our
Latin American regional portal. We also intend to introduce our interactive
services in additional countries in Latin America, including Puerto Rico.
We were incorporated in Delaware on November 22, 1999. Our principal
executive offices are located at 6600 N. Andrews Ave., Suite 500, Ft.
Lauderdale, FL 33309, and our telephone number is (954) 689-3100. Before August
7, 2000 our business was conducted by affiliates of AOL Latin America, S.L.,
a limited liability company organized in Spain in December 1998. AOL Latin
America, S.L. was formed by AOL and the Cisneros Group as a joint venture. The
Cisneros Group refers to the Cisneros Group of Companies, a group of companies
and joint ventures that are associated with two of our directors, Ricardo and
Gustavo Cisneros, and their families. On August 7, 2000, we completed a
corporate reorganization. Our class A common stock has been traded on the Nasdaq
National Market since August 8, 2000 and trades under the symbol "AOLA". Prior
to that time, there was no public market for our class A common stock.
Consolidated Results of Operations
REVENUES.
The following table and discussion highlights the revenues of the
Company for the three months ended September 30, 2000 and 1999.
Three Months Ended
September 30,
------------------------
2000 1999
-------- --------
(In thousands)
Revenues:
Subscriptions $ 2,621 $ 1,129
Advertising and commerce 1,931 78
-------- --------
Total revenues $ 4,552 $ 1,207
======== ========
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<PAGE> 11
SUBSCRIPTION REVENUES.
We plan to build our subscriber base by aggressively marketing our
AOL-LA country services in Brazil, Mexico and Argentina. We also plan to expand
services into Puerto Rico and additional countries in Latin America.
Accordingly, because of our expected growth, we expect in the near term that a
substantial percentage of our subscribers will be in their trial period, which
is typical of Internet subscription businesses in the early stages of their
growth. Therefore, it may not be unusual at any particular date in the near term
for a majority of our subscribers to be trial members. The percentage of trial
members is likely to be highest following our launch in a new market and in
connection with particular promotional campaigns, which may include offering
extended trial periods.
For the three months ended September 30, 2000, revenues from
subscription services increased to $2.6 million as compared to $1.1 million for
the three months ended September 30, 1999. The increase in subscription services
comes from an increase in payments from our AOL-LA services of approximately
$2.0 million offset by a decrease in payments from our CompuServe Classic
service of approximately $485,000. As of September 30, 2000, we had
approximately 314,000 subscribers for our interactive services, a majority of
which are in their free trial period.
For the three months ended September 30, 1999, our subscription
revenues were generated from members paying fees to subscribe to our CompuServe
Classic service. We expect that future subscription revenues will be generated
primarily from members paying fees to subscribe to the AOL-LA country services
and, to a lesser extent, from the CompuServe Classic service as the Company is
not actively promoting this service.
We currently offer Brazilian subscribers two alternative methods by
which they can pay their subscription fees: credit cards and boletos bancarios
("boleto"). The boleto is a customary form of payment under which Brazilian
banks that we designate act as conduits for collecting the payments. We send
each member a bill and the member pays the bill at a local bank. These local
banks then send the payments to our designated banks. This is a common method
for payment in Brazil, but is more costly for us than payment through credit
cards and results in a longer collection cycle. As the boleto is a common form
of payment in Brazil, approximately 82% of our subscribers in Brazil had
selected this method of payment as of September 30, 2000. Although we have not
experienced any significant difficulties collecting subscription fees from
members using credit cards, a significant number of our subscribers using
boletos who have received an invoice have not made timely payment. The Company
is undertaking efforts to improve its collection of amounts due from boleto
payers.
For subscribers in Brazil that have elected to pay their subscription
fees with credit cards, we begin to recognize subscription revenues when the
fees become due. For subscribers in Brazil who pay through means other than
credit cards, we begin to recognize subscription revenues when we receive
payment.
In Mexico and Argentina, our subscribers can pay their subscription
fees with either credit cards or bank debit cards. Upon the expiration of the
free trial period following the launch of our America Online Mexico and America
Online Argentina services, we will begin to recognize subscription revenue when
the fees become due.
ADVERTISING AND COMMERCE REVENUES. Advertising revenues are derived
principally from:
o advertising arrangements under which we receive fees based on
the number of advertisements displayed on our interactive
services; and
o sponsorship or co-sponsorship arrangements that allow
advertisers to sponsor an area on our interactive services in
exchange for a fixed payment either in cash or, in some
instances, in equity.
