##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549
 
 FORM 10-K þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2004 OR o
    
    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
(State or other jurisdiction of incorporation or
organization)
    
    65-0963212
(I.R.S. Employer
Identification No.)
 6600 N. Andrews Avenue
Suite 400
Fort Lauderdale, FL 33309
(Address of principal executive offices, including zip code) 
  Securities registered pursuant to section 12(g) of the Act: class A common stock, par value $0.01 per share
(Title of class) 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 þ No o. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of the registrants knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. o Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule
12b-2 of the Act). Yes o No þ   1




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The aggregate market value of the registrants voting and non-voting common stock held by
non-affiliates of the registrant (without admiting that any person whose shares are not included in
such calculation is an affiliate) computed by reference to the price at which class A common stock
was last sold as of the last business day of the registrants
most recently completed second fiscal
quarter, June 30, 2004, was $15,022,479. The number of shares of the registrants class A common stock outstanding as of March 18, 2005
was 135,260,715. No shares of the registrants class B common stock or class C common stock were
outstanding as of March 18, 2005. TABLE OF CONTENTS  
 PagePART IItem 1.
    
    Business
    
    
    3Item 2.
    
    Properties
    
    
    16Item 3.
    
    Legal Proceedings
    
    
    16Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    16PART IIItem 5.
    
    Market for Registrants Common Equity and Related Stockholder Matters and Issuer Purchases of Equity Securities
    
    
    17Item 6.
    
    Selected Financial Data
    
    
    18Item 7.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    19Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    42Item 8.
    
    Financial Statements and Supplementary Data
    
    
    43Item 9.
    
    Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    43Item 9A.
    
    Controls and Procedures
    
    
    43Item 9B.
    
    Other Information
    
    
    43PART IIIItem 10.
    
    Directors and Executive Officers of the Registrant
    
    
    43Item 11.
    
    Executive Compensation
    
    
    48Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    52Item 13.
    
    Certain Relationships and Related Transactions
    
    
    56Item 14.
    
    Principal Accountant Fees and Services
    
    
    59PART IV.Item 15.
    
    Exhibits, Financial Statement Schedules
    
    
    60EXECUTIVE RETENTION AGREEMENT/ EDUARDO ESCALANTEEXECUTIVE RETENTION AGREEMENT/ MILTON CAMARGOAMENDMENT TO STRATEGIC INTERACTIVE SERVICES & MARKETING AGREEMENTLETTER OF EMPLOYMENT / DAVID A. BRUSCINOLETTER OF EMPLOYMENT/ EDUARDO ESCALANTE CASTILLOSUBSIDIARIESCONSENT OF ERNST & YOUNG LLPCERTIFICATION OF CEO PURSUANT TO SECTION 302CERTIFICATION OF CFO PURSUANT TO SECTION 302CERTIFICATION OF CEO & CFO PURSUANT TO SECTION 906
  Preliminary Statement As we have stated in previous reports filed with the Securities and Exchange Commission,
America Online Latin America, Inc. (we, us, AOLA or the Company) does not expect to reach
cash flow break even with available cash on hand. We
only had $17.9 million of available cash as of March 16,
2005. We expect that available cash will only be
sufficient to fund operations into the third quarter of 2005. To continue operations beyond such
time, we would need an additional, substantial capital infusion. We will not be able to obtain
additional financing, whether from Time Warner Inc. (Time Warner), America Online, Inc. (America
Online), the Cisneros Group of Companies (Cisneros Group), Banco Itaú or any other source. We
are not currently expending resources to obtain financing from any source because we believe that
any efforts to obtain financing would be futile based on past experience. We incurred cumulative net operating losses of approximately $928.8 million from December 15, 1998, the date of our
inception, through December 31, 2004. We expect to continue to incur additional losses and will not be able to continue
normal operations indefinitely. Publicity surrounding our financial condition, including the likelihood that we will cease
operations, may negatively impact our revenues, membership and cash balances. Since May 2004, we, together with our financial advisors, have explored potential strategic
alternatives for AOLA and its subsidiaries, including a possible sale of our entire company, the
sale of one or more of our operating businesses, the 2




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sale of specific assets or other comparable transactions. To date, we have not successfully
completed any such transaction. We are reviewing preliminary and non-binding indications of
interest from multiple parties with respect to the sale of certain assets. However, there can be no
assurance that a transaction relating to any of these expressions of interest, or any other
transaction, will be completed. Time Warner, the holder of $160 million of our senior convertible
notes, has the right to require us to use the proceeds from any sale transaction to repay the
senior convertible notes. In addition, our preferred stock has a current aggregate liquidation
preference of approximately $599 million, excluding accrued but unpaid dividends. Even if we are successful in selling all of our businesses, the proceeds will not be
sufficient to repay the senior convertible notes, and none of those proceeds will be available to
our common stockholders. As a result, we do not believe that our common stock has, or will have,
any value. If we do not consummate the disposition of our businesses in a timely manner, we expect to
cease operating those businesses, although no definitive decision has been made to cease any
particular operation at any particular time. At any time during the process of attempting to sell
our businesses or ceasing any operation, we may conclude that it is advantageous for us to file for
protection under the bankruptcy laws of the United States or the insolvency laws of one or more
foreign jurisdiction in which we operate. Any such voluntary filing would require the consent of
the holders of our class B and C preferred stock, in addition to the authorization of our board of
directors. In addition, any potential sale of our businesses requires the consent of the holders of our class B and C preferred
stock and the consent of Time Warner, the holder of our senior convertible notes. We do not have the right to sub-license
our rights under our license agreement with America Online. Accordingly, any potential acquirer of any of our operating
businesses would have to negotiate such license rights directly from America Online. There is no assurance that any such
negotiations would be consummated on agreeable terms. The audited consolidated financial statements included in this report have been prepared on a
going concern basis, which contemplates the realization of assets and satisfaction of liabilities
and commitments in the normal course of business. On March 16, 2005, management concluded that AOLA
is not a going concern for financial reporting purposes and eventually will not have sufficient
funds to continue operations. In light of that conclusion, management reviewed current contracts in
effect and determined that the recording of a full impairment of the remaining unamortized
balance of unearned services recorded as a result of our strategic marketing agreement with Banco
Itaú is necessary. Management estimates that the amount of this non-cash impairment is
approximately $52.5 million, and will be recorded in the first quarter of 2005. Our initial estimate of this impairment was $38.9 million. However, we revised our estimate based on additional analysis. In addition, we
believe we may be in default under the senior convertible notes held by Time Warner. This may have
automatically accelerated our obligation to repay these notes and, therefore, the full $160 million
may be immediately due and payable. We do not have sufficient funds available to repay this debt.
In addition, Ernst & Youngs LLPs audit report on our consolidated financial statements contains a
going concern qualification because of its doubts about our ability to continue as a going
concern. If a determination is made to liquidate the Company, or it is probable that a liquidation is imminent, we will be required to
change our basis of accounting to the liquidation basis of
accounting. No such adjustments have been made to the audited
consolidated financial statements contained in this report. This Annual Report on Form 10-K, including this Preliminary Statement, contains
forward-looking statements that are based on our current expectations. Actual results may differ
materially from those expressed or implied by such forward-looking statements because of a number
of risks and uncertainties. For a discussion of factors affecting our business and prospects, see
Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations -
Risk Factors. On December 30, 2004, our subsidiary in Argentina entered into a preliminary letter of intent
to negotiate a merger of its ISP business in Argentina and certain related assets and liabilities
with and into La Nación. We no longer believe that we will be able to consummate the transaction on
mutually agreeable terms. All of the statements and other information presented in this report are qualified by this
Preliminary Statement. 
 PART I 
 Item 1. Business Overview We provide interactive services in Latin America. We derive our revenues principally from
member subscriptions to our AOLA country services, the AOL-branded service in Puerto Rico and our
web-based interactive services. We also generate additional revenues from advertising and other
revenue sources. Other revenue sources include certain 3




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programming services provided to America Online for its Latino content area, revenue sharing
agreements with certain local telecommunications providers, and limited call center support
services that we provide to AOL Germany. Our AOLA country services and web-based interactive services provide our members access to
online communities, content and localized versions of certain of America Online interactive
products. Our services enable members to access and explore the Internet and encourage members to
participate in interactive communities through tools such as Spanish and Portuguese versions of AOL
Instant Messenger, Buddy Lists, e-mail, web logs, public bulletin boards, online meeting rooms,
conversations, chat and auditorium events. Our AOLA country services require members to use a
client software program on their computers, whereas our web-based services do not require this
software. Members of most of our services can personalize their online experience through a variety
of features, including customized news and e-mail controls. Our interactive services typically also
provide members with local and regional content organized into channels, making areas of interest
easy to find, and our AOLA country services also provide access to the global content of the AOL
service. Our main markets in Latin America are Brazil, Mexico and Puerto Rico. We have no plans to
expand to other markets in Latin America, and as described above in Preliminary Statement we are
attempting to sell our businesses, and if we cannot consummate the disposition of our businesses in
a timely manner, we will cease operating these businesses, although no definitive decision
has been made to cease any particular operation at any particular time. We consider countries in
which we have launched our AOLA country services or web-based interactive services as operational
segments and internally report our operations on a country-by-country basis. Each of our operating
segments, except for Puerto Rico, derives its subscription revenues through the provision of
interactive services and also from advertising and other revenue sources. In Puerto Rico, we derive
our subscription revenue from our arrangement with America Online whereby America Online transfers
its net economic interests from members to the AOL-branded service in Puerto Rico to us. Our Puerto
Rico segment also derives revenue from advertising and other revenue. Although amounts for
Argentina are not material and are not expected to be material in future reporting periods, we have
decided not to consolidate Argentina with our corporate and other segment in order to facilitate
historical segment comparisons. In the table below, we provide the date on which we first launched our country service in each
market and our market service coverage as of December 31, 2004. CommencementMarket
    
    
    Date
    
    
    
    Service CoverageBrazil
    
    
    November 1999
    
    
    Available in 491 citesMexico
    
    
    July 2000
    
    
    Available in 58 citesPuerto Rico
    
    
    December 2000
    
    
    Available island-wide
 Subscribers in Puerto Rico are provided with both English and Spanish language content
through the AOL-branded service. We launched our web-based content and connectivity services in Brazil, Argentina and Puerto
Rico in September 2003, October 2003 and February 2004, respectively. Our web-based services are
priced at lower rates than our AOLA country services and are designed to be more competitively
priced. In Puerto Rico we offer a web-based product, Conexis, which provides basic Internet
connectivity, one email address, and minimal content. A web-based service is available in Mexico,
although it is not actively promoted. We are primarily responsible for the technical support,
development and billing for our web-based services. Although at present the majority of our members in Brazil use the AOLA country service, we no
longer actively promote the AOLA country service in Brazil. We no longer promote either the AOLA
country service or the web-based service in Argentina, although they are still available. We do
not expect our web-based product offering in Puerto Rico to become our primary product offering.
We have experienced migration of membership from our AOL Brazil country services and our
AOL-branded service in Puerto Rico to our web-based services. We expect that trend to continue in
the near future. As of December 31, 2004, approximately 16% of active subscribers to our
narrowband web-based services have migrated from our AOLA country services in Brazil, Mexico and
Argentina and the AOL-branded service in Puerto Rico. 4




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Approximately 21.4% of the membership totals as of December 31, 2004, were subscribers to our
narrowband web-based interactive services. Results since launch of the web-based services in all
four markets have been below expectations both in terms of ability to attract new members as well
as to reduce membership turnover. We launched our broadband service in Brazil nationally in August 2003. Our broadband service
offers subscribers faster Internet access through DSL and cable. Subscribers to our broadband
services in Brazil can select either our AOLA country service or our web-based service. The
pricing of our broadband service in Brazil varies depending upon our telecommunications partner.
Approximately 11.7% of the membership totals as of December 31, 2004, were subscribers to our
broadband interactive services. In Brazil, subscribers to the local broadband interactive service
represented about 19.2% of the membership base as of December 31, 2004. In June 2000, we entered into a ten-year strategic agreement with Banco Itaú, one of the
largest banks in Latin America. Banco Itaú is obligated to market and promote a co-branded version
of our interactive services in Brazil as the principal means of accessing Banco Itaús interactive
financial services. Banco Itaú customers who subscribe to our service, except broadband
subscribers, receive a discount. In January 2003, we entered into a five-year agreement with McDonalds in Brazil to market
our service via kiosks in McDonalds restaurants in Brazil. We paid McDonalds an initial fee of
approximately $2.1 million and are required to pay an annual fee of up to $1.0 million over the
term of the agreement. In addition, we also are required to pay McDonalds a fee for each new
member who becomes a paying member of our service in Brazil. We launched the project in a limited
number of restaurants in October 2003, but the implementation of this project has been subject to
a number of delays and still has not been fully implemented. In March 2004, we modified our agreement with McDonalds under which, among other things,
McDonalds was required to establish functioning kiosks in 550 of its restaurants by August 31,
2004. On that date, we and McDonalds concluded that only 375 restaurants were functioning.
Therefore, McDonalds paid us a penalty of approximately $0.8 million. For accounting purposes the
penalty was netted against our initial investment of $2.1 million and will reduce future
amortization of the balance of our investment. The next measurement date is March 31, 2005, at
which point the required target is to establish functioning kiosks in 600 McDonalds restaurants. Implementation under the terms of the modified agreement remains behind schedule, and we do
not expect that McDonalds will be able to satisfy its obligations under the agreement by March
31, 2005, as required. Overall productivity has been low in McDonalds restaurants where kiosks
have been established. McDonalds has not, and will not, become a significant member acquisition
channel. We intend either to renegotiate the terms of the agreement, including the elimination of
annual maintenance fees, to negotiate a termination of the agreement or to cease performing our
obligations under the agreement. If the agreement is terminated, we anticipate the recording of a net
impairment charge of approximately $0.8 million related to the initial fee we paid McDonalds in
2003 which is currently being amortized over the life of the
agreement. The outcome of these decisions may have a material adverse effect on our financial condition and ability to pay creditors. Commencing in the second quarter of 2002, we began to reduce our spending on brand and
acquisition marketing activities and we began to increase our reliance on co-branded and joint
marketing arrangements, where a third-party partner is responsible for implementing a significant
percentage of the marketing effort. In Brazil, our principal marketing arrangement is our
strategic marketing agreement with Banco Itaú. In Mexico and Puerto Rico, we have continued our
reliance on existing distribution channels, focusing primarily on kiosks located at retail
locations such as shopping malls and general merchandise stores. Our reliance on the marketing
efforts of strategic partners has reduced the rate at which we use cash and has lowered our sales
and marketing expenses, since costs incurred by our partners are not accounted for in our results.
However, reliance on third-party arrangements has also increased the potential for unforeseen
events and delays over which we have limited control, as has been the case with McDonalds in
Brazil. Although historically we have been 5




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able to decrease our marketing expenditures, we will be unable to significantly reduce these
expenditures in the future. Due to our limited liquidity we will not be able to invest adequately
in marketing activities and this will negatively impact our membership base and consequently the
attractiveness of our business to potential purchasers. At December 31, 2004, our ending membership base was approximately 415,000 members, an
increase from approximately 400,000 members at September 30, 2004. The membership increase
resulted from growth in our broadband membership in Brazil due to a one time promotion with
telecommunications providers during the fourth quarter. Membership in our Banco Itaú co-branded
service was approximately 108,000 members at December 31, 2004, as compared with approximately
103,000 members at September 30, 2004, and accounted for approximately 26% of our total membership
base. Strong price competition from providers of free and paid Internet services in Brazil, as
well as increased competition from broadband providers in Mexico and Puerto Rico, continue to
significantly impact member acquisition and retention. Total
membership counts include members of our AOLA country services, the
AOL-branded service in Puerto Rico, our web-based
interactive services and broadband service, as well as members of the co-branded Banco Itaú
services. Our membership totals also include members participating in free trial periods and
retention programs. As of December 31, 2004, 91% of our members, including members still in their
trial periods, had selected credit cards, direct debit and other non-cash payment options, which
have a better rate of collection than cash-payment methods, as compared with approximately 81% at
December 31, 2003. Approximately 9% of our total subscribers at December 31, 2004 were in free
trial periods or member retention programs, compared with 14% at December 31, 2003. Despite positive membership growth in the last quarter of 2004, we anticipate that our
membership will once again decline during the first quarter of 2005 to approximately 406,000
members. Due to diminishing investments in brand advertising and marketing acquisition activities,
we believe our membership base will continue to decline. In addition, media coverage concerning
our financial condition may result in a significant reduction in our membership levels. During 2004, we experienced a decrease in our subscription revenues as compared with 2003.
This reduction was driven by declines in Brazil and Mexico, partially offset by a minimal increase
in Puerto Rico. The losses in Brazil and Mexico were driven primarily by decreases in paying
members. Positive impact on subscription revenues due to currency appreciation in Brazil
year-over-year was fully offset by negative impact of currency devaluation in Mexico. To date, our
web-based services have not met our expectations for attracting and retaining new members. Given
our decreased investment in brand advertising and marketing acquisition activities and the other
adverse factors we have referred to in this report, we expect our subscription revenues to
decrease in the future, driven by the decreases in paying members and by the continued change of
the subscriber mix in favor of our lower-priced web-based services, rather than our higher-priced
AOLA country services. Advertising and other revenues also decreased in 2004, as compared to 2003, as a result of
our reduced membership base, our lack of success in attracting significant commitments from
traditional media advertisers and lower amounts received from America Online for programming
services provided for their Latino content area. Cash
and cash equivalents at December 31, 2004 were $22.2 million, as compared with cash and
cash equivalents of $31.9 million at December 31, 2003. December 31, 2004 cash and cash equivalents
do not include approximately $1.1 million that served to collateralize certain retention
obligations to employees and $0.7 million to collateralize
certain operational expenditures. These amounts were not, and will not be, available for general corporate
use. As previously disclosed, we do not expect to reach cash flow breakeven with available cash on
hand and available cash is only sufficient to fund operations into the third quarter of 2005. To
continue operations beyond such time, we would need an additional, substantial capital infusion,
which we will not to be able to obtain from any source. Given our current circumstances, our rate
of cash use may increase significantly if we are required to cease operations or initiate
bankruptcy proceedings. During the year ended December 31, 2004, our net loss applicable to common stockholders was
$92.7 million, compared with a loss of $116.6 million for the year ended December 31, 2003. We consider countries in which we have launched our AOLA country services or web-based
interactive services as operational segments and internally report our operations on a
country-by-country basis. Although amounts for Argentina 6




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are not currently material and operational results are not expected to be material in future
reporting periods, we have decided not to consolidate Argentina with our corporate and other
segment in order to facilitate historical segment comparisons. Each of our operating segments,
except for Puerto Rico, derives its subscription revenues through the provision of interactive
services and also from advertising and other revenue sources. In Puerto Rico, we derive our
subscription revenue from an arrangement with America Online whereby America Online transfers its
net economic interests from members to the AOL-branded service in Puerto Rico to us. Our Puerto
Rico segment also derives revenue from advertising and other revenue. Please see Item 7 
Managements Discussion and Analysis of Financial Condition and Results of Operations  Segment
Results of Operations. Our founders and principal stockholders are America Online, a subsidiary of Time Warner, and
the Cisneros Group. The Cisneros Group is a name used to describe a group of investments, joint
ventures, strategic alliances and companies that are associated with two of our directors, Ricardo
and Gustavo Cisneros, and trusts established by them principally for the benefit of themselves and
their families. Our principal executive offices are located at 6600 N. Andrews Ave., Suite 400, Ft.
Lauderdale, FL 33309, and our telephone number is (954) 689-3000. We were incorporated in Delaware
on November 22, 1999. Before August 7, 2000, our business was conducted by affiliates of AOL Latin
America, S.L., a limited liability company incorporated under the laws of Spain in December 1998.
AOL Latin America, S.L. was formed by America Online and the Cisneros Group as a joint venture. On
August 7, 2000, we reorganized our corporate structure. Available Information We make available free of charge on or through our Internet website our annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(Exchange Act) as soon as reasonably practicable after we electronically file such material
with, or furnish it to, the SEC. Our Internet address is http://www.aola.com/investors/. Our Services The AOLA Country Services and Web-Based Services Our AOLA country services and web-based interactive services offer the following features: Access to the Internet.We provide our members with access to and use of the Internet. A tool
bar allows members to move between the features and content on our online service and the
Internet. Online Community Features.We believe that our services promote interactive online
communities through features such as e-mail, web logs, Buddy Lists, AOL Instant Messenger and
online community centers. Channel Line-Up.Our services feature several channels including news, finance,
entertainment, Internet and computing, sports, local, lifestyles and shopping. Personalization and Control Features.Members to our AOLA country services and web-based
interactive services are able to personalize their interactive experience in varying degrees
through a number of features and tools, including parental and spam controls. Online and Offline Help.We offer our members both online help and offline customer
support services. Our AOLA country services and web-based interactive services help feature
assists members with their inquiries online. Offline, we have call centers providing live customer
service to members for technical support, currently 24 hours a day seven days a week. For billing
and other account and product inquiries, the call center is available during limited hours. The
cost of such member services support is free to members subscribing to bundled pricing plans,
although members may incur the cost of domestic telephone calls, except in Brazil where members
also incur the cost of long distance calls. Members subscribing to unbundled plans incur per call
charges and/or charges proportional to the amount of time required to service the call, in
addition to any costs for domestic telephone calls. 7




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Service Plans, Pricing and Collection Mechanisms. Service plans are priced according to
usage and the level of member services support selected by the member. In general,members are
able to select from one of several service plan combinations, including those that follow:  
    unlimited use plans inclusive of live member services support (unlimited bundled
plans), which offer unlimited online access and unlimited live member services support for
a fixed monthly fee;
    limited use plans, inclusive of live member services support (limited bundled plan),
which offer a combination of a fixed monthly fee for a specified number of hours of online
access with the option to spend additional time online, billed at an hourly rate, plus
access to unlimited live member services support; and
    unlimited access plans, exclusive of live member services support (unbundled plans),
which offer unlimited online access at a lower price than unlimited bundled plans. Member
services support, if requested by the member, is billed at a flat rate per service call or
based on the duration of the call to the call center. Most new members are selecting unbundled plans, which do not provide free call center
support. The following table sets forth the service plans and pricing that we offer in our markets as
of March 10, 2005. All references to the equivalent pricing in U.S. dollars reflect exchange rates
for the applicable local currencies as of March 10, 2005. Brazil
    
    
    
    
    
    
    
    
    Mexico
    
    
    
    
    
    
    
    
    Argentina
    
    
    
    
    
    
    
    
    Puerto RicoPrice
    
    
    VAT
    
    
    Total
    
    
    
    
    
    
    
    
    Price
    
    
    VAT
    
    
    Total
    
    
    
    
    
    
    
    Price
    
    
    VAT
    
    
    Total
    
    
    
    
    
    
    Price
    
    
    VAT
    
    
    TotalBundled AOLA Country
ServiceUnlimited Access
    
    
    
    12.93
    
    
    
    0.68
    
    
    
    13.61
    
    
    
    
    
    
    
    
    
    16.94
    
    
    
    2.54
    
    
    
    19.48
    
    
    
    
    
    
    
    
    
    10.88
    
    
    
    2.28
    
    
    
    13.16
    
    
    
    
    
    
    
    
    
    23.90
    
    
    
    
    
    
    
    23.9020 Hours
    
    
    
    7.33
    
    
    
    0.39
    
    
    
    7.72
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    15 Hours
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.56
    
    
    
    1.38
    
    
    
    7.9410 Hours
    
    
    
    5.48
    
    
    
    0.29
    
    
    
    5.76
    
    
    
    
    
    
    
    
    
    12.68
    
    
    
    1.90
    
    
    
    14.58
    
    
    
    
    
    
    
    
    
    4.95
    
    
    
    1.04
    
    
    
    5.99
    
    
    
    
    
    
    
    
    
    14.95
    
    
    
    
    
    
    
    14.955 Hours
    
    
    
    3.65
    
    
    
    0.19
    
    
    
    3.85
    
    
    
    
    
    
    
    
    
    8.43
    
    
    
    1.26
    
    
    
    9.69
    
    
    
    
    
    
    
    
    
    2.28
    
    
    
    0.48
    
    
    
    2.75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional Hour
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.53
    
    
    
    0.23
    
    
    
    1.76
    
    
    
    
    
    
    
    
    
    1.00
    
    
    
    0.21
    
    
    
    1.22
    
    
    
    
    
    
    
    
    
    2.95
    
    
    
    
    
    
    
    2.95Bring your own Access
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8.43
    
    
    
    1.26
    
    
    
    9.69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14.95
    
    
    
    
    
    
    
    14.9512 Month Unlimited
Prepaid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136.09
    
    
    
    20.41
    
    
    
    156.50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    06 Month Unlimited
Prepaid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    76.51
    
    
    
    11.48
    
    
    
    87.99Unbundled AOLA Country
ServiceUnlimited Access
    
    
    
    11.18
    
    
    
    0.59
    
    
    
    11.77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.56
    
    
    
    1.38
    
    
    
    7.94
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Additional Hour
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1.00
    
    
    
    0.21
    
    
    
    1.22
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Member Services Support
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.84
    
    
    
    0.18
    
    
    
    1.01
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Setup Fee
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.64
    
    
    
    0.56
    
    
    
    3.20
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Web-Based ServicesAOL Total/Conexis
    
    
    
    12.91
    
    
    
    0.68
    
    
    
    13.59
    
    
    
    
    
    
    
    
    
    10.13
    
    
    
    1.52
    
    
    
    11.65
    
    
    
    
    
    
    
    
    
    9.67
    
    
    
    2.03
    
    
    
    11.71
    
    
    
    
    
    
    
    
    
    14.95
    
    
    
    
    
    
    
    14.95AOL Executive
    
    
    
    9.06
    
    
    
    0.48
    
    
    
    9.54
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AOL Youth
    
    
    
    9.06
    
    
    
    0.48
    
    
    
    9.54
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AOL Lite
    
    
    
    7.31
    
    
    
    0.38
    
    
    
    7.70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    AOL Web without Member
Service
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6.33
    
    
    
    1.33
    
    
    
    7.65
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 We offer four versions of our web-based Internet connectivity service in Brazil:  1)
    AOL Total, which provides content and email services (seven addresses) similar to our
current AOL country services;2)
    AOL Executive, which focuses on news and sports relevant to adults and provides three
email addresses;3)
    AOL Youth, which provides content and services of interest to the youth segment and
provides three email addresses; and4)
    AOL Lite, which provides basic Internet connectivity, one email address, and minimal
content. We launched our broadband service in Brazil nationally in August 2003. The pricing of our
broadband service in Brazil varies depending upon our telecommunications partner. The Brazil service plans described above are also offered at discounts to monthly billing
rates for members who prepay their AOL service. Prepayment plans are offered for six and twelve
month periods. Additional discounts are offered for payments via credit cards. The price of all
Brazil service plans includes an amount equivalent to the 5.0% ICMS (Imposto 8




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sobre Circulação de
Mercadorias e Serviços) tax levied on telecommunications services in Brazil and paid to local tax
authorities. To date, the majority of our subscribers in Brazil have chosen unlimited service price
plans. The Argentina service plans described above are also offered at discounts to monthly billing
rates for members who prepay their AOL service. Prepayment plans are offered for six and
twelve-month periods. Additional discounts are offered for payments via credit cards. The Mexico plans described above are offered at discounts to monthly billing rates for members
who prepay their AOLA country service. Prepayment plans are offered for three, six and twelve-month
periods. Additionally, discounts are offered for payments via credit cards for any price plan. As
of December 31, 2004, approximately 41% of the membership base in Mexico were subscribers to one of
these prepaid plans. At the time our Mexican segment is either sold or ceases operations, members
of prepaid plans may have a claim against the Company for our failure to satisfy the full term of
their contracts. Furthermore, due to our current financial condition, we may cease offering prepaid
plans in the near future. In Puerto Rico, pricing for the AOL-branded service is based on service plans offered by
America Online in the United States. All service plans offered are bundled, and therefore include
unlimited call center support. We also offer Bring your own access, which refers to usage of the
AOL-branded service through a third-party Internet access provider. Prepaid plans offering
additional discounts are also available in Puerto Rico. In Puerto Rico, we also offer a web-based
connectivity service known as Conexis, which provides basic Internet connectivity, one email
address, and minimal content. Although we are actively promoting Conexis, we do not expect it to
become our primary product offering in Puerto Rico. We offer multiple mechanisms through which our members can pay us, including credit cards,
direct debits from bank accounts and cash payment methods (including boletos). Cash payment
methods historically have accounted for a substantial majority of all new member registrations in
Brazil, Mexico and Argentina. Cash payment methods are not available in Puerto Rico. The percentage
of new registrations selecting cash payment alternatives has been declining since we no longer
accept cash as a form of payment for new members in Brazil, and we no longer offer any free trial
period for new members selecting cash payments in Mexico. As of December 31, 2004, cash payment
mechanisms had been selected by approximately 8% of our subscribers in Brazil, 9% of our members in
Mexico and 41% of our members in Argentina, or by 9% of our total subscriber base. This compares
with 23% of members in Brazil, 31% of members in Mexico and 44% of members in Argentina who had
selected a cash payment option at December 31, 2003, accounting for 19% of our total subscriber
base. 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 historically have been lower and less timely. Throughout 2004 we
continued to encourage conversion of cash payment subscribers to non-cash payment options and to
terminate members who do not pay on a timely basis. In Mexico we have encouraged the sale of
long-term prepaid plans, which now account for 41% of current AOL Mexico members, and eliminated
free trial periods for members choosing the cash payment options. In Brazil we no longer offer cash
as a form of payment for new members. In addition, in Argentina and for existing members in Brazil,
we either offer discounts for non-cash payment options or apply surcharges to subscribers to our AOLA country and web-based interactive
services who choose cash payment options. Free Trial.We generally make our AOLA country services, the AOL-branded service in Puerto
Rico and our web-based interactive services available for free to new subscribers for a limited
period of time so they can experience our service offerings. We currently offer new subscribers to
our AOLA country services, including subscribers to the Banco Itaú co-branded service, a 30-day
free trial period from the date they register for the service. Subscribers to our web-based
interactive services who select cash payment options do not typically receive free trial periods.
In Mexico, we eliminated free trial periods entirely for members who choose cash payment options. Strategic Alliance with Banco Itaú In June 2000, we entered into a ten-year strategic alliance with Banco Itaú, one of the
largest banks in Latin America. Banco Itaú is obligated to market and promote a co-branded version
of our AOLA country service in Brazil as the principal means of accessing Banco Itaús interactive
financial services. We also market a version of our web-based interactive 9




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services in Banco Itaú
branches containing the same co-branded features as the country service. Our relationship with
Banco Itaú has been central to our marketing efforts in Brazil. On December 14, 2002, we amended our strategic marketing alliance with Banco Itaú. Under the
terms of the revised agreement, we now oversee, in large part, the marketing activities for the
co-branded service. Banco Itaú is obligated to establish kiosks and point-of-sale displays in
hundreds of its bank branches for the promotion of the co-branded services, which are staffed by
promoters trained by AOL Brazil. Potential subscribers are able to sample the co-branded services
and register in the bank branches. The number of promoters varies depending on the success of the
marketing efforts, which are reviewed every three months. If the marketing efforts do not meet
specified goals, the number of promoters may be decreased, subject to a floor on the number of
promoters. Conversely, if the marketing efforts exceed specified levels, the number of promoters
may be increased, subject to a maximum number of promoters. Banco Itaú is also required to
distribute, at our direction, CDs containing the software for the co-branded AOLA country service
via in-branch promotions and direct mail. Banco Itaú must also produce and broadcast a certain
number of television commercials promoting the co-branded services and provide exclusive online
banking benefits to subscribers to the co-branded services. Banco Itaú is responsible for the cost
of these marketing efforts. The modified marketing arrangements are scheduled to remain in effect through March 2006,
although the ten-year term of the agreement did not change. Banco Itaú is obligated to make cash
payments to us if minimum annual revenue targets and marketing commitments are not met through
March 2006. The maximum aggregate amount that Banco Itaú will be required to pay us if these
targets are not met, which we refer to as reference payments, is $21.0 million and $13.0 million in
2005 and 2006, respectively. We expect to receive no amounts from Banco Itaú for the March 24, 2005
measurement date because of payments we received from Banco Itaú in lieu of marketing as described
below. Beginning in the second half of 2003, as a result of lower than expected productivity, we
reduced the number of promoters in Banco Itaú branches. Because of this reduction and our
cancellation of certain CD distributions, Banco Itaú made payments to us of $4.7 million and $4.5
million during 2004 and 2003, respectively, in lieu of marketing activities it was obligated to
make under our revised marketing agreement. We expect these payments to continue in the near future
but the amounts to gradually decrease over time pursuant to the terms of the revised marketing
agreement. Should we cease operations, such payments may cease or differ materially from currently projected payments.
We have the right to redeploy or reinstate some of the promoters in the branches in the
future, in which case we would forego such payments from Banco Itaú. Such payments from Banco Itaú
are accounted for as funds from financing activities and will reduce future marketing expense by
lowering the amortization expense associated with the shares issued to Banco Itaú. Payments we
receive from Banco Itaú in lieu of marketing activities it is obligated to make serve to offset
amounts that may be owed as reference payments. Banco Itaús customers who register for the narrowband co-branded services currently are
entitled to a one-month free trial period, the length of which may be changed in the future and, if
they subscribe to the co-branded AOL country service on a monthly, bundled unlimited-use plan, are
entitled to a 20% discount. Banco Itaú, at its option, may subsidize hours for certain customers
who were subscribers to the co-branded service prior to December 14, 2002. For the years ended
December 31, 2004 and 2003, the amount of subsidies paid by Banco Itaú for its members was not
material. On March 16, 2005, the Companys management concluded that AOLA is not a going concern for
financial reporting purposes and eventually will not have sufficient funds to continue operations.
In light of that conclusion, management reviewed current contracts in effect and determined that
the recording of a full impairment of the remaining unamortized balance of unearned services
recorded as a result of its strategic marketing agreement with Banco
Itaú is necessary. Management
estimates that the amount of this non-cash impairment is
approximately $52.5 million, and will be
recorded in the first quarter of 2005. Our initial estimate of this impairment was $38.9 million. However, we revised our estimate based on additional analysis. Termination. In general, if we or Banco Itaú commit a material breach of our agreement and
fail to cure the breach, then the non-breaching party will have the right to terminate the
agreement after an arbiter reviews the matter and confirms the uncured material breach. If the
breach relates to an exclusivity provision, the non-breaching party may elect to continue the
agreement with the option to be relieved of the exclusivity provisions of the agreement applicable
to it. Banco Itaú may also terminate the agreement upon a change in control of AOLA. A material
breach of the agreement by us includes:  
    If subscribers are unable to access the co-branded service for specified periods of time; and 10




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
    Our breach of certain exclusivity obligations under the agreement. In addition, our agreement with Banco Itaú provides that if AOL Brazil becomes or is declared insolvent or bankrupt or ceases to
operate its business in the normal course, the agreement automatically terminates. Our agreement with Banco Itaú also
provides that if there is a change of control of AOLA (as defined in the agreement, but including the transfer of 60% or
more of the fair market value of its assets), Banco Itaú would have the right to terminate the agreement. Customer Service We offer online and offline customer support. Offline Customer Service.We have a regional customer call center in Argentina to provide
support for our Spanish-language members in Argentina, Mexico and Puerto Rico. We also have a
Portuguese-language call center, which has been outsourced to a third party in Brazil. Call center
support was consolidated in Argentina during 2002 for the AOL-branded service in Puerto Rico and in
early 2003 for the AOLA country service in Mexico to maximize operational efficiencies and benefit
from lower cost opportunities afforded by the steep devaluation of the Argentine peso. America
Online provides English-language support for members of the AOL-branded service in Puerto Rico. Our
customer service is free of charge for subscribers enrolled in our bundled services plans. It is
provided through toll-free telephone numbers in Mexico and Puerto Rico. In Brazil and Argentina,
the customer incurs the cost for local and long distance calls to our call centers. Email and live
chat support are also provided. Customers enrolled in our lower cost unbundled service plans incur
per call, per day or time-based charges for accessing live call center support. Online Help.Our AOLA country services and web-based interactive services provide
extensive help features to assist new users coming online for the first time. Members are able to
reach customer service representatives by e-mail and AOL Instant Messenger. The AOLA country
services also have the notify AOL feature that allows members to contact us for security
assistance and the download sentry alert feature that reminds members not to download files
attached to e-mails sent from strangers. Content Our AOLA interactive services feature content obtained from local, regional and global content
providers and member-generated content, including movie and book reviews, message board commentary
and online discussions. Our agreements with third-party content providers range from simple links between our
interactive services and the providers Web site to an integration of their content into our
interactive services. We attempt to select our content providers based on the quality and depth of
their content. Advertising and Other Revenues We generate a portion of our revenues from advertising on our online services. Such
advertising revenues are derived from third party relationships. Through our relationship with
America Online, we sometimes have the opportunity to participate in America Onlines global
advertising arrangements. We also generate additional revenues from other sources such as certain
programming services provided to America Online for its Latino content area and revenue sharing
agreements with certain local telecommunications providers, and limited call center support
services that we provide to AOL Germany. Advertising.We offer our advertisers programs for the marketing of products and services,
including:  
    Advertising arrangements under which we receive fees based on the number of
advertisements displayed on our interactive services or the performance of these
advertisement; and
    Sponsorship or co-sponsorship arrangements that allow advertisers to sponsor an area on
our interactive services in exchange for a fixed payment. In return for most advertising arrangements, we receive cash payments. We have also entered
into and may seek barter arrangements, including co-marketing and cross-promotion agreements. To
date, the number and effect of barter arrangements that we have entered into has not been material. Our advertising revenue in 2004 decreased from 2003 levels. We expect further reductions in
the future as a result of our reduced membership base, our lack of success in attracting
significant commitments from traditional media advertisers and the renegotiation of long-term
contracts at lower rates in 2004. A portion of our deferred revenues at December 31, 2004 included
deferred advertising revenues for online marketing efforts to be fulfilled in 2005. Although these
amounts 11