For the three months ended September 30, 2000, revenues from
advertising and commerce increased $1.9 million relative to the three months
ended September 30, 1999. The increase in advertising and commerce revenues was
due to increased advertising revenues in all of the countries in which we
provide services, particularly in Brazil.
-11-
<PAGE> 12
We expect our advertising revenues to increase as the number of subscribers to
our services increases.
For the three months ended September 30, 1999, our revenues from
advertising and commerce were $78,000.
As of September 30, 2000, we had deferred revenues of approximately
$4.0 million, primarily from advertising arrangements. The deferred revenues
consist of payments received in advance of our delivery of the related service
and will be recognized as income as the services are delivered.
The Company will recognize future barter revenue based on the fair
value of the advertising that the Company agrees to provide, where the Company
can demonstrate fair value by reference to recent similar cash-based
transactions in accordance with Emerging Issues Task Force (EITF) Issue 99-17,
ACCOUNTING FOR ADVERTISING BARTER TRANSACTIONS. As of September 30, 2000, the
Company has not yet recognized any barter revenue.
COSTS AND EXPENSES. The following table and discussion highlights the
costs and expenses of the Company for the three months ended September 30, 2000
and 1999.
Three Months Ended
September 30,
------------------------
2000 1999
-------- --------
(In thousands)
Cost and expenses:
Cost of revenues $ 16,473 $ 632
Sales and marketing 76,296 44
Product development 2,098 252
General and administrative 7,990 2,488
--------- --------
Total costs and expenses $ 102,857 $ 3,416
========= ========
COST OF REVENUES. Cost of revenues includes:
o network-related costs consisting primarily of fees paid to
third parties to carry our data over their telecommunications
networks;
o fees we pay to AOL for use of their servers that run our
interactive services;
o fees we pay to AOL and the Cisneros Group for technical
support and training;
o personnel and related costs for customer support and product
and content development;
o fees paid to content providers; and
o amortization of capitalized product development costs.
For the quarter ended September 30, 2000, cost of revenues was
approximately $16.5 million and consisted primarily of costs to launch our
AOL-LA country service in Mexico and Argentina, expansion of our services in
Brazil, as well as the continued servicing of our CompuServe Classic
subscribers. These costs also included payments made or due to AOL and other
third parties for the costs of using their computer systems, equipment and
operations, staffing costs and the cost of establishing our call centers. These
costs also include payments made to a third party for the management and
administration of the CompuServe Classic service under our contract. During this
period, the cost of services provided by AOL that were classified as cost of
revenues was approximately $3.7 million. We expect that our cost of revenues
will continue to grow and will exceed, or represent a significant portion of,
our total revenues as we expand our capacity to accommodate new users of our
interactive services.
-12-
<PAGE> 13
For the three months ended September 30, 1999, cost of revenues was
approximately $632,000. These costs, which were primarily payable to AOL,
reflected the costs we incurred to provide service to our CompuServe Classic
subscribers and in preparation of our November 1999 launch in Brazil.
SALES AND MARKETING. Sales and marketing expenses include our costs to
acquire and retain our members, the 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 as well as the costs of brand
advertising on television and in newspapers, magazines and other media.
For the three months ended September 30, 2000, sales and marketing
expenses were approximately $76.3 million and primarily reflect aggressive brand
advertising and direct and other marketing expenditures in Brazil and costs
related to the launch of our AOL-LA country services in Argentina and Mexico.
During this period, we engaged in a significant amount of advertising to promote
our brand as well as direct marketing to acquire subscribers to our interactive
service.
On June 12, 2000, the Company entered into a strategic interactive
services and marketing agreement with Banco Itau of Brazil. Pursuant to this
agreement, 31.7 million shares of class A common stock, valued at $253.6 million
based on the initial public offering price of $8.00 per share, were issued to
Banco Itau on August 11, 2000. As there are potential, specific payments (from
Banco Itau to the Company) related to performance in the first five years of the
agreement with Banco Itau, $164.8 million of the cost will be expensed on a
straight-line basis over that period. The remaining balance of the cost, $88.8
million, will be expensed on a straight-line basis over the ten-year term of the
agreement. For the three months ended September 30, 2000, approximately $10.5
million of expense was recorded for the Banco Itau shares and is included in
sales and marketing expenses. The unamortized balance for this agreement is
recorded as a reduction to stockholders' equity and entitled "unearned services"
in the Company's consolidated balance sheet at September 30, 2000.
As we launch our services in new markets, we expect that our sales and
marketing expenses will initially be relatively high and decrease over time as
our brand and name recognition increase. While we have launched services in
three of our main target markets, Brazil, Mexico and Argentina, we expect our
sales and marketing expenditures to remain high as we continue to expand our
interactive services, and attempt to attract new members and users.
Sales and marketing expenses for the three months ended September 30,
1999 totaled $44,000 and were primarily related our pre-launch activities in
Brazil.
PRODUCT DEVELOPMENT. We capitalize product development costs, which
mainly consist of charges from AOL for personnel and related costs associated
with the localization of our interactive services and any developments we
request AOL to provide, once the product or enhancement reaches technological
feasibility. We capitalize costs incurred only after technological feasibility
has been established up until completion of beta testing. Once beta testing is
complete and the product or service is commercially available, costs are again
expensed as incurred. Amortization, a cost of revenue, is provided on a
product-by-product basis, using the greater of the straight-line method or the
current year revenue as a percentage of total revenue estimates for the related
software product, not to exceed three years, beginning the month after the date
of product release. Quarterly, we review and expense the unamortized cost of any
feature identified as being impaired. We also review the recoverability of the
total unamortized cost of all features and software products in relation to
their estimated online service and other relevant revenues and, when necessary,
make an appropriate adjustment to net realizable value.
Product development costs expensed for the three months ended September
30, 2000 were approximately $2.1 million and $252,000 for the three months ended
September 30, 1999. These product development costs represent research and
development costs payable to AOL primarily for localization of our software and
other requested development work. In the three months ended September 30, 2000,
a significant portion of these costs was due to an increase in technical support
from AOL for the launch of our AOL-LA interactive services in Mexico and
Argentina.
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<PAGE> 14
GENERAL AND ADMINISTRATIVE. For the three months ended September 30,
2000, our general and administrative costs were approximately $8.0 million. Our
general and administrative expenses increased during this period as we hired
additional management and administrative personnel to support the launches in
Mexico and Argentina, as well as deepened our staff in Brazil. Both AOL and the
Cisneros Group provided us with management and administrative services to
support the launch in Argentina and Mexico. During this period, we incurred
support fees of approximately $379,000 for support services provided by AOL and
$48,000 for services provided by the Cisneros Group. We anticipate that our
general and administrative expenses will continue to increase in fiscal 2001 due
to the growth of management and administrative personnel required to support our
recently launched AOL-LA interactive services in Mexico and Argentina, the
additional support staff required in our Fort Lauderdale headquarters and future
launches.
For the three months ended September 30, 1999, general and
administrative costs were approximately $2.5 million. Expenses during this
period were primarily attributable to personnel costs, general office expenses
and support fees of approximately $841,000 payable to AOL and $50,000 payable to
the Cisneros Group.
OTHER INCOME, NET. Other income, net consists primarily of interest
income, losses on investments including available for sale securities, and
foreign currency transaction gains and losses. For the three months ended
September 30, 2000, other income, net was $206,000 which consisted primarily of
interest income of $1.9 million offset by losses on securities of $1.3 million.
The interest income was primarily attributable to proceeds from the Company's
IPO and prior capital contributions from AOL and the Cisneros Group while the
loss on securities was related to losses realized on a derivative security
acquired by the Company in fiscal year 2000. The loss on securities was
recognized as a result of the Company's adoption of SFAS 133 during the quarter
ended September 30, 2000.
INCOME TAXES. There was no provision for income taxes made during the
three months ended September 30, 2000. There was a provision of approximately
$103,000 for the three months ended September 30, 1999.
For U.S. tax purposes, the Company has made elections to treat foreign
operating entities as branches and therefore, loss carryforwards prior to the
reorganization are not available to the Company. Most of the consolidated
operating losses arising in periods after the reorganization are available for
carry forward by the Company.
The Company anticipates that most of the net operating losses for tax
purposes will be available to offset the Company's future U.S. and foreign
taxable income. If the Company does not use these carryforwards in a timely
manner, they will expire. To the extent that the Company realizes net operating
loss carryforwards that relate to stock option deductions, the resulting
benefits will be credited to stockholders' equity. As of September 30, 2000, and
September 30, 1999, the Company had not recognized any net deferred tax assets
or liabilities.
Liquidity and Capital Resources
From inception through August 11, 2000, the Company's operations were
financed primarily through capital contributed by the Cisneros Group ($132.6
million) and AOL ($32.5 million). As of September 30, 2000, each is obligated to
contribute an additional $17.5 million by December 31, 2000. Through the end of
fiscal year 2000, the Company used $78.4 million in cash to fund losses from
operations. For the quarter ended September 30, 2000, the Company used $91.8
million in cash to fund losses from operations. The Company completed its
initial public offering on August 11, 2000 which generated an additional $187.5
million in cash, net of underwriting commissions and other offering costs. In
September 2000, the Company received proceeds from the exercise of the
over-allotment option by the underwriters, of 2,062,500 shares of class A common
stock which yielded us, net of underwriting discount, proceeds of approximately
$15.6 million.