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are not material, in the event the Company is required to cease operations, current
advertising customers may not realize services for the full term of their contracts. Other Revenues.Other revenues are comprised of fees we receive from America Online for
programming services we provided to America Online for use on their Latino content area,
representation fees we receive from America Online for selling advertising on their interactive
services, fees we receive from local telecommunications companies for routing our traffic over
their networks and call center support services that we provide to AOL Germany. Other revenues also
include amounts received from an advertising agreement with Google. Revenues are generated based on
the volume of queries in our search tool. In February 2003, we entered into a one-year agreement for consulting services with America
Online under which we provided programming services to America Online related to America Onlines
Latino content area. This agreement expired in February 2004 and we received $750,000 pursuant to
this agreement for the period. An interim contract was in place for the period March through
September 2004. During that period we recognized $183,000 of revenues related to the interim
contract and programming work provided to America Online in 2003. A Localization
Services, Licensing and Content Programming Agreement was entered into as of September 2004. Under
this agreement, as amended, we provide America Online with programmers for their Latino content
area in the United States in exchange for an annual payment of $400,000. We also provide America
Online with certain localization services in exchange for America Online providing us with
localization engineering services. America Online may also elect to engage AOLA to provide other
localization services under this agreement. We received $100,000 in 2004 under the new agreement.
We expect the payments to be received by us under the Localization Services, Licensing and Content
Programming Agreement to exceed $60,000 in 2005 Because local telephone service in Latin America is often metered, the utilization of our AOLA
country services by our members results in incremental revenues to local telecommunications
companies. To encourage incremental traffic on their local networks by our members, local providers
of network access may enter into agreements compensating us for routing our traffic on their
networks. Currently, we have such agreements with telecommunications providers in Argentina and
Brazil. Under certain of these agreements, we receive payments based on the number of modems we
have connected to the telecommunications providers network. Such revenues have not been material
in the past and we do not expect such revenues to be material in the future. Marketing In the past, we typically distributed compact discs (CDs) containing the software for our
country service. These CDs offered new consumers the opportunity to use our online service free of
charge for a limited trial period and were distributed through a broad range of distribution
vehicles. Beginning in 2002, we largely ceased the mass distribution of CDs. Commencing in the second quarter of 2002, we began to reduce our spending on brand advertising
and acquisition marketing activities and we began to increase our reliance on co-branded and joint
marketing arrangements, where a third-party partner is responsible for implementing a significant percentage of the marketing
effort. In Brazil, our principal marketing arrangement is our strategic marketing agreement with
Banco Itaú. In Mexico and Puerto Rico, we have continued our reliance on existing distribution
channels, focusing primarily on targeted increases in the number of kiosks located at retail
locations such as shopping malls and general merchandise stores. Our reliance on the marketing
efforts of strategic partners has reduced the rate at which we use cash and has lowered our sales
and marketing expenses, since costs incurred by our partners are not accounted for in our results.
However, reliance on third-party arrangements has also increased the potential for unforeseen
events and delays over which we have limited control, as has been the case with McDonalds in
Brazil. In Argentina, we no longer market our services. Local and Long Distance Telephone Service, Telecommunications Network Capacity and Technology Local and Long Distance Telephone Service.In each of our Latin American target markets, our
members initiate access to our AOL country services through local and long distance dial-up
telephone lines or via TCP/IP through DSL or cable broadband access. The dial-up lines are owned
and operated by local and regional telephone service companies. Local and regional telephone or
cable companies provide the broadband connectivity. In most Latin American countries, local 12




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phone
service continues to be metered, which results in incremental variable cost to subscribers of our
country services. Metered phone service allows us to reduce expenses through revenue sharing
agreements with local phone companies in Brazil and also earn additional immaterial revenues in
Argentina. The telephone service industry in Latin America continues to undergo considerable change. Many
Latin American telephone companies in recent years have undertaken significant investments in their
infrastructure. These investments have resulted in an improvement in the quality of telephone
service in these countries. Although the telephone service industry in Latin America is
significantly less developed outside of major cities than in the U.S., we believe that the local
and long distance telephone service available is of adequate quality and sufficient capacity to
meet the needs of our members. Telecommunications Network Capacity.Third-party telecommunications network providers
transmit our online services data between the local and long distance telephone services used by
our members in Latin America and America Onlines servers, which run all of our interactive
services, in the U.S. and Brazil, as well as the Internet. These third-party networks provide the
modems that allow our members to establish a connection to our online services and the Internet.
They also carry our data between Latin America and the U.S. by satellite and through fiber optic
cable. In Brazil, we have contracts with Telefonica, Brazil Telecom and Telemar to carry our data
within Brazil and to provide the modems through which our members connect to our America Online
Brazil proprietary and web-based interactive services. Telefonica also carries our data from Brazil
to the U.S. through their own or affiliates networks or through third-party suppliers. Our
contracts with Telefonica and Embratel expire on December 31, 2005 and May 25, 2005, respectively.
Our contracts with Brasil Telecom and Telemar expire in April 2006 and July 2006, respectively. We
also have access to capacity provided by Progress Telecommunications Corporation (Progress)
through a contract between America Online and Progress, which expires in April 2011. America Online
invoices us for the capacity used by us and the maintenance under this agreement. In Mexico, we
have entered into a network contract with Avantel, an affiliate of MCI. Our contract with Avantel
expired in January 2005. We are currently operating under an
oral arrangement with Avantel, pending
negotiation of a new agreement. We also have an agreement with UNINET, a Telefonos de Mexico
affiliate, (Telmex) under which UNINET is obligated to provide us with network capacity through
June 30, 2005. In Argentina, we have entered into a network contract with Impsat. Our contract with
Impsat expired on March 1, 2005, and we are currently operating
under an undocumented extension. In Puerto
Rico, our dial-up network is provided by Centennial de Puerto Rico under a contract between America
Online and Centennial which expires in June 2007. Should we decide to cease operations, additional
payments or early contract termination penalties under some or all of these contracts may be
incurred. In each of our target markets we work closely with our network providers to ensure
satisfactory network performance. We work with network providers that have multiple operations
centers for network monitoring and we have developed quality control standards that our providers
must meet. Fiber optic cable is our preferred means of transmitting data between Latin America and
the U.S. because it offers greater capacity and is generally more reliable than satellite-based
transmissions. In each country where we operate our AOLA country services, we believe that we have secured
adequate network capacity. To ensure this going forward, we regularly forecast our needs and may
make adjustments based on marketing projections and other considerations. We believe our current
suppliers can and will provide us with sufficient network capacity. However, this capacity is based on our expectations of use in specific geographic
areas. Some of our contracts commit us to purchase minimum amounts of network capacity. If the
number of our subscribers, or their use of our online services, do not meet these minimums our per
unit network costs could increase. In recent years, we have paid penalties to telecommunications
providers to reduce network capacity as part of our efforts to size our infrastructure to members
who pay on a timely basis. Technology.Our main servers are owned and maintained by America Online in three locations in
Virginia in the United States and in São Paulo, Brazil. The AOLA content and the tools to operate
our online services are located on these servers. Our members can access our online services only through personal computers using the Windows
95, 98, ME, 2000 and XP operating systems and our Windows-compatible online service software. In
addition, users of WAP enabled phones in each country can access certain features and content of
the AOLA country services. Our online services support the V.90 standards for access at 56 kilobits
per second. In Brazil, our members can also access broadband services via cable and via DSL
connections. 13




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Competition We operate in the highly competitive and rapidly evolving businesses of online services and
Internet access, and online advertising. We compete primarily with providers of Spanish- and
Portuguese-language Internet access services. Our primary local competitors in our core target
countries include Universo Online (UOL) and Terra Lycos and free services provided by Internet
Gratis (iG), iTelefonica and iBest in Brazil; Telmex in Mexico, which has an alliance with
Microsoft for the development of content and offers a Prodigy-branded service; Ciudad Internet,
Advance, which is owned by Telefonica Argentina, UOL-Sinectis, and Arnet, which is owned by
Telecom, and free services provided by Fullzero, Tutopia and Alternativa Gratis in Argentina; and
Coquinet/PRT.net service offered by Telefonica de Puerto Rico and Caribe.net in Puerto Rico. The
regulatory environment in Brazil is supportive of providers of free Internet access in Brazil. As a
result, free Internet access providers have continued to attract significant numbers of new users
in Brazil. Our online service subscription fees for our country services and the co-branded service in
Puerto Rico are generally higher than those offered by competing online service providers because
we consider our service to be a premium service. In order to better compete with providers of
low-cost and free Internet services, during 2003 we launched our web-based services interactive
services in Brazil, Puerto Rico and Argentina. To date, our web-based services have not met our
expectations for attracting and retaining new members. We also compete for advertising revenues with traditional media such as newspapers, magazines,
radio and television. We believe that the principal competitive factors in generating advertising
revenue include the demographics of visitors, in addition to the number of visitors to an online
service or Internet site. Our lower membership levels have negatively impacted our ability to
provide advertisers with viewer impressions, and as a result advertising revenue has not recovered
in line with the overall market. The AOL License Agreement, Intellectual Property and Proprietary Rights Our license Under our license agreement with America Online, we have:  
    a royalty free, exclusive license to offer AOL-branded PC-based online services in Latin America;
    the exclusive right to offer AOL-branded TV-based online services in Latin America;
    the exclusive right to offer in Latin America any AOL-branded wireless-based online
services developed by America Online for commercial launch on or before August 7, 2004; and
    a non-exclusive license to offer a localized network of AOL-branded portals in Latin
America, with an option to license exclusively any Spanish or Portuguese-language
AOL-branded portals that America Online may develop for the Latin American market, subject
to our payment of a license fee. We also have the rights to use all related America Online proprietary software and technology
as well as AOL-registered domain names and principal trademarks in Latin America. We have interconnected our America Online Brazil, America Online Mexico and America Online
Argentina country services to the services provided by America Online and its international
affiliates. This interconnection provides our members with access to the AOL services and AOL
international interactive services and permits AOL members worldwide to access our AOLA country
services. America Online is obligated to license to us, or to use commercially reasonable efforts
to obtain for us, the license rights it has in third-party software products used in operating the
AOL-branded interactive services. These third-party licenses may be royalty-free or may require
payments by us. From December 15, 1998 through December 31, 2004, we did not make any payments to America
Online for services received under the license agreement. We believe that annual payments for these
services will not exceed $60,000 in the future. We have the same rights described above to offer CompuServe-branded services, although we no
longer offer the CompuServe-branded service. We only have the right to offer AOL and
CompuServe-branded interactive services. We do not have the right to offer ICQ, Netscape, MapQuest,
Moviefone or any other non-AOL-branded interactive service, which is owned by America Online or
Time Warner. We do not have the right to sub-license our rights under our license agreement with America
Online. Accordingly, any potential acquirer of any of our operating businesses would have to
negotiate such license rights directly from America Online. There is no assurance that any
such negotiations would be consummated on agreeable terms. 14




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Termination of our exclusive rights We will lose the exclusivity of our licensed rights:  
    to AOL-branded PC-based online services on the date which either America Online or the
Cisneros Group own 20% or less of the outstanding voting stock of AOLA outstanding on
August 7, 2000.
    to AOL-branded TV-based and wireless-based online services, upon the later of August 7,
2005 or the date on which either America Online or the Cisneros Group own 20% or less of
the outstanding voting stock of AOLA. For PC-based online services, the threshold number of shares is lowered if:  
    an additional strategic stockholder is admitted as a stockholder of AOLA;
    we issue more shares of our capital stock; or
    America Online exercises a warrant it holds to purchase 16,541,250 shares of our voting common stock. For TV and wireless-based online services, the threshold number of shares is lowered if:  
    an additional strategic stockholder is admitted as a stockholder of AOLA; or
    America Online exercises a warrant it holds to purchase 16,541,250 shares of our voting common stock. America
Online may terminate our rights under the license if we materially breach its terms. We do not believe
that the commencement of a proceeding under the U.S. Bankruptcy Code would
give rise to a termination right under our license agreement with America Online. Trademarks and domain names America Online has granted us rights to use in Latin America its registered trademarks
containing the AOL brand and domain names. We believe that America Online is taking appropriate
steps to protect its trademarks and domain name rights in Latin America. We rely on a combination of contract provisions and patent, copyright, trademark and trade
secret laws to protect our rights in our online services as licensed to us by America Online. We
have distributed and will continue to distribute software, licensed to us by America Online, for
our online services under agreements that grant members a license to use the software. We rely on
the protections afforded primarily by copyright laws to protect against the unauthorized
reproduction of the software. We also rely in part on electronic licenses, which members do not
manually sign, and instead agree to by clicking a button on their monitor screen. These licenses
may be unenforceable under the laws of Brazil, Mexico and Argentina and other jurisdictions in
Latin America. We attempt to protect our trade secrets and other confidential information through
agreements with employees and consultants. Although we intend to protect our rights vigorously, these measures may not be successful.
Policing unauthorized use of the software for our online services is difficult and the steps taken
may not prevent the misappropriation of our licensed
technology and intellectual property rights. Moreover, effective patent, trademark, trade
secret and copyright protection may be unavailable or limited in Latin America. America Online has obtained U.S. federal registrations for a number of trademarks and service
marks, including AOL, America Online, Buddy List, and AOLs triangle design logo, and has trademark
rights in the U.S. and abroad in many other proprietary names, including AOL Instant Messenger,
Youve Got Mail and CompuServe. We do not believe that our exercise of our licensed rights under our agreement with America
Online infringes on the proprietary rights of third parties. However, America Online has received
communications from third parties asserting that features, contents or names of some of our
services may infringe their patents, copyrights, trademarks and other rights. We are not involved
in any litigation of this type that would have a material adverse effect on our ability to develop,
market and sell or operate our services. We cannot assure that in the future third parties will not
make infringement claims against us for current or future features or the content of our services
or that any claim would not result in litigation or require us to enter into royalty or other
similar arrangements. Third parties may also challenge America Onlines marks and these challenges
may result in limitation or loss of our licensed rights to America Onlines proprietary marks. 15




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Government Regulation and Legal Uncertainties In Brazil, there are no license or registration requirements applicable to interactive
services. However, the Brazilian legislature is considering various laws that would regulate
interactive service providers, including laws that would create potential liabilities for ISPs
whose members offer illegal goods, services or information through their service, laws allowing
telecommunication providers to provide interactive services and laws regarding taxation of
interactive service providers. We cannot predict at this time whether or not these bills will be
enacted or, if enacted, whether they will undergo major changes or what any potential effect on our
business could be. We believe telephone regulations in Brazil may change. We cannot predict at this time when or
whether or not these regulations will be enacted. In addition, if enacted, we cannot predict what
the impact may be. In Mexico, the federal telecommunications law requires providers of value-added services,
including Internet access services, to register with the Mexican federal telecommunications
commission. We have complied with this registration requirement. In Argentina, Internet access providers must hold a correspondent license from the Argentine
telecommunications authority. We have received this license. The Argentine federal government does
not specifically regulate information available on the Internet. However, Argentine laws and
regulations on consumer protection, contract, competition and advertising generally apply to portal
and commerce service providers. In this respect, several judicial precedents have recognized the
applicability of commercial, criminal and civil law to Internet matters. Employees As of December 31, 2004, we had 669 full-time employees of whom 195 were located in Brazil,
108 in Mexico, 308 in Argentina, and 58 in the United States (of which 29 are in Puerto Rico). We
also had 182 contract employees. Our Executive Officers Please see Item 10 of Part III of this annual report for information regarding our executive
officers. 
 Item 2. Properties Our principal executive office is located in approximately 37,000 square feet of office space
in Fort Lauderdale, Florida, under a lease that expires in March 2006. Our Brazilian headquarters
are located in São Paulo in approximately 22,700 square feet of office space under lease, of which
approximately 11,000 square feet expire in July 2005 and the balance in August 2009. Our Mexican
headquarters are located in Mexico City in approximately 14,100 square feet of office space under a
lease expiring in October 2007. Our Argentina headquarters and call center, located in Buenos
Aires, is approximately 14,000 square feet of office space under a lease expiring in November 2005.
We also lease offices for part of our customer service operations in Argentina. It has
approximately 4,090 square feet under a contract expiring in March 2006. Our Puerto Rico
headquarters, located in San Juan, is approximately 5,000 square feet of office space under a lease
that expires in March 2008. 
 Item 3. Legal Proceedings From time to time, AOLA and its subsidiaries are involved in litigation relating to claims
arising out of their operations in the normal course of business. AOLA is not currently a party to
any legal proceedings, the adverse outcome of which, individually or in the aggregate, is expected
to have a material adverse effect on our financial position. 
 Item 4. Submission of Matters to a Vote of Security Holders On November 11, 2004, the holders of all our outstanding preferred stock voted by unanimous
written consent to approve, the transfer by AOL Mexico S. de R.L. de C.V. of its interest in AOL
Servicios Professionales S. de R.L. de C.V. (AOLSP) to another wholly owned subsidiary, AOL S. de R.L. de C.V. and the subsequent dissolution
of AOLSP following such transfer. 16




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On December 20, 2004, the holders of all our outstanding series B preferred stock voted by
unanimous written consent to appoint Joseph M. Redling and Neil Smit as class B directors of AOLA. 
 PART II 
 Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases
of Equity Securities Market Price of Common Stock Our class A common stock is traded on the Nasdaq SmallCap Market under the symbol AOLA. We
believe that our class A common stock has no value. See Preliminary Statement above. From August 8, 2000 to June 21, 2002, our class A common stock traded on the Nasdaq National
Market. From November 7, 2002 to January 29, 2003, our class A common stock traded under the
ticker AOLAC because our stock was under a conditional listing period due to non-compliance
with Nasdaqs minimum market capitalization requirement for continued listing. We regained
compliance with the minimum-listing requirement through the conversion of preferred stock into
class A common stock by America Online and the Cisneros Group in January 2003. On June 15, 2004,
the Nasdaq staff informed us that our class A common stock failed to maintain a minimum bid price
of $1.00 over the 30 consecutive trading days prior to such date, as required to remain listed on
the Nasdaq SmallCap Market. In accordance with Nasdaq rules, we were given 180 calendar days, or
until December 13, 2004, to regain compliance with this requirement. Since our class A common
stock had an aggregate market value exceeding $50 million based on the closing bid price on
December 13, 2004, we received a second 180-day grace period ending on June 13, 2005 to correct
the minimum bid price deficiency. The closing bid price of our class A common stock must be above
$1.00 for at least ten consecutive trading days starting no later than May 31, 2005 or our class
A common stock will be delisted from the Nasdaq SmallCap Market. We expect that our class A
common stock will be delisted. No shares of our class B common stock or class C common stock are outstanding and,
accordingly, no established trading market for our class B common stock or class C common stock
exists. The following table sets forth, for the periods indicated, the low and high sales prices
per share of the class A common stock as reported on the Nasdaq National Market or Nasdaq
SmallCap Market, as applicable, since the first quarter of 2003. The table also sets forth the
closing price of our class A common stock as of the last trading day in the period indicated. Low
    
    
    High
    
    
    Close2004October 1, 2004 through December 31, 2004
    
    $
    0.36
    
    
    $
    0.97
    
    
    $
    0.75July 1, 2004 through September 30, 2004
    
    
    0.21
    
    
    
    0.71
    
    
    
    0.44April 1, 2004 through June 30, 2004
    
    
    0.56
    
    
    
    1.29
    
    
    
    0.69January 1, 2004 through March 31, 2004
    
    
    1.07
    
    
    
    2.03
    
    
    
    1.122003October 1, 2003 through December 31, 2003
    
    $
    1.05
    
    
    $
    2.75
    
    
    $
    1.42July 1, 2003 through September 30, 2003
    
    
    0.56
    
    
    
    2.10
    
    
    
    1.05April 1, 2003 through June 30, 2003
    
    
    0.35
    
    
    
    0.93
    
    
    
    0.60January 1, 2003 through March 31, 2003
    
    
    0.36
    
    
    
    0.75
    
    
    
    0.41
 Stockholders There were 699 holders of record of class A common stock as of March 18, 2005. 17




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##### Table of Contents



Dividends We have never declared or paid any cash dividends on our shares of class A common stock. To
date we have not, and will not, accumulate any retained earnings nor do we expect to do so in the
foreseeable future. Therefore, we do not anticipate paying any cash dividends on our shares of
class A common stock in the future. In addition, under the terms of the senior convertibles notes
(see discussion in Item 7. - Managements Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources), we are not permitted, without the
consent of the holders of the notes, to declare or pay any dividends on our capital stock other
than dividends on preferred stock in accordance with the terms of such preferred stock and payable
only in additional shares of preferred stock. The special committee of our board of directors, which consists of one director appointed by
each of America Online and the Cisneros Group, must unanimously approve the payment of any
dividends before our full board of directors can approve a dividend payment. Further, before the
payment of any dividends on our shares of class A common stock, we must pay dividends, payable in
series B and series C preferred stock, as and when declared by our board of directors, on our
shares of series B and series C preferred stock. 
 Item 6. Selected Financial Data The selected consolidated financial data set forth below for each of the three years in the
period ended December 31, 2004 are derived from our audited consolidated balance sheets as of
December 31, 2004 and 2003 and the related audited consolidated statements of operations, of
stockholders equity and of cash flows for each of the three years ended December 31, 2004, 2003
and 2002, which are included elsewhere in this report. The selected consolidated
financial data set forth below should be read in conjunction with, and are qualified by reference
to, Item 7. - Managements Discussion and Analysis of Financial Condition and Results of
Operations and our audited consolidated financial statements. (In thousands, except share, and per share amounts) Six MonthsYEAR ENDED
    
    
    Ended
    
    
    Year EndedDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    June 30,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000
    
    
    2000Condensed Consolidated OperationsRevenues:Subscription
    
    $
    48,816
    
    
    $
    59,415
    
    
    $
    62,998
    
    
    $
    49,918
    
    
    $
    8,050
    
    
    $
    5,848Advertising and other
    
    
    3,602
    
    
    
    5,759
    
    
    
    9,109
    
    
    
    16,525
    
    
    
    4,423
    
    
    
    3,35252,418
    
    
    
    65,174
    
    
    
    72,107
    
    
    
    66,443
    
    
    
    12,473
    
    
    
    9,200Costs and expenses
    
    
    111,284
    
    
    
    148,835
    
    
    
    228,736
    
    
    
    361,511
    
    
    
    212,588
    
    
    
    109,124Loss from operations
    
    $
    (58,866
    )
    
    $
    (83,661
    )
    
    $
    (156,629
    )
    
    $
    (295,068
    )
    
    $
    (200,115
    )
    
    $
    (99,924
    )Net loss applicable to common stockholders
    
    $
    (92,671
    )
    
    $
    (116,608
    )
    
    $
    (180,591
    )
    
    $
    (307,320
    )
    
    $
    (205,662
    )
    
    $
    (97,913
    )Loss per common share, basic and diluted
    
    $
    (0.69
    )
    
    $
    (0.88
    )
    
    $
    (2.69
    )
    
    $
    (4.66
    )
    
    $
    (4.24
    )
    
    
    N/AWeighted average number of common shares outstanding
    
    
    135,246,144
    
    
    
    132,903,430
    
    
    
    67,067,603
    
    
    
    66,017,796
    
    
    
    48,496,436
    
    
    
    N/A
 AS OFDecember 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    December 31,
    
    
    June 30,2004
    
    
    2003
    
    
    2002
    
    
    2001
    
    
    2000
    
    
    2000Cash and cash equivalents
    
    $
    22,167
    
    
    $
    31,899
    
    
    $
    75,501
    
    
    $
    46,676
    
    
    $
    132,866
    
    
    $
    33,321Total assets
    
    $
    37,724
    
    
    $
    55,739
    
    
    $
    100,274
    
    
    $
    84,384
    
    
    $
    179,031
    
    
    $
    55,640Stockholders equity (capital deficiency)
    
    $
    (149,527
    )
    
    $
    (132,959
    )
    
    $
    (97,086
    )
    
    $
    21,123
    
    
    $
    123,821
    
    
    $
    23,319Working
capital (deficit)
    
    $
    (153,045
    )
    
    $
    17,009
    
    
    $
    53,001
    
    
    $
    806
    
    
    $
    111,243
    
    
    $
    13,261
 For a discussion of material uncertainties with respect to the data presented that may
make such data not indicative of our future financial condition or results of operations, see
Item. 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations. 18




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Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Overview. As noted above in our Preliminary Statement, we do not expect to reach cash flow break even
with available cash on hand, and we do not have sufficient funds to continue operations beyond the third quarter of 2005. In addition,
 we will not be able to obtain additional financing from Time
Warner, America Online, the Cisneros Group, Banco Itaú or any other source. While we continue our
efforts to sell our businesses or specified assets, Time Warner, the holder of $160 million of our
senior convertible notes, has the right to require us to use the proceeds from any sale transaction
to repay the senior convertible notes. In addition, our preferred stock has a current aggregate
liquidation preference of approximately $599 million, excluding accrued but unpaid dividends. We incurred cumulative net operating losses of approximately $928.8 million from December 15, 1998, the date of our
inception, through December 31, 2004. We expect to continue to incur additional losses and will not be able to continue
normal operations indefinitely. Publicity surrounding our financial condition, including the likelihood that we will cease
operations, may negatively impact our revenues, membership and cash balances. Even if we are successful in selling all of our businesses, the proceeds will not be
sufficient to repay the senior convertible notes, and none of those proceeds will be available to
our common stockholders. As a result, we do not believe that our common stock has, or will have,
any value. Any potential sale of our businesses
requires the consent of our preferred stockholders and the consent of Time Warner, the holder of our senior
convertible notes. We do not have the right to sub-license our rights under our license agreement with
America Online. Accordingly, any potential acquirer of any of our operating businesses would have to negotiate
such license rights directly from America Online. There is no assurance that any such negotiations would be
consummated on agreeable terms. Any person considering an investment in our securities is urged to consider both the risk that
we will cease operations in the near future and the risk that our securities are, and will be,
worthless even assuming completion of one or more strategic transactions. The audited consolidated financial statements included in this report have been prepared on a
going concern basis, which contemplates the realization of assets and satisfaction of liabilities
and commitments in the normal course of business. On March 16, 2005, management concluded that AOLA
is not a going concern for financial reporting purposes and eventually will not have sufficient
funds to continue operations. In light of that conclusion, management reviewed current contracts in
effect and determined that the recording of a full impairment of the remaining unamortized
balance of unearned services recorded as a result of our strategic marketing agreement with Banco
Itaú was necessary. Management estimates that the amount of this non-cash impairment is
approximately $52.5 million and will be recorded in the first quarter of 2005. Our initial estimate of this impairment was $38.9 million. However, we revised our estimate based on additional analysis. In
addition, we may be in default under the senior convertible notes held by Time Warner
Inc. This may have automatically accelerated our obligation to repay these notes and, therefore,
the full $160 million may be immediately due and payable. We do not have sufficient funds available
to repay this debt. In addition, Ernst & Youngs LLPs audit report on our consolidated financial
statements contains a going concern qualification because of its doubts about our ability to
continue as a going concern. If a determination is made to liquidate the Company, or it is probable that a liquidation is imminent, we will be required to
change our basis of accounting to the liquidation basis of
accounting. No such adjustments have been made to the audited
consolidated financial statements contained in this report. All of the statements set forth in this report are qualified by reference to the foregoing and
to the Preliminary Statement and the risk factors contained within this report. During 2004, we continued to focus our efforts on minimizing cash utilization. These efforts
allowed us to reduce our operating losses despite continuing declines in revenues. This focus had
several important impacts on our fiscal 2004 results, as compared with 2003 results:  
    a reduction in operating loss and cash utilization;
    a reduction in our costs of revenues, sales and marketing expenses and other expenses; and
    a decrease in our total membership (from 462,000 at December 31, 2003 to 415,000 at December 31, 2004). We launched web-based services in Brazil and Argentina in the second half of 2003. In February
2004, we also launched a low-cost web-based service in Puerto Rico. To date, our web-based services
have not met our expectations for attracting and retaining new members. Approximately 21.4% of the
membership totals as of December 31, 2004, were subscribers to our narrowband web-based interactive
services. Results to date indicate that membership turnover is slightly lower for our web-based
offerings than for our AOLA country services, although we believe this slight improvement is not
sufficient to enable us to achieve cash self-sufficiency. 19




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Our rate of member acquisitions has also been affected by reduced marketing expenditures and
our increased focus on marketing efficiency. Given our intention to continue to decrease our
investment in brand advertising and marketing acquisition activities, we expect our subscription
revenues to decrease in the future driven by the continued reductions in paying members.
Additionally, registrations rates and member turnover rates, and therefore total membership,
continue to be negatively impacted by competition in all segments. The decreases in our membership
levels are in direct contrast to increasing Internet usage in all sectors in which we operate. The
regulatory environment in Brazil, under which the cost of local Internet connection calls results
in incremental revenues to local telephone companies, continues to be supportive of lower-cost and
free Internet service providers. As a result, the Brazilian market has continued to experience a
proliferation of new competitors. Despite positive membership growth in the last quarter of 2004, we anticipate that our
membership will once again decline during the first quarter of 2005 to approximately 404,000
members at March 31, 2005. Due to lack of funds to invest in brand advertising and
marketing acquisition activities, we believe our membership base will continue to decline. Membership in our Banco Itaú co-branded service increased from approximately 103,000 members
at December 31, 2003 to approximately 108,000 members, or 26% of our total membership base, at
December 31, 2004 primarily as a result of the introduction of broadband services in our Brazil
market. Total
membership counts include members of our AOL country services, the
AOL-branded service in Puerto Rico, our web-based interactive
services and broadband offerings, as well as members of the co-branded Banco Itaú service. Our
membership totals also include members participating in free trial periods and retention programs.
As of December 31, 2004, 90% of our members, including members still in their trial periods, had
selected credit cards, direct debit and other non-cash payment options, which have a better rate of
collection than cash-payment methods. Approximately 9% of our total subscribers at December 31,
2004, were in free trial periods. In January 2003, we entered into a five-year agreement with McDonalds to market our service
via kiosks in McDonalds restaurants in Brazil. We paid McDonalds an initial fee of approximately
$2.1 million and are required to pay an annual fee of up to $1.0 million. In addition, we also are
required to pay McDonalds a fee for each new member who becomes a paying member of our service in
Brazil. We launched the project in October 2003. The implementation of this agreement has been
subject to a number of delays. In March 2004, we modified our agreement with McDonalds under which, among other things,
McDonalds was required to establish functioning kiosks in 550 of its restaurants by August 31,
2004. On that date, we and McDonalds concluded that only 375 restaurants were functioning.
Therefore, McDonalds paid us a penalty of approximately $0.8 million. For accounting purposes the
amount was netted against our initial investment of $2.1 million and will reduce our amortization
of the balance of our investment. The next measurement date will be March 31, 2005, at which point
the required target is to establish functioning kiosks in 600 of its restaurants. Implementation under the terms of the modified agreement remains behind schedule, and we do
not expect that McDonalds will be able to satisfy its obligations under the agreement by March
31, 2005, as required. Overall productivity has been low in McDonalds restaurants where kiosks
have been established. McDonalds has not become a significant member acquisition channel and we
no longer expect McDonalds to become one. While we believe that the failure to successfully
implement the McDonalds project adversely affected the acquisition of new members, it did not
have a material financial impact in 2004, other than the $0.8 million
penalty we received as described above. We intend either to renegotiate the terms of agreement, including the elimination
of annual maintenance fees, to negotiate a termination of the agreement or to cease performing our
obligations under the agreement. If the agreement is terminated, we anticipate the recording of a
net impairment charge of approximately $0.8 million related to the initial fee we paid McDonalds
in 2003 which is currently being amortized over the life of the agreement. The outcome of any
decisions may have an additional material adverse affect on our financial condition. Commencing in the second quarter of 2002, we began to reduce our spending on brand
advertising and acquisition marketing activities and we began to increase our reliance on
co-branded and joint marketing arrangements, where a third-party partner is responsible for
implementing a significant percentage of the marketing effort. In Brazil, our principal 20




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marketing arrangement is our strategic marketing agreement with Banco Itaú. In Mexico and Puerto Rico, we
have continued our reliance on existing distribution channels, focusing primarily on targeted
increases in the number of kiosks located at retail locations such as shopping malls and general
merchandise stores. Our reliance on the marketing efforts of strategic partners has reduced the
rate at which we use cash and has lowered our sales and marketing expenses, since costs incurred
by our partners are not accounted for in our results. However, reliance on third-party
arrangements has also increased the potential for unforeseen events and delays over which we have
limited control, as has been the case with McDonalds in Brazil. Although historically we have
been able to decrease our marketing expenditures, we will be unable to significantly reduce these
expenditures further. Due to our limited liquidity we will not be able to invest adequately in
marketing activities and this will negatively impact our membership base. During 2004, we experienced a decrease in our subscription revenues as compared with the prior
year. This reduction was driven by the loss of paying members. The loss of paid membership occurred
primarily in Brazil and Mexico, while Puerto Rico increased slightly. The loss of paying members
has been the main factor driving lower subscription revenues in 2004. We expect that due to lack of
funds to invest in marketing activities, and the likelihood of a sale or the cessation of
operations, our membership base and subscription revenues will continue to decline. Advertising and other revenue continued to decrease throughout 2004, despite an improved
online advertising environment in Latin America. We expect our advertising and other revenues to
continue decreasing in 2005. Advertising revenues are expected to decrease due to reduced
advertising sales and lower membership levels. Other revenues are expected to decrease due to the
renegotiation of our agreement to provide programming services to America Online for their Latino
content area at lower rates. Consolidated Results of Operations Revenues.Total revenues consist of subscription revenues and advertising and other revenues.
The following table presents the components of our revenues for the years ended December 31, 2004,
December 31, 2003 and December 31, 2002. (In thousands, except percentages) YEAR ENDEDDecember 31,
    
    
    December 31,
    
    
    
    
    
    
    %
    
    
    December 31,
    
    
    
    
    
    
    %2004
    
    
    2003
    
    
    Change
    
    
    Change
    
    
    2002
    
    
    Change
    
    
    ChangeRevenuesSubscription
    
    $
    48,816
    
    
    $
    59,415
    
    
    $
    (10,599
    )
    
    
    (17.8
    )%
    
    $
    62,998
    
    
    $
    (3,583
    )
    
    
    (5.7
    )%Advertising and other
    
    
    3,602
    
    
    
    5,759
    
    
    
    (2,157
    )
    
    
    (37.5
    )
    
    
    9,109
    
    
    
    (3,350
    )
    
    
    (36.8
    )$
    52,418
    
    
    $
    65,174
    
    
    $
    (12,756
    )
    
    
    (19.6
    )%
    
    $
    72,107
    
    
    $
    (6,933
    )
    
    
    (9.6
    )%Distribution of revenuesSubscription
    
    
    93.1
    %
    
    
    91.2
    %
    
    
    
    
    
    
    
    
    
    
    87.4
    %Advertising and other
    
    
    6.9
    %
    
    
    8.8
    %
    
    
    
    
    
    
    
    
    
    
    12.6
    %100.0
    %
    
    
    100.0
    %
    
    
    
    
    
    
    
    
    
    
    100.0
    %
 Subscription revenues.We derive our subscription revenues from members paying fees to
subscribe to our AOLA country services and to our web-based interactive services, and from revenues
received from America Online related to subscribers to the AOL-branded service in Puerto Rico.
Subscription revenues do not include amounts paid to us by Banco Itaú on behalf of its customers
for subsidies that it chooses or was required to make. Such receipts from Banco Itaú are netted
against and recorded as a reduction of marketing expenses and thus are not accounted for as
subscription revenues. Amounts paid directly to us by subscribers that exceed any time subsidized
by Banco Itaú are included in subscription revenues. Under the terms of the revised marketing
agreement, Banco Itaú is no longer required to subsidize its customers who are subscribers to the
co-branded service. As a result, subsidies from Banco Itaú for its customers were not material as
of the second half of 2003. We do not expect subsidies from Banco Itaú for its customers to be
material in future periods. 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 begin
to recognize subscription revenues when we receive payment. 21