Based upon our current business plan, we anticipate that the cash on
hand, provided by the August 2000 IPO and the related over-allotment in
September 2000 and the cash to be contributed by AOL and the Cisneros Group will
be sufficient to fund operations through March 2001. A portion of this cash may
be used for the acquisition and subsequent funding of technologies, products or
businesses complementary to our
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<PAGE> 15
business. When or if necessary, we may seek to sell additional equity or debt
securities or to enter into a credit facility although there is no assurance
that such funding will be obtained on favorable terms. In addition, the
projected spending under the current business plan is comprised primarily of
discretionary items that could be adjusted, when or if necessary.
Current assets were approximately $211.5 million at September 30, 2000
and $42.5 million at June 30, 2000, while current liabilities were approximately
$43.5 million and $29.2 million at those same dates. Therefore, at September 30,
2000, the Company had working capital of approximately $168.0 million, compared
to working capital of approximately $13.3 million at June 30, 2000.
The increase in current assets was primarily attributable to an
increase in cash and cash equivalents and short-term investments as a result of
proceeds from the Company's IPO and the prepayment of advertising expenses in
advance to enable the Company to take advantage of prepayment discounts in the
country of Mexico. The increase in current liabilities was primarily
attributable to increases in amounts payable to external vendors and to AOL,
primarily for increases in accrued telecommunications and marketing costs, as
well as an increase in support services.
At September 30 2000, our material operating commitments were
approximately $60.7 million, which represents our minimum obligations under
third party telecommunications network contracts through the end of fiscal 2003,
obligations under leases for office space, autos and office equipment and the
Company's exclusive sponsorship of the Rock in Rio Music Festival.
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 expansion of our country services and internet portals, future
marketing efforts, future subscription revenues, future expenses, the future
availability of net operating losses for tax purposes and the period of time
that our existing cash resources will be sufficient to fund our operations.
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. For a discussion of factors that could cause actual
results to differ materially from those described in the forward-looking
statements, please refer to the section entitled "Forward-Looking Statements" in
the Company's Annual Report on Form 10-K for the fiscal year ended June 30,
2000.
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<PAGE> 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk
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. 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 depreciation
in the past. Our revenues from our services will decline in value if the local
currencies in which we are paid depreciate relative to the U.S. dollar. 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 because we will have
substantial expenses as well as 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 hedging transactions or if our hedging
transactions are unsuccessful. 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.
The Company is exposed to market risk as it relates to changes in the
market value of its investments. As of September 30, 2000, we had an investment
in a publicly traded company that was acquired, in fiscal year 2000, in exchange
for future services. The investment is comprised of common stock and warrants
and had an original fair market value of $4.5 million. The net unrealized loss
as of September 30, 2000, on the common share portion of this investment, is
$1.9 million and is included as a separate component of stockholders' equity.
Pursuant to the criteria established by SFAS 133, the warrants acquired in this
transaction are classified as derivatives. The decline in value of the warrants
totaled $1.3 million and was recorded as other income during the present
quarter, as a result of the Company's adoption of SFAS 133 on July 1, 2000. The
Company's objective in managing its exposure to stock market fluctuations is to
minimize the impact of stock market declines on the Company's earnings and cash
flows. Continued market declines are beyond the control of the Company and have
the potential to have a material non-cash impact on the operating results of the
Company in future periods.
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<PAGE> 17
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
Changes in Securities
During the quarter ended September 30, 2000, the Company sold the
following securities that were not registered under the Securities Act as
summarized below.
(a) Issuances of Capital Stock
On August 7, 2000, the Company entered into a contribution agreement
with AOL, Riverview Media Corp., a wholly owned subsidiary of the Cisneros
Group, and AOL Latin America, S.L. under which the Company issued 101,858,334
shares of our series B preferred stock to AOL and 101,858,334 shares of its
series C preferred stock to Riverview Media Corp. and two current executives and
one former executive of the Cisneros Group in exchange for their contribution to
the Company of all their interests in AOL Latin America S.L. AOL contributed a
royalty free license in exchange for shares of the Company's series B preferred
stock. The Company recorded the value of the license at AOL's historical cost
basis, which was zero. The Cisneros Group has contributed an aggregate amount of
$100.1 million for the Company's series C preferred stock.