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##### Table of Contents



Advertising and other revenues.Advertising and other revenues is derived principally from:  
    Advertising arrangements under which we receive fees for advertisements displayed on our
interactive services;
    Advertising sponsorship or co-sponsorship arrangements that allow advertisers to sponsor
an area on our interactive services in exchange for a fee;
    Fees we receive from America Online for programming services we provide to America
Online for use on their Latino content area;
    Representation fees we receive from America Online for selling advertising on their interactive services; and
    Revenue sharing arrangements with local telecommunications providers. Because local telephone service in Latin America is often metered, the utilization of our AOLA
country services and of our web-based interactive services by our members results in incremental
revenues to local telecommunications companies. To encourage incremental traffic on their local
networks by our members, some local providers of network access have entered into agreements
compensating us for routing our traffic on their networks. Subscription Revenues Fiscal 2004 Compared to Fiscal 2003 Subscription revenues for the year ended December 31, 2004 were $48.8 million, a decrease of
$10.6 million, or 17.8%, as compared to the year ended December 31, 2003. For 2004, the decline in
subscription revenues versus the prior-year period was driven by the loss of paid members in all
operating segments except Puerto Rico. The loss of paying subscribers was primarily a result of
increased competition, which resulted in members lost through attrition. New member registration
rates were lower than necessary to replace membership attrition, and have been negatively impacted
as well by the problems related to the low productivity of the McDonalds initiative in Brazil and
the lack of alternative member acquisition channels. On a sequential quarter basis, reported subscription revenues remained flat in the fourth
quarter of 2004 as compared to the quarter ended September 30, 2004. We expect subscriber revenues to continue to decrease as a result of increased levels of
competition and limited investment in brand advertising and marketing acquisition required to bring
new registrations to offset regular membership attrition. Furthermore, the likelihood of ceasing
operations may result in a significant drop in our membership and revenue levels. As of December 31, 2004 approximately 41% of the membership base in Mexico subscribed to
prepaid plans. The Company has recorded approximately $4.5 million of deferred subscription revenue
at December 31, 2004. In the event the Company ceases operations, current members on prepaid plans
may have a claim against the Company for our failure to satisfy the full terms of their contracts.
Furthermore, due to the Companys current financial condition, we may decide to cease offering
prepaid plans in the near future. Fiscal 2003 Compared to Fiscal 2002 Subscription revenues for the year ended December 31, 2003 were $59.4 million, a decrease of
$3.6 million, or 5.7%, as compared to $63.0 million in the year ended December 31, 2002. For 2003,
the overall decrease in subscription revenues as compared to the prior year was primarily due to
currency devaluation. Currency devaluation reduced revenues by $3.7 million during the 2003 fiscal
year. Excluding the impact of currency devaluation, however, subscription revenues gains in Puerto
Rico were offset by subscription revenue losses in Brazil, Mexico and Argentina. Furthermore, in
the second half of 2003, losses in paying subscribers began to drive decreases in total
subscription revenues. Increased competition and reduced marketing expenditures resulted in a lower
level of registrations, which was insufficient to replace members lost through attrition. This
resulted in a lower number of paying subscribers. Advertising and Other Revenues Fiscal 2004 Compared to Fiscal 2003 22




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##### Table of Contents



For the year ended December 31, 2004, revenue from advertising and other was $3.6 million, a
decrease of $2.2 million, or 37.5%, from $5.8 million in the year ended December 31, 2003. The
decrease in advertising and other revenues resulted primarily from our failure to convince
advertisers to redirect resources from traditional media channels to our interactive services and
reduced revenues from America Online for programming services we provided for their Latino content
area. Sequentially, advertising and other revenue in the fourth quarter of 2004 experienced an
increase of $41,000 or 3.6%, from $1.2 million in our fiscal 2004 third quarter. We expect advertising and other revenue to further decrease during fiscal 2005, driven by
continued weak advertising. We have not been successful in convincing advertisers in Latin America
to redirect resources from traditional media channels to online advertising on our services. The
reduction in membership levels we experienced in 2004 and that we expect to experience during 2005
is also expected to further restrict our ability to generate revenue from advertising by reducing
our ability to generate consumer impressions. Furthermore, advertisers concern regarding our
financial condition may result in a significant decline in advertising and other revenue levels. As of December 31, 2004, deferred advertising and other revenues amounted to $0.3 million,
remaining flat as compared to December 31, 2003. Deferred revenues from advertising and other
consists of payments received in advance of our delivery of the related service and are recognized
as income as the services are delivered. In the event the Company ceases operations, current
advertising customers may have a claim against the Company for our failure to satisfy the full term
of their contracts. During the year ended December 31, 2004, advertising and other revenues from related parties
accounted for approximately 30.3%, or $1.1 million, of the $3.6 million recorded for the period, as
compared with $1.8 million in 2003. Advertising revenue from Banco Itaú amounted to $0.7 million in
2004. Other revenue from America Online in 2004 was $0.4 million, and consisted primarily of fees
for certain programming services we provided to America Online for their Latino content area and of
representations for advertising sold by us on the America Online service in the U.S. Fiscal 2003 Compared to Fiscal 2002 For the year ended December 31, 2003, revenue from advertising and other was $5.8 million, a
decrease of $3.4 million, or 36.8%, from $9.1 million in the year ended December 31, 2002. The
decrease in advertising and other revenue resulted primarily from our failure to convince
advertisers to redirect resources from traditional media channels to our interactive services,
partially offset by increased revenue from America Online for our programming services related to
their Latino content area Costs and expenses.The following table presents the components of costs and expenses for the
years ended December 31, 2004, December 31, 2003 and December 31, 2002. (In thousands, except percentages) YEAR ENDEDDecember 31,
    
    
    December 31,
    
    
    
    
    
    
    %
    
    
    December 31,
    
    
    
    
    
    
    %2004
    
    
    2003
    
    
    Change
    
    
    Change
    
    
    2002
    
    
    Change
    
    
    ChangeCosts and expenses:Cost of revenues
    
    $
    33,957
    
    
    $
    56,387
    
    
    $
    (22,430
    )
    
    
    (39.8
    )%
    
    $
    98,695
    
    
    $
    (42,308
    )
    
    
    42.9
    %Sales and marketing
    
    
    49,519
    
    
    
    65,397
    
    
    
    (15,878
    )
    
    
    (24.3
    )
    
    
    97,170
    
    
    
    (31,773
    )
    
    
    32.7General and administrative
    
    
    23,799
    
    
    
    27,051
    
    
    
    (3,252
    )
    
    
    (12.0
    )
    
    
    32,871
    
    
    
    (5,820
    )
    
    
    17.7Impairment of Argentina VAT receivable
    
    
    4,009
    
    
    
    
    
    
    
    4,009
    
    
    
    100.0
    
    
    
    
    
    
    
    
    
    
    
    Total costs and expenses
    
    $
    111,284
    
    
    $
    148,835
    
    
    $
    (37,551
    )
    
    
    (25.2
    )%
    
    $
    228,736
    
    
    $
    (79,901
    )
    
    
    34.9
    %As a percentage of total costs
and expenses:Cost of revenues
    
    
    30.5
    %
    
    
    37.9
    %
    
    
    
    
    
    
    
    
    
    
    43.1
    %Sales and marketing
    
    
    44.5
    %
    
    
    43.9
    %
    
    
    
    
    
    
    
    
    
    
    42.5
    %General and administrative
    
    
    21.4
    %
    
    
    18.2
    %
    
    
    
    
    
    
    
    
    
    
    14.4
    %Impairment of Argentina
VAT receivable
    
    
    3.6
    %
    
    
    0.0
    %
    
    
    
    
    
    
    
    
    
    
    0.0
    %Total costs and expenses
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    
    
    
    
    
    
    
    
    100.0
    %
 23




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##### Table of Contents



Cost of Revenues.Cost of revenues includes:  
    network-related costs consisting primarily of fees paid to third parties to carry our
data over their telecommunications networks;
    personnel and related costs for customer support and in-house product and content development;
    fees we pay to America Online for use of their servers that run our interactive services (i.e. hosting services);
    fees we pay to America Online for technical support and training;
    fees we pay to America Online for product development;
    fees paid to third-party content providers; and
    collection costs and certain miscellaneous taxes. Fiscal 2004 Compared to Fiscal 2003 For the year ended December 31, 2004, cost of revenues was $34.0 million, a decrease of $22.4
million, or 39.8% as compared with $56.4 million in the year ended December 31, 2003. The decrease
was driven by lower network and telecommunications costs and member services costs, reflecting the
renegotiation of network unit costs. These reductions were in addition to cost reduction efforts
taken in 2003. Product development costs, which are primarily driven by development needs for our
AOLA country services, also decreased in 2004 as a result of our strategic focus on web-based
services. Costs of revenue accounted for 30.5% of our total costs in 2004, down from 37.9% in the
prior-year period. Currency fluctuations had a minimal effect on cost of revenues during the 2004
fiscal year. Cost of revenues paid to related parties primarily consists of payments made or due to America
Online and its affiliates for the costs of hosting, maintenance, product development and other
technical support services for our country operations. During the years ended December 31, 2004 and
2003, the cost of these services amounted to $7.5 million and $11.7 million, respectively. The decrease was driven by a reduced average membership base
which directly impacted hosting fees, as well as a reduction of approximately 40% in the cost per
hour of hosting fees. As of December 31, 2003, America Online had billed us approximately $3.8
million over and above amounts we had recorded in our statements of operations. The difference
related to a portion of items under dispute, primarily for support services provided by America
Online. This dispute was settled in our favor in February 2004 in a manner which was consistent
with our historical accounting treatment and which did not have any cash impact on our financial
condition. America Online is no longer seeking payment for these amounts. Fiscal 2003 Compared to Fiscal 2002 For the year ended December 31, 2003, cost of revenues was $56.4 million, a decrease of $42.3
million, or 42.9% as compared with $98.7 million in the year ended December 31, 2002. The decrease
was driven by lower network and telecommunications costs and member services costs, reflecting the
renegotiation of network unit costs, including the impact for the full year of zero-port cost
arrangements with telecommunications providers, and the consolidation and outsourcing of our member
services operations. Hosting costs were also lower, reflecting lower usage, primarily as a result
of our termination of members who were delinquent in their payments of fees to us. These reductions
were in addition to cost reduction efforts taken in 2002. Product development costs, which are
primarily driven by development needs for our AOLA country services, also decreased in 2003 as a
result of our strategic focus on web-based services. Cost of revenues in fiscal 2003 also reflected
lower one-time charges. 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 such as the costs of kiosks and
related support and the costs of CDs and their distribution 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 unearned services related to Banco Itaús strategic marketing
agreement (see Strategic Alliance with Banco Itaú in
Item 1 - Business, as well as Note 4 to our
audited consolidated financial statements). 24




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##### Table of Contents



Fiscal 2004 Compared to Fiscal 2003 The
24.3% reduction in sales and marketing expenditures, to $49.5 million from $65.4 million
for the years ended December 31, 2004 and 2003, respectively, was driven by reductions in member
acquisition activities, brand marketing costs and lower amortization of the value of the shares of
our class A common stock issued to Banco Itaú. The reduction in member acquisition costs was
achieved through a reduction in mailing of CDs containing our software as well as fewer staffed
kiosks. During 2004, we continued to evaluate the productivity of our kiosks located at Banco Itaú
branches and at retail locations in Brazil, Mexico and Puerto Rico, and we closed those with lower
than acceptable levels of registrations. As a result, we had 300 kiosks in operation inside the
Banco Itaú branches throughout 2004 instead of a
maximum of 600 kiosks in accordance with the revised contract. Excluding the kiosks located inside
Banco Itaú branches and McDonalds restaurants in Brazil, the average number of kiosks in 2004 was
reduced by 46% to 102 when compared to 2003. In addition, we cancelled certain CD distributions Banco Itaú was obligated to make, but did
not at our request. As a result of the cancellation of marketing activities Banco Itaú was
obligated to make, pursuant to the terms of our revised marketing agreement, we received from Banco
Itaú payments of approximately $4.7 million and $4.5 million during 2004 and 2003, respectively, in
exchange for advertising on our service in lieu of the marketing activities they were obligated to
undertake. We expect these payments to continue in the future but the amounts to gradually decrease
pursuant to the terms of the revised marketing agreement. Should we cease operations, such payments
may cease or differ materially from currently projected payments. Such payments from Banco Itaú are
reflected as funds received from financing activities in our statement of cash flows and reduce
future marketing expense associated with the amortization of shares
issued to Banco Itaú under our
strategic marketing agreement. As a consequence, total amortization of shares issued to Itaú
reduced to $37.0 million in 2004 compared to $41.2 million in 2004. We have the right to choose to
redeploy or reinstate some promoters in the branches in the future, in which case we would forego
the corresponding payments from Banco Itaú. Brand marketing expense was also reduced by $4.5 million or 54.8% during 2004, from $8.2
million in 2003. The reduction is partially the result of investments of $1.9 million we made in
2003 to launch and promote our new web-based service in Brazil. In addition, in 2004 we increased
reliance on third-party marketing arrangements, such as Banco Itaús advertisement of our services
in accordance with our revised marketing agreement. Currency devaluation reduced sales and marketing expense in fiscal 2004 by approximately $0.6
million. For the year ended December 31, 2004, sales and marketing expenses incurred with related
parties were $76,100, excluding amortization expense related to the Banco Itaú strategic marketing
agreement. This expense was primarily for advertising on Time Warner properties. For the year ended
December 31, 2003, sales and marketing expenses incurred with related parties were $1.0 million,
and were also for advertising on Time Warner properties. For the year ended December 31, 2004, the amount of monies received from Banco Itaú for
subsidies it pays on behalf of its members was not material, compared with $0.9 million in 2003.
Subsidies paid by Banco Itaú on behalf of its members largely ceased during the third quarter of
2003 as a result of the revised marketing agreement with Banco Itaú, under which Banco Itaú is no
longer required to make subsidy payments to us on behalf of its members to the co-branded service.
Amortization expense of unearned services related to the Banco Itaú marketing agreement was $37.0
million in 2004 and $41.2 million in 2003. For a discussion of advertising and other relationships
with Time Warner and Banco Itaú, please see Item 13  Certain Relationships and Related
Transactions. Fiscal 2003 Compared to Fiscal 2002 Sales and marketing expense was $65.4 million in the year ended December 31, 2003, a decrease
of $31.8 million from $97.2 million in the year ended December 31, 2002. The 32.7% reduction in
sales and marketing expenditures during fiscal 2003 was driven by reductions in both member
acquisition costs and brand marketing. The reduction in member acquisition costs was achieved
through our continued focus on initiatives designed to target members who have higher probabilities
of becoming and remaining paying members. Specifically, we significantly reduced the mass mailing
of non-solicited CDs containing our software in favor of an increased focus on acquiring members
through direct customer interaction channels, primarily through staffed kiosks at high traffic
retail locations. During 2003, we also evaluated the productivity of our kiosks located at Banco
Itaú branches and at retail locations in Brazil, Mexico and Puerto Rico, and closed those with
lower than acceptable levels of registrations. As a result, a substantial majority of the kiosks in
operation 25




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##### Table of Contents



at the beginning of 2003 at Banco Itaú branches were closed, as were a majority of the
kiosks at retail locations in Mexico, resulting in additional savings. In addition, we also cancelled certain CD distributions Banco Itaú was obligated to make, but
did not at our request. As a result of the cancellation of marketing activities Banco Itaú was
obligated to make, as per the terms of our revised marketing agreement, Banco Itaú made payments to
us of approximately $4.5 million during 2003 in exchange for advertising on our service in lieu of
the marketing activities they were obligated to undertake. Brand marketing expense was also reduced
by $8.0 million during 2003. Currency devaluation reduced sales and marketing expense in fiscal
2003 by approximately $1.5 million. General and Administrative. General and administrative expenses consist primarily of personnel-related expenses, office
lease payments, legal, tax and travel-related expenses, among others. Fiscal 2004 Compared to Fiscal 2003 For the year ended December 31, 2004, general and administrative expenses were $23.8 million,
a decrease of $3.3 million, or 12.0%, from $27.1 million in the fiscal year ended December 31,
2003. The reduction in general and administrative expense was driven primarily by lower
personnel-related expenses due to resignations of employees not replaced. Our
general and administrative costs in the quarter ended December 31, 2004, decreased by $0.2
million, or 3.5%, to $5.5 million, from $5.7 million in the fourth quarter of 2003. The decline in
general and administrative expense was primarily due to lower staffing levels in the fourth quarter
of 2004, as compared to the prior-year period. We believe our general and administrative expenses
could increase in 2005 due to increased fees to legal and financial advisors, potential increase in
Director and officer insurance premiums, key personnel retention programs and severance payments. Both America Online and the Cisneros Group have in the past provided us with general and
administrative services. In the year ended December 31, 2004, we incurred general and
administrative expenses of $227,000 to America Online and the Cisneros Group. In the year ended
December 31, 2003, we incurred general and administrative expenses of $44,000 to America Online,
while in the year ended December 31, 2002, we incurred fees of approximately $1.6 million and
$219,000 for support services provided by America Online and for services provided by the Cisneros
Group, respectively. Fiscal 2003 Compared to Fiscal 2002 For
the year ended December 31, 2003, general and administrative expenses were $27.1 million,
a decrease of $5.8 million, or 17.7%, from $32.9 million in the fiscal year ended December 31,
2002. The reduction in general and administrative expense was driven by lower personnel-related
expenses due to employee work force reductions. Currency devaluations decreased reported general
and administrative expense by approximately $0.6 million during our 2003 fiscal year. Both America Online and the Cisneros Group have in the past provided us with general and
administrative services. In the year ended December 31, 2003, we incurred general and
administrative expenses of $44,000 to America Online. In the year ended December 31, 2002, we
incurred fees of approximately $1.6 million and $219,000 for support services provided by America
Online and for services provided by the Cisneros Group, respectively. Argentina Value-Added Tax Allowance.We have not been successful in achieving growth in our
interactive services in Argentina and do not expect future growth for this business. During the
second quarter of 2004, based on projections of our taxable revenue in Argentina, we determined
that it was not likely that we would be able to recover our value-added tax (VAT) receivable from
the Argentine government with a value of approximately $4.0 million at June 30, 2004. This
receivable, which arose in the normal conduct of our business, can only be recovered as we make
sales in Argentina and make collections from our customers. As a result, in the quarter ended June
30, 2004, we recorded a non-cash charge to establish an allowance in order to reduce the value of
this VAT asset to zero. We do not expect our interactive services in 26




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##### Table of Contents



Argentina to form a material
part of our operations in the foreseeable future. We expect that our call center operations in
Argentina will continue to be the primary focus of any activities in Argentina. Interest Expense.Interest expense consists almost entirely of interest on our senior
convertible notes. During the year ended December 31, 2004, interest expense was $17.5 million,
down $0.5 million as compared with $18.0 million in the prior-year year. We expect quarterly
interest expense to remain at current levels since our average balance of senior convertible notes
outstanding is expected to remain constant. The decrease during fiscal 2004 was due to a one time
correction, in the first quarter of 2004, of interest paid in 2003. Interest on our senior convertible notes for the fiscal year 2004 was paid through the
issuance of 24,901,613 shares of our series B preferred stock to Time Warner. Under the terms of
the senior convertible notes, we may choose to make payment of interest through the issuance of
shares of our series B preferred stock, with the exception of the last payment, which must be paid
in cash (approximately $3.2 million). To the extent we make payment through the issuance of shares,
interest expense does not represent a cash outlay. Given our focus on cash preservation, we expect
future payments of interest to be undertaken through the issuance of additional shares, except as
noted. Consequently, interest expense should not have a cash impact on our financial condition,
except for the final interest payment which must be paid in cash. A decision by us to pay the
interest on the senior convertible notes through the issuance of additional shares of stock could
result in significant additional dilution to our existing shareholders. Additionally, under the terms of our revised charter, on August 7, 2005, we are required to
redeem approximately 88% of the then outstanding series B and C preferred stock issued to America
Online and the Cisneros Group. It is not clear, however, whether such redemption would be
prohibited by Delaware law in view of certain statutory restrictions on redemption of shares of a corporations own stock for cash or property. It also is not clear
whether we would have sufficient available authorized shares of class A common stock for any such
redemption. If any shares of preferred stock are redeemed, such redemption would result in
significant additional dilution to our class A stockholders. Other Income, net.Other income, net consists primarily of foreign currency gains and losses
and realized gains and losses on investments. For the year ended December 31 2004, other income,
net was approximately $0.3 million, as compared with $0.9 million in the prior year. Income taxes. For the year ended December 31, 2004, we had a provision of $124,000 related to income taxes.
For the year ended December 31, 2003 we had a provision of $4,000 related to income taxes. Our
income tax expense results from the application of gross asset taxes in Argentina and Mexico, which
are used as alternative minimum tax systems by the governments of these countries and may be
applied as credits for actual future income taxes. For additional information regarding income
taxes, see note 9 to our audited consolidated financial statements. Liquidity and Capital Resources Current Liquidity At
December 31, 2004, we had available cash and cash equivalents of $22.2 million, and debt in
the form of 11% senior convertible notes due March 2007 in the amount of $160.0 million, as
indicated in the table below: 27




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##### Table of Contents



(In thousands, except percentages) AS OFDecember 31,
    
    
    December 31,
    
    
    
    
    
    
    %2004
    
    
    2003
    
    
    Change
    
    
    ChangeCash and cash equivalents
    
    $
    22,167
    
    
    $
    31,899
    
    
    $
    (9,732
    )
    
    
    (30.0
    )%Current assets
    
    $
    33,233
    
    
    $
    44,207
    
    
    $
    (10,974
    )
    
    
    (24.8
    )%Total assets
    
    $
    37,724
    
    
    $
    55,739
    
    
    $
    (18,015
    )
    
    
    (32.3
    )%Working
capital (deficit)
    
    $
    (153,045
    )
    
    $
    17,009
    
    
    $
    (170,054
    )
    
    
    (999.8
    )%Current liabilities
    
    $
    186,278
    
    
    $
    27,199
    
    
    $
    (159,079
    )
    
    
    (584.9
    )%Long-term debt
    
    $
    
    
    
    $
    160,000
    
    
    $
    160,000
    
    
    
    100
    %Stockholders equity (capital deficiency)
    
    $
    (149,527
    )
    
    $
    (132,959
    )
    
    $
    (16,568
    )
    
    
    12.5
    %Total assets breakdown by segment:- Brazil
    
    $
    13,531
    
    
    $
    10,069
    
    
    $
    3,462
    
    
    
    34.4
    %- Mexico
    
    
    1,371
    
    
    
    3,575
    
    
    
    (2,204
    )
    
    
    (61.7
    )- Argentina
    
    
    470
    
    
    
    4,421
    
    
    
    (3,951
    )
    
    
    (89.4
    )- Puerto Rico
    
    
    209
    
    
    
    569
    
    
    
    (360
    )
    
    
    (63.3
    )- Corporate and other
    
    
    22,143
    
    
    
    37,105
    
    
    
    (14,962
    )
    
    
    (40.3
    )$
    37,724
    
    
    $
    55,739
    
    
    $
    (18,015
    )
    
    
    (32.3
    )%Property
and equipment, net:- Brazil
    
    $
    1,455
    
    
    $
    2,381
    
    
    $
    (926
    )
    
    
    (38.9
    )%- Mexico
    
    
    301
    
    
    
    593
    
    
    
    (292
    )
    
    
    (49.2
    )- Argentina
    
    
    188
    
    
    
    282
    
    
    
    (94
    )
    
    
    (33.3
    )- Puerto Rico
    
    
    137
    
    
    
    232
    
    
    
    (95
    )
    
    
    (40.9
    )- Corporate and other
    
    
    531
    
    
    
    1,283
    
    
    
    (752
    )
    
    
    (58.6
    )$
    2,612
    
    
    $
    4,771
    
    
    $
    (2,159
    )
    
    
    (45.3
    )%
 Current assets at December 31, 2004 were $33.2 million, a decrease of $11.0 million, or 24.8%,
from $44.2 million at December 31, 2003. The decrease in current assets was driven almost entirely
by the decline in our cash and cash equivalents position. Current liabilities at December 31, 2004
were $186.3 million, an increase of $159.1 million, or 584.9%, from $27.2 million at December 31, 2003. Current
liabilities increased as a result of the reclassification of the senior convertible notes issued to
Time Warner from long-term debt to current liabilities. Our working
capital deficit balance at
December 31, 2004 was $(153.0) million, down
from a working capital of $17.0 million at the end of the prior year, also as a result of the reclassification of the senior convertible notes issued to
Time Warner from long term debt. The decrease in current assets at December 31, 2004 was attributable to the use of initial
cash balances throughout the year to finance operating losses and other operating requirements,
partially offset by the receipt of cash from Banco Itaú in lieu of marketing activities it was
obligated to make under the terms of our revised strategic marketing agreement and the penalty of
approximately $0.8 million paid to us by McDonalds. The increase in current liabilities primarily
reflects the reclassification of the senior
convertible notes from long-term debt to current liabilities, only partially offset by a reduction in accounts payable resulting from a reduction in cost of revenues and sales and marketing expenditures.
 As discussed previously, our level of
expenditures has been reduced in
relation to the declining membership base as well as our efforts to continue reducing our cost
structure. We had only $17.9 million of cash available as of March 16, 2005. We expect that available cash will only be sufficient to fund operations into the third quarter of 2005. To continue operations beyond such time, we would require an additional, substantial capital infusion. Additional capital will not be available to us from any source. In our previous filings we have stated that we do not expect to reach
cash flow break even with available cash on hand. In prior periods we were able to reduce
discretionary expenditures, including marketing activities, certain costs of revenue and personnel
expenses that we felt provided us with additional financial flexibility. We will be unable to significantly reduce these discretionary expenditures in the future. We have not identified any sources of financing to partially or fully repay the $160.0 million
senior convertible notes that will be due in March 2007, and no additional financing will be made
available to us. We believe we may be default under the senior convertible notes held by Time Warner Inc. This may have
automatically accelerated our obligation to repay these notes and therefore, the full $160 28




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##### Table of Contents



million may be immediately due and payable. We do not have sufficient funds available to repay this debt. The
full amount of the senior convertible notes is recorded in current
liabilities in the consolidated balance
sheet as of December 31, 2004 included herein. Since May 2004 we, together, with our financial advisors, have explored potential strategic
alternatives for AOLA and its subsidiaries, including a possible sale of sale of our entire
company, the sale of one or more of our operating businesses, sale of specific assets or other
comparable transactions. To date we have not successfully completed any such transaction. In the
event we are unsuccessful in completing any strategic transaction in a timely manner, we will be
required to cease operations. Even if we are successful in selling all of our businesses, the proceeds will not be
sufficient to repay the senior convertible notes, and none of those proceeds will be available to
our common stockholders. As a result, we do not believe that our common stock has, or will have,
any value. If we do not consummate the disposition of our businesses in a timely manner, we expect
to cease operating those businesses. Additionally, under the terms of our revised charter, on August 7, 2005, we are required to
redeem 87.8% of the then outstanding series B and C preferred stock. The exact percentage to be
redeemed is subject to adjustment based on the number of shares we will issue in payment of
interest on our senior convertible notes through August 7, 2005, which is in turn dependent on the
price of our class A common stock. The series B and series C preferred stock may be redeemed, at
our option, in cash, by delivery of shares of class A common stock or by any combination of cash
and shares of class A common stock. Due to our limited cash position, we expect to redeem these
shares of preferred stock through the issuance of shares of class A common stock. It is not clear,
however, whether such redemption would be prohibited by Delaware law
in view of certain statutory restrictions on redemption of shares of a corporations own stock
for cash or property. It also is not clear whether we would have sufficient available shares of
class A common stock for any such redemption. If any shares of preferred stock are redeemed, such
redemption would result in significant additional dilution to our class A common stockholders. As
noted elsewhere in this report, in addition to dilution, we believe our common stock has, and will
have, no value. An additional restriction on our ability to obtain additional funding is that the holders of
the senior convertible notes can require that the proceeds of any financing or the sale of assets
be used to repay the senior convertible notes. We will not be able to
obtain any
financing from Time Warner, America Online, the Cisneros Group, Banco Itaú or any other
source. The audited consolidated financial
statements included in this report have been prepared on a going concern basis, which contemplates the
realization of assets and satisfaction of liabilities and commitments in the normal course of business.
On March 16, 2005, management concluded that AOLA is not a going
concern for financial reporting purposes and eventually will not have
sufficient funds to continue operations. In addition, Ernst &
Young LLPs audit report on our
consolidated financial statements contains a going concern qualification because of its
doubts about our ability to continue as a going concern. Contractual Obligations At December 31, 2004, our material firm operating commitments for the next five years were
approximately $36.1 million, compared to approximately $35.0 million at December 31, 2003. Material
firm operating commitments represent our minimum obligations to third-parties under
telecommunications network contracts, obligations under leases for office space, autos and office
equipment used in the normal course of operations. However we do not expect to continue operations
under the normal course, and therefore the amounts owed may be materially different from the ones
shown in the table below The following table summarizes our contractual firm operating obligations at December 31,
2004, and the timing and effect that such obligations are expected to have on our liquidity and
cash flows in future periods: 29




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##### Table of Contents



(in thousands) Less than 1
    
    
    
    
    
    
    
    
    
    
    More than 5Contractual Obligations
    
    Total
    
    
    year
    
    
    1 - 3 years
    
    
    3 - 5 years
    
    
    yearsLong-Term Debt
    
    $
    160,000
    
    
    $
    160,000
    
    
    $
    
    
    
    $
    
    
    
    $
    Capital Lease Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Operating Lease Obligations
    
    
    36,083
    
    
    
    13,675
    
    
    
    22,408
    
    
    
    
    
    
    
    Purchase Obligations
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Other Long-Term Liabilities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    TOTAL
    
    $
    196,083
    
    
    $
    173,675
    
    
    $
    22,408
    
    
    $
    
    
    
    $
    
 Our network agreements do not extend beyond 2007; therefore the foregoing table does not
reflect any amounts in 2007 and beyond. We do not expect to replace expiring contracts at future
dates. (In thousands, except percentages) YEAR ENDEDDecember 31,
    
    
    December 31,
    
    
    
    
    
    
    %
    
    
    December 31,
    
    
    
    
    
    
    %2004
    
    
    2003
    
    
    Change
    
    
    Change
    
    
    2002
    
    
    Change
    
    
    ChangeCondensed Cash Flow Statement:Cash and cash equivalents, beginning of period
    
    $
    31,899
    
    
    $
    75,517
    
    
    $
    (43,093
    )
    
    
    (57.1
    )%
    
    $
    46,676
    
    
    $
    28,841
    
    
    
    61.8
    %Cash flow (used) provided by :Operating activities
    
    
    (14,825
    )
    
    $
    (47,228
    )
    
    $
    31,878
    
    
    
    68.3
    
    
    $
    (127,705
    )
    
    $
    81,002
    
    
    
    63.4Investing activities
    
    
    (300
    )
    
    
    (1,559
    )
    
    
    1,259
    
    
    
    80.7
    
    
    
    (2,026
    )
    
    
    467
    
    
    
    23.1Financing activities
    
    
    4,814
    
    
    
    4,556
    
    
    
    (258
    )
    
    
    (5.7
    )
    
    
    159,490
    
    
    
    (154,934
    )
    
    
    (97.1
    )Effect of
exchange rate changes on cash and cash equivalents
    
    
    579
    
    
    
    613
    
    
    
    33
    
    
    
    5.3
    
    
    
    (918
    )
    
    
    1,531
    
    
    
    166.8Net decrease in cash and cash
equivalents
    
    
    (9,732
    )
    
    
    (43,618
    )
    
    
    33,362
    
    
    
    77.4
    
    
    
    28,841
    
    
    
    (71,934
    )
    
    
    (249.4
    )Cash and cash equivalents, end of period
    
    $
    22,167
    
    
    $
    31,899
    
    
    $
    (9,732
    )
    
    
    (30.0
    )%
    
    $
    75,517
    
    
    $
    (43,093
    )
    
    
    (57.1
    )%Capital spending by segment:- Brazil
    
    $
    110
    
    
    $
    998
    
    
    $
    (888
    )
    
    
    (89.0
    )%
    
    $
    1,059
    
    
    $
    (61
    )
    
    
    (5.8
    )%- Mexico
    
    
    24
    
    
    
    259
    
    
    
    (235
    )
    
    
    (90.7
    )
    
    
    249
    
    
    
    10
    
    
    
    4.0- Argentina
    
    
    31
    
    
    
    136
    
    
    
    (105
    )
    
    
    (77.2
    )
    
    
    7
    
    
    
    129
    
    
    
    1,842.9- Puerto Rico
    
    
    23
    
    
    
    157
    
    
    
    (134
    )
    
    
    (85.3
    )
    
    
    133
    
    
    
    24
    
    
    
    18.0- Corporate and other
    
    
    112
    
    
    
    9
    
    
    
    103
    
    
    
    11.4
    
    
    
    578
    
    
    
    (569
    )
    
    
    (98.4
    )$
    300
    
    
    $
    1,559
    
    
    $
    (1,259
    )
    
    
    (80.7
    )%
    
    $
    2,026
    
    
    $
    (467
    )
    
    
    (23.1
    )%
 Cash Flow In
the year ended December 31, 2004, we utilized
$14.8 million of cash to fund our operating losses
and working capital activities. Cash capital expenditures during 2004 were an additional $0.3 million.
This was financed through a reduction in the amount of cash on hand at the beginning of the year,
through $4.7 million received from Banco Itaú in lieu of marketing activities it was obligated to
undertake under the terms of our revised strategic marketing agreement, as well as the penalty of
$0.8 million received from McDonalds, as described in Item 1. Monies received from Banco Itaú in
lieu of marketing activities are recorded as financing activities. Furthermore, monies received
from Banco Itaú in lieu of marketing activities serve to offset amounts Banco Itaú may owe as a
result of not meeting the targets contained in our strategic marketing agreement. As a result, we
do not expect to receive any amounts from Banco Itaú for the March 2005 measurement date. We also
received in 2004 a penalty payment of approximately $0.8 million from McDonalds for its failure to
comply with the terms of the agreement. The McDonalds penalty payment was applied against our
initial investment of $2.1 million. Cash used in operating activities in the fourth quarter of 2004 was $3.5 million, a decrease
of 53.7% from $7.5 million used in the fourth quarter of 2003 and an increase of 11.6% from $3.1
million, in the third quarter of 2004. Our ending cash and cash
equivalents position of $22.2
million at December 31, 2004 benefited from a payment from Banco Itaú to the Company in lieu of
certain marketing activities. We received $1.2 million from Banco Itaú in the 2004 fourth quarter,
compared to $1.8 million received in the same period of the prior year. We expect these payments to continue in the near future but the amounts to gradually decrease over time pursuant to the terms
of the revised marketing agreement. Should we cease operations, such payments may cease or differ materially from
currently projected payments. The Company expects cash
utilization to increase in the first quarter of 2005, primarily as a result of seasonal working
capital fluctuations including payment of annual bonus, and the payment of approximately $700,000
for differences in historical tax rates over collected revenues we were contesting in Brazil. This
amount has been reflected 30




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##### Table of Contents



in the 2004 consolidated statements of operations. Throughout the year,
we also expect cash utilization to increase significantly when compared to fiscal 2004 driven by
incremental legal and financial advisory fees, Director and Officers liability insurance premiums
and severance and retention obligations. In
the year ended December 31, 2003, our operations required $47.2 million to fund operating
losses and activities and capital expenditures of $1.6 million. This was financed through the use
of initial cash and cash equivalent balances on hand and through the issuance of $160.0 million in
senior convertible notes to Time Warner in 2002. Senior Convertible Notes On March 8, 2002, we entered into a note purchase agreement with Time Warner under which Time
Warner made available to us $160.0 million in exchange for our senior convertible notes due in
March 2007. We completed the draw down of the funds available to us under the note purchase
agreement on December 30, 2002. The senior convertible notes bear an annual coupon of 11%, payable
quarterly. 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 are convertible at any time at the option of the holder and are redeemable
by us at any time, subject to the holders right to convert the senior convertible notes into
preferred stock. 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 is payable either in cash or preferred stock, at our option. If interest is paid in
shares, the price per share is determined based on the average closing price of the class A common
stock for the twenty trading dates ending two days prior to the date of payment. On December 31,
2004, we made our quarterly payment of interest on the Time Warner notes, which covered the period
from October 1 through December 31, 2004. The interest payment of approximately $4.4 million was
made through the issuance of 5,772,497 shares of series B preferred stock to Time Warner, based on
an average price of $0.7685 per share. For the year ended December 31, 2004, we incurred $17.3
million related to interest payable to Time Warner on the senior convertible notes, as compared
with $17.8 million for the year ended December 31, 2003. We expect to incur approximately $17.6
million in annual interest expense as long as the full amount of $160.0 million in senior
convertible notes is outstanding. Under the terms of the senior convertible notes, we may choose to
make payment of interest through the issuance of shares of our series B preferred stock, with the
exception of the last payment, which must be paid in cash (approximately $3.2 million). To the
extent we make payment through the issuance of shares, interest expense does not represent a cash
outlay. Given our focus on cash preservation, we expect future payments of interest to be
undertaken through the issuance of additional shares, except as noted. Consequently, interest
expense should not have a cash impact on our financial condition, except for the final interest
payment which must be paid in cash. However, depending on market conditions at the time, a decision
by us to pay the interest on the senior convertible notes through the issuance of additional shares
of stock could result in significant additional dilution to our existing shareholders. In the event the $160.0 million in senior convertible notes were to be converted by Time
Warner, an additional 44,150,105 shares of preferred stock would be issued to Time Warner,
increasing the economic ownership by America Online and its
affiliates in AOLA to 62.5% and their
relative voting strength to 74.1%, assuming conversion of the warrant granted to America Online at
the date of our initial public offering and the options granted to its employees who are members of
our Board of Directors. Interest payments on the senior convertible notes over the remaining life
of the notes will total approximately $38.4 million, assuming the notes are not converted to stock
prior to their maturity. Because we intend to pay interest through the issuance of additional
shares of preferred stock, we expect America Onlines relative ownership and voting strength to
continue to increase over the foreseeable future. Time Warner has granted us a waiver for fiscal 2002, 2003 and 2004 related to our
non-compliance with an affirmative covenant in the senior convertible notes requiring our auditors
to certify annually that we have not defaulted under the notes. Our auditors were unable to provide
the certification because it required them to certify non-quantitative matters. There can be no
assurance that we will receive any future waivers from Time Warner or any other holder of the
senior convertible notes for any non-compliance by us under this covenant or any other covenant. If
we do not obtain this waiver, we will be in default under the notes and may be obligated to repay
them immediately. We may be in default under the notes
and Time Warner might request us to repay them
immediately. We do not, and will not, have sufficient funds to repay the notes. 31




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##### Table of Contents



Historical Financing From inception through December 31, 2004, our operations have been financed through the
issuance of senior convertible debt and through capital raised in several rounds of financing,
including our initial public offering on August 8, 2000. Funds raised through December 31, 2004
have totaled $711.5 million, net of issuance-related expenses, as shown in the following table in
millions: Total AmericaAmerica
    
    
    Time
    
    
    
    Online and
    
    
    
    Cisneros
    
    
    BanceOnline
    
    
    Warner
    
    
    
    Time Warner
    
    
    
    Group
    
    
    Itau
    
    
    Public
    
    
    
    TotalPre-IPO
    
    $
    50.0
    
    
    $
    
    
    
    
    $
    50.0
    
    
    
    $
    150.1
    
    
    $
    
    
    
    $
    
    
    
    
    $
    200.1IPO
    
    
    31.3
    
    
    
    
    
    
    
    
    31.3
    
    
    
    
    31.3
    
    
    
    
    
    
    
    140.5
    
    
    
    
    203.1March-01
    
    
    65.8
    
    
    
    
    
    
    
    
    65.8
    
    
    
    
    63.3
    
    
    
    19.7
    
    
    
    
    
    
    
    
    148.8Sr. Convertible Notes
    
    
    
    
    
    
    159.5
    
    
    
    
    159.5
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    159.5Totals
    
    $
    147.1
    
    
    $
    159.5
    
    
    
    $
    306.6
    
    
    
    $
    244.7
    
    
    $
    19.7
    
    
    $
    140.5
    
    
    
    
    711.5
 Prior to the initial public offering, 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 in August 2000 generated total net proceeds of $203.1
million, including exercise of the over-allotment option by the underwriters. An additional round
of financing took place in March 2001, pursuant to which we raised $150.0 million (net $148.8
million) through the sale of stock to America Online, the Cisneros Group and Banco Itaú. Our last
financing took place in March 2002, through the sale of senior convertible notes due March 2007 to
Time Warner. Segment Results of Operations In accordance with Statement of Financial Accounting Standards (SFAS) No. 131, Disclosures
about Segments of an Enterprise and Related Information, we disclose information based on the way
we organize financial information for making operating decisions and assessing performance. We
consider markets in which we have launched our AOLA
country services or web-based interactive services as operational segments and report our
operations on a country-by-country basis. In determining reporting segments, we internally reviewed
the current management structure that reports to the chief operating decision-maker and analyzed
the reports received by that decision-maker in order to allocate resources and measure performance.
Each of our operating segments derives its revenues from subscriptions to our interactive services,
and to a lesser extent from advertising and other revenues. The accounting policies of the
reportable segments are the same as those described in Item 7.  Managements Discussion and
Analysis of Financial Condition and Results of Operations Critical Accounting Policies and in the
summary of significant accounting policies contained in Note 2 of our audited consolidated
financial statements. As of December 31, 2004, we internally reported our results of operations in four geographic
segments  Brazil, Mexico, Argentina and Puerto Rico  in addition to our corporate and other
group. Although amounts for Argentina are not currently material and are not expected to be
material in future reporting periods, we have decided not to consolidate Argentina with our
corporate and other segment in order to facilitate historical segment comparisons. No single
customer accounted for 10% or more of our total revenues for any of the periods presented. See Note
6 to our audited consolidated financial statements for a discussion of segments. Revenues by Segment Our revenues by type on a segment basis are shown in the table below: 32




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##### Table of Contents



(In thousands, except percentages)YEAR ENDEDDecember 31,
    
    
    December 31,
    
    
    
    
    
    
    %
    
    
    December 31,
    
    
    
    
    
    
    %2004
    
    
    2003
    
    
    Change
    
    
    Change
    
    
    2002
    
    
    Change
    
    
    ChangeRevenues by operating segment- Brazil
    
    $
    18,350
    
    
    $
    25,267
    
    
    $
    (6,917
    )
    
    
    (27.4
    )%
    
    $
    30,755
    
    
    $
    (5,488
    )
    
    
    (17.8
    )%- Mexico
    
    
    17,427
    
    
    
    22,726
    
    
    
    (5,299
    )
    
    
    (23.3
    )
    
    
    27,164
    
    
    
    (4,438
    )
    
    
    (16.3
    )- Argentina
    
    
    2,028
    
    
    
    2,019
    
    
    
    9
    
    
    
    0.4
    
    
    
    2,301
    
    
    
    (282
    )
    
    
    (12.3
    )- Puerto Rico
    
    
    14,369
    
    
    
    14,188
    
    
    
    181
    
    
    
    1.3
    
    
    
    11,374
    
    
    
    2,814
    
    
    
    24.7- Corporate and other
    
    
    244
    
    
    
    974
    
    
    
    (730
    )
    
    
    (74.9
    )
    
    
    513
    
    
    
    461
    
    
    
    89.9$
    52,418
    
    
    $
    65,174
    
    
    $
    (12,756
    )
    
    
    (19.6
    )%
    
    $
    72,107
    
    
    $
    (6,933
    )
    
    
    (9.6
    )%As a percentage of total revenues- Brazil
    
    
    35.0
    %
    
    
    38.8
    %
    
    
    
    
    
    
    
    
    
    
    42.7
    %- Mexico
    
    
    33.2
    %
    
    
    34.9
    %

    
    
    
    
    
    
    
    
    
    
    37.7
    %- Argentina
    
    
    3.9
    %
    
    
    3.1
    %
    
    
    
    
    
    
    
    
    
    
    3.2
    %- Puerto Rico
    
    
    27.4
    %
    
    
    21.8
    %
    
    
    
    
    
    
    
    
    
    
    15.8
    %- Corporate and other
    
    
    0.5
    %
    
    
    1.4
    %
    
    
    
    
    
    
    
    
    
    
    0.6
    %100.0
    %
    
    
    100.0
    %
    
    
    
    
    
    
    
    
    
    
    100.0
    %
 Fiscal 2004 Compared to Fiscal 2003 For the year ended December 31, 2004, our total consolidated revenues were $52.4 million, a
decrease of 19.6% from $65.2 million in the year ended December 31, 2003. The decrease was driven
primarily by declines in Brazil and Mexico, which were partially offset by a minimal increase in
Puerto Rico and Argentina. The decrease in total revenues was driven by declines in both revenues
from subscriptions and revenues from advertising and other. Total revenues in 2004 in Brazil, which remained our largest segment at 35.0% of total
revenues, fell by 27.4% to $18.4 million in 2004, as compared with 2003. The decrease was driven by
reductions in both advertising and other revenue and lower subscription revenue. Advertising and
other revenue fell by $0.9 million, or 37.5%, in 2004. Subscription
revenue in Brazil also declined by $6.0 million, or 26.3%, during the year. The decrease in
subscription revenue in Brazil was primarily driven by loss of paying membership and lower price
mix due to migration of AOLA country service members to the lower priced web service. Currency
appreciation had a positive impact in subscription revenues of about $0.9 million. Competition from
low-cost and free Internet service providers in Brazil during 2004 placed us at a pricing
disadvantage that resulted in increased membership turnover, especially among members of our AOLA
country service in Brazil. Membership was also negatively impacted by a decrease in new member
registration rates caused by the reduction in marketing activity from our closing of inefficient
and unproductive kiosks at retail locations, and from the delays in the implementation and low
productivity of our McDonalds marketing agreement. In September 2003, we launched our web-based interactive services in Brazil. Our web based
services in Brazil have performed below expectations both in terms of attracting new members as
well as reducing membership turnover. The pricing of our web-based services is lower than that of
our AOLA country service. Consequently, revenue from the web-based service has been lower due to
both lower pricing and fewer member registrations. Our Banco Itaú membership levels grew modestly
in 2004 due primarily to the introduction of our broadband web-based services. The modest growth
in the membership level of Banco Itaú is not sufficient to offset lost revenues and contribution
from our AOLA country service in Brazil, and therefore we believe that we will not be able to
achieve operating cash self-sufficiency in Brazil. For the year ended December 31, 2004, total revenues from Mexico were $17.4 million, a
decrease of $5.3 million, or 23.3%, from $22.7 million in the prior year. Mexico continued as our
second largest segment in fiscal 2004, accounting for 33.2% of total revenues. The decrease in
total revenues from Mexico was driven primarily by lower subscription revenue, which fell by
approximately $4.7 million, or 22% from the prior year. The decrease in subscription revenue was
caused by a loss of paid membership, and by an increase in the number of members choosing long-term
prepaid plans which are sold at a discount to our monthly, unlimited usage plan. Currency
devaluation reduced reported total revenue from Mexico by
$0.5 million, or (2.7)%. Advertising and
other revenue in Mexico also declined by approximately $0.6 million, or by 41.0%, to $0.9 million
in 2004. 33




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Total revenues from Puerto Rico increased by 1.3% to $14.4 million in the year ended December
31, 2004, driven by an increase in subscription revenue that more than offset a decrease in
advertising and other revenues. Puerto Rico accounted for 27.4% of total revenues, as compared with
21.8% of total revenues in 2003. Puerto Rico continued as our third largest segment in 2004,
although it increased its relative share of our total revenues. We estimate that the premium tier
of the Puerto Rican market represents 20% of the total addressable market in Puerto Rico, and that
we are market leaders in the premium segment. We launched a web-based product offering Internet
connectivity and minimal content and email features in February 2004, targeting the low-cost
segment of the Puerto Rican market. We do not believe that our web based services in Puerto Rico,
Conexis, will become a significant portion of our business in Puerto Rico. Total revenues in Argentina in the year ended December 31, 2004 increased by $9,000, or 0.4%
to $2.0 million. The increase was driven by advertising and other revenues which grew $0.3 million
or, 94.1%, more than offsetting a decline in subscription revenue of 18.8%, or $0.3 million, which
was caused by the loss of paid membership during the year. Total revenues from our corporate and other segment decreased $0.7 million in the year ended
December 31, 2004, down from $1.0 million in 2003. Revenues in our corporate and other segment are
comprised primarily of advertising and other revenue. During 2004, approximately $0.2 million was
derived from our provision of programming services to America Online for the Latino content area of
America Onlines U.S. service. Our agreement with America Online expired in February 2004. An
interim contract was in place for the period March through September 2004. During that period we
recognized $183,000 of revenues related to the interim contract. A new two year agreement was
signed in September 2004 under which America Online will pay us $400,000 per year and provide us
without charge with certain product development services for our Spanish-language client software. Fiscal 2003 Compared to Fiscal 2002 For the year ended December 31, 2003, our total consolidated revenues were $65.2 million, a
decrease of 9.6% from $72.1 million in the year ended December 31, 2002. The decrease was driven
primarily by declines in Brazil and Mexico, which were partially offset by increases in Puerto Rico
and our corporate and other segments. The decrease in total revenues was driven by declines in both
revenues from subscriptions and revenue from advertising and other. Total revenues in 2003 in Brazil, which remained our largest segment at 38.8% of total
revenues, fell by 17.8% to $25.3 million in 2003, from $30.8 million in 2002. The decrease was
driven by reductions in both advertising and other revenue and lower subscription revenue. Currency
devaluation reduced reported total revenues by $1.2 million in 2003, as compared with 2002.
Advertising and other revenue fell by $3.1 million, or 56.9%, in 2003. Subscription revenue in
Brazil also declined by $2.3 million, or 9.3%, during the year. The decrease in subscription
revenue in Brazil was driven by both the loss of paying membership and currency devaluation.
Competition from low-cost and free Internet service providers in Brazil during 2003 placed us at a
pricing disadvantage that resulted in increased membership turnover, especially among members of
our AOLA country service in Brazil. Membership was also negatively impacted by a decrease in new
member registration rates caused by the reduction in marketing activity from our closing of
inefficient and unproductive kiosks at both Banco Itaú and retail locations, and from the delays in
the implementation of our McDonalds marketing agreement. For the year ended December 31, 2003, total revenues from Mexico were $22.7 million, a
decrease of $4.4 million, or 16.3%, from $27.2 million in the prior year. Mexico was our second
largest segment in fiscal 2003, accounting for 34.9% of total revenues. The decrease in total
revenues from Mexico was driven primarily by lower subscription revenue, which fell by
approximately $3.8 million, or 15.1% from the prior year. The decrease in subscription revenue was
caused by a reduction in the number of paid members, and by an increase in the number of members
choosing long-term prepaid plans which are sold at a discount to our monthly, unlimited usage plan.
Currency devaluation also reduced reported revenue from Mexico by $2.5 million, or 10%. Advertising
and other revenue in Mexico also declined by approximately $0.7 million, or by 30.3%, to $1.6
million in 2003. Total revenues from Puerto Rico increased by 24.7% to $14.2 million in the year ended December
31, 2003, up from $11.4 million in the prior year. This increase was driven primarily by higher
subscription revenue. Puerto Rico accounted for 21.8% of total revenues, as compared with 15.8% of
total revenues in 2002. Puerto Rico continued as our third largest segment in 2003, although it
increased its relative share of our total revenues. Our rate of increase in subscription revenue 34




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in Puerto Rico, however, decreased in 2003 from 2002, as we believe we neared saturation of the
premium-tiered market segment in Puerto Rico. Operating Losses by Segment Our losses from operations on a segment basis are as follows: (In thousands, except percentages)YEAR ENDEDDecember 31,
    
    
    December 31,
    
    
    
    
    
    
    %
    
    
    December 31,
    
    
    
    
    
    
    %2004
    
    
    2003
    
    
    Change
    
    
    Change
    
    
    2002
    
    
    Change
    
    
    ChangeIncome / (loss) from operations by segment:- Brazil
    
    $
    (41,502
    )
    
    $
    (60,458
    )
    
    $
    18,956
    
    
    
    31.4
    %
    
    $
    (95,447
    )
    
    $
    34,989
    
    
    
    36.7
    %- Mexico
    
    
    (2,020
    )
    
    
    (7,649
    )
    
    
    5,629
    
    
    
    73.6
    
    
    
    (37,268
    )
    
    
    29,619
    
    
    
    79.5- Argentina
    
    
    (5,190
    )
    
    
    (1,683
    )
    
    
    (3,507
    )
    
    
    (208.4
    )
    
    
    (3,141
    )
    
    
    1,458
    
    
    
    46.4- Puerto Rico
    
    
    4,530
    
    
    
    2,495
    
    
    
    2,035
    
    
    
    (81.6
    )
    
    
    956
    
    
    
    1,539
    
    
    
    (161.0
    )- Corporate and other
    
    
    (14,684
    )
    
    
    (16,366
    )
    
    
    1,682
    
    
    
    10.3
    
    
    
    (21,729
    )
    
    
    5,363
    
    
    
    24.7$
    (58,866
    )
    
    $
    (83,661
    )
    
    $
    24,795
    
    
    
    29.6
    %
    
    $
    (156,629
    )
    
    $
    72,968
    
    
    
    46.6
    %As a percentage of total loss from operations:- Brazil
    
    
    70.5
    %
    
    
    72.3
    %
    
    
    
    
    
    
    
    
    
    
    60.9
    %- Mexico
    
    
    3.4
    
    
    
    9.1
    
    
    
    
    
    
    
    
    
    
    
    23.8- Argentina
    
    
    8.8
    
    
    
    2.0
    
    
    
    
    
    
    
    
    
    
    
    2.0- Puerto Rico
    
    
    (7.7
    )
    
    
    (3.0
    )
    
    
    
    
    
    
    
    
    
    
    (0.6
    )- Corporate and other
    
    
    25.0
    
    
    
    19.6
    
    
    
    
    
    
    
    
    
    
    
    13.9100.0
    %
    
    
    100.0
    %
    
    
    
    
    
    
    
    
    
    
    100.0
    %
 Our loss from operations in the year ended December 31, 2004 was $58.9 million, a
decrease of $24.8 million, or 29.6%, from $83.7 million in the prior-year period. Brazil, Mexico
and our corporate and other segment all reduced losses, while profit from Puerto Rico increased
during the year. Argentina recorded an increase in its operating loss for the year
due to the write off of their VAT receivable in June 2004 for $4.0 million. The reduced
segment losses were primarily achieved by lower telecommunications, network and member services
expense in costs of revenues, and lower sales and marketing expense, which offset decreases in
revenues. In the year ended December 31, 2004, Brazil reduced its year-over-year loss by 31.4% to $41.5
million. Of this amount, $37.0 million is expense related to the amortization of the unearned
services related to the strategic marketing agreement between us and Banco Itaú, a non-cash charge.
Our Mexico segment loss declined by 73.6% to $2.0 million during the 2004 fiscal year. Argentinas
loss increased by 208.4% to $5.2 million. Excluding the effect of the VAT written off, Argentinas
operating loss would have decreased by 29.8% from the prior year. Our corporate and other segment
loss was reduced by 10.3% to $14.7 million, primarily as a result of workforce cost reduction
efforts. Puerto Rico reported a profit of $4.5 million during 2004, up from $2.5 million in the
prior-year period. The increase in Puerto Rico was driven by higher average paid membership levels. Our loss from operations for the year ended December 31, 2003 decreased to $83.7 million, from
$156.6 million in the prior year ended December 31, 2002. All segments significantly reduced their
losses aided primarily by cost reductions achieved through our focus on higher quality members.
Brazil narrowed its year-over-year loss by 36.7%, or $35.0 million, to $60.5 million. Mexico
reduced its loss to $7.6 million, down $29.6 million, or 79.5%, from 2002. Argentinas loss was
reduced by 46.4% to $1.7 million, down from a loss of $3.1 million in the year ended December 31,
2002. The improvement in Argentina was driven by the impact of a 66% decline in the value of the
peso, in addition to reduction in local operating activities necessitated by the economic crisis
affecting that country. Our corporate and other segment also reduced its loss, from $21.7 million
in 2002 to $16.4 million, primarily as a result of workforce cost reduction efforts. Total and Long-Lived Assets by Segment Our total and long-lived assets on a segment basis are as follows. Long-lived assets are
comprised primarily of fixed assets and capitalized product development and other intangible assets
for each period presented: 35




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(In thousands, except percentages)AS OFDecember 31,
    
    
    December 31,
    
    
    
    
    
    
    %2004
    
    
    2003
    
    
    Change
    
    
    ChangeTotal assets breakdown by segment:- Brazil
    
    $
    13,531
    
    
    $
    10,069
    
    
    $
    3,462
    
    
    
    34.4
    %- Mexico
    
    
    1,371
    
    
    
    3,575
    
    
    
    (2,204
    )
    
    
    (61.7
    )- Argentina
    
    
    470
    
    
    
    4,421
    
    
    
    (3,951
    )
    
    
    (89.4
    )- Puerto Rico
    
    
    209
    
    
    
    569
    
    
    
    (360
    )
    
    
    (63.3
    )- Corporate and other
    
    
    22,143
    
    
    
    37,105
    
    
    
    (14,962
    )
    
    
    (40.3
    )$
    37,724
    
    
    $
    55,739
    
    
    $
    (18,015
    )
    
    
    (32.3
    )%Property
and equipment, net:- Brazil
    
    $
    1,455
    
    
    $
    2,381
    
    
    $
    (926
    )
    
    
    (38.9
    )%- Mexico
    
    
    301
    
    
    
    593
    
    
    
    (292
    )
    
    
    (49.2
    )- Argentina
    
    
    188
    
    
    
    282
    
    
    
    (94
    )
    
    
    (33.3
    )- Puerto Rico
    
    
    137
    
    
    
    232
    
    
    
    (95
    )
    
    
    (40.9
    )- Corporate and other
    
    
    531
    
    
    
    1,283
    
    
    
    (752
    )
    
    
    (58.6
    )$
    2,612
    
    
    $
    4,771
    
    
    $
    (2,159
    )
    
    
    (45.3
    )%
 At December 31, 2004, we had total assets of $37.7 million, a decrease from $55.7 million
at December 31, 2003. At December 31, 2004, our assets were primarily concentrated in our corporate
and other sector, which at $22.1 million accounted for 58.7% of total assets. Cash and cash
equivalent balances at December 31, 2004, of $22.2 million
accounted for 60.2% of total assets and
80.4% of assets in our corporate and other segment. Assets located in Brazil, Mexico, Argentina and
Puerto Rico amounted to $13.5 million, $1.4 million, $0.5 million and $0.2 million at December 31,
2004, respectively, and consisted primarily of accounts receivable and prepaid expenses. Fixed
assets and capitalized product development accounted for $2.6 million of total assets. At December 31, 2003, we had total assets of $55.7 million, down from $100.3 million at
December 31, 2002. At December 31, 2003, our assets were primarily concentrated in our corporate
and other sector, which at $37.1 million accounted for 66.6% of total assets. Cash and cash
equivalent balances represented $31.9 million of total assets. Assets located in Brazil, Mexico,
Argentina and Puerto Rico amounted to $10.1 million, $3.6 million, $4.4 million and $0.6 million at
December 31, 2003, respectively, and were comprised primarily of accounts receivable, fixed assets
and capitalized product development. Of the assets located in Argentina, $4.0 million corresponded
to our prepaid value-added tax position. In June 2004 Argentina recorded an allowance of $4.0
million against the value-added tax position, reducing the prepaid balance to zero. The reported
dollar value of assets located in the countries was reduced by approximately 16% due to the
translation impact of currency devaluation. The year-over-year decrease in long-lived assets located in the operating countries resulted
mainly from the amortization of fixed assets over their expected useful lives and the impact of
currency devaluation on reported translated values. The reduction in long-lived assets in Brazil
and Mexico during 2003 was also impacted by write-off of leasehold improvements associated with the
abandonment of our leased office space as part of our consolidation of customer call centers. Depreciation
and amortization expense exclusive of the amortization of unearned services related to the
strategic marketing agreement with Banco Itaú for the year ended December 31, 2004 totaled $2.4
million, and was primarily incurred in Brazil and our corporate and other segments. Depreciation
and amortization expense for the year ended December 31, 2003 totaled $3.7 million. Capital expenditures for long-lived assets in the year ended December 31, 2004 totaled $0.3
million, down from $1.6 million in the year ended December 31, 2003. Brazil accounted for most of
our capital spending in 2004, with $0.1 million. Expenditures on capital assets in the year ended
December 31, 2003 amounted to $1.6 million, with Brazil accounting for the majority with $1.0
million. 36




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Seasonality We expect subscriber registrations to be lower during the first and fourth calendar quarters,
which is the summer season in Brazil and Argentina, and higher during our second and third calendar
quarters, which is the winter season in these countries. However, seasonality from the southern
hemisphere countries has been offset by the counter-balancing effects of Mexico and Puerto Rico,
which are in the northern hemisphere. Therefore, we have not experienced pronounced seasonality to
date in our business. Critical Accounting Policies 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 our audited consolidated financial statements. Revenue Recognition For subscribers in Brazil, Mexico and Argentina that have elected to pay their subscription
fees with credit 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, we do not begin to
recognize subscription revenues until the cash payment is received. Subscribers to the AOL-branded
service in Puerto Rico pay their membership fees directly to America Online. Revenue from
subscribers in Puerto Rico, which is paid to us by America Online, is recognized 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. Under our strategic alliance with Banco Itaú, prior to December 14, 2002, Banco Itaú was
required to offer at least one hour of subsidized usage per months to subscribers of the co-branded
service following the expiration of a subscribers trial period. Banco Itaú could also choose to
provide additional subsidized time to its customers beyond the one-hour
obligation. Banco Itaú was also required to pay us a nominal amount for subscribers who had
not used the service during the previous month and who were beyond their free trial period. Amounts
paid to us by Banco Itaú on behalf of its customers for subsidies that it chose or was required to
make were recorded as a reduction of marketing expenses and not as subscriber revenues. Amounts
paid directly to us by subscribers that exceeded the time subsidized by Banco Itaú were included in
subscription revenues. Were we to have recognized payments from Banco Itaú as revenues, our
subscriber revenues and sales and marketing expense would be higher than currently reported. Under
the terms of the revised marketing agreement, Banco Itaú is no longer required to subsidize some of
its customers, although it may choose to do so. To the extent any additional customer subsidies are
received from Banco Itaú, we will continue to record such subsidies as reductions in marketing
expenses. In the second half of 2003, subsidies from Banco Itaú on behalf of its customers largely
ceased. Cost of Revenues  Zero Port Costs We have entered into zero-cost agreements with telecommunications companies who provide us
with modem ports that are used by our customers to access our interactive services and the
Internet. Under these agreements, we provide the telecommunications providers with advertising in
exchange for the rental fees of the ports. We credit the value of the advertising we provide
against our telecommunications expense in cost of revenues because we are not able to reliably
determine the fair value of the ports or advertising under these arrangements. As a consequence,
our income statement essentially reflects a cost of zero for ports under these arrangements. Were we able to value the fair value of the ports or advertising received, we would recognize
incremental revenue for the value of the advertising provided. We would also recognize expense for
the value of the ports. Although the profit impact of this alternative treatment would be neutral,
we would report both higher revenues and higher expense. Valuation of Accounts Receivable  Reserve for Bad Debt 37




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We estimate that the carrying amount of our trade accounts receivable, which are primarily
from subscriber fees and advertising and other revenues, 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 allowance 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, the amounts we eventually collect will be adjusted to income in the period
actually collected. We recorded provisions to the allowance of approximately $155,000, $25,000, and net recoveries
of $451,000 during the years ended December 31, 2004, 2003 and 2002, respectively. Write-offs
against the allowance totaled approximately $282,000, $467,000, and $860,000 during the years ended
December 31, 2004, 2003 and 2002, respectively. As of December 31, 2003, we had a value-added tax (VAT) receivable from the Argentine
government of approximately $4.0 million. During the second quarter of 2004, based on projections
of our taxable revenue in Argentina, we determined that it was not likely that we would be able to
recover our value-added tax (VAT) receivable from the Argentine government with a value of
approximately $4.0 million at June 30, 2004. This receivable, which arose in the normal conduct of
our business, can only be recovered as we make sales in Argentina and make collections from our
customers. As a result, in the quarter ended June 30, 2004, we recorded a non-cash charge to
establish an allowance in order to reduce the value of this VAT asset to zero. We do not expect our
interactive services in Argentina to form a material part of our operations in the foreseeable
future. 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 that we have fully reserved to reduce their carrying
value to zero. Were we to determine that such assets were eventually to be utilized, we would
reverse the related valuation allowances and recognize a benefit related to these assets. Stock-Based Compensation: Accounting for Stock Options AOLA follows SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123), which
established a fair value based method of accounting for stock-based compensation plans and
encourages entities to adopt that method of accounting for their employee stock compensation plans.
This pronouncement also allows an entity to continue to measure compensation cost for those plans
based on Accounting Principles Board (APB) Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employeesand disclose the pro forma net income and net income per share as if the fair value
method had been applied in measuring cost. Compensation cost is determined based on the intrinsic
value of the stock options as required by the provisions of APB 25. AOLA has elected to apply APB
25 in accounting for its 2000 Stock Plan. Accordingly, as a result of applying the intrinsic value method of accounting to stock options
we have issued, no compensation expense has been recognized for options granted with an exercise
price equal to market value at the date of grant. During fiscal 2004 no expenses were recognized in
relation to the granting of stock options issued below market price. Total expense recognized in
relation to the granting of stock options issued below market price was limited to approximately
$241,000 in the year ended December 31, 2003 and $301,000 in the year ended December 31, 2002,
related to options grant issued to our Chief Executive Officer. Had we accounted for stock options
issued to our employees using the fair value method, our stock-based compensation expense would
have had a stock-based compensation expense of $1.2 million in
the year ended December 31, 2004, a stock-based compensation credit of $61,000 in the year ended December 31, 2003, and a
stock-based compensation expense of $5.3 million in the year ended December 31, 2002. Forward-Looking Statements 38




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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: our plans to sell, cease operating or liquidate our
businesses and the expected consequences of such actions, our expectation that current cash on hand
will be sufficient to fund operations into the third quarter of 2005, future membership levels,
future revenues, cash in lieu of marketing activities we expect to receive from our strategic alliance with
Banco Itaú, our marketing agreement with McDonalds in Brazil and the expected amendment or
termination of this agreement, future marketing efforts, future costs of revenues and future costs
and expenses, future losses, the effect of a bankruptcy proceeding on our license agreement with America Online, and the method of payment of interest on the Time Warner notes. Risk Factors The following factors, among others, could cause actual results to differ materially from
those described in the forward-looking statements: Available cash may last
only until the third quarter of 2005 and we will not be able to sustain our
business after that We
only had $17.9 million of available cash as of March 16,
2005. We expect that available cash will only be sufficient to fund
operations into the third quarter of 2005. To continue operations beyond such time, we
would require an additional, substantial capital infusion. Additional capital will not be available
to us from any source. In our previous filings we
have stated that we do not expect to reach cash flow break even with
available cash on hand. We incurred cumulative net operating losses of approximately $928.8 million from December 15, 1998,
the date of our inception, through December 31, 2004. We expect to continue to incur additional
losses and will not be able to continue normal operations indefinitely.
 In light of our current situation, we may incur additional unanticipated
expenses, anticipated expenses may be incurred prior to when we currently anticipate they will
be incurred or our revenues may deteriorate faster than expected, in which case we could run out of cash prior to the third quarter of 2005. The class A shares have, and will have, no value Our class A common stock ranks junior to both classes of preferred stock and to our senior
convertible notes. We do not have sufficient funds to repay the senior convertible notes.
Therefore, the class A common shares have, and will have, no value. Even if we successfully
complete one or more strategic transactions, we still will not have sufficient funds to pay
anything to our stockholders. America Online, Time Warner, the Cisneros Group and Banco Itaú do not have any commitment to fund
our future capital requirements and they will not provide us with any further funding We disclosed in previous filings that our cash on hand will only be sufficient to fund
operations into the third quarter of 2005. In addition, in March 2007, we will require $160.0
million to repay our senior convertible notes. Our principal stockholders have no obligation to
provide additional financing to cover our future needs, and Time Warner has stated that it does not
plan to provide us with additional funding. Moreover, we do not believe that any of our
stockholders or anyone else will provide us with additional funding. Furthermore, Time Warner is
not obligated to refinance our senior convertible notes. If America Online, Time Warner and the Cisneros Group fail to agree on matters related to our
business, our business may be adversely affected for as long as they are unable to agree Because America Online and the Cisneros Group jointly control us through provisions contained
in our restated certificate of incorporation, restated by-laws, and stockholders agreement, either
America Online or the Cisneros Group can block a wide variety of actions, including seeking
bankruptcy protection, material assets sales, budgetary authorizations and changing significant
corporate governance provisions in our restated certificate of incorporation and restated by-laws.
Additionally, Time Warner holds certain veto rights through its ownership of our senior convertible
notes. If our 39




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##### Table of Contents



stakeholders are unable to reach agreement, our business will be adversely affected
and we will be unable to complete transactions that might otherwise permit us to satisfy a larger
amount of our liabilities. We may be in default under our senior convertible notes We may be in default under our senior convertible notes. If so, Time Warner would be able to
demand immediate payment under the notes, and we do not have sufficient funds to repay the notes. Insolvency of subsidiaries may result in termination of important agreements Various agreements to which our subsidiaries are parties provide that if our subsidiary is or
becomes insolvent, ceases to operate in the ordinary course or commences liquidation or dissolution
proceedings, those agreements automatically terminate or the other party to the agreement may have
the right to terminate those agreements. In connection with any such
termination, we may be required to incur significant penalty payments. Any such termination could have a material adverse impact
on our businesses and our ability to sell or operate them and may require us to cease operating
them sooner than would otherwise be the case. We may not be able to sell any of our businesses. Even if we were successful in selling any of our
businesses, we would still have to cease operations We will not be able to obtain additional funding from any source. Since May 2004 we, together
with our financial advisors, have explored potential strategic alternatives for AOLA and its
subsidiaries, including a possible sale of our entire company, the sale of one or more of our
operating businesses, the sale of specific assets or other comparable transactions. To date, we
have not successfully completed any such transaction. Any such transaction may be subject to the consent of third parties under contracts they have with us, which we may not be able to obtain.
 Even if we are able to complete a strategic
transaction or the sale of one or more of our businesses, we are required to use the proceeds of
any such transaction to repay the senior convertible notes, and those funds would not be available
for use by the Company, whether to pay other creditors, common stockholders or otherwise. Even if
we are able to complete any such transaction, we will be required to cease operations. In addition, any potential sale of our businesses requires the consent of our preferred stockholders and the consent of
Time Warner, the holder of our senior convertible notes. We do not have the right to sub-license our rights under our
license agreement with America Online. Accordingly, any potential acquirer of any of our operating businesses would
have to negotiate such license rights directly from America Online. There is no assurance that any such negotiations would
be consummated on agreeable terms. America Online, Time Warner and the Cisneros Group control our company, may have interests that
conflict with each other as well as with the interests of class A common stockholders and are free
to place their respective interests ahead of those stockholders At December 31 2004, America Online/Time Warner and the Cisneros Group controlled
approximately 69.7%, and 28.8%, respectively, of the voting power of our outstanding capital stock.
Because they operate in the interactive services and media industries, their control creates actual
and potential conflicts of interest between them and us. Neither our restated certificate of
incorporation nor our agreements with America Online, Time Warner and the Cisneros Group prevent
them from pursuing other opportunities that might be disadvantageous to us, acquiring a minority
interest in businesses that compete with us or, in some instances, directly competing with us.
Consequently, they each have the power to take actions that may be directly opposed to our
interests and the interests of the class A common stockholders. Insolvency proceedings in foreign jurisdictions may reduce amounts available to our creditors If we are unable to pay all of our creditors in full in any of the foreign
jurisdictions in which we operate, we may become subject to the insolvency
laws of that jurisdiction. If that were the case, in certain
jurisdictions, management could be dispossessed of the business and a
judge, trustee, liquidator, receiver or other person performing similar
functions may have the right to liquidate the assets of the affected
entity. The appointment of such an entity and the forced liquidation of the
affected entitys assets, may further adversely impact our ability to sell all or a
portion of our businesses and could reduce the amounts available to our creditors. The insolvency laws of foreign jurisdictions may differ materially from the insolvency laws of the United States. Our marketing agreement with McDonalds in Brazil has not been successful and we need to
renegotiate better terms, negotiate a termination of the agreement or stop performing our
obligations under the agreement Our marketing agreement with McDonalds in Brazil has not been successful. We intend to either
renegotiate the terms of the agreement to more favorable ones, including eliminating the annual
maintenance fees that we are required to pay, negotiate a termination of the agreement or cease
performing our obligations under the agreement. If these negotiations are not successful, the
termination of the agreement, other than on a mutual basis, may have a material adverse effect on
our financial condition and ability to pay creditors. We do not expect to satisfy the continued listing requirements of the Nasdaq SmallCap market, and
we expect that our class A common stock will be delisted Our class A common stock is traded on the Nasdaq SmallCap Market under the symbol AOLA. On
June 15, 2004, the Nasdaq staff informed us that our class A common stock failed to maintain a
minimum bid price of $1.00 over the 30 consecutive trading days prior to such date, as required
to remain listed on the Nasdaq SmallCap Market. In 40




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accordance with Nasdaq rules, we were given
180 calendar days, or until December 13, 2004, to regain compliance with this requirement. Since
our class A common stock had an aggregate market value exceeding $50 million based on the closing
bid price on December 13, 2004, we received a second 180-day grace period ending on June 13, 2005
to correct the minimum bid price deficiency. The closing bid price of our class A common stock
must be above $1.00 for at least ten consecutive trading days starting no later than May 31, 2005
or our class A common stock will be delisted from the Nasdaq SmallCap Market. Although we have
obtained authorization from our stockholders to effect a 1-for-2, 1-for-3, 1-for-5, 1-for-7,
1-for-10 or 1-for-15 reverse stock split, we do not expect to implement a reverse stock split and
therefore expect that our stock will be delisted. Intense competition in Latin America, including competition from providers of free and low-cost
Internet services, continues to adversely affect our ability to generate revenues We compete in a marketplace with a wide range of competitors, including providers of online
and Internet access services and portals. Competition is intense and may increase, which could
adversely affect our ability to generate revenues and acquire market share. Furthermore, providers
of free Internet access in Brazil have continued to attract significant numbers of new users. We compete with providers of Spanish- and Portuguese-language interactive services, including
Internet access services, portals, search engines and Web directories. We compete in the broader
Latin American regional market as well as in country specific local markets. Our principal regional
market competitors include Terra Lycos, an affiliate of Telefónica, and Microsoft (MSN). Our
primary local competitors in our core target countries include UOL and free services provided by
Internet Gratis (iG), Super11 and iBest in Brazil; Telmex in Mexico, which has an alliance with
Microsoft for the development of content and offers a Prodigy-branded service; Ciudad Internet and
Arnet, which is owned by Telecom, in Argentina; and Puerto Rico Telephone Company, AT&T, Earthlink
and Juno in Puerto Rico. There are currently many other Internet access providers in Latin America. Some of our competitors may have the following advantages: longer operating histories, greater
name recognition in some markets, access to capital and larger established customer bases. Reduced marketing expenditures and publicity about our financial condition and prospects will
negatively impact our ability to attract new members or sell our businesses In the past three years, we significantly reduced our marketing expenditures in an effort to
conserve available cash and to target higher-value members. Although to date we have been able to
decrease our marketing expenditures, we do not anticipate being able to further reduce these
expenditures in the future. The diminishing investment in marketing initiatives and publicity
about our financial condition and prospects will have a direct influence on our ability to
increase or sustain our membership base, which may also make it difficult for us to sell our
businesses at prices we consider attractive, or at all. Our issuance of stock upon our payment of interest under the notes in additional stock and our
expected redemption of preferred stock for shares of class A common stock will cause substantial
dilution The continued payment of interest on the senior convertible notes in stock will result in
substantial dilution to the interests of our class A stockholders, particularly if the price of our
stock declines. Additionally, under the terms of our revised charter, on August 7, 2005, we are required to
redeem approximately 88% of the then outstanding series B and C preferred stock issued to America
Online and the Cisneros Group. The exact percentage to be redeemed is subject to adjustment based
on the number of shares we will issue in payment of interest on our senior convertible notes
through August 7, 2005, which is in turn dependent on the price of our class A common stock. The
series B and series C preferred stock may be redeemed, at our option, in cash, by delivery of
shares of class A common stock or by any combination of cash and shares of class A common stock.
Due to our limited cash position, we expect to redeem these shares of preferred stock through the
issuance of shares of class A common stock. It is not clear, however, whether such redemption
would be prohibited by Delaware law in view of certain statutory restrictions on redemption of
shares of a corporations own stock for cash or property. It also is not clear whether we would
have sufficient available 41




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authorized shares of class A common stock for any such redemption. If any
shares of preferred stock are redeemed, such redemption would result in significant additional
dilution to our class A stockholders. As noted above, we do not believe that our common stock has,
or will have, any value. Media coverage concerning our financial condition could cause our members to terminate their
subscriptions to our interactive services, which would negatively impact our ability to sell our
businesses or have ana adverse effect on the price we could obtain in
any such sale. The interactive services industry, including our Company, receives prominent media coverage.
Media coverage concerning our financial condition may cause our members to seek other interactive
service providers, which would make it more difficult for us to sell
our businesses. Or adversely effect the price we might obtain in any
such sale. We may not be able to retain qualified personnel, which could impact our business and our ability
to realize proceeds from the sale or liquidation of our businesses Our ability to implement our plans to sell our businesses depends in part upon both the
continued services of our executive officers and other key employees. The loss of the services of
one or more of our key personnel could adversely impact our plans. Since competition for talented
people is intense, we may have difficulty in retaining skilled and qualified personnel. During
fiscal 2004, we implemented a retention bonus plan for key executives and directors, but this may
not prove effective and we have already lost some employees. We may become subject to burdensome government regulations affecting interactive services, which
could increase our costs of doing business or impair our ability to generate revenues The legal and regulatory environment that pertains to interactive services in Latin America
remains uncertain and may change. Latin American countries may adopt laws and regulations or apply
existing laws to interactive services, including
online service and Internet advertising. Uncertainty and new regulations could increase our costs
or prevent us from delivering our interactive services We have a number of arrangements with telecommunications network providers that have not been
executed and these providers could modify the terms of these arrangements at any time We have several arrangements with telecommunications providers that have not been memorialized
in written contracts. As a result, these telecommunication providers could change the terms under
which they provide service to us or terminate their relationship with us at any time. In addition,
a change in telecommunications regulations could encourage these providers to change the terms
under which they provide service or terminate their relationships with us. 
 Item 7A. 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, including prolonged periods of devaluation, in the past. If the currencies of the
countries in which we operate depreciate and we do not or are unable to 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 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. To date, our consolidated results of operations have not been materially impacted by
inflation. Inflation was approximately 7.6% in Brazil during calendar 2004 and is expected to stay
around 5% in calendar 2005. Inflation in Argentina was approximately 6.0% during calendar 2004, and
is expected increase slightly to 9% in calendar 2005 as the 42




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Argentine economy has resumed growth
after devaluing its currency in 2001. Inflation in Mexico was 5% in 2004 and is forecasted to
decrease to 4% in 2005. We are exposed to market risk as it relates to changes in the market value of our investments.
As of December 31, 2004, we did not have any material investments in marketable securities. 
 Item 8. Financial Statements and Supplementary Data Reference is made to the financial statements listed under the heading (a) (1) Audited
consolidated financial statements of Item 15 of this report, which financial statements are
incorporated herein by reference in response to this Item 8. 
 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure. None. 
 Item 9A. Controls and Procedures. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this Annual Report on Form 10-K, an evaluation was
performed under the supervision and with the participation of our management, including the Chief
Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the design
and operation of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)). Based on that evaluation, the CEO and CFO have concluded that our disclosure
controls and procedures were adequate and effective to ensure that material information relating to
us, including our consolidated subsidiary, was made known to them by others within those entities,
particularly during the period in which this Annual Report on Form 10-K was being prepared. Changes in Internal Controls There have been no changes in our internal controls over financial reporting, identified in
connection with the above-mentioned evaluation of such internal controls that occurred during our
fourth quarter of fiscal 2004 that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting. 
 Item 9B. Other Information On March 7, 2005, we entered into an amendment to our strategic marketing agreement with Banco
Itaú as of November 4, 2004. This amendment, which is effective as of September 23, 2003, revised
our strategic marketing agreement so that it applied to our web-based and broadband products in
Brazil, which were not covered by the existing agreement. The amendment also sets forth the
pricing structure for such new products. A copy of the agreement is
included as Exhibit 10.54 to
this report and is incorporated by reference herein. 
 PART III 
 Item 10. Directors and Executive Officers of the Registrant Board Structure Our board consists of 15 directors who are elected annually. America Online, Inc. and the
Cisneros Group are each entitled to elect five directors, but each has elected only four. America Online, Inc. has elected:  
    David Gang
    Joseph M. Redling 43




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
    Neil Smit
    Gerald Sokol, Jr. The Cisneros Group has elected:  
    Steven I. Bandel
    Gustavo A. Cisneros
    Ricardo J. Cisneros
    Cristina Pieretti Our three remaining directors are:  
    William H. Luers
    M. Brian Mulroney
    Robert S. OHara, Jr. We currently have four vacancies on our Board of Directors, one of which resulted from the
resignation of Roberto Egydio Setúbal on July 31, 2002 and
one of which resulted from the resignation of Donna Hrinak on
March 28, 2005. Ms. Hrinak served as a member of our Board from
July 2004 until March 28, 2005. We do not expect these vacancies to be filled
at this time. We do not expect America Online or The Cisneros Group to fill the remaining vacancies
at this time. Biographical Information The individuals listed below are our executive officers or members of our board of directors,
as indicated. The stated age of each such individual is as of March 21, 2005. Name
    
    Age
    
    PositionCharles M. Herington
    
    
    45
    
    
    President and Chief Executive OfficerOsvaldo Baños
    
    
    49
    
    
    Executive Vice President and Chief Financial OfficerPaulo Moledo
    
    
    38
    
    
    Controller and TreasurerDavid A. Bruscino
    
    
    42
    
    
    Vice President, General Counsel and SecretaryEduardo A. Escalante Castillo
    
    
    46
    
    
    President, AOL MexicoMilton R. Camargo
    
    
    47
    
    
    President, AOL BrasilTravis Good
    
    
    44
    
    
    Vice President, Technology and OperationsEduardo Hauser
    
    
    36
    
    
    Executive Vice President, AOL Services and Business AffairsSteven I. Bandel
    
    
    51
    
    
    DirectorGustavo A. Cisneros
    
    
    59
    
    
    DirectorRicardo J. Cisneros
    
    
    57
    
    
    DirectorDavid A. Gang
    
    
    47
    
    
    DirectorNeil Smit
    
    
    46
    
    
    DirectorWilliam H. Luers
    
    
    75
    
    
    DirectorM. Brian Mulroney
    
    
    66
    
    
    DirectorRobert S. OHara, Jr.
    
    
    65
    
    
    DirectorCristina Pieretti
    
    
    53
    
    
    DirectorJoseph M. Redling
    
    
    46
    
    
    DirectorGerald Sokol, Jr.
    
    
    42
    
    
    Director
 Charles M. Herington.Mr. Herington has been our president and chief executive officer since
February 1999. Before joining AOLA, Mr. Herington served as president of Revlon América Latina from
January 1998 to February 1999. From 1990 through 1997, Mr. Herington held a variety of senior
management positions with PepsiCo Restaurants International, including regional vice president of
KFC, Pizza Hut and Taco Bell for South America, Central America and the Caribbean from September
1995 to September 1997, regional vice president of KFC for Latin America from February 1994 to
September 1995, general manager of KFC Puerto Rico from February 1992 to February 1994, general
manager of franchise 44




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markets for KFC Latin America from February 1991 to February 1992 and
marketing director for KFC for Latin America from May 1990 to February 1991. Between 1981 and 1990,
Mr. Herington served in various managerial positions at Procter & Gamble. Mr. Herington is also a
director of Molson Coors Brewing Company, ADVO, Inc. and of NII Holdings, Inc. Osvaldo Baños. Mr. Baños has been our executive vice president and chief financial officer
since September 2002. From June 1999 to September 2002, Mr. Baños was a partner and executive
officer of Gemini Group, a consulting and venture capital firm in Buenos Aires, Argentina. From
July 1997 to May 1999, Mr. Baños served as president and chief executive officer of Buenos Aires
Embotelladora, S.A., a bottler of Pepsi products in Latin America. From 1981 to 1996, Mr. Baños
served in various executive positions at PepsiCo, Inc. Paulo Moledo.Mr. Moledo has been our treasurer and controller since October 2004. He is also
our principal accounting officer. From August 1999 until October 2004, Mr. Moledo held the position
of director, business planning for AOLA. Prior to AOLA, Mr. Moledo held the position of director of
regional planning, Latin America for Revlon, Inc. for eighteen months. Mr. Moledo began his career,
and spent six years, in the areas of business planning and accounting with Ford Motor Company,
Brazil. David A. Bruscino.Mr. Bruscino has been our vice president, general counsel and secretary
since May 2000. From September 1988 to April 2000, Mr. Bruscino was an attorney with the law firm
of Baker & Hostetler LLP in Cleveland, Ohio, and was a partner of that firm beginning in 1996. Milton R. Camargo. Mr. Camargo has been the president and general manager of our Brazilian
subsidiary, AOL Brazil, since March 31, 2003. Prior to that, he served as the chief operating
officer of AOL Brazil beginning in May 1, 2001, having started with AOL Brazil in July 2000 as the
business unit director for the AOL/ Banco Itaú relationship. From
July 1997 to July 2000, Mr. Camargo served as president of the Brazil Porto Alegre South
Mission of the Church of Jesus Christ of the Latter-Day Saints. From February 1996 to June 1997,
he worked for Philips do Brasil as marketing director in the Lighting Division. From April 1991 to
January 1996, he worked for Otis Elevator Company, a subsidiary of United Technologies Corporation,
in various positions, culminating in the position of international commercial division manager. Eduardo A. Escalante Castillo.Mr. Escalante is president and general manager of our Mexican
subsidiary, AOL Mexico, a position he has held since November 1999. Prior to that, from September
1998 to November 1999, Mr. Escalante was vice president of Alestra, a joint venture of AT&T, Grupo
Alfa and Bancomer. From January 1996 to August 1998, Mr. Escalante was director of marketing and
from November 1994 to December 1995 he served as assistant director of strategic planning for Grupo
Alfa . From May 1992 to October 1994 he served as marketing manager and from June 1991 to April
1992 as the manager of planning and new product development for Sigma Alimentos, the food segment
of Grupo Alfa. Travis Good.Mr. Good has been our vice president of technology and operations since March
1999. From May 1995 to February 1999, he held a variety of management positions at America Online,
including general manager for America Onlines Global Network Navigator and director of product
marketing for AOL client software. From January 1995 to May 1995 he was director of Internet
services for Cable & Wireless. From March 1994 to January 1995, Mr. Good served as general manager
of GE Information Services distributorship in Mexico. From December 1987 to March 1994, he served
in a variety of positions at General Electric Corporation. Eduardo Hauser.Mr. Hauser is our executive vice president of AOL services and business
affairs, a position he has held since July 2003. From January 2001 to June 2003, Mr. Hauser served
as our vice president of AOL services. From January 2002 to July 2003, Mr. Hauser served as our
vice president of business affairs. From March 1999 to January 2001, Mr. Hauser served as our vice
president of corporate development. Before joining AOLA, Mr. Hauser was employed from September
1988 to March 1999 by different companies in the Cisneros Group, serving in a variety of positions,
including vice president, news, of Venevisión from September 1997 to March 1999, and as managing
director of Highgate Properties, a company within the Cisneros Group, from September 1993 to
September 1997. Steven I. Bandel.Mr. Bandel has been a member of our board of directors since January 2000
and was appointed to the board by the Cisneros Group. Since January 1995, Mr. Bandel has held
several senior management positions at companies within the Cisneros Group, with responsibilities
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has the title of president and chief
operating officer of the Cisneros Group. Mr. Bandel is also a director of Pueblo Xtra
International, Inc., a company within the Cisneros Group. Gustavo A. Cisneros.Mr. Cisneros has been a member of our board of directors since January
2000 and was appointed to the board by the Cisneros Group. He is chairman and chief executive
officer of the Cisneros Group. Since 1975, Mr. Cisneros has overseen the management and operations
of the Cisneros Group and is an executive officer and director of many of its constituent
companies. Mr. Cisneros is a director of Spalding Holdings Corporation, Pueblo Xtra International,
Inc. and Pan American Beverages, Inc. Mr. Cisneros is a founding member of the international
advisory board of the Council on Foreign Relations, as well as a member of the board of overseers
of the International Center for Economic Growth. He serves on the chairmans international advisory
council of the Americas Society. Mr. Cisneros is a member of the international advisory board of
Columbia University and a founding member of the advisory committee for the David Rockefeller
Center for Latin American Studies at Harvard University. He is a director of the Joseph H. Lauder
Institute of Management and International Studies of the Wharton School of the University of
Pennsylvania. Mr. Cisneros is the brother of Ricardo J. Cisneros. Ricardo J. Cisneros.Mr. Cisneros has been a member of our board of directors since January
2000 and was appointed to the board by the Cisneros Group. He is vice-chairman of the Cisneros
Group. Since 1975, he has served as an executive officer and a director of a number of the
companies within the Cisneros Group. He serves on the board of the Simon Bolivar Foundation in New
York. Mr. Cisneros is also the director of the Fundación Cisneros and the Fundación Cultural
Venevisión in Venezuela. In 1993, Mr. Cisneros with his brother Gustavo, established the Gustavo
and Ricardo Cisneros Fund at Rockefeller University, which focuses its research on diseases
prevalent in Latin America and provides for the annual appointment of the Rockefeller Latin
American Research Scientists. David A. Gang.Mr. Gang has been a member of our board of directors since July 31, 2003 and
was appointed to the board by America Online. Mr. Gang has served as executive vice president of
AOL Products since April 2003. Before that, he served as executive vice president of product
marketing for America Online from June 2002 to April 2003. From June 1999 until June 2002, Mr.
Gang served as senior vice president of strategic development for America Online and from July 1995
to June 1999 he served as vice president of product marketing of America Online. Before joining
America Online, Mr. Gang was vice president of marketing at Aldus Consumer Division from 1992 to
1994, where he created and developed award-winning products Aldus home publisher and Aldus art
explorer. From 1990 to 1992, he was president of After Hours Software. William H. Luers.Mr. Luers has been a member of our board of directors since August 2000.
He has been chairman, chief executive officer and president of the United Nations Association of
the United States of America since February 1999. From May 1986 to February 1999, Mr. Luers served
as president of the Metropolitan Museum of Art in New York, New York. He is a member of the board
of directors of IDEX Corporation, Wickes Inc., and several incorporated mutual funds managed by
Deutsche Scudder Investments, Inc. The Right Honourable M. Brian Mulroney.The Right Honourable M. Brian Mulroney has been a
member of our board of directors since August 2000. He has been a senior partner in the law firm of
Ogilvy Renault in Montreal, Quebec, Canada since August 1993. From September 1984 to June 1993, Mr.
Mulroney served as the prime minister of Canada. He is a member of the board of directors of the
Archer Daniels Midland Company, Barrick Gold Corp.,Trizec Properties, Inc., Cendant Corporation,
Quebecor Inc. and Quebecor World Inc. 46




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Robert S. OHara, Jr.Mr. OHara has been a member of our board of directors since January
2000 and was appointed to the board by the Cisneros Group. From 1974 to 2002, Mr. OHara was a
member of Milbank, Tweed, Hadley & McCloy LLP, a law firm in New York, N.Y. Since January 2002, he
has been Consulting Partner and Senior Counsel at the firm. Cristina Pieretti.Ms. Pieretti has been a member of our board of directors since January
2000 and was appointed to the board by the Cisneros Group. From 1992 to March 1995, and since
February 1996, Ms. Pieretti has held a number of senior management positions with marketing and
operations responsibilities at companies within the Cisneros Group in the consumer goods, retail
and telecommunications industries. From March 1995 to February 1996, Ms. Pieretti was a partner at
Booz-Allen & Hamilton, a consulting firm. Ms. Pieretti has the title of executive vice president of
operations of the Cisneros Group. Ms. Pieretti is also a director of Pueblo Xtra International,
Inc., a company within the Cisneros Group. Joseph M. Redling.Mr. Redling joined America Online, Inc. in 1999 as Senior Vice President,
Marketing, for AOLs flagship service. Today he acts as Chief Marketing Officer and is responsible
for overall brand management and marketing, both domestic and international, for the AOL family of
brands. Before joining AOL, Mr. Redling served as Chief Operating and Marketing Officer for Arnold
Palmer Golf, an entrepreneurial venture that established the first nationally branded chain of golf
courses. Mr. Redling spent 15 years in the entertainment and tourism industry in senior positions
in marketing, entertainment, and event functions. He served as Senior Vice President, Marketing and
Entertainment, Six Flags Theme Parks. While working in the tourism business, Mr. Redling served in
a number of leadership positions including Co-Chair of the Marketing Committee for the White House
Conference on Tourism and Chair of the National Council of Travel Attractions. Neil Smit.Mr. Smit currently leads America Online, Inc.s Access Business and oversees access
network management for the companys Internet access services. Before he was named to his current
position in 2004, Smit was Executive Vice President, Member Development. Earlier, Mr. Smit had been
Senior Vice President of AOLs product and programming team and Chief Operating Officer of AOL
Local. Prior to joining AOL in 2000, Mr. Smit spent 10 years in the consumer packaged-goods
industry. He was a regional president with Nabisco where he was responsible for 75 leading brands
and a staff of 4,000. He also held management positions with Pillsbury. Mr. Smit began his career
as a Navy SEAL and rose to the rank of Lieutenant Commander. Gerald Sokol, Jr.Mr. Sokol has been a member of our board of directors since January 2000 and
was appointed to the board by America Online. Mr. Sokol currently serves as Executive Vice
President, Marketing Operations, leading the day-to-day management of AOLs marketing operations.
Prior to this, he served as executive vice president of AOL International from October 2002 to
November 2004. Before that he served as senior vice president of strategic planning and general
manager of AOL International from September 1999 to October 2002 and before that was vice president
of finance of AOL International since February 1999. From August 1996 to January 1999, Mr. Sokol held several
positions with NTN Communications, Inc., most recently serving as president, chief executive
officer and chairman of the board of directors. From July 1987 to May 1996, Mr. Sokol held several
positions with Tele-Communications, Inc., most recently serving as vice president and treasurer. Controlled Company Status We are exempt from certain independent director requirements set forth in Rule 4350(c) of The
Nasdaq Stock Market Inc. because it is a Controlled Company within the meaning of Rule
4350(c)(5). We have received a letter from NASDAQ confirming our analysis that we are a
Controlled Company. We have concluded that we are a Controlled Company because America Online
and the Cisneros Group currently own in excess of 50% of the voting power of our securities and
each of America Online and the Cisneros Group have on file a Schedule 13D acknowledging that it may
be considered to be acting as a member of a group with the other. Audit Committee We have an Audit Committee established by our Board of Directors for the purpose of overseeing
our accounting and financial reporting processes and our audits of our financial statements. This
committee currently has two members, comprised of our Chairman,
Robert S. OHara, Jr., and William H.
Luers. Donna Hrinak, who joined our Board in July 2004, was the third
member of this committee until she resigned from our Board and
our Audit Committee on March 28, 2005. 47




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The Board of Directors has determined that we do not have an audit committee financial expert
(as that term is defined under Item 401(h) of Regulation S-K) serving on our audit committee. As
disclosed above, we have few independent directors and are deemed a Controlled Company under
Nasdaq regulations. None of our independent directors meet the criteria of an audit committee
financial expert. Nonetheless, our Board of Directors believes that the members of our audit
committee are competent and able to fulfill their duties. Commencing
in 2002, pursuant to the requirements of the Sarbanes-Oxley Act of
2002 our Audit Committee became
responsible for the review and approval of all related-party transactions.  Code of Ethics The company has adopted a code of ethics that applies to all employees, including the
principal executive officer, principal financial officer and principal accounting officer. We have
made our code of ethics available on our website at www.aola.com/investors. Disclosure regarding
any amendments to, or waivers from, provisions of our code of ethics that apply to our directors,
principal executive and financial officers will be included in a Current Report on Form 8-K within
five business days following the date of the amendment or waiver, unless website posting of such
amendments or waivers is then permitted by the rules of The Nasdaq Stock Market, Inc. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires directors, executive officers
and beneficial owners of more than 10% of our capital stock to file reports with the Securities and
Exchange Commission regarding their ownership and changes in their ownership of our capital stock.
To our knowledge, during 2004, our officers, directors and greater than 10% beneficial stockholders
complied with all Section 16(a) filing requirements on time, except that Messrs. Bruscino, Hauser,
Escalante and Camargo and Ms. Hrinak each failed to file timely one Form 4 relating to an option
grant. 
 Item 11. Executive Compensation Compensation of Directors The directors appointed by America Online and the Cisneros Group received no cash compensation
for services rendered in their capacity as directors. The other members of our board receive a fee
of $10,000 for each regular board meeting they attend, a fee of $1,000 for each special telephonic
meeting they attend and a fee of $7,500 per fiscal year for
serving on a committee of our board. The chairperson of each committee receives an additional
fee of $2,500 per fiscal year. The directors may receive additional compensation in a manner to be
determined by our board. All directors are eligible for reimbursement for actual reasonable costs
incurred in attending our board and committee meetings. Our non-employee directors also receive automatic stock option grants under our 2000 Stock
Option Plan upon joining our board. Options granted under this plan are non-qualified stock
options. Each non-employee board member elected for the first time to our board is granted an
option to purchase 60,000 shares of class A common stock upon the date of his or her initial
election. The exercise price of the options is 100% of the fair market value of the class A common
stock on the date of the option grant. The options are exercisable as of the date granted, and
their term is ten years. As of March 11, 2005, none of these options granted under the plan had
been exercised. Under America Onlines conflicts of interests standards, David A. Gang, Neil Smit,
Joseph M. Redling, and Gerald Sokol, Jr., each a member of our board as well as an employee of
America Online, must transfer the economic benefit of their options to America Online. Compensation Committee Interlocks and Insider Participation Messrs. Mulroney and Luers currently constitute our compensation committee. Neither member of
our compensation committee has been an officer or employee of our company. No executive officer of
our company serves as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of directors or
compensation committee. 48




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##### Table of Contents



Summary Compensation Table The following table presents the total compensation paid or accrued to our named executive
officers during our fiscal years ended December 31, 2004, December 31, 2003 and December 31, 2002. Named executive officer refers to our chief executive officer and to our four most highly
paid executive officers who earned more than $100,000 in the fiscal year ended December 31, 2004,
and who were employed by us on December 31, 2004. Summary Compensation Table SecuritiesName and Principal
    
    
    
    
    
    
    
    Underlying
    
    Other AnnualPosition
    
    Year
    
    Salary
    
    Bonus
    
    Options Awarded
    
    CompensationCharles M. Herington (1)
    
    2004
    
    $457,084
    
    $498,177
    
    150,000
    
    $31,154President and Chief and
    
    2003
    
    435,000
    
    372,605
    
    
    
    33,604Executive Officer
    
    2002
    
    431,700
    
    440,220
    
    150,000
    
    33,904Osvaldo Baños (2)
    
    2004
    
    $315,275
    
    $171,785
    
    115,000
    
    Executive Vice President
    
    2003
    
    300,154
    
    128,485
    
    
    
    and Chief Financial
    
    2002
    
    140,487
    
    231,845
    
    250,000
    
    OfficerEduardo A Escalante
    
    2004
    
    $316,331
    
    $143,856
    
    80,000
    
    $31,264Castillo (3)
    
    2003
    
    314,960
    
    138,306
    
    
    
    65,619President and General
    
    2002
    
    316,315
    
    179,860
    
    80,000
    
    47,200Manager, AOL MexicoEduardo Hauser Executive
    
    2004
    
    $216,633
    
    $76,273
    
    44,600
    
    Vice President AOL
    
    2003
    
    209,541
    
    81,383
    
    
    
    Services and Business
    
    2002
    
    204,390
    
    98,062
    
    44,600
    
    AffairsDavid A. Bruscino (4)
    
    2004
    
    $197,801
    
    $82,265
    
    44,600
    
    $18,006Vice President and
    
    2003
    
    187,658
    
    64,443
    
    
    
    18,622General Counsel
    
    2002
    
    179,029
    
    66,904
    
    44,600
    
    7,137
   (1)
    Other annual compensation includes Mr. Heringtons automobile allowance and payment of
club membership fees.(2)
    Mr. Baños annual bonus compensation in 2002 consisted of a signing bonus that was
granted under his employment agreement.(3)
    Mr. Escalantes other annual compensation in 2002, 2003 and 2004 consists of medical
and life insurance, use of automobile, and childrens education allowance.(4)
    Mr. Bruscinos other annual compensation in 2002, 2003 and 2004 consists of partial
reimbursement of expenses related to overseas work. Option Grants in 2004 to Named Executive Officers The following table sets forth information with respect to employee options to purchase shares
of class A common stock awarded during the year ended December 31, 2004 to the named executive
officers listed in the summary compensation table. 49




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##### Table of Contents



Individual GrantsNumber of
    
    
    Percentage of
    
    
    
    
    
    
    
    At Assumed AnnualSecurities
    
    
    Total Options
    
    
    
    
    
    
    
    Rates of StockUnderlying
    
    
    Granted to
    
    Exercise
    
    
    
    
    Price AppreciationOptions
    
    
    Employees
    
    Price
    
    
    Expiration
    
    For Option Term (2)Name
    
    Granted (1)
    
    
    in 2004
    
    (Per Share)
    
    
    Date
    
    5%
    
    
    10%Herington, Charles M.
    
    
    150,000
    
    
    8.51%
    
    $
    1.42
    
    
    01/01/14
    
    
    133,955
    
    
    
    339,467Baños, Osvaldo H.
    
    
    115,000
    
    
    6.53
    
    
    1.42
    
    
    01/01/14
    
    $
    102,698
    
    
    $
    260,258Escalante Castillo, Eduardo
    
    
    80,000
    
    
    4.54
    
    
    1.42
    
    
    01/01/14
    
    
    71,442
    
    
    
    181,049Hauser, Eduardo A.
    
    
    44,600
    
    
    2.53
    
    
    1.42
    
    
    01/01/14
    
    
    39,829
    
    
    
    100,935Bruscino, David A.
    
    
    44,600
    
    
    2.53
    
    
    1.42
    
    
    01/01/14
    
    
    39,829
    
    
    
    100,935
   (1)
    Options are non-qualified stock options and generally terminate
60 days following termination of the executive officers
employment with AOLA or the expiration date, whichever occurs
earlier. The exercise price of each option was equal to the fair
market value per share of the class A common stock on the grant
date. All options vest over a four-year period at the rate of 25%
per year with the first vesting date occurring on January 1,
2005, with the exception of the options granted to Mr. Herington,
which vest over three years.(2)
    Amounts represent hypothetical gains that could be achieved for
the respective options if exercised at the end of the option
term. These gains are based on assumed rates of stock
appreciation of 5% and 10% compounded annually from the date the
respective options were granted to their expiration date. The
gains shown are net of the option exercise price, but do not
include deductions for taxes or other expenses associated with
the exercise of the option or the sale of the underlying shares.
The actual gains, if any, on the exercise of stock options will
depend on the future performance of the class A common stock, the
option holders continued employment throughout the option
period, and the date on which the options are exercised. Aggregated Option Exercises in the Last Fiscal Year and Year End Option Values The following table summarizes for each of the named executive officers unexercised options
held at December 31, 2004. None of the named executive officers held any stock appreciation rights
or exercised any stock options or stock appreciation rights during 2004. The value of unexercised
in-the-money options at year-end is the difference between the exercise price and the fair market
value of the underlying stock on December 31, 2004. The closing price of our class A common stock
on the Nasdaq SmallCap Market on that date was $0.75. Number of Securities
    
    
    Vote of UnexercisedUnderlying Unexercised
    
    
    In-the-money SharesOptions at Year-End
    
    
    at Year-End (1)Name
    
    Exercisable
    
    
    Unexercisable
    
    
    Exercisable
    
    
    UnexercisableHerington, Charles M.
    
    
    2,150,000
    
    
    
    200,000
    
    
    
    
    
    
    
    Escalante Castillo, Eduardo
    
    
    605,000
    
    
    
    80,000
    
    
    
    
    
    
    
    Hauser, Eduardo A.
    
    
    379,000
    
    
    
    44,600
    
    
    
    
    
    
    
    Baños, Osvaldo H.
    
    
    62,500
    
    
    
    240,000
    
    
    
    62,500
    
    
    
    125,000Bruscino, David A.
    
    
    334,600
    
    
    
    44,600
    
    
    
    
    
    
    
    
   1) Actual gains, if any, on exercise will depend on the value of class A common stock on the date of sale of
any shares acquired upon exercise of the option Employment Contracts and Termination of Employment and Change-in-Control Agreements 50




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##### Table of Contents



Charles M. Herington.Mr. Herington serves as our president and chief executive officer. Mr.
Heringtons annual base salary from March 2004 through December 2004 was $461,100. From March 2002
through February 2004 was $435,000. From March 2001 through February 2002, Mr. Heringtons annual
base salary was $413,000. Mr. Herington is eligible to receive an annual bonus of up to 130% of his
base salary, at the discretion of our board based on his performance. The Company has historically awarded bonuses to Mr. Herington based on the achievement of annually established company and personal performance objectives.
 On August 7, 2000, Mr.
Herington also received an option to purchase 1,300,000 shares of our class A common stock at $8.00
per share, its initial public offering price. As of January 1, 2003, Mr. Herington can purchase all
shares available under this option grant. On January 1, 2004 Mr. Herington received an additional
option grant of 150,000 shares. The board, in its discretion, may grant other stock options to Mr.
Herington based upon his performance. Mr. Herington also holds options to purchase Time Warner
common stock. According to the terms of his employment agreement, if we terminate Mr. Herington for any reason other than:  .
    His willful and material violation of AOLAs company policy, which is not cured within
30 days after he has received written notice from our board;.
    His failure to comply with the lawful direction of our board;.
    His commission of a material act of dishonesty or fraud; or.
    His conviction or plea of no contest to a felony, Mr. Herington
is entitled to receive his salary for 24 months following termination (such amount subject to reduction by the amount of any income earned by Mr. Herington during the 24-month severance period),
as well as a portion of his target annual bonus. Options granted to Mr. Herington before his termination will
continue to vest during the applicable severance payment period. In addition to the foregoing, in 2004 the Compensation Committee and Special Committee of our
Board of Directors approved a retention arrangement for Mr. Herington. The approvals
provide for a retention payment of $230,550 if Mr. Herington remains employed by the Company
through July 1, 2005, pursuant to an agreement substantially in the form and otherwise containing the conditions of
agreements provided to other key executives. The approvals also make
reference to the severance terms contained in the employment agreement described above.
 A significant portion of the retention payment is
secured by an irrevocable letter of credit. The committees also approved the grant to Mr. Herington
of 500,000 shares of restricted stock, which Mr. Herington elected to forego. This arrangement has
not been memorialized in a written agreement, and the particular terms of the arrangement have not
been finalized. Osvaldo Baños.Mr. Baños serves as our chief financial officer. Mr. Baños annual base salary
from March 2004 through December 2004 was $318,000. Prior to that, his annual base salary was
$300,000 since the beginning of his employment in August 2002. Mr. Baños also received a signing
bonus of $150,000 in 2002. Mr. Baños is eligible to receive an incentive bonus of up to 50% of his
base salary based on his performance and on the achievement of specified performance objectives. He
is also eligible to receive options to purchase our class A common
stock. As part of his employment agreement, Mr. Baños received an initial option grant of 250,000 shares. On January 1, 2004 Mr.
Baños received an additional option grant of 115,000 shares. In addition to the foregoing, in 2004 our Compensation Committee and Special Committee
approved a severance and retention arrangement for Mr. Baños. The approvals provide for a
retention payment of $159,000 if Mr. Baños remains employed by the Company through July 1, 2005,
and a severance payment of one years salary, pursuant to an agreement substantially in the form and
otherwise containing the conditions of agreements provided to other key executives. A significant
portion of the retention payment is secured by an irrevocable letter of credit. The committees
also approved the grant to Mr. Baños of 150,000 shares of restricted stock, which Mr. Baños elected
to forego. This arrangement has not been memorialized in a written agreement, and the particular
terms of the arrangement have not been finalized. David A. Bruscino.Mr. Bruscino is our vice president and general counsel. Mr. Bruscinos
annual base salary from March 2004 through December 2004 was $194,532. From March 2002 through
February 2004 his annual base salary was $183,521. From March 2001 through February 2002, Mr.
Bruscinos annual base salary was $166,837. Mr. Bruscino is eligible to receive an incentive bonus
of up to 35% of his base salary based on his performance and on the achievement of specified
performance objectives. As part of his employment agreement, Mr. Bruscino is also eligible to receive options to purchase shares of our
class A common stock. 51




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##### Table of Contents



Eduardo A. Escalante Castillo.Mr. Escalante is president and general manager of AOL Mexico.
Mr. Escalantes annual salary from March 2004 to December 2004 was $317,429. From March 2002
through February 2004 was $282,584. From March 2001 through February 2002, Mr. Escalantes annual
base salary was $294,803. Mr. Escalantes base salary is also impacted by fluctuations in exchange
rate of the Mexican peso versus the U.S. dollar. Mr. Escalante is eligible to receive an incentive
bonus of up to 50% of his base salary based on his performance and on the achievement of specified
performance objectives. As part of his employment agreement, Mr. Escalante is also eligible to receive options to purchase shares of our
class A common stock. Eduardo Hauser. Mr. Hauser is our executive vice president of AOL Services and Business
Affairs. Mr. Hausers annual base salary from March 2004 through December 2004 was $217,923. From
March 2002 through February 2004 was $209,541. From March 2001 through February 2002, Mr. Hausers
annual base salary was $182,210. Mr. Hauser is eligible to receive an annual bonus of up to 75% of
his base salary, based on specified performance objectives related to
advertising revenue. As part of his employment agreement, Mr. Hauser is
also eligible to receive options to purchase our class A common stock. We are parties to retention agreements with Messrs. Bruscino, Hauser and Escalante. If such
persons remain employed by the Company through July 1, 2005, the Company will pay such executive on
July 1, 2005, a lump sum payment (Retention Bonus) of $120,000 (in the case of Mr. Bruscino),
$140,000 (in the case of Mr. Hauser) and $200,000 (in the case of Mr. Escalante). If any of the
following events occurs prior to July 1, 2005, AOLA will pay such officer or his estate the
Retention Bonus on the date such event occurs: (a) AOLA terminates the executives employment
without Cause (as defined in the retention agreement) or as a result of the executives
Disability (as defined in the retention agreement); (b) the executive terminates his employment
for Good Reason (as defined in the retention agreement); or (c) the executive dies. A significant
portion of the Retention Bonus is secured by an irrevocable letter of credit. In addition, if the executives employment is terminated without Cause or as a result of the
executives Disability or the executive terminates his employment for Good Reason, he will be
entitled to receive a lump sum payment equal to twelve months salary plus pro rata bonus and a
payment for accrued, but unused vacation time. He will also receive health and dental insurance
coverage for a twelve month period. All unvested options held by the executive will also become
immediately exercisable. In the event of a Going Private Event (AOLA ceases to be required to file reports with the
Securities and Exchange Commission) or a Change of Control (America Online, Inc., Time Warner
Inc. and the Cisneros Group no longer collectively hold 50% of the voting power of AOLAs stock or
have the right to approve the election of a majority of AOLAs board of directors), all options
will also become fully exercisable. Pursuant to the retention agreements, each of Messrs. Bruscino, Hauser and Escalante were
granted options under AOLAs 2000 Stock Plan to purchase AOLAs class A common stock at a price of
$1.59 per share. These options vest in two equal installments on January 1, 2005 and January 1,
2006. All such options expire on June 5, 2014. Messrs. Bruscino, Hauser and Escalante were granted
options to purchase 120,000 shares, 140,000 shares and 200,000 shares of class A common stock,
respectively. 
 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters The following table provides information regarding the ownership of our class A common stock
as of February 20, 2005 by:  
    the named executive officers listed in the summary compensation table;
    each director and nominee for director;
    all current directors and executive officers as a group; and
    each stockholder known by us to own beneficially more than 5% of our class A common stock. For purposes of calculating the number and percentage of outstanding shares held by each
holder named below, any shares which that holder has the right to acquire within 60 days of
February 20, 2005 are considered to be outstanding, but shares which may be similarly acquired by
other holders are not considered to be outstanding. 52




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##### Table of Contents



We believe that the stockholders named in this table have the sole voting and investment power
for all shares of the class A common stock shown to be beneficially owned by them based on
information they have provided to us, with the following exceptions:  
    The Cisneros Groups shares are owned by Aspen Investments LLC and Atlantis Investments
LLC, companies within the Cisneros Group of Companies. Aspen Investments LLC is indirectly
beneficially owned by a trust established by Gustavo A. Cisneros for the benefit of himself
and members of his family, and Atlantis Investments LLC is indirectly beneficially owned by
a trust established by Ricardo J. Cisneros for the benefit of himself and members of his
family. Aspen Investments LLC and Gustavo A. Cisneros disclaim beneficial ownership of the
 shares of AOLA owned by Atlantis Investments LLC or Ricardo J. Cisneros. Atlantis
Investments LLC and Ricardo J. Cisneros disclaim beneficial ownership of the shares of AOLA
owned by Aspen Investments LLC or Gustavo A. Cisneros.
    A total of 216,666 shares originally issued to the Cisneros Group consist of shares of
series C preferred stock held by the children of Gustavo A. Cisneros. These shares are
subject to a voting agreement allowing Aspen Investments LLC to vote the shares. The voting
agreement terminates if the series C preferred shares are transferred by the children in
the future or if the shares are converted into shares of our class A common stock.
    A total of 288,888 shares originally issued to the Cisneros Group consist of shares of
series C preferred stock held by the children of Ricardo J. Cisneros. These shares are
subject to a voting agreement allowing Atlantis Investments LLC to vote the shares. The
voting agreement terminates if the series C preferred shares are transferred by the
children in the future or if the shares are converted into shares of our class A common
stock.
    America Onlines shares include 240,000 shares of class A common stock issuable upon
exercise of options held by employees of America Online, who are also directors of AOLA.
Although such employees are the record holders of their respective options, America Online
holds or shares disposition power with respect to all of the shares of the class A common
stock underlying the options.
    Banco Itaús shares are held through an indirectly wholly-owned subsidiary, Garnet
Corporation. Banco Itaú transferred these shares in December 2003. The address for America Online is 22000 AOL Way, Dulles, Virginia 20166. The address for Time
Warner is One Time Warner Center, 12th Floor, NY, NY 10019. The address for the stockholders
affiliated with the Cisneros Group is c/o Finser Corporation, 550 Biltmore Way, Suite 900, Coral
Gables, Florida 33134. The address for Banco Itaú and Garnet Corporation is Rua Boa Vista 176, São
Paulo, Brazil. Shares ofBeneficial Owner
    
    Class A Common StockBeneficially OwnedNumber
    
    
    
    
    
    
    PercentExecutive Officers and DirectorsCharles M. Herington
    
    
    2,160,000
    
    
    
    (1
    )
    
    
    1.57
    %Osvaldo Baños
    
    
    91,250
    
    
    
    (2
    )
    
    
    0.07
    %Eduardo
Escalante
    
    
    605,000
    
    
    
    (3
    )
    
    
    0.45
    %David A. Bruscino
    
    
    335,600
    
    
    
    (4
    )
    
    
    0.25
    %Eduardo Hauser
    
    
    862,376
    
    
    
    (5
    )
    
    
    0.64
    %Steven I. Bandel
    
    
    640,593
    
    
    
    (6
    )
    
    
    0.47
    %Gustavo A. Cisneros
    
    
    57,730,886
    
    
    
    (7
    )(17)
    
    
    32.98
    %Ricardo J. Cisneros
    
    
    57,803,108
    
    
    
    (8
    )(17)
    
    
    33.01
    %David A. Gang
    
    
    60,000
    
    
    
    (9
    )
    
    
    0.04
    %Neil Smit
    
    
    60,000
    
    
    
    (9
    )
    
    
    0.04
    %Robert S. OHara, Jr.
    
    
    68,000
    
    
    
    (10
    )
    
    
    0.05
    %
 53




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##### Table of Contents



Shares ofBeneficial Owner
    
    Class A Common StockBeneficially OwnedNumber
    
    
    
    
    
    
    PercentExecutive Officers and DirectorsCristina Pieretti
    
    
    457,748
    
    
    
    (11
    )
    
    
    0.34
    %Joseph M. Redling
    
    
    60,000
    
    
    
    (9
    )
    
    
    0.04
    %Gerald Sokol, Jr.
    
    
    60,000
    
    
    
    (9
    )
    
    
    0.04
    %William H. Luers
    
    
    62,350
    
    
    
    (13
    )
    
    
    0.05
    %M. Brian Mulroney
    
    
    60,000
    
    
    
    (12
    )
    
    
    0.04
    %All current and former executive
officers and directors as a group 
19 persons
    
    
    121,116,911
    
    
    
    
    
    
    
    55.30
    %Five Percent StockholdersAmerica Online, Inc.
    
    
    136,791,706
    
    
    
    (14
    )(17)
    
    
    58.99
    %Time Warner Inc
    
    
    241,247,307
    
    
    
    (15
    )(17)
    
    
    71.73
    %Aspen Investments LLC
    
    
    57,730,886
    
    
    
    (7
    )(17)
    
    
    32.98
    %Atlantis Investments LLC
    
    
    57,803,108
    
    
    
    (8
    )(17)
    
    
    33.01
    %Banco Itaú S.A.
    
    
    35,937,840
    
    
    
    (16
    )(17)
    
    
    26.57
    %
   (1)
    Consists of options to purchase 2,150,000 shares of class A
common stock, which are exercisable within 60 days of
February 20, 2005 and 10,000 shares of class A common
stock.(2)
    Consists of options to purchase 91,250 shares of class A
common stock, which are exercisable within 60 days of
February 20, 2005.(3)
    Consists of options to purchase 605,000 shares of class A
common stock, which are exercisable within 60 days of
February 20, 2005.(4)
    Consists of options to purchase 334,600 shares of class A
common stock, which are exercisable within 60 days of
February 20, 2005 and 1,000 shares of class A common stock.(5)
    Consists of options to purchase 379,600 shares of class A
common stock, which are exercisable within 60 days of
February 20, 2005 and 482,776 shares of class A common
stock.(6)
    Consists of options to purchase 60,000 shares of class A
common stock granted to each of our directors which are
exercisable as of the date granted and 580,593 shares of
class A common stock.(7)
    Consists of the following as of February 20, 2005: (a)
17,947,646 shares of class A common stock, (b) 39,723,240
shares of series C preferred stock, which represented
approximately one-half of all series C preferred stock
outstanding as of that date and includes 216,666 shares
owned by the children of Gustavo A. Cisneros as to which
Aspen Investments LLC has voting power, and (c) currently
exercisable options to purchase 60,000 shares of class A
common stock. Shares of series C preferred stock are
convertible into AOLAs class C common stock at any time,
on a one share-for-one share basis, and the class C common
stock is convertible into class A common stock at any time,
on a one-share-for-one-share basis. Adding all these
 shares, as of February 20, 2005, Gustavo A. Cisneros,
either directly or through Aspen Investments LLC,
beneficially owned a total of 57,730,886 shares of class A
common stock.(8)
    Consists of the following as of February 20, 2005: (a)
17,947,646 shares of class A common stock, (b) 39,795,462
shares of series C preferred stock, which represented
approximately one-half of all series C preferred stock
outstanding as of that date and includes 288,888 shares
owned by the children of Ricardo J. Cisneros as to which
Atlantis Investments LLC has voting power and (c) currently
exercisable options to purchase 60,000 shares of class A
common stock. Shares of series C preferred stock are
convertible into AOLAs class C common stock at any time,
on a one-share-for-one-share basis, and class C common
stock is convertible into class A common stock at any time,
on a one share-for-one share basis. Including all these
 shares, as of February 20, 2005, Ricardo J. Cisneros,
either directly or through Atlantis Investments LLC,
beneficially owned a total of 57,803,108 shares of class A
common stock. 54




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##### Table of Contents



(9)
    Consists of options to purchase 60,000 shares of class A
common stock granted to each of our directors, which are
exercisable as of the date granted. Under America Onlines
conflicts of interests standards David A. Gang, Neil Smit,
Joseph M. Redling and Gerald Sokol, Jr., each a member of
our board as well as an employee of America Online, must
transfer the economic benefit of their options to America
Online.(10)
    Consists of options to purchase 60,000 shares of class A
common stock granted to each of our directors, which are
exercisable as of the date granted and 8,000 shares of
class A common stock.(11)
    Consists of options to purchase 60,000 shares of class A
common stock granted to each of our directors, which are
exercisable as of the date granted, and 397,248 shares of
class A common stock held by Pallium Operating II, LLC, a
holding company beneficially owned by Ms. Pieretti and her
husband. Also includes 500 shares of class A common stock
held in accounts for which Ms. Pierettis husband is a
cosignatory. Ms. Pieretti disclaims beneficial ownership of
these 500 shares.(12)
    Consists of options to purchase 60,000 shares of class A
common stock granted to each of our directors, which are
exercisable as of the date granted.(13)
    Consists of options to purchase 60,000 shares of class A
common stock granted to each of our directors, which are
exercisable as of the date granted and 2,350 shares of
class A common stock.(14)
    Consists of the following as of February 20, 2005: (a)
40,169,780 shares of class A common stock, (b) 79,840,676
shares of series B preferred stock, (c) currently
exercisable options to purchase 240,000 shares of class A
common stock held by certain directors of AOLA, and (d)
16,541,250 shares of class A common stock issuable pursuant
to a warrant held by America Online. Shares of series B
preferred stock are convertible into AOLAs class B common
stock at any time, on a one-share-for-one share basis, and
such class B common stock is convertible into class A
common stock at any time, on a one-share-for-one share
basis. Adding all these shares, as of February 20, 2005,
America Online beneficially owned a total of 136,791,706
shares of class A common stock. Time Warner, the parent
company of America Online, may be deemed jointly to
beneficially own all these shares.(15)
    Consists of the following, as of February 20, 2005: (a)
40,169,780 shares of class A common stock, (b) 79,840,676
shares of series B preferred stock held by America Online,
(c) currently exercisable options to purchase 240,000
shares of class A common stock held by certain directors of
AOLA, (d) 16,541,250 shares of class common stock issuable
pursuant to a warrant held by America Online, (e)
44,150,105 shares of series B preferred stock issuable upon
conversion of $160.0 million in principal amount in senior
convertible notes held by Time Warner, and (f) 60,305,496
shares of series B preferred stock held by Time Warner.
Shares of series B preferred stock are convertible into
AOLAs class B common stock at any time on a
one-share-for-one-share basis, and such class B common
stock is convertible into class A common stock at any time,
on a one-share-for-one share basis. Including all these
 shares, as of February 20, 2005, Time Warner beneficially
owned a total of 241,247,307 shares of class A common
stock.(16)
    Consists of class A common stock. Banco Itaú transferred
these shares to Garnet Corporation, an indirect,
wholly-owned subsidiary, in 2003.(17)
    Under Rule 13d-5(b)(1) promulgated under the Exchange Act,
to the extent a group is deemed to exist by virtue of the
following agreements involving America Online, Time Warner
and the Cisneros Group: stockholders agreement, the voting
agreement, and the America Online-ODC registration rights
agreement, America Online and Time Warner may be deemed to
have beneficial ownership, under Sections 13(d) and 13(g)
of the Exchange Act, of all of the equity securities of
AOLA beneficially owned by entities within the Cisneros
Group and each of Gustavo A. Cisneros and Ricardo J.
Cisneros, and vice versa. Under Rule 13d-5(b)(1)
promulgated under the Exchange Act, to the extent a group
is deemed to exist by virtue of the Banco Itaú registration
rights agreement, America Online and Time Warner, one the
one hand, and the entities within the Cisneros Group and
Gustavo A. Cisneros and Ricardo J. Cisneros, on the other
hand, may be deemed to have beneficial ownership, for
purposes of Sections 13(d) and 13(g) of the Exchange Act,
of all of the equity securities of AOLA beneficially owned
by Banco Itaú, and vice versa. Each of (1) America Online
and Time Warner, (2) the entities within the Cisneros Group
and Gustavo A. Cisneros and Ricardo J. Cisneros, and (3)
Banco Itaú, respectively, disclaims beneficial ownership of
any AOLA securities directly or indirectly beneficially
owned by the other. 55




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Equity Compensation Plan Information The following table sets forth information as of the end of our fiscal year ended December 31, 2004
with respect to compensation plans under which our equity securities are authorized for issuance.
The information is as follows: Number of SecuritiesNumber of Securities to
    
    
    Weighted Average
    
    
    Remaining Available forbe Issued Upon Exercise
    
    
    Exercise Price of
    
    
    Future Issuance UnderPlan Category
    
    of Outstanding Options
    
    
    Outstanding Options
    
    
    Equity Compensation PlansEquity compensation plans
approved by stockholders
    
    
    7,896,101
    
    
    $
    5.66
    
    
    
    7,529,065Equity compensation plans not
approved by stockholders
    
    
    2,783,167
    
    
    $
    2.53
    
    
    
    4,600,000Total
    
    
    10,679,268
    
    
    $
    4.84
    
    
    
    12,129,065
   (1)
    
    Consists of the 2000 Stock Option Plan. Although our stockholders initially approved
the Plan, in March 2001, we increased the total number of shares available for issuance
under the Plan by 4,600,000 shares. Stockholder approval was not sought although our
Compensation Committee and our Board of Directors approved this increase. 
 Item 13. Certain Relationships and Related Transactions 2002 Debt Financing Note Purchase Agreement with Time Warner.In order to fund our operating and cash
requirements, on March 8, 2002, we entered into a note purchase agreement with Time Warner, the
parent of America Online, which is one of our principal stockholders. Under the note purchase
agreement, Time Warner provided us with $160.0 million in 2002 in exchange for senior convertible
notes of AOLA due in March of 2007. The senior convertible notes bear an annual coupon of 11%,
payable quarterly. 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 are convertible at any time at the option of the holder, and are redeemable by us at any time, subject to the holders right to convert the senior convertible
notes into preferred stock. In addition, the senior convertible notes are required to be repaid, at
the option of the holder, in the event of significant asset sales or if we raise additional debt or
equity funds. Interest is payable either in cash or preferred stock, at our 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 the class A common stock for the twenty trading dates ending on the third day
prior to the date of payment. In the event Time Warner were to convert the $160.0 million in senior convertible notes, an
additional 44,150,105 shares of series B preferred stock would be issued to Time Warner, increasing
the economic ownership by America Online and its affiliates in AOLA
to 62.5% and their relative
voting strength to 74.1%, also assuming conversion of the warrant granted to America Online at the
date of our initial public offering and the exercise of options to purchase 300,000 shares of class
A common stock issued to certain of our current directors. It is our intention to continue to pay
the interest on the senior convertible notes through the issuance of additional shares. Preferred Stock Conversion Agreement with America Online and the Cisneros Group In January 2003, America Online and the Cisneros Group converted a total of 36,169,780 shares
of series B and 31,895,292 shares of series C preferred stock to shares of class A common stock,
respectively, at the request of AOLA. This conversion was designed to increase the total market
capitalization of AOLAs class A common stock, in order to 56




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##### Table of Contents



comply with the minimum market
capitalization requirements of the NASDAQ SmallCap market. As a result of this conversion, the
total number of shares of class A common stock outstanding increased to 135,135,137 shares. Stockholders Agreement, as amended, with America Online and the Cisneros Group On August 7, 2000, we entered into a stockholders agreement with America Online and the
Cisneros Group, which contains various provisions that affect the way in which we operate our
business and govern many important aspects of the relationships among America Online, the Cisneros
Group and us. On March 30, 2001, this agreement was amended in connection with the equity
investment by America Online, the Cisneros Group and Banco Itaú. On March 8, 2002, this agreement
was further amended in connection with the note purchase agreement to add Time Warner as party to
the stockholders agreement for limited purposes and to require any subsidiaries of Time Warner
that may hold senior convertible notes in the future to become a party to the stockholders
agreement for limited purposes. The Registration Rights Agreement, as Amended, with America Online and the Cisneros Group On March 30, 2001, we amended our existing agreement with America Online and the Cisneros
Group to provide them with their respective registration rights for the shares of class A common
stock issuable upon conversion of their series B and C preferred stock we issued to them, and in
the case of America Online, upon the exercise of the warrant it holds to purchase 16,541,250 shares
of our capital stock. On March 8, 2002, in connection with the note purchase agreement, we further
amended the existing registration rights agreement by adding Time Warner as a party, requiring
subsidiaries of Time Warner that may hold notes in the future to become a party, and providing
registration rights for shares of class A common stock issuable upon conversion of the B stock and
series B preferred stock issued upon conversion or as interest on the senior convertible notes. The AOL License Agreement For discussion of the AOL License Agreement, see Item 1.  Business  The AOL License
Agreement, Intellectual Property and Proprietary Rights. From December 15, 1998 through December
31, 2004, we did not make any payments to America Online for services received under the license
agreement. We believe that annual payments for these services will not exceed $60,000 in the
future.


The AOL Services Agreement

We entered into a services agreement with America Online on August 7, 2000, under which
America Online provides various services to us, including:



| | . | Localization of AOL software and software updates;                                                                     
| | - | -----------------------------------------------------------------------------------------------------------------------
|
| | . | Development and installation services, including requested modifications, enhancements
and revisions to AOLs software;
|
| | . | Host computer services;                                                                                                
|
| | . | Network connections from our services to the America Online servers;                                                   
|
| | . | Technical support;                                                                                                     
|
| | . | Training in areas such as marketing, business development, member support, public
relations, finance and accounting;   
|
| | . | Support and maintenance for third-party software licensed to us by America Online; and                                 
|
| | . | Joint venture assistance.                                                                                              

We have agreed to compensate America Online for these services at rates at least as favorable
to us as those charged by America Online to any other party, including joint venture affiliates,
but excluding affiliates that are at least 75% owned by America Online. Based on our managements
experience negotiating similar contracts, as well as its knowledge of our competitors cost
structures, we believe that the terms of the services agreement are at least as favorable as we
could have obtained from an unaffiliated third party.

57



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For the 2004 fiscal year, we had incurred expenses totaling approximately $7.1 million payable
to America Online under our services agreement. We anticipate that payments to America Online for
these services will exceed $60,000 annually in the future. As of December 31, 2003, America Online
had billed us approximately $3.8 million over and above amounts we recorded in our statements of
operations. The difference related to a portion of items under dispute, primarily for support
services provided by America Online. This dispute was settled in our favor in February 2004 in a
manner which was consistent with our historical accounting treatment and which did not have any
cash impact on our financial condition. The Letter Agreement Regarding Puerto Rico Subscribers We entered into a letter agreement with America Online under which America Online transferred
to us the economic benefit associated with subscribers to the AOL-branded service in Puerto Rico,
and we include these subscribers in our member totals. For fiscal 2004, we incurred expenses of
$0.9 million to America Online under this agreement. We anticipate that payments to America Online
for services provided under the letter agreement will exceed $60,000 annually. We also received
from America Online $14.2 million for fees collected by America Online from subscribers to the
AOL-branded service in Puerto Rico, which we recorded as subscription revenue. Interactive Services Agreement and Agreement for Consulting Services with America Online Relating
to U.S. Latino Content Area In February 2003, we entered into a one-year agreement for consulting services with America
Online under which we provided programming services to America Online related to America Onlines
Latino content area. This agreement
expired in February 2004 and we received $750,000 pursuant to this agreement for the period.
An interim contract was in place for the period March through September 2004. During that period we
recognized $183,000 of revenues related to the interim contract and programming work provided to
America Online in 2003. A Localization Services, Licensing and Content Programming
Agreement was entered into as of September 2004. Under this agreement, as amended, we provide
America Online with programmers for their Latino content area in the United States in exchange for
an annual payment of $400,000. We also provide America Online with certain localization services in
exchange for America Online providing us with localization engineering services. America Online may
also elect to engage AOLA to provide other localization services under this agreement. We received
$100,000 in 2004 under the new agreement. We expect the payments to be received by us under the
Localization Services, Licensing and Content Programming Agreement to exceed $60,000 in 2005. Advertising Arrangements with America Online We have an arrangement with America Online under which we pay them a commission as a finders
fee of 15% of advertising revenues received from global transactions in which part of the
advertising is on our AOLA country services and/or web-based interactive services. We made no
payments in 2004 regarding this arrangement. Based on our managements experience negotiating
similar arrangements, we believe that the terms of this arrangement are at least as favorable as we
could have obtained from an unaffiliated third party. Advertising Agreements with Banco Itaú We entered into a series of advertising agreements with Banco Itaú under which they advertised
on our AOLA country service in Brazil during 2004. The amount of payments received by us from Banco
Itaú during fiscal 2004 was approximately $0.6 million. We do not currently have any commitment by
Banco Itaú to advertise on our country service or web-based services in Brazil in 2005. Network Arrangement with America Online We have an arrangement with America Online under which we receive network capacity from
Progress Networks. America Online is a party to the agreement with Progress Networks and invoices
us for the amount of network capacity we use. The amount of such payments during fiscal 2004 was
approximately $1.3 million. 58




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##### Table of Contents



Strategic Alliance with Banco Itaú For discussion of our agreement with Banco Itaú, see Item 1, Business  Strategic Alliance
with Banco Itaú. Advertising and Content Agreement with Turner Broadcasting System Latin America, Inc., as Amended Under this agreement, we receive content from CNN, Cartoon Network and TNT for distribution on
our AOLA country services. During fiscal 2004, we purchased an aggregate of approximately $599,000
in advertising on various Turner media properties. Services received from Turner properties during
2004 were applied against a prepayment established in 2002. As of December 31, 2004, the prepaid
balance had been fully utilized. Relationships with Officers of Time Warner and America Online Four members of our board appointed by America Online are also executive officers of America
Online.  .
    Gerald Sokol Jr. is Executive Vice-President of Marketing Operations;.
    David A. Gang is executive vice president of AOL Products;.
    Neil Smit is President of AOL Access Business; and.
    Joseph M. Redling is Chief Marketing Officer. Relationships with Officers of the Cisneros Group Four of the members of our board appointed by the Cisneros Group are also executive officers
and directors of companies within the Cisneros Group.  .
    Gustavo A. Cisneros oversees the management and operations of the Cisneros Group and is
an executive officer and director of many of its constituent companies;.
    Ricardo J. Cisneros is an executive officer and director of many of the constituent
companies of the Cisneros Group;.
    Steven I. Bandel holds several senior management positions in companies in the Cisneros
Group and has the title of president and chief operating officer of the Cisneros Group;
and.
    Cristina Pieretti holds a number of senior management positions in companies in the
Cisneros Group and has the title of executive vice president of operations of the Cisneros
Group. The Registration Rights and Stockholders Agreement, as amended, with Banco Itaú On August 11, 2000, we entered into a registration rights and stockholders agreement with
Banco Itaú. This agreement was subsequently amended on March 30, 2001, in connection with the
equity investment by America Online, the Cisneros Group and Banco Itaú. The agreement limits Banco
Itaús ability to compete with us, gives Banco Itaú representation rights on our board and governs
many aspects of Banco Itaús ability to sell its shares of class A common stock. 
 Item 14. Principal Accountant Fees and Services 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 in 2005:  
    Tax advisory services
    Audit-related services Our Audit Committee must approve expenditures for non-audit services as required by its policy. Fees Paid to Independent Auditors 59




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The following table presents fees for professional audit services rendered by Ernst & Young
LLP for the audit of our annual financial statements for the years ended December 31, 2004, and
December 31, 2003, and fees billed for other services rendered by Ernst & Young LLP during those
periods: 2004
    
    
    2003Audit Fees (1)
    
    $
    874,100
    
    
    $
    771,200Audit Related Fees (2)
    
    
    42,000
    
    
    
    9,600Tax Fees (3)
    
    
    62,100
    
    
    
    57,400All Other Fees (4)
    
    
    800
    
    
    
    Total
    
    $
    979,000
    
    
    $
    838,200
   (1)
    Auditservices include audit work performed in the preparation of financial statements, as
well as work that generally only the independent auditor can reasonably be expected to
provide, including comfort letters, statutory audits, and attest services and consultation
regarding financial accounting and/or reporting standards.(2)
    Audit-Relatedservices are for assurance and related services that are traditionally
performed by the independent auditor, including due diligence related to mergers and
acquisitions, employee benefit plan audits, and special procedures required to meet certain
regulatory requirements.(3)
    Taxservices include all services performed by the independent auditors tax personnel,
except those services specifically related to the audit of the financial statements, and
includes fees in the areas of tax compliance, tax planning, and tax advice.(4)
    Other Feesare those associated with services not captured in the other categories. The
Company generally does not request such services from the independent auditor. Policy on Audit Committee Pre-Approval of Audit and Permissible Non-audit Services of Independent
Auditors Consistent with SEC policies regarding auditor independence, the Audit Committee has
responsibility for appointing, setting compensation and overseeing the work of the independent
auditor. In recognition of this responsibility, the Audit Committee has established a policy
requiring pre-approval of all audit and permissible non-audit services provided by the independent
auditor. Prior to engagement of the independent auditor for the next years audit, management will
submit an aggregate of services expected to be rendered during that year for each of four
categories of services to the Audit Committee for approval. Prior to engagement, the Audit Committee pre-approves these services by category of service.
The fees are budgeted and the Audit Committee requires the independent auditor and management to
report actual fees versus the budget periodically throughout the year by category of service.
During the year, circumstances may arise when it may become necessary to engage the independent
auditor for additional services not contemplated in the original pre-approval. In those instances,
the Audit Committee requires specific pre-approval before engaging the independent auditor. The Audit Committee has delegated pre-approval authority to its chairperson, Robert S. OHara,
Jr. Mr. OHara reports, for informational purposes only, any pre-approval decisions to the Audit
Committee at its next scheduled meeting. 
 Part IV 
 Item 15. Exhibits, Financial Statement Schedules (a)(1) Audited consolidated financial statements The following audited consolidated financial statements of America Online Latin America, Inc.
and the Report of Independent Registered Public Accounting Firm thereon are included below: 60




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Report of Independent Registered Public Accounting Firm
    
    
    F- 1Consolidated Balance Sheets as of December 31, 2004 and 2003
    
    
    F- 2Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002
    
    
    F- 3Consolidated Statements of Changes in Stockholders Equity (Capital Deficiency) for the
years ended December 31, 2004, 2003 and 2002
    
    
    F- 4Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003 and 2002
    
    
    F- 5Notes to Consolidated Financial Statements
    
    
    F- 6
 (a)(2) Financial Statement Schedules All financial statement schedules required by Item 15(a)(2) have been omitted because they are
either inapplicable or the required information has been included in our audited consolidated
financial statements and notes thereto. (a)(3) Exhibits The following Exhibits are incorporated herein by reference or are filed with this report as
indicated below. Copies of exhibits will be furnished, upon request, to holders or beneficial
owners of America Online Latin America, Inc. class A common stock as of March 21, 2005, subject to
payment in advance of a fee of 25 cents per page to reimburse America Online Latin America, Inc.
for reproduction costs. 
 EXHIBIT INDEX Exhibit Number
    
    Description of ExhibitExhibit 3.1@
    
    Fifth Restated Certificate of Incorporation of America Online Latin America, Inc.
(included as Exhibit 3.1 to the companys Quarterly Report on Form 10-Q for the quarter
ended June 30, 2004 (No. 000-31181) and incorporated herein by reference).Exhibit 3.2@
    
    Amended and Restated By-laws of America Online Latin America, Inc. (included as Exhibit
3.2 to the Companys Form 10-Q for the quarter ended June 30, 2002 (No. 000-31181) and
incorporated herein by reference).Exhibit 4.1@
    
    Form of class A common stock certificate (included as Exhibit 4.1 to Amendment No. 10
of the companys Registration Statement on Form S-1 (No. 333-95051) and incorporated
herein by reference).Exhibit 10.1@
    
    America Online Latin America, Inc. 2000 Stock Plan (included as Exhibit 10.1 to
Amendment No. 10 of the companys Registration Statement on Form S-1 (No. 333-95051)
and incorporated herein by reference).Exhibit 10.2@+
    
    Strategic Interactive Services and Marketing Agreement, dated as of June 12, 2000, by
and among America Online Latin America, Inc., AOL Brasil Ltda. and Banco Itaú S.A.
(included as Exhibit 10.13 to Amendment No. 12 of the companys Registration Statement
on Form S-1 (No. 333-95051) and incorporated herein by reference).Exhibit 10.3@
    
    Letter Agreement, dated August 7, 2002, amending the Strategic Interactive Services and
Marketing Agreement among America Online Latin America, Inc., AOL Brasil, Ltda. and
Banco Itaú, S.A. (included as Exhibit 10.6 to the companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 (No. 000-31181) and incorporated herein
by reference).Exhibit 10.4@
    
    Letter Agreement, dated September 6, 2002, amending the Strategic Interactive Services
and Marketing Agreement among America Online Latin America, Inc., AOL Brasil Ltda. and
Banco Itaú, S.A. (included as Exhibit 10.7 to the companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 (No. 000-31181) and incorporated herein
by reference).
 61




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##### Table of Contents



Exhibit Number
    
    Description of ExhibitExhibit 10.5@
    
    Letter Agreement, dated November 8, 2002, amending the Strategic Interactive Services
and Marketing Agreement among America Online Latin America, Inc., AOL Brasil, Ltda. and
Banco Itaú, S.A. (included as Exhibit 10.8 to the companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 (No. 000-31181) and incorporated herein
by reference).Exhibit 10.6@
    
    Letter dated July 22, 2003 from AOL Brasil Ltda. to Banco Itaú, S.A. (included as
Exhibit 10.1 to the companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (No. 000-31181) and incorporated herein by reference).Exhibit 10.7@+
    
    Stock Subscription Agreement, dated as of June 12, 2000, by and among America Online
Latin America, Inc., Banco Itaú S.A. and Banco Banerj S.A. (included as Exhibit 10.14
to Amendment No. 6 of the companys Registration Statement on Form S-1 (No. 333-95051)
and incorporated herein by reference).Exhibit 10.8@
    
    Contribution Agreement, dated as of July 3, 2000, by and among America Online Latin
America, Inc., AOL Latin America, S.L., America Online, Inc. and Riverview Media Corp.
(included as Exhibit 10.19 to Amendment No. 10 of the companys Registration Statement
on Form S-1 (No. 333-95051) and incorporated herein by reference).Exhibit 10.8@
    
    Contribution Agreement by and among America Online Latin America, Inc., AOL Latin
America, S.L., America Online, Inc. and Riverview Media Corp., dated as of August 7,
2000 (included as Exhibit 10.3 to Amendment No. 11 of the companys Registration
Statement on Form S-1 (No. 333-95051) and incorporated herein by reference).Exhibit 10.9@+
    
    AOL License Agreement, dated as of August 7, 2000, by and between America Online, Inc.
and America Online Latin America, Inc. (included as Exhibit 10.5 to Amendment No. 11 of
the companys Registration Statement on Form S-1 (No. 333-95051) and incorporated
herein by reference).Exhibit 10.10@+
    
    AOL Online Services Agreement, dated as of August 7, 2000, by and between America
Online, Inc. and America Online Latin America, Inc. (included as Exhibit 10.6 to
Amendment No. 11 of the companys Registration Statement on Form S-1 (No. 333-95051)
and incorporated herein by reference).Exhibit 10.11@
    
    Amended and Restated Warrant issued by America Online Latin America, Inc. to America
Online, Inc., dated as of August 7, 2000 (included as Exhibit 10.7 to Amendment No. 2
of the companys Registration Statement on Form S-1 (No. 333-95051) and incorporated
herein by reference).Exhibit 10.12@
    
    Form of Escrow Agreement, dated as of August 7, 2000, by and among The Bank of New
York, America Online Latin America, Inc., AOL Brasil Ltda. and Banco Itaú S.A.
(included as Exhibit 10.16 to Amendment No. 6 of the companys Registration Statement
on Form S-1 (No. 333-95051) and incorporated herein by reference).Exhibit 10.13@+
    
    Second Amended and Restated Stockholders Agreement, dated as of March 8, 2002, by and
among America Online Latin America, Inc., America Online, Inc., Aspen Investments LLC,
Atlantis Investments LLC and for purposes of certain sections thereof Time Warner Inc.
(included as Exhibit 10.2 to the companys Annual Report on Form 10-K for the year
ended December 31, 2001 (No. 000-31181) and incorporated herein by reference).Exhibit 10.14@
    
    Second Amended Registration Rights Agreement, dated as of March 8, 2002, by and among
America Online Latin America, Inc., America Online, Inc., Time Warner Inc., Aspen
Investments LLC and Atlantis Investments LLC (included as Exhibit 10.4 to the companys
Annual Report on Form 10-K for the year ended December 31, 2001 (No. 000-31181) and
incorporated herein by reference).Exhibit 10.15@
    
    Amended and Restated Registration Rights and Stockholders Agreement, dated as of March
30,
 62




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##### Table of Contents



Exhibit Number
    
    Description of Exhibit2001, by and among America Online Latin America, Inc., Banco Itaú, S.A., Banco
Banerj, S.A., Banco Itaú, S.A.-Cayman Branch, Itaú Bank Limited and for purposes of
certain sections thereof, America Online, Inc., Atlantis Investments LLC and Aspen
Investments LLC (filed as Exhibit 2 to Amendment No. 3 to Schedule 13D of Time Warner
Inc. and America Online, Inc., with respect to shares of America Online Latin America,
Inc., filed with the Securities and Exchange Commission on April 13, 2001 (No.
005-59485) and incorporated herein by reference).Exhibit 10.16@
    
    Amendment, dated as of May 20, 2002, to the Voting Agreement, dated as of March 8,
2002, by and among Time Warner Inc., America Online, Inc., Aspen Investments LLC and
Atlantis Investments LLC (included as Exhibit 15 to Amendment No. 6 to Schedule 13D of
Time Warner Inc. and America Online, Inc., with respect to securities of America Online
Latin America, Inc., filed with the Securities and Exchange Commission on August 29,
2002 (No. 005-59485) and incorporated herein by reference).Exhibit 10.17@
    
    Amendment, dated as of May 20, 2002, to the Voting Agreement, dated as of March 8,
2002, by and among Time Warner Inc., America Online, Inc., Banco Itaú, S.A., Banco
Banerj, S.A., Banco Itaú, S.A.-Cayman Branch, and Itaú Bank Limited (included as
Exhibit 16 to Amendment No. 6 to Schedule 13D of Time Warner Inc. and America Online,
Inc. with respect to securities of America Online Latin America, Inc., filed with the
Securities and Exchange Commission on August 29, 2002 (No. 005-59485) and incorporated
herein by reference).Exhibit 10.18@
    
    Exclusivity and Key Partner Contracts Agreement, dated July 31, 2002, by and among
America Online Latin America, Inc., America Online, Inc., Aspen Investments LLC and
Atlantis Investments LLC (included as Exhibit 10.10 to the companys Quarterly Report
on Form 10-Q for the quarter ended September 30, 2002 (No. 000-31181) and incorporated
herein by reference).Exhibit 10.19@
    
    Amendment of Memorandum of Agreement, dated September 24, 2002, between America Online
Latin America, Inc. and Turner Broadcasting System Latin America, Inc. (included as
Exhibit 10.11 to the companys Quarterly Report on Form 10-Q for the quarter ended
September 30, 2002 (No. 000-31181) and incorporated herein by reference).Exhibit 10.20@
    
    Preferred Stock Conversion Agreement, dated October 7, 2002, by and among America
Online Latin America, Inc., America Online, Inc., Aspen Investments LLC and Atlantis
Investments LLC (included as Exhibit 99.2 to the companys Current Report on Form 8-K
filed on October 7, 2002 (No. 000-31181) and incorporated herein by reference).Exhibit 10.21@+
    
    Memorandum of Agreement, dated as of December 14, 2002, by and among America Online
Latin America, Inc., AOL Brasil Ltda. and Banco Itaú S.A. (included as Exhibit 10.1 to
the companys Current Report on Form 8-K filed as of December 18, 2002 (No. 000-31181)
and incorporated herein by reference).Exhibit 10.22@+
    
    Business Cooperation Agreement, dated January 9, 2003, between McDonalds Comercio de
Alimentos Ltda. and AOL Brasil Ltda. (included as Exhibit 10.24 to the companys Annual
Report on Form 10-K/A for the year ended December 31, 2002 (No. 000-31181) and
incorporated herein by reference).Exhibit 10.23@+
    
    First Addendum to the Agreement of Commercial Cooperation, dated as of March 24, 2004,
between McDonalds Comercio de Alimentos Ltda. and AOL Brasil Ltda. (included as
Exhibit 10.4 to the companys Quarterly Report on Form 10-Q for the quarter ended March
31, 2004 (No. 000-31181) and incorporated herein by reference).Exhibit 10.25#*
    
    Executive Retention Agreement,
dated as of June 5, 2004, by and between Eduardo Escalante
Castillo and AOL Mexico, S. de R.L. de C.V.Exhibit 10.26@#
    
    Executive Retention Agreement,
dated as of June 5, 2004, by and between Eduardo Hauser
and America Online Latin America, Inc. (included as Exhibit 10.2 to the companys
Quarterly Report on
 63




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##### Table of Contents



Exhibit Number
    
    Description of ExhibitForm 10-K filed with the Commission for the period ended September
30, 2004 (No. 000-31181) and incorporated herein by reference).Exhibit 10.27@#
    
    Letter of Employment for Eduardo Hauser, dated February 22, 2000 (included as Exhibit
10.23 to Amendment No. 10 of the companys Registration Statement on Form S-1 (No.
333-95051) and incorporated herein by reference).Exhibit 10.28@#
    
    Letter of Employment for Charles M. Herington, dated July 31, 2000 (included as Exhibit
10.8 to Amendment No. 10 of the companys Registration Statement on Form S-1 (No.
333-95051) and incorporated herein by reference).Exhibit 10.29@#
    
    Amendment to Letter of Employment for Charles M. Herington, dated
December 15, 2000 (included as Exhibit 10.9 to the companys Transition
Report on Form 10-K for the transition period from July 1, 2000 to December 31, 2000
(No. 000-31181) and incorporated herein by reference).Exhibit 10.30@#
    
    Executive Retention Agreement, dated as of June 5, 2004 by and between David A.
Bruscino and America Online Latin America, Inc. (included as Exhibit 10.1 to the
companys Quarterly Report on Form 10-K filed with the Commission for the period ended
September 30, 2004 (No. 000-31181) and incorporated herein by reference).Exhibit 10.31@#
    
    Executive Retention Agreement, dated as of June 5, 2004 by and between Paulo Moledo and
America Online Latin America, Inc. (included as Exhibit 10.3 to the companys Quarterly
Report on Form 10-K filed with the Commission for the period ended September 30, 2004
(No. 000-31181) and incorporated herein by reference).Exhibit 10.32#*
    
    Executive Retention Agreement,
dated as of April 15, 2004, by and between Milton Camargo
and AOL Brasil, Ltda.Exhibit 10.33@#
    
    Letter of Employment, dated July 26, 2002, between America Online Latin America, Inc.
and Osvaldo Baños (included as Exhibit 10.4 to the companys Quarterly Report on Form
10-Q for the quarter ended September 30, 2002 (No. 000-31181) and incorporated herein
by reference).Exhibit 10.34@
    
    Stock Purchase Agreement, dated as of March 30, 2001, by and among America Online Latin
America, Inc., America Online, Inc., Aspen Investments LLC, Atlantis Investments LLC
and Banco Itaú., S.A. -Cayman Branch (filed as Exhibit 8 to Amendment No. 3 to Schedule
13D of Time Warner Inc., and America Online, Inc., with respect to shares in America
Online Latin America, Inc., filed with the Securities and Exchange Commission on April
13, 2001 (No. 005-59485) and incorporated herein by reference).Exhibit 10.35@
    
    Agreement, dated as of March 30, 2001, by and among America Online Latin America, Inc.,
Banco Itaú, S.A., Banco Banerj, S.A., Banco Itaú, S.A. - Cayman Branch and Itaú Bank
Limited (filed as exhibit 10 to Amendment No. 3 to Schedule 13D of Banco Itaú, S.A.,
Itaúsa-Investimentos Itaú, S.A., Companhia ESA and the shareholders of Companhia ESA,
filed with the Securities and Exchange Commission on April 12, 2001 (No. 005-59485) and
incorporated herein by reference).Exhibit 10.36@
    
    Agreement, dated as of March 30, 2001, by and among America Online Latin America, Inc.,
Compuserve Interactive Services, Inc. and America Online, Inc. (included as Exhibit
10.7 to the Companys Quarterly Report on Form 10-Q for the quarter ended March 31,
2001 (No. 003-31181) and incorporated herein by reference).Exhibit 10.37@
    
    Amendment No. 1 to the Note Purchase Agreement, dated as of May 20, 2002, between Time
Warner Inc. and America Online Latin America, Inc. (included as Exhibit 14 to Amendment
No. 6 to Schedule 13D of Time Warner Inc. and America Online, Inc., with respect to
securities of America Online Latin America, Inc., filed with the Securities and
Exchange Commission on August 29, 2002 (No. 005-59485) and incorporated herein by
reference).
 64




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##### Table of Contents



Exhibit Number
    
    Description of ExhibitExhibit 10.38@+
    
    Agreement by and between Avantel, S.A. and AOL Mexico, S. de R.L. de C.V., dated as of
January 20, 2000 (included as Exhibit 10.17 to Amendment No. 12 of the companys
Registration Statement on Form S-1 (No. 333-95051) and incorporated herein by
reference).Exhibit 10.39@+
    
    Addendum and Letter Agreement by and between AOL Mexico, S. de R.L. de C.V. and
Avantel, S.A., dated as of October 31, 2001 (included as Exhibit 10.33 of the Companys
Annual Report on Form 10-K for the year ended December 31, 2001 (No. 000-31181) and
incorporated herein by reference).Exhibit 10.40@+
    
    Agreement, dated December 13, 2002, by and between Avantel, S.A. and AOL Mexico, S. de
R.L. de C.V. (included as Exhibit 10.5 to the companys Annual Report on Form 10-K/A for the year ended December 31, 2002 (No. 000-31181) and incorporated herein by reference).Exhibit 10.41@
    
    Note Purchase Agreement, dated as of March 8, 2002, by and between America Online Latin
America, Inc. and Time Warner Inc. (included as Exhibit 99.2 to the companys Current
Report on Form 8-K filed on March 11, 2002 (No. 000-31181) and incorporated herein by
reference).Exhibit 10.42@
    
    Form of Initial Note (included as Exhibit 10.35 to the Companys Annual Report on Form
10-K for the year ended December 31, 2001 (No. 000-31181) and incorporated herein by
reference).Exhibit 10.43@+
    
    Cancellation Agreement made by and between Telefonos de Mexico, S.A. DE C.V. and AOL
Mexico, S. de R.L. de C.V., dated as of February 27, 2004 (included as Exhibit 10.1 to
the companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (No.
000-31181) and incorporated herein by reference).Exhibit 10.44@+
    
    Services Contract by and between Uninet, S.A. de C.V. and AOL Mexico, S. de R.L. de
C.V. dated as of March 1, 2004 (included as Exhibit 10.2 to the companys Quarterly
Report on Form 10-Q for the quarter ended March 31, 2004 (No. 000-31181) and
incorporated herein by reference).Exhibit 10.45@+
    
    Letter Agreement dated as of March 1, 2004, by and between Uninet, S.A. de C.V. and AOL
Mexico, S. de R.L. de C.V. dated as of March 1, 2004 (included as Exhibit 10.3 to the
companys Quarterly Report on Form 10-Q for the quarter ended March 31, 2004 (No.
000-31181) and incorporated herein by reference).Exhibit 10.46@+
    
    Letter Agreement dated as of March 1, 2004 between AOL Brasil Ltda. and
Telecomunicacoes de Sao Paulo S.A.TELESP (included as Exhibit 10.1 to the companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (No. 000-31181) and
incorporated herein by reference).Exhibit 10.47@+
    
    Letter of Amendment to Agreement for Advertising Space Availability, dated as of August
25, 2003 between AOL Brasil Ltda. and Telecomunicacoes de Sao Paulo S.A.TELESP
(included as Exhibit 10.2 to the companys Quarterly Report on Form 10-Q for the
quarter ended June 30, 2004 (No. 000-31181) and incorporated herein by reference).Exhibit 10.48@+
    
    Agreement for Supplying Web Channel Service, dated as of August 25, 2003, entered into
by Telefonica Empresas S.A. and AOL Brasil Ltda. (included as Exhibit 10.3 to the
companys Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (No.
000-31181) and incorporated herein by reference)Exhibit 10.49@
    
    Agreement for Availability of Advertising Space between AOL Brasil Ltda. and
Telecomunicacaoes de Sao Paulo S.A. (TELESP) (included as Exhibit 10.4 to the companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (No. 000-31181) and
incorporated herein by reference).Exhibit 10.50@
    
    Agreement for Development of Telephonic Traffic between AOL Brasil Ltda. and
Telecomunicacaoes de Sao Paulo S.A. (TELESP) (included as Exhibit 10.5 to the companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (No. 000-31181) and
incorporated herein by reference).
 65




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##### Table of Contents



Exhibit Number
    
    Description of ExhibitExhibit 10.51@
    
    Agreement For Service Providing And Supplying Access Infrastructure To Internet
Services  Dial Provider  Promotional Plan between AOL Brasil Ltda. and
Telecomunicacaoes de Sao Paulo S.A. (TELESP) (included as Exhibit 10.6 to the companys
Quarterly Report on Form 10-Q for the quarter ended June 30, 2004 (No. 000-31181) and
incorporated herein by reference).Exhibit 10.52@
    
    Localization Services, Licensing and Content Programming Agreement, dated as of
September 2, 2004 by and between America Online, Inc. and America Online Latin America,
Inc. (included as Exhibit 10.1 to the companys Current Report on Form 8-K filed on
December 22, 2004 (No. 000-31181) and incorporated herein by reference).Exhibit 10.53@
    
    Schedule No. 2, dated as of December 28, 2004, to Localization Services, Licensing and
Content Programming Agreement, dated as of September 2, 2004 by and between America
Online, Inc. and America Online Latin America, Inc. (included as Exhibit 10.1 to the
companys Current Report on Form 8-K filed on January 7, 2005 (No. 000-31181) and
incorporated herein by reference).Exhibit 10.54*
    
    Amendment to Strategic Interactive Services and Marketing Agreement, dated as of
November 4, 2004, by and among America Online Latin America, Inc., AOL Brasil Ltda. and
Banco Itaú S.A.Exhibit 10.55*#
    
    Letter of Employment for David A.
Bruscino, dated April 21, 2000.Exhibit 10.56*#
    
    Letter of Employment for Eduardo Escalante
Castillo, dated September 21, 1999.21.1*
    
    Subsidiaries of America Online Latin America, Inc.23.1*
    
    Consent of Ernst & Young LLP, Independent Registered Public Accounting Firm.31.1*
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 200231.2*
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 200232.1*
    
    Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
   *
    
    Filed herewith.@
    
    Incorporated by reference as indicated.+
    
    Confidential treatment has been requested for portions of this exhibit. These portions have been omitted and
filed separately with the Securities and Exchange Commission.#
    
    Management contract. 
 SIGNATURES Pursuant to the requirements of Section 13 or15(d)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.By:
    
    /s/ Charles M. HeringtonCharles M. HeringtonChief Executive Officer
 Date: March 30, 2005 66




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##### Table of Contents



Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated. Signature
    
    Title
    
    Date/s/ Charles M. Herington
    
    Chief Executive Officer
    
    March 30, 2005(principal executive officer)Charles M. Herington/s/ Osvaldo Baños
    
    Chief Financial Officer
    
    March 30, 2005(principal financial officer)Osvaldo Baños/s/ Paulo Moledo
    
    Treasurer and Controller
    
    March 30, 2005(principal accounting officer)Paulo MoledoDirector
    
    March 30, 2005/s/ Steven I. BandelSteven I. Bandel/s/ Gustavo A. Cisneros
    
    Director
    
    March 30, 2005Gustavo A. Cisneros/s/ Ricardo J. Cisneros
    
    Director
    
    March 30, 2005Ricardo J. Cisneros/s/ David A. Gang
    
    Director
    

    March 30, 2005David A. Gang/s/ Joseph M. Redling
    
    Director
    
    March 30, 2005Joseph M. RedlingRobert S. OHara, Jr.
    
    Director
    
    March 30, 2005Robert S. OHara, Jr.
 67




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##### Table of Contents



Signature
    
    Title
    
    DateDirector
    
    March 30, 2005/s/ Cristina PierettiCristina PierettiDirector
    
    March 16, 2005/s/ Neil SmitNeil SmitDirector
    
    March 30, 2005/s/ Gerald Sokol, Jr.Gerald Sokol, Jr.Director
    
    March 30, 2005/s/ William H. LuersWilliam H. LuersDirector
    
    March 30, 2005/s/ M. Brian MulroneyM. Brian Mulroney
 68




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##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders
America Online Latin America, Inc. We have audited the accompanying consolidated balance sheets of America Online Latin America, Inc.
as of December 31, 2004 and 2003, and the related consolidated statements of operations, changes in
stockholders equity (capital deficiency), and cash flows for each of the three years in the period
ended December 31, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Companys internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Companys internal control over financial
reporting. Accordingly we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of America Online Latin America, Inc. at December 31,
2004 and 2003, and the consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 2004, in conformity with U.S. generally accepted
accounting principles. The accompanying consolidated financial statements have been prepared assuming that America Online
Latin America, Inc. will continue as a going concern. As more fully described in Note 1, the
Company has incurred recurring operating and cash flow losses, has a net capital deficiency and
requires additional capital to fund its operations. These conditions raise substantial doubt about
the Companys ability to continue as a going concern. Managements plans in regard to these matters
are also described in Note 1. The consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification of assets or the
amounts and classification of liabilities that may result from the outcome of this uncertainty. /s/ Ernst & Young LLP
Certified Public Accountants Ft. Lauderdale, Florida
March 24, 2005 F-1




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC. 
 CONSOLIDATED BALANCE SHEETS (In thousands, except share amounts)
 As ofDecember 31,
    
    
    December 31,2004
    
    
    2003ASSETSCURRENT ASSETSCash
    
    $
    22,030
    
    
    $
    31,631Short-term money market investments
    
    
    137
    
    
    
    268Total cash and cash equivalents
    
    
    22,167
    
    
    
    31,899Other short-term investments
    
    
    326
    
    
    
    Restricted cash
    
    
    1,781
    
    
    
    1,003Trade accounts receivable, less allowances of $227 (December 31, 2003 - $363)
    
    
    1,565
    
    
    
    2,267Other receivables
    
    
    575
    
    
    
    243Prepaid expenses
    
    
    2,677
    
    
    
    5,549Other current assets
    
    
    4,142
    
    
    
    3,246Total current assets
    
    
    33,233
    
    
    
    44,207Property and equipment, net
    
    
    2,612
    
    
    
    4,771Investments, including securities available-for-sale (at fair value)
    
    
    814
    
    
    
    194Other assets
    
    
    1,065
    
    
    
    6,567TOTAL ASSETS
    
    $
    37,724
    
    
    $
    55,739LIABILITIES AND STOCKHOLDERS EQUITY (CAPITAL DEFICIENCY)CURRENT LIABILITIESTrade accounts payable
    
    $
    2,105
    
    
    $
    3,264Payables to affiliates
    
    
    3,095
    
    
    
    1,349Other accrued expenses and liabilities
    
    
    5,520
    
    
    
    9,672Deferred revenue
    
    
    4,829
    
    
    
    4,810Accrued personnel costs
    
    
    5,384
    
    
    
    4,533Other taxes
payable
    
    
    5,345
    
    
    
    3,571Senior
convertible notes in default (Note 1)
    
    
    160,000
    
    
    
    Total current liabilities
    
    
    186,278
    
    
    
    27,199Other non-current liabilities
    
    
    973
    
    
    
    1,499Senior convertible notes
    
    
    
    
    
    
    160,000TOTAL LIABILITIES
    
    
    187,251
    
    
    
    188,698COMMITMENTS AND CONTIGENCIESSTOCKHOLDERS EQUITY (CAPITAL DEFICIENCY)Preferred stock, $.01 par value; 1,000,000,000 shares authorized:Series B and C cumulative redeemable convertible; 350,000,000 shares of series B and 300,000,000 shares of series C authorized:Series B  $382,151 liquidation value; issued and outstanding shares - 140,146,172 (December 31, 2003 - 115,244,559)
    
    
    1,402
    
    
    
    1,152Series C  $216,863 liquidation value; issued and outstanding shares - 79,518,702 (December 31, 2003 - 79,518,702)
    
    
    795
    
    
    
    795Series D and E cumulative redeemable convertible; 25,000,000 shares authorized each; none issued and outstanding
    
    
    
    
    
    
    2,197
    
    
    
    1,947Common stock, $.01 par value; 2,250,000,000 shares authorized:Class A1,400,000,000 shares authorized; issued and outstanding shares - 135,260,715 (December 31, 2003 - 135,186,195)
    
    
    1,353
    
    
    
    1,352Class B and C  450,000,000 shares of series B and 400,000,000 shares of series C authorized; none issued and outstanding
    
    
    
    
    
    
    1,353
    
    
    
    1,352Additional paid-in capital
    
    
    839,626
    
    
    
    822,471Unearned services
    
    
    (59,393
    )
    
    
    (101,156
    )Accumulated other comprehensive loss
    
    
    (4,503
    )
    
    
    (4,956
    )Accumulated deficit
    
    
    (928,807
    )
    
    
    (852,617
    )Total stockholders equity (capital deficiency)
    
    
    (149,527
    )
    
    
    (132,959
    )TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (CAPITAL DEFICIENCY)
    
    $
    37,724
    
    
    $
    55,739
 The accompanying notes are an integral part of these audited consolidated financial statements. F-2




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC. 
 CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 2004, 2003 and 2002
(In thousands, except share and per share amounts)
 Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Revenues:Subscription
    
    $
    48,816
    
    
    $
    59,415
    
    
    $
    62,998Advertising and other
    
    
    3,602
    
    
    
    5,759
    
    
    
    9,109Total revenues
    
    
    52,418
    
    
    
    65,174
    
    
    
    72,107Costs and expenses:Cost of revenues
    
    
    33,957
    
    
    
    56,387
    
    
    
    98,695Sales and marketing
    
    
    49,519
    
    
    
    65,397
    
    
    
    97,170General and administrative
    
    
    23,799
    
    
    
    27,051
    
    
    
    32,871Impairment of Argentina VAT receivable
    
    
    4,009
    
    
    
    
    
    
    
    Total costs and expenses
    
    
    111,284
    
    
    
    148,835
    
    
    
    228,736Loss from operations
    
    
    (58,866
    )
    
    
    (83,661
    )
    
    
    (156,629
    )Interest expense
    
    
    (17,525
    )
    
    
    (17,990
    )
    
    
    (5,302
    )Other income, net
    
    
    325
    
    
    
    916
    
    
    
    139Loss before income taxes
    
    
    (76,066
    )
    
    
    (100,735
    )
    
    
    (161,792
    )Income taxes
    
    
    (124
    )
    
    
    (4
    )
    
    
    (75
    )Net loss
    
    
    (76,190
    )
    
    
    (100,739
    )
    
    
    (161,867
    )Less: Dividends on Series B and C preferred shares
    
    
    16,481
    
    
    
    15,869
    
    
    
    18,724Net loss applicable to common stockholders
    
    $
    (92,671
    )
    
    $
    (116,608
    )
    
    $
    (180,591
    )Loss per common share, basic and diluted
    
    $
    (0.69
    )
    
    $
    (0.88
    )
    
    $
    (2.69
    )Weighted average number of common shares outstanding
    
    
    135,246,144
    
    
    
    132,903,430
    
    
    
    67,067,603SUPPLEMENTAL RELATED PARTIES DISCLOSURE:Transactions with affiliated parties are reflected in the
consolidated statements of operations as follows:Subscription revenues
    
    $
    14,444
    
    
    $
    14,530
    
    
    $
    10,855Advertising and other revenues
    
    
    1,097
    
    
    
    1,797
    
    
    
    3,211Cost of revenues
    
    
    7,471
    
    
    
    11,715
    
    
    
    21,629Sales and marketing
    
    
    37,097
    
    
    
    42,116
    
    
    
    41,277General and administrative
    
    
    227
    
    
    
    44
    
    
    
    1,808Interest expense
    
    
    17,334
    
    
    
    17,845
    
    
    
    5,161
 The accompanying notes are an integral part of these audited consolidated financial statements. F-3




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC. 
 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY (CAPITAL DEFICIENCY)
For the Years Ended December 31, 2004, 2003 and 2002
(In thousands, except share amounts)
 AccumulatedAdditional
    
    
    
    
    
    
    otherPreferred Stock
    
    
    Common Stock
    
    
    paid-in
    
    
    Unearned
    
    
    comprehensive
    
    
    AccumulatedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    capital
    
    
    services *
    
    
    income (loss)
    
    
    deficit
    
    
    TotalBALANCES AT DECEMBER 31, 2001
    
    
    227,424,450
    
    
    $
    2,274
    
    
    
    67,054,714
    
    
    $
    671
    
    
    $
    800,714
    
    
    $
    (189,191
    )
    
    $
    (3,334
    )
    
    $
    (590,011
    )
    
    $
    21,123Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (161,867
    )
    
    
    (161,867
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,684
    )
    
    
    
    
    
    
    (2,684
    )Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (164,551
    )Interest paid with issuance of Series B preferred shares
    
    
    10,865,643
    
    
    
    109
    
    
    
    
    
    
    
    
    
    
    
    4,048
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,157Stock options exercised
    
    
    
    
    
    
    
    
    
    
    15,351
    
    
    
    
    
    
    
    39
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    39Non-cash marketing expense amortization **
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,845
    
    
    
    
    
    
    
    
    
    
    
    41,845Non-cash compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    301BALANCES AT DECEMBER 31, 2002
    
    
    238,290,093
    
    
    
    2,383
    
    
    
    67,070,065
    
    
    
    671
    
    
    
    804,801
    
    
    
    (147,045
    )
    
    
    (6,018
    )
    
    
    (751,878
    )
    
    
    (97,086
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (100,739
    )
    
    
    (100,739
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,062
    
    
    
    
    
    
    
    1,062Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (99,677
    )Interest paid with issuance of Series B preferred shares
    
    
    24,538,240
    
    
    
    245
    
    
    
    
    
    
    
    
    
    
    
    17,600
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,845Conversion of preferred shares to common
    
    
    (68,065,072
    )
    
    
    (681
    )
    
    
    68,065,072
    
    
    
    681
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Stock options exercised
    
    
    
    
    
    
    
    
    
    
    51,058
    
    
    
    
    
    
    
    70
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    70Non-cash marketing expense amortization **
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    41,162
    
    
    
    
    
    
    
    
    
    
    
    41,162Proceeds in accordance with strategic marketing
agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,486
    
    
    
    
    
    
    
    
    
    
    
    4,486Non-cash compensation expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    241
    
    
    
    
    
    
    
    
    
    
    
    241BALANCES AT DECEMBER 31, 2003
    
    
    194,763,261
    
    
    
    1,947
    
    
    
    135,186,195
    
    
    
    1,352
    
    
    
    822,471
    
    
    
    (101,156
    )
    
    
    (4,956
    )
    
    
    (852,617
    )
    
    
    (132,959
    )Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (76,190
    )
    
    
    (76,190
    )Foreign currency translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (45
    )
    
    
    
    
    
    
    (45
    )Net unrealized gain from securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    498
    
    
    
    
    
    
    
    498Total comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,737
    )Interest paid with issuance of Series B preferred shares
    
    
    24,901,613
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    17,084
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,334Stock options exercised
    
    
    
    
    
    
    
    
    
    
    74,520
    
    
    
    1
    
    
    
    71
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    72Non-cash marketing expense amortization **
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,021
    
    
    
    
    
    
    
    
    
    
    
    37,021Proceeds in accordance with strategic marketing
agreement
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,742
    
    
    
    
    
    
    
    
    
    
    
    4,742BALANCES AT DECEMBER 31, 2004
    
    
    219,664,874
    
    
    $
    2,197
    
    
    
    135,260,715
    
    
    $
    1,353
    
    
    $
    839,626
    
    
    $
    (59,393
    )
    
    $
    (4,503
    )
    
    $
    (928,807
    )
    
    $
    (149,527
    )
   *
    
    Unearned services includes the unamortized portion of the $253.6 million associated with stock
issued to Banco Itaú, net of related costs accrued as of June 30, 2000. See accompanying note 4 included herein.**
    
    Represents the amortization associated with the stock issued to Banco Itaú for the marketing
services strategic alliance. See accompanying note 4 included herein. The accompanying notes are an integral part of these audited consolidated financial statements. F-4




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC. 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2004, 2003 and 2002
(In thousands)
 Year EndedDecember 31,2004
    
    
    2003
    
    
    2002OPERATING ACTIVITIESNet loss
    
    $
    (76,190
    )
    
    $
    (100,739
    )
    
    $
    (161,867
    )Adjustments to reconcile net loss to net cash used in operating activities:Provision (benefit) for uncollectible accounts
    
    
    155
    
    
    
    25
    
    
    
    (451
    )Depreciation and amortization
    
    
    2,369
    
    
    
    3,694
    
    
    
    5,028(Gain) loss from investment securities
    
    
    (77
    )
    
    
    (36
    )
    
    
    810Non-cash marketing expense
    
    
    37,021
    
    
    
    41,162
    
    
    
    41,845Non-cash stock based compensation expense
    
    
    
    
    
    
    241
    
    
    
    301Non-cash asset impairment charges and lease reserves
    
    
    
    
    
    
    1,012
    
    
    
    948Issuance of preferred stock in lieu of interest due to affiliate
    
    
    17,334
    
    
    
    17,845
    
    
    
    4,157Write-off of Argentina VAT receivable
    
    
    4,009
    
    
    
    
    
    
    
    Changes in operating assets and liabilities:Trade accounts receivable
    
    
    1,383
    
    
    
    2,064
    
    
    
    (52
    )Restricted cash
    
    
    778
    
    
    
    154
    
    
    
    16Other operating assets
    
    
    2,095
    
    
    
    (1,982
    )
    
    
    347Operating liabilities
    
    
    (4,153
    )
    
    
    (5,341
    )
    
    
    (14,960
    )Deferred revenues
    
    
    (581
    )
    
    
    425
    
    
    
    153Payables to affiliates
    
    
    1,032
    
    
    
    (5,752
    )
    
    
    (3,980
    )Net cash used in operating activities
    
    
    (14,825
    )
    
    
    (47,228
    )
    
    
    (127,705
    )INVESTING ACTIVITIESCapital spending
    
    
    (300
    )
    
    
    (1,559
    )
    
    
    (2,026
    )Net cash used in investing activities
    
    
    (300
    )
    
    
    (1,559
    )
    
    
    (2,026
    )FINANCING ACTIVITIESProceeds from issuance of senior convertible notes, net of issuance costs
    
    
    
    
    
    
    
    
    
    
    159,451Proceeds in accordance with strategic marketing agreement
    
    
    4,742
    
    
    
    4,486
    
    
    
    Proceeds from stock options exercised
    
    
    72
    
    
    
    70
    
    
    
    39Net cash provided by financing activities
    
    
    4,814
    
    
    
    4,556
    
    
    
    159,490Effect of exchange rate changes on cash and cash equivalents
    
    
    579
    
    
    
    613
    
    
    
    (918
    )Net decrease in cash and cash equivalents
    
    
    (9,732
    )
    
    
    (43,618
    )
    
    
    28,841CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    31,899
    
    
    
    75,517
    
    
    
    46,676CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    22,167
    
    
    $
    31,899
    
    
    $
    75,517SUPPLEMENTAL CASH FLOW DISCLOSUREIncome taxes paid
    
    $
    
    
    
    $
    
    
    
    $
    53Interest paid
    
    $
    
    
    
    $
    28
    
    
    $
    1,008
 The accompanying notes are an integral part of these audited consolidated financial statements. F-5




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC. 
 Notes to Consolidated Financial Statements
 
 Note 1. Organization and Basis of Presentation: America Online Latin America, Inc. (AOLA or the Company) began operations in December
1998. AOLA launched its first online service in Brazil in November 1999. The Mexico and Argentina
country services were launched in July 2000 and August 2000, respectively. Under an agreement with
America Online, Inc. (America Online), AOLA also provides certain Spanish language content to
America Onlines subscribers in Puerto Rico and markets the AOL-branded service in Puerto Rico.
Beginning in 2004, AOLA became a subsidiary of Time Warner Inc.
(Time Warner), the parent company of America Online, for consolidation purposes. The Company launched its web-based content and connectivity services in Brazil, Argentina and
Puerto Rico in September 2003, October 2003 and February 2004, respectively. The web-based
services are priced at lower rates than the AOLA country services and are designed to be more
competitively priced. In Puerto Rico the Company offers a web-based product, Conexis, which
provides basic Internet connectivity, one email address, and minimal content. A web-based service
is available in Mexico, although it is not actively promoted. AOLA is primarily responsible for
the technical support, development and billing for its web-based services. Although at present the majority of the Companys members in Brazil use the AOLA country
service, the Company no longer actively promotes the AOLA country service in Brazil. The Company
no longer promotes either the AOLA country service or the web-based service in Argentina, although
they are available. To date, growth of the Companys web-based services has been slow and AOLA does not expect
any improvement in this trend in the future. Approximately 21.4% of the membership totals as of
December 31, 2004, were subscribers to the Companys narrowband web-based interactive services.
Results since launch of the web-based services in all four markets were below expectations both in
terms of ability to attract new members as well as to reduce membership turnover. AOLA launched a broadband service in Brazil, nationally in August 2003. The broadband service
offers subscribers faster Internet access through DSL and cable. Subscribers to the Companys
broadband services in Brazil can select either the AOLA country service or web-based service. The
pricing of the Companys broadband service in Brazil varies depending upon the telecommunications
partner. AOLA also has continued to test broadband products in Mexico, although there are no plans
to launch nationally. Approximately 11.7% of the membership totals as of December 31, 2004, were
subscribers to the Companys broadband interactive services. In Brazil, subscribers to the local
broadband interactive service represented approximately 19.2% of the membership base as of
December 31, 2004. AOLA derives its revenues principally from member subscriptions to its AOLA country services
and web-based interactive services, and to a lesser extent from advertising and other revenues.
AOLA currently has the exclusive right to offer AOL-branded PC-based online services in Latin
America. Under its license agreement with America Online, it also has the exclusive right to offer
AOL-branded TV-based online services in Latin America if America Online develops these services.
AOLA also has the exclusive right to offer in Latin America any AOL-branded wireless-based online
services developed by America Online for commercial launch on or before August 7, 2004. As discussed in more detail in Note 4, during fiscal year 2001, AOLAs principal stockholders,
America Online, the Cisneros Group of Companies (the Cisneros Group) and Banco Itaú, signed a
stock purchase agreement under which they provided an aggregate of $150.0 million in additional
capital. On March 8, 2002, AOLA entered into a note purchase agreement with Time Warner. Under the note purchase agreement, Time Warner made
available to AOLA $160.0 million in exchange for senior convertible notes of AOLA due in March
2007. AOLA completed the draw down of the entire amount available to it under the note purchase
agreement on December 30, 2002. The senior convertible notes bear an annual coupon of 11%, payable
quarterly. 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 of $3.020 on March 8, 2002). The
senior convertible notes are convertible at any time at the option of the holder, and are
redeemable by AOLA at any time, subject to the holders right to convert the senior convertible
notes into preferred stock. 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 AOLA
raises additional debt or equity funds. Interest is payable either in cash or preferred stock, at
the Companys option. The interest payment on the final maturity date must be made in cash only. 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. In
addition, the senior convertible notes restrict the payment of any cash dividends without prior
consent of Time Warner. The Company previously disclosed that it will
not be able to obtain additional sources of financing necessary to repay the $160 million in senior convertible notes. F-6




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 The
Company believes that it may be in
default under the senior convertible notes held by Time Warner. This may have automatically
accelerated the Companys obligation to repay these notes and, therefore, the full $160 million may
be immediately due and payable. As a result, the full amount of the senior
convertible notes is recorded in current liabilities in the
accompanying consolidated balance sheet as of December 31, 2004. As
the Company has stated in previous reports filed with the Securities and Exchange Commission, the
Company does not expect to reach cash flow breakeven with available
cash. The Company expects that available cash will only be sufficient to fund
operations into the third quarter of 2005 and the Company does not
expect that it will be able to continue normal operations beyond such
time. To continue operations beyond such time, the Company would need an additional,
substantial capital infusion, which it will not be able to obtain.
The Company will not receive any
additional funding from Time Warner, America Online, the Cisneros Group, Banco Itaú or any other
source. Since May 2004, the Company, together with its financial advisors, have explored potential
strategic alternatives for AOLA and its subsidiaries, including a possible sale of the entire
company, the sale of one or more of its operating businesses, the sale of specific assets or other
comparable transactions. The Company has not successfully completed any such transaction.
Time Warner, the holder of $160 million of the Companys senior convertible notes, has the right to
require the Company to use the proceeds from any sale transaction to repay the senior convertible
notes. In addition, AOLAs preferred stock has a current aggregate liquidation preference of
approximately $599.0 million (excluding accrued, but unpaid, dividends). For further discussion of
preferred stock see Note 4. Even if the Company is successful in selling all of its businesses, the
proceeds will not be sufficient to repay the senior convertible notes, and none of those proceeds
will be available to the common stockholders. As a result, the
Company does not believe that its common stock
has, or will have, any value. If the Company does not consummate the disposition of its businesses in a timely manner,
management expect to cease operating those businesses, although no definitive decision has been
made to cease operations of any particular business at any particular time. At any time during the
process of attempting to sell the Companys businesses or ceasing operations, management may
conclude that it is advantageous for the Company to file for protection under the bankruptcy laws
of the United States or the insolvency laws of one or more foreign jurisdiction in which the
Company operates. Any such voluntary filing would require the consent of the holders of the
Companys class B and C preferred stock, in addition to the authorization of the Companys board of
directors. As of December 31, 2004, approximately $1.1 million of AOLAs cash on hand served to
collateralize certain Company obligations to employees. In total, the Company may be obligated to make payments amounting to up to $1.8 million under these obligations in 2005. An additional $0.7 million served to collateralize certain operational expenditures. These amounts were not, and will not be, available for general corporate use. The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. The conditions discussed above and elsewhere herein raise
substantial doubt about the Companys ability to continue as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty. On March 16, 2005, management concluded that AOLA is not a going concern for financial
reporting purposes and eventually will not have sufficient funds to continue operations. If a determination is made to liquidate the Company, or it is probable that a liquidation is
imminent, the Company will be required to change its basis of accounting to the liquidation basis
of accounting. No such adjustments have been made to the accompanying audited consolidated
financial statements. Note 2. Summary of Significant Accounting Policies: Principles of Consolidation These financial statements include the accounts of AOLA and its subsidiaries on a consolidated
basis. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires AOLAs management to make estimates and assumptions that
affect the amounts reported of assets and liabilities and the reported amounts of revenues and
expenses during the fiscal year in these financial statements and notes. These estimates are
subjective in nature and AOLAs actual results could differ from those estimates. Foreign Currency Translation The financial statements of AOLAs wholly owned foreign subsidiaries have been translated into
U.S. dollars in accordance with F-7




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 Statement of Financial Accounting Standards (SFAS) No. 52, Foreign Currency Translation. Assets
and liabilities are translated at year-end exchange rates, and revenues and expenses are translated
at average rates prevailing during the period. Translation adjustments are included as a component
of other comprehensive income (loss). Foreign currency transaction gains and losses are included in
results of operations in other income. Revenue Recognition and Barter Transactions AOLA recognizes subscription revenues over the period that it provides its service following
expiration of the members trial period. For subscribers in Brazil, Mexico and Argentina that have
elected to pay their subscription fees with credit cards or through direct debit from bank
accounts, AOLA begins to recognize subscription revenues when the fees become due and are confirmed
as collectible. For subscribers in these countries who pay on a cash basis, AOLA does not begin to
recognize subscription revenues until the cash payment is received. As AOLA gains additional
experience with the collectibility of its cash accounts receivable, it may eventually begin to
recognize revenue when the fees become due, although it does not expect to do so in the near term
future. The vast majority of subscribers to the AOL-branded service in Puerto Rico pay their
subscription fees by credit card or direct debit of their bank accounts. Revenues from subscribers
to Puerto Rico, which are received directly from America Online, are recognized when the fees
become due. AOLA records deferred revenues when it has received payments from subscribers but has
not yet provided its interactive services. The Companys Mexican segment offers subscription
programs on a prepaid basis. Revenue is recognized as the services are provided over the term of
the contract. Related costs of the prepaid program are
capitalized and amortized to marketing expense over the term of the contract. AOLA recognizes advertising revenues for advertising arrangements that require AOLA to display
a specified number of advertisements, for a fixed fee, as the advertisements are displayed. AOLA
recognizes revenues derived from sponsorship or co-sponsorship arrangements that provide for
advertising and other services on a straight-line basis over the term of the contract, provided
AOLA is meeting its obligations under the contract. AOLA records deferred revenues when it receives
payments from advertisers before AOLA displays their advertisements on its interactive services. AOLA also derives revenues from other transactions arising from the conduct of its normal
course of operations. Other sources of revenue consist primarily of programming services provided
to America Online for its Latino content area, amounts received from an advertising agreement with
Google Inc. in which revenues are generated based on the volume of queries in AOLAs search tool,
revenue sharing agreements with certain telecommunications providers, representation fees for
advertising sold on America Onlines services outside of Latin America, and call center support
services that the Company provides to AOL Germany, and are recognized as earned. AOLA measures revenue for payments made in the form of equity at the fair value of the
securities at the earlier of the initiation of the agreement, if fully vested and non-forfeitable,
or the date performance is complete. The fair value of these securities is determined by using
either market price or other standard valuation models. If AOLAs receipt of the securities is
contingent upon the achievement of performance criteria, AOLA will measure revenue at that time
based upon the achievement of those criteria. AOLA recognizes these revenues ratably, over the term
of the contract, or when performance is completed. In November 1999, AOLA received $4.5 million in
equity securities of Hollywood Media Corp. in exchange for future services to be provided to
Hollywood Media Corp. This contract expired in October 2003. AOLA did not receive any equity
securities for future services during the years ended December 31, 2004, 2003 or 2002. AOLA exchanges advertising for products and services. Such transactions are recorded at the
estimated fair value of the products or services received or given in accordance with the
provisions of APB 29, Accounting for Non-Monetary Transactionsand the Emerging Issues Task Force
(EITF) Issue No. 99-17, Accounting for Advertising Barter Transactions.Revenue from barter
transactions is recognized when advertising is provided, and services received are charged to
expense when used. Barter transactions are not material to AOLAs statement of operations for any
periods presented. AOLA has entered into zero-cost agreements with telecommunications companies who provide the
Company with modem ports that are used by its customers to access its interactive services and the
Internet. Under these agreements, AOLA provides the telecommunications providers with advertising
in exchange for the use of the ports. AOLA credits the value of the advertising it provides against
its telecommunications expense in cost of revenues because it is not able to reliably determine the
fair value of the ports or advertising under these arrangements. Subscriber Acquisition and Advertising Costs AOLA accounts for direct marketing costs incurred for acquiring subscribers as well as other
advertising costs as required by F-8




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 SOP 93-7, Reporting on Advertising Costs.AOLA expenses all advertising, marketing and other
subscriber acquisition costs as it incurs them and reports such costs in sales and marketing
expenses. Excluding the general and administrative component related to sales and marketing expenses,
brand marketing and member acquisition costs totaled approximately $46.5 million in the year ended
December 31, 2004, $60.2 million in the year ended December 31, 2003 and $90.9 million in the year
ended December 31, 2002. These amounts include amortization of unearned services related to the
Banco Itaú strategic alliance which amounted to $37.0 million in the year ended December 31, 2004,
$41.2 million for the year ended December 31, 2003 and $41.8 million for the year ended December
31, 2002. This expense is included in the accompanying consolidated statements of operations as
sales and marketing expenses. Contained within sales and marketing expense is the amortization of 31,700,000 shares of class
A common stock issued to Banco Itaú in June 2000, in consideration for its entering into a ten-year
strategic alliance with AOLA. This amount, which was valued at $253.6 million, was accounted for as
contra-equity  unearned services in the Companys
consolidated balance sheets. 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,
based on the original valuation of the penalties. AOLA is expensing the remaining balance of the
cost, $88.8 million, on a straight-line basis over the ten-year term of the agreement. As discussed above, on March 16, 2005, the Companys management concluded that AOLA is not
a going concern for financial reporting purposes and eventually will not have sufficient funds to continue operations. In light of
that conclusion, management reviewed current contracts in effect and determined that the
recording of a full impairment of the remaining unamortized balance of unearned services
recorded as a result of its strategic marketing agreement with Banco Itaú was necessary. Management
estimates that the amount of this non-cash impairment is
approximately $52.5 million. This
impairment will be recorded by the Company in the first quarter of 2005. Cash and Cash Equivalents; Cash Restrictions AOLA considers all highly liquid investments with an original maturity of three months or less
to be cash equivalents. Such investments are carried at cost plus accrued interest, which
approximates fair value. All other investments not considered to be cash equivalents are classified
as Investments. The Company has a letter of credit outstanding in support of its U.S. office
lease which is collateralized by a certificate of deposit in the
amount of $156,000. The Company also has an assignment of a time
deposit in the amount of $525,000 in favor of its bank to secure ACH
deposits used to fund its U.S. employees payroll payments. In addition,
as of December 31, 2004, approximately $1.1 million of AOLAs cash on hand served to partially collateralize
obligations under executive retention agreements. This collateral is not available for general
corporate use and is reflected as restricted cash in the accompanying
consolidated balance sheets as
of December 31, 2004 and December 31, 2003. Investments, Including Securities Available-For-Sale AOLA classifies all debt and equity securities for which there is a determinable fair market
value as available-for-sale. These securities are reported at their fair value, with unrealized
gains and losses excluded from earnings and reported net of applicable taxes in accumulated other
comprehensive income (loss). Realized gains and losses and declines in value of available-for-sale
securities, other than those determined to be temporary, are included in other income (loss). The
cost basis for realized gains and losses on available-for-sale securities is determined on a
specific identification basis. AOLA held no debt securities at December 31, 2004 and December 31,
2003. AOLA has an available-for-sale equity investment in Hollywood Media Corp., a public company
traded on the NASDAQ National Market. The investment was acquired in exchange for
future services and is comprised of common stock and warrants which had an original fair market
value of $4.5 million. The fair market value of this investment at December 31, 2004 and 2003
amounted to $814,000 and $194,000, respectively, including the fair value of the warrants of
$159,000 and $36,000 at those dates. Quarterly, AOLA performs a review of the common stock portion of its holdings in Hollywood
Media Corp. to determine if this value is impaired on an other-than-temporary basis. As a result of
that review, AOLA recorded an impairment charge of approximately $761,000 to other income, net
during the year ended December 31, 2002. Under the criteria established by Statement of Financial
Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative Instruments and Hedging
Activities, the warrants acquired in this transaction are classified as derivatives. Trade Accounts Receivable and Credit Risk AOLA sells its services in Latin America to a diverse range of customers and subscribers. The
carrying amount of AOLAs trade accounts receivable approximates their fair market value and is
comprised of two main categories: subscriptions and advertising and F-9




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 other revenues. AOLAs trade accounts receivable portfolio has a higher concentration of balances
derived from advertising and other revenues, although this concentration has been decreasing in
line with the reduction experienced in advertising revenue. At December 31, 2004 and 2003, the
balances of receivables outstanding related to advertising represented approximately 61% and 56% of
the total credit portfolio. Credit
risk in subscription trade receivables is substantially mitigated by
the Companys short
collection terms and sales to a large number of customers, as well as the low average revenue per
transaction for most of AOLAs services. The average transaction amount for advertising and other
revenue is significantly larger, however. To mitigate credit risk, management performs ongoing
credit evaluations of its customers financial condition and takes prompt action by stopping
delivery of services in situations where there is a high probability of non-payment. The Company
generally does not require collateral. Management maintains an allowance to provide for estimated credit losses and has the
responsibility for determining that the allowance is adequate for probable and inherent losses
relating to trade receivables at each reporting date. Allowances for potential credit losses are
determined based on historical experience and current evaluation of the composition of accounts
receivable and expected credit trends. Actual credit losses could differ from such estimates. The
Company writes off delinquent balances when all reasonable collection efforts have been exhausted. AOLA recorded provisions to the allowance of approximately $0.2 million in the year ended
December 31, 2004, $25,000 in the year ended December 31,
2003 and a recovery of $0.5 million in the year
ended December 31, 2002. Write-offs against the allowance totaled $0.3 million in the year ended
December 31, 2004, $0.5 million in the year ended December 31, 2003 and $0.8 in the year ended
December 31, 2002. Property and Equipment Property and equipment, including leasehold improvements, are carried at cost less accumulated
depreciation and impairment allowances. Depreciation or amortization is calculated using the
straight-line method over the estimated useful life of each type of asset. Amortization of
leasehold improvements and allowances is computed using the straight-line method over the terms of
the leases or estimated useful lives of the improvements, whichever is 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
for its call centers in Brazil and Mexico, AOLA incurred a charge of approximately $1.0 million for
the impairment of leasehold improvements and furniture and equipment in the year ended December 31,
2003, which is included in cost of revenues in the accompanying consolidated statement of
operations. AICPA Statement of Position (SOP) 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Userequires AOLA to capitalize various costs for the
development of internal use software, including the costs of coding, software configuration,
upgrades and enhancements.   AOLA   accounts for costs incurred for software obtained or developed for
internal use in accordance with SOP 98-1. In March 2000, the EITF issued its consensus on Issue No. 00-2, Accounting for Web Site
Development Costs(EITF 00-2). AOLA accounts for the development and maintenance of its website
in accordance with EITF 00-2. Product Development Costs Under specific conditions, AOLA capitalizes certain product development costs, which consist
mainly of charges from America Online for personnel and costs associated with the localization of
its interactive services and other development we request America Online to provide. AOLA
capitalizes such costs incurred once the product or enhancement reaches technological feasibility
and up until completion of beta testing. Prior to technological feasibility, and once the product
or service is commercially available (upon completion of beta testing), costs are again expensed as
incurred. Amortization of product development costs 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, AOLA reviews and expenses the unamortized cost of any feature identified as being
impaired. AOLA also reviews 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, makes an appropriate adjustment to net realizable value. F-10




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 Income Taxes Income taxes have been provided in accordance with SFAS No. 109, Accounting for Income
Taxes.Deferred income tax assets and liabilities are determined based on the difference between
financial reporting and the tax bases of assets and liabilities. AOLA measures these taxes using
the enacted tax rates and laws that will be in effect when it expects the differences to reverse.
Because of the Companys history of operating losses, the Companys net deferred income tax asset
position is currently valued at zero through offsetting valuation allowances. Financial Instruments The carrying amounts of AOLAs cash and cash equivalents, other receivables, other assets,
trade accounts payable and other liabilities approximate their fair market value due to their
short-term nature. Management believes that it is not practicable to estimate the fair value of its
$160.0 million senior convertible notes issued to Time Warner as there is no market for the notes
and the entire outstanding principal amount is held by one entity. Loss Per Common Share AOLA computes loss per common share in accordance with SFAS No. 128, Earnings per Share.
Basic loss per common share is calculated based on the weighted average number of shares of class A
common stock outstanding during the period. AOLA has convertible preferred stock and outstanding
options and warrants that are convertible or exercisable into AOLAs common stock. AOLA has not
included these potential common shares in the computation of diluted loss per share as their effect
is anti-dilutive for all periods presented. Loss per common share does not include any accretion to liquidation value of AOLAs series B
and C preferred stock. Refer to Note 5 included herein for the loss per common share calculation
for the periods reported in these financial statements. Stock-Based Compensation AOLA follows SFAS No. 123, Accounting for Stock-Based Compensation(SFAS 123), which
established a fair value based method of accounting for stock-based compensation plans and
encourages entities to adopt that method of accounting for their employee stock compensation plans.
This pronouncement also allows an entity to continue to measure compensation cost for those plans
based on Accounting Principles Board (APB) Opinion No. 25 (APB 25), Accounting for Stock Issued
to Employeesand disclose the pro forma net income (loss) and earnings (loss) per share as if the
fair value method had been applied in measuring cost. Compensation cost is determined based on the
intrinsic value of the stock options as required by the provisions of APB 25. Accordingly, no
compensation expense has been recognized for options granted with an exercise price equal to market
value at the date of grant. No compensation expense was recognized related to new options granted in the years ended
December 31, 2004, 2003 and 2002, since the Company did not issue any grants at below fair market
value. Total expense recognized in relation to the granting of stock options issued below market
price totaled approximately $241,000 in the year ended December 31, 2003 and $301,000 in the year
December 31, 2002, and was related to an options grant issued to the Companys Chief Executive
Officer in 2001. The following table presents AOLAs net loss and loss per common share assuming
AOLA had used the fair value method to recognize compensation expense with respect to its options: Year EndedDecember 31,(in thousands, except per share data)
    
    2004
    
    
    2003
    
    
    2002ReportedNet loss applicable to common stockholders
    
    $
    (92,671
    )
    
    $
    (116,608
    )
    
    $
    (180,591
    )Loss per
common share - basic and diluted
    
    $
    (0.69
    )
    
    $
    (0.88
    )
    
    $
    (2.69
    )Recorded employee stock-based compensation
    
    $
    
    
    
    $
    241
    
    
    $
    301Employee stock-based compensation under fair value method
    
    $
    (1,230
    )
    
    $
    61
    
    
    $
    (5,279
    )Pro formaNet loss applicable to common stockholders
    
    $
    (93,901
    )
    
    $
    (116,306
    )
    
    $
    (185,569
    )Loss per
common share - basic and diluted
    
    $
    (0.69
    )
    
    $
    (0.88
    )
    
    $
    (2.77
    )
 F-11




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 AOLA estimated the fair value of employee-stock-based awards using the
Black-Scholes option-pricing model based on the weighted average assumptions for options granted
during the periods as indicated below. Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Risk free interest rate
    
    
    3.04
    %
    
    
    3.61
    %
    
    
    2.63
    %Expected life (in years)
    
    
    2.80
    
    
    
    4.50
    
    
    
    4.50Expected volatility
    
    
    120.0
    %
    
    
    120.0
    %
    
    
    70.0
    %Expected dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average fair value of options granted
    
    $
    0.90
    
    
    $
    0.60
    
    
    $
    0.88
 Comprehensive Loss Comprehensive loss is defined as the change during a period in the equity of a business
enterprise from transactions and other events and circumstances, except for those resulting from
investments by owners and distributions to owners. In addition to its net loss, AOLAs other
comprehensive loss results from changes in the unrealized gains and losses on securities that are
classified as available-for-sale and foreign currency translation adjustments. The presentation of
comprehensive loss required by SFAS No. 130, Reporting Comprehensive Income,is set forth in the
accompanying statements of changes in stockholders equity (capital deficiency). Reclassifications Certain reclassifications have been made to the consolidated financial statements for the
years ended December 31, 2003 and December 31, 2002 to conform to the presentation of the
consolidated financial statements for the year ended December 31, 2004. Recent Pronouncements Share-Based Payments On December 16, 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement
No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123,
Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows.
Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123.
However, Statement 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the income statement based on their fair values. Pro
forma disclosure is no longer an alternative. Statement 123(R) must be adopted no later than July
1, 2005. Statement
123(R) permits public companies to adopt its requirements using one of two methods:  1.
    A modified prospective method in which compensation cost is recognized beginning with
the effective date (a) based on the requirements of Statement
123(R) for all share-based
payments granted after the effective date and (b) based on the requirements of Statement
123 for all awards granted to employees prior to the effective date
of Statement 123(R)
that remain unvested on the effective date.2.
    A modified retrospective method which includes the requirements of the modified
prospective method described above, but also permits entities to restate based on the
amounts previously recognized under Statement 123 for purposes of pro forma disclosures
either (a) all prior periods presented or (b) prior interim periods of the year of
adoption. The
Company has not determined the method it will use to implement Statement 123(R) or the impact on
results of operations for periods subsequent to adoption. F-12




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 Note 3. Related Party Transactions AOLA records the unpaid portion of costs incurred with related parties in payables to
affiliates line item in the accompanying consolidated balance sheets. America Online charges fees
for providing its services on an allocated cost plus basis. The Cisneros Group charges fees for
services on a cost basis. Management believes that the expenses for these services are
representative of what would have been incurred by AOLA on an arms-length basis. As of December 31, 2003, America Online had billed AOLA approximately $3.8 million over and
above amounts recorded in the consolidated financial statements. The difference relates to a
portion of items under dispute, primarily for support services provided by America Online. This
dispute was settled in February 2004 in a manner which was consistent with the historical
accounting treatment and which did not have any cash impact on the Companys financial condition.
America Online is no longer seeking payment for these amounts. The Company received a credit for
these invoices in March 2004. In April 2002, AOLA established an accrual relating to marketing expenses for an
employee of America Online who also served as a director of AOLA. America
Online never invoiced the Company for such services and America Online
informed the Company that it did not intend to bill for such services.
Accordingly, in the fourth quarter of 2004, the Company reversed such accrual in
the amount of $0.6 million. The AOL Services Agreement The Company entered into a services agreement with America Online on August 7, 2000, under
which America Online provides various services to the Company, including:  
    localization of AOL software and software updates;
    development and installation services, including requested modifications, enhancements and revisions to AOLs software;
    host computer services;
    network connections from our services to the America Online servers;
    technical support;
    training in areas such as marketing, business development, member support, public relations, finance and accounting;
    support and maintenance for third-party software licensed to the Company by America Online; and
    joint venture assistance. AOLA agreed to compensate America Online for these services at rates at least as favorable to
AOLA as those charged by America Online to any other party, including joint venture affiliates, but
excluding affiliates that are at least 75% owned by America Online. Based on managements
experience negotiating similar contracts, as well as its knowledge of competitors cost
structures, the Company believes that the terms of the services agreement are at least as favorable
as AOLA could have obtained from an unaffiliated third party. For the 2004 fiscal year, AOLA incurred expenses totaling approximately $7.1 million payable
to America Online under the services agreement as compared with $11.8 million in 2003 and $19.3
million in 2002. Agreement for Consulting Services with America Online Relating to U.S. Latino Content Area In February 2003, the Company entered into a one-year agreement for consulting services with
America Online under which the Company provided programming services to America Online related to
America Onlines Latino content area. This agreement expired in February 2004 and the Company
received $750,000 pursuant to this agreement for the period. An interim contract was in place for
the period March through September 2004. During that period the Company recognized $183,000 of
revenues related to the interim contract and programming work
provided to America Online in 2003. A Localization Services, Licensing and Content Programming Agreement was entered into
as of September 2004. Under this agreement, as amended, the Company provides America Online with
programmers for their Latino content area in the United States in exchange for an annual payment of
$400,000. The Company also provides America Online with certain localization services in exchange
for America Online providing the Company with localization engineering services. America Online may
also elect to engage AOLA to provide other localization services under this agreement. The Company
received $100,000 in 2004 under the new agreement. Advertising Arrangements with America Online AOLA has an arrangement with America Online under which it pays America Online a commission as
a finders fee of 15% of advertising revenues received from global transactions in which part of
the advertising is on the Companys country services and/or web-based interactive services. The amount of these payments during fiscal 2004, 2003 and 2002 was not material.
Based on managements experience negotiating similar arrangements, AOLA believes that the terms of
this arrangement are at least as favorable as it could have obtained from an unaffiliated third
party. F-13




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 Network Arrangement with America Online AOLA has an arrangement with America Online under which it receives network capacity from
Progress Networks. America Online is a party to the agreement with Progress Networks and invoices
AOLA for the amount of network capacity AOLA uses. The amount of such payments during each of fiscal 2004 and 2003
was $1.3 million. Agreement Regarding Puerto Rico Subscribers The Company has an agreement with America Online under which America Online transfers to AOLA
the economic benefit associated with subscribers to the AOL-branded service in Puerto Rico.
Subscribers to the AOL-branded service in Puerto Rico are included in AOLA member totals. During
2004, 2003 and 2002, AOLA incurred expenses of $0.9 million, $4.0 million and $2.7 million,
respectively to America Online under this agreement. During 2004, 2003 and 2002, AOLA recorded
$14.2 million, $13.6 million and $10.9 million, respectively, in subscription revenues consisting of
fees collected by America Online from subscribers to the AOL-branded service in Puerto Rico. Interest on Senior Convertible Notes In 2004, AOLA incurred $17.3 million in interest on the senior convertible notes purchased by
Time Warner. The interest was paid through the issuance of 24,901,613 shares of series B preferred
stock. During 2003, AOLA paid $17.8 million in interest on the senior convertible notes through the
issuance of 24,538,240 shares of series B preferred stock. During 2002, AOLA paid $5.2 million in
interest on the senior convertible notes, consisting of 10,865,643 shares of series B preferred
stock and $1.0 million in cash. Advertising Agreement with Turner Broadcasting System Latin America, Inc. AOLA entered into an advertising agreement with Turner Broadcasting System Latin America, Inc.
(Turner), an affiliate of Time Warner. For the years ended December 31, 2004, 2003 and 2002, AOLA
purchased approximately $0.6 million, $1.0 million and $0.6 million, respectively, in advertising
on various Turner media properties. During the year ended December 31, 2003, AOLA made prepayment for future advertisement to
Turner Broadcasting in the amount of $1.2 million. Advertising services were delivered through
December 31, 2004. As of December 31, 2004, the balance of
this prepaid amount had been fully utilized. Support Arrangements and Other Agreements with the Cisneros Group and Affiliated Companies AOLA may also receive support services from companies in the Cisneros Group who charge fees to
AOLA on a cost basis for those services. The Company did not incur material fees for support
services from the Cisneros Group in 2003 or in 2004. In addition, AOLA has entered into various agreements with the following companies associated
with the Cisneros Group. In 2003, AOLA entered into an agreement with El Sitio Management S.A.
(Claxson) under which Claxson provided the Company with chat room technology for AOLAs web-based
services. In 2005, Claxson terminated this agreement. AOLA has entered into agreements with Claxson under which AOLA advertised on certain of
Claxsons cable TV properties. AOLA also had an agreement with Pueblo Supermarkets in Puerto Rico,
under which AOLA paid rent for kiosks in the supermarkets for purposes of soliciting new members,
along with a bounty for new members who register through these promotional efforts. The agreement
with Pueblo has expired. The costs incurred payable to the Cisneros Group and its affiliates for the aforementioned
services totaled approximately $48,000, $30,000 and $0.2 million in the years ended December 31,
2004, 2003 and 2002, respectively. Advertising Agreements with Banco Itaú AOLA has entered into a series of advertising agreements with Banco Itaú under which they
advertise on AOLAs country service and web-based services in Brazil. For the year ended December
31, 2004, AOLA received $0.6 million from Banco Itaú under this agreement. For the year ended
December 31, 2003, AOLA received $0.6 million for advertising services from Banco Itaú. The amount
of payments received by the Company during the year ended December 31, 2002 was $0.9 million. Dependence on AOL The termination or loss of exclusivity of AOLAs license or services agreement with America
Online would adversely impact the F-14




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 Companys business. In exchange for its initial ownership
interest in AOLA, America Online entered into a royalty-free license agreement and a services
agreement with AOLA. Under the license agreement, AOLA has the exclusive right to offer in Latin
America AOL-branded PC-based online services. AOLA also has the exclusive right to offer
AOL-branded TV-based online services in Latin America. AOLA has the additional 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 a non-exclusive license to offer a localized network of Spanish- and
Portuguese-language AOL-branded portals in Latin America with an option to license exclusively any
Spanish- or Portuguese-language AOL-branded portals that America Online may develop for the Latin
American market, subject to payment of a license fee. Under the services agreement, America Online
provides services including software localization, updates, development, and installation services,
server connection services, technical support and training. America Online may also provide AOLA
with business development, administrative, tax, financial and legal services under the services
agreement. Each of these agreements may be terminated if AOLA materially breaches its terms. AOLA will
lose exclusivity of its licensed rights to PC-based services on the date on which America Online or
the Cisneros Group owns less than 20% of the outstanding capital stock of AOLA outstanding on
August 7, 2000, and to TV-and wireless-based services on the later of August 7, 2005 or the date on
which either America Online or the Cisneros Group owns less than 20% of the outstanding capital
stock of AOLA. Note 4. Stockholders Equity Preferred Stock AOLA is authorized to issue up to 1,000,000,000 shares of preferred stock, par value of $.01
per share, in one or more series with rights, preferences and privileges that are determined by
AOLAs board of directors. As of December 31, 2004, the
Company had outstanding 140,146,172 shares
of series B preferred stock, which is the series owned by America Online and Time Warner, and
79,518,702 shares of series C preferred stock, which is the series owned by the Cisneros Group. Before completion of AOLAs initial public offering in August 2000, AOLA had issued
101,858,334 shares of series B preferred stock and 101,858,334 shares of series C preferred stock.
At the time, America Online owned all of the outstanding series B preferred stock and the Cisneros
Group and certain family members of Gustavo Cisneros and Ricardo Cisneros owned all of the
outstanding series C preferred stock. The series B and series C preferred stock are convertible at
any time on a one-for-one basis into shares of class B and class C common stock, respectively,
which, themselves, are convertible on a one-for-one basis into shares of class A common stock. Concurrently with the IPO, the Cisneros Group gifted 2,057,950 shares of class A common stock
to some of its current and former employees. These shares were issued by AOLA to the Cisneros Group
as series C preferred stock and converted into shares of class A common stock upon their gifting.
An additional 1,996,424 shares of series C preferred stock held by three individuals related to the
Cisneros Group were also converted into 1,996,424 shares of class A common stock. On March 30, 2001, AOLAs principal stockholders, America Online, the Cisneros Group and Banco
Itaú provided an aggregate of $150.0 million in additional capital. America Online purchased
approximately a total of $66.3 million of the AOLAs series B redeemable convertible preferred. The
Cisneros Group purchased a total of approximately $63.8 million of AOLAs series C redeemable
convertible preferred stock. Banco Itaú purchased approximately $19.9 million of AOLAs class A
common stock. The purchase price per share for the series B preferred stock, series C preferred
stock and class A common stock was $4.6875. On July 31, 2001, the stockholders and board of directors authorized the amendment and
restatement of AOLAs certificate of incorporation. Under the
terms of the Companys revised charter,
on August 7, 2005, the Company is required to redeem
approximately 87.8% of the then outstanding
series B and C preferred stock issued to America Online and the Cisneros Group. The exact
percentage to be redeemed is subject to adjustment based on the number of shares the Company issues
in payment of interest on the senior convertible notes through August 7, 2005, which is in turn
dependent on the price of the Companys class A common stock. For the August 7, 2005 redemption,
the redemption price per share will be approximately $2.73, or an aggregate redemption price of
approximately $350.0 million (excluding accrued, but unpaid, dividends of approximately $73.8
million which AOLA is required to pay at the time of redemption), based on the current number of
shares of series B and C preferred stock currently outstanding. The
series B and series C preferred stock may be redeemed, at the
Companys option, in cash, by delivery
of shares of class A common stock or by any combination of cash and shares of class A common stock,
valued at its then fair market value. Due to the Companys limited cash position, the Company
expects to redeem these shares of preferred stock through the issuance of shares of class A common F-15




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated
Financial Statements 
 stock. It is not clear, however, whether such redemption would be prohibited by Delaware law in
view of certain statutory restrictions on redemption of shares of a corporations own stock for
cash or property. It also is not clear whether the Company would have sufficient available shares
of class A common stock for any such redemption. If any shares of preferred stock are redeemed,
such redemption would result in significant additional dilution to the Companys class A common
stockholders. It is not possible to predict how many shares of class A common stock would
have to be issued since the number of shares would be dependent upon
the then market value of the Companys
class A common stock. Also, as noted above, the Company believes that its class A common stock has, and
will have, no value. Of the remaining balance of series B and C preferred stock outstanding after the August 7,
2005 redemption, AOLA must redeem an additional amount on April 2, 2006, and the balance on March
8, 2007. As of December 31, 2004, AOLA had 140,146,172 shares of series B preferred stock
outstanding and 79,518,702 shares of series C preferred stock outstanding. The foregoing redemptions, if they are made, will result in
further dilution to the Companys class A common stockholders. Holders of the series B and C preferred stock are entitled to receive a cumulative annual
dividend at the rate of 3% of the per share liquidation preference, of $2.7268 and $2.7272 per
share, respectively, as and when declared by the board of directors and before payment of any
dividend to the holders of the class A, class B and class C common stock. The dividend is payable
in series B and C preferred stock, in cash or in any combination of series B and C preferred stock
and cash, at AOLAs option. After payment of dividends on the preferred stock, the holders of the
class A, class B and class C common stock, together with the holders of series B and series C
preferred stock, will share ratably in any dividend declared by the board of directors based on the
number of shares of common stock and preferred stock held. As of December 31, 2004, the liquidation
value on the series B preferred shares was approximately $382.2 million, excluding cumulative
dividends of $40.9 million. For the series C preferred shares, the liquidation value at such date
was approximately $216.9 million, excluding cumulative dividends of $32.9 million. Common Stock AOLA is authorized to issue a total of 2,250,000,000 shares of common stock, par value $.01
per share. This amount is comprised of authority to issue 1,400,000,000 shares of class A common
stock, 450,000,000 shares of class B common stock and 400,000,000 shares of class C common stock. As of December 31, 2003, a total of 135,186,195 shares of
class A common stock were outstanding.
The increase in the number of class A common stock outstanding, as compared with 67,070,065
shares outstanding at December 31, 2002, resulted primarily from the conversion of preferred stock
by America Online and the Cisneros Group in January 2003 in support of AOLA's efforts to comply with
Nasdaq continued listing requirements.


As of December 31, 2004, a total of 135,260,715 shares of class A common stock were outstanding. No
shares of class B common stock are outstanding and no shares of class C common stock are
outstanding. The class B and class C common stock is convertible into shares of class A common
stock at any time on a one-for-one basis. The holders of class A common stock are each entitled to one vote per share. America Online,
Time Warner and the Cisneros Group are entitled to ten votes for each share of series B and series
C preferred stock and, if issued, class B and class C common stock, that they hold. From inception
through December 31, 2004, the Cisneros Group has contributed approximately $244.7 million to
AOLAs equity capital and America Online has contributed $147.1 million to AOLAs equity capital. These amounts are net of related
offering costs and include the purchase of class A common stock by
America Online and the Cisneros Group in the Companys initial public offering.
Time Warner has also subscribed to and purchased $160.0 million of senior convertible notes, which
are convertible into shares of the Companys series B preferred stock. As of December 31, 2004,
none of AOLAs senior convertible notes had been converted. Under AOLAs restated certificate of incorporation, each of America Online and the Cisneros
Group has the right to directly elect five members of AOLAs 15-member board of directors. The
affirmative vote of the holders of a majority of the outstanding series B preferred stock and class
B common stock, voting separately as a class, as well as the holders of a majority of the
outstanding series C preferred stock and class C common stock, voting separately as a class, is
required to approve a large number of corporate and business matters, as well as to amend or repeal
a number of the provisions of AOLAs restated certificate of incorporation. In accordance with the Registration Rights and Stockholders Agreement by and among AOLA,
America Online, the Cisneros Group and Banco Itaú, both America Online and the Cisneros Group have
agreed to vote for one nominee designated by Banco Itaú for election to AOLAs Board of Directors.
On July 31, 2002, Roberto Setubal, the director designated by
Banco Itaú, resigned from AOLAs Board
of Directors. AOLAs Board of Directors currently has 11
members, including four each directly elected
by America Online and by the Cisneros Group, and four vacancies. Otherwise, holders of class A common stock, series B preferred stock and series C preferred
stock and any issued class B and class C common stock generally will vote together as a single
class on matters presented to the stockholders for their vote or approval, including for election
of directors who are not elected directly by America Online or the Cisneros Group, except as
otherwise required by applicable Delaware law. However, because America Online, Time Warner and the
Cisneros Group together control approximately 97.6% of the voting power of outstanding AOLA capital stock, America Online, Time Warner and the
Cisneros Group have the power to elect the remaining four directors. Under the stockholders agreement by and among the Company, America Online and the Cisneros
Group, both America Online F-16




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements and the Cisneros Group have agreed to non-compete provisions.
If either America Online or the Cisneros Group breaches these provisions, the Company and the
non-breaching party may be able to acquire the breaching partys capital stock. Common shares reserved for issuance at December 31, 2004 and December 31, 2003 were: As ofDecember 31,
    
    
    December 31,2004
    
    
    2003Series B Preferred Stock
    
    
    140,146,172
    
    
    
    115,244,559Series C Preferred Stock
    
    
    79,518,702
    
    
    
    79,518,702AOL Warrant
    
    
    16,541,250
    
    
    
    16,541,250TW Senior Convertible Notes
    
    
    44,150,105
    
    
    
    44,150,105Stock Options
    
    
    22,808,333
    
    
    
    22,808,333303,164,562
    
    
    
    278,262,949
 The Banco Itaú Strategic Alliance In June 2000, AOLA entered into a ten-year strategic alliance with Banco Itaú, one of the
largest banks in Latin America. AOLA launched a co-branded, customized version of our America
Online Brazil country service that Banco Itaú began marketing to its customers in December 2000 and
Banco Itaú is obligated to promote the co-branded service as the principal means of accessing Banco
Itaús interactive financial services. AOLA also markets a version of its web-based interactive
services in Banco Itaú branches containing the same co-branded features as the AOLA country
service. On December 14, 2002, AOLA entered into an agreement that restructured the strategic marketing
alliance with Banco Itaú. Under the terms of the agreement, AOLA oversees, in large part, the
marketing activities for the co-branded service. Banco Itaú is obligated to establish kiosks and
point-of-sale displays inside many of its bank branches for the promotion of the co-branded
service, which are staffed by promoters trained by AOL Brazil. Potential subscribers are able to
sample the co-branded services and register in the bank branches. The number of promoters varies
depending on the success of the marketing efforts, which are reviewed every three months. If the
marketing efforts do not meet specified goals, the number of promoters will be decreased, subject
to a floor on the number of promoters. Conversely, if the marketing efforts exceed specified
levels, the number of promoters may be increased, subject to a maximum number of promoters.
Furthermore, Banco Itaú is required to distribute, at AOLAs direction, CD-ROMs containing the
software for the co-branded service, in connection with the in-branch promotions and through direct
mail. In addition, Banco Itaú is required to produce and broadcast a certain number of television
commercials promoting the co-branded service and is required to provide exclusive or preferred
online banking benefits to subscribers to the co-branded service. Banco Itaú is responsible for the
cost of these marketing efforts. The
modified marketing arrangements are scheduled to remain in effect through March 2006, although the
ten-year term of the agreement did not change. Banco Itaú is obligated to make cash payments to
AOLA if minimum annual revenue targets and marketing commitments are not met through March 2006.
The maximum aggregate amount that Banco Itaú will be required to pay AOLA if these targets are not
met, which are referred to as reference payments, is $21.0 million and $13.0 million in 2005 and
2006, respectively. AOLA expects to receive no amounts from Banco Itaú for the March 24, 2005 measurement date because of payments received from Banco Itaú in
lieu of marketing, as described below. Beginning in the second half of 2003, as a result of lower than expected productivity, AOLA
reduced the number of promoters under the revised marketing agreement. Because of this reduction
and the cancellation of certain CD distributions, Banco Itaú made payments of $4.7 million and
$4.5 million to AOLA during 2004 and 2003, respectively, in lieu of marketing activities it was
obligated to perform under the revised marketing agreement. AOLA