On August 11, 2000, the Company issued to Banco Itau 31,700,000 shares
of class A common stock at $8.00 per share, the initial public offering price,
pursuant to a stock subscription agreement with Banco Itau.
On August 11, 2000, the Company issued 31,250 shares of our class A
common stock to Bakti Technologies Inc., a Panamanian corporation and an
affiliate of Abrenuncio, S.A., a Colombian corporation in exchange for
Abrenuncio, S.A.'s agreement to enter into an interactive services agreement.
(b) Issuance of Warrant
On August 7, 2000, we issued a warrant to AOL to purchase any
combination of 16,541,250 shares of series B preferred stock or class A or class
B common stock at a per share exercise price equal to the initial public
offering price.
(c) Grant of Stock Options
Pursuant to our 2000 Stock Plan, as of September 30, 2000, the Company
issued options to purchase an aggregate of 9,284,235 shares of Class A common
stock at prices ranging from $.01 to up to $9.44.
Except with respect to the sale to Banco Itau and Bakti Technologies
Inc., the sale and issuance of the above securities were deemed to be exempt
from registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under Rule 701. The
recipient of securities in each such transaction represented their intention to
acquire the securities for investment only and not with the view to or for the
sale in connection with any distribution thereof and appropriate legends were
affixed to the share certificates and instruments issued in such transactions.
All recipients had adequate access, through their relationships with the
Company, to information about us. We issued the shares of class A common stock
to Banco Itau and Bakti Technologies Inc. under Regulation S.
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<PAGE> 18
Use of Proceeds
In connection with our Initial Public Offering, we sold 27,062,500
shares of class A common stock, par value $.01 per share (including 2,062,500
shares sold in connection with the underwriters' exercise of an over-allotment
option), at an initial public offering price of $8.00 per share. As a result, we
received net offering proceeds of approximately $203.1 million, reflecting gross
proceeds of $216.5 million less underwriter commissions and other offering costs
of approximately $13.4 million. On August 7, 2000, the Securities and Exchange
Commission declared our Registration Statement on Form S-1 (File No. 333-95051)
effective. The following table sets forth our cumulative use of the net offering
proceeds as of September 30, 2000.
<TABLE>
<CAPTION>
<S> <C>
Construction of plant, building and facilities $2.1 million
Purchase and installation of machinery and equipment -
Purchases of real estate -
Acquisition of other business(es) -
Repayment of indebtedness -
Working capital -
Temporary investments $173.6 million
Funding of losses $27.4 million
</TABLE>
The foregoing use of net proceeds does not represent a material change
in the use of net proceeds described in our Registration Statement on Form S-1.
Item 4. Submission of Matters to a Vote of Security Holders
On August 7, 2000, the sole stockholder of the Series B Redeemable
Convertible Preferred Stock, America Online, Inc., by written consent elected
Miles R. Gilburne, J. Michael Kelly, Michael Lynton, Robert W. Pittman and
Gerold Sokol, Jr. as Class B Directors of the Company for a term expiring at the
next annual meeting of the stockholders and until the election and qualification
of their successors.
On August 7, 2000, the sole stockholder of the Series C Redeemable
Convertible Preferred Stock, Riverview Media Corp., by written consent elected
Steven I. Bandel, Gustavo A. Cisneros, Ricardo J. Cisneros, Robert S. O'Hara,
Jr., and Cristina Pieretti as Class C Directors of the Company for a term
expiring at the next annual meeting of the stockholders and until the election
and qualification of their successors.
Also on August 7, 2000, the holders of all outstanding shares of the
Company by written consent elected Vernon E. Jordan, Jr., William H. Leurs, M.
Brian Mulroney, and Roberto Egydio Setubal as Class A Directors of the Company
for a term expiring at the next annual meeting of the stockholders or until
their respective successors are elected and qualified. On the same date, these
stockholders by written consent also approved and adopted the America Online
Latin America, Inc. 2000 Stock Plan.
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<PAGE> 19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
AMERICA ONLINE LATIN AMERICA, INC.
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.
DATE: November 10, 2000 SIGNATURE: /s/ Charles M. Herington
-----------------------------
Charles M. Herington
Chief Executive Officer
DATE: November 10, 2000 SIGNATURE: /s/ Javier Aguirre
-----------------------------
Javier Aguirre
Chief Financial Officer
Principal Financial Officer
DATE: November 10, 2000 SIGNATURE: /s/ Paul Freudenthaler
-----------------------------
Paul Freudenthaler
Controller
Principal Accounting Officer
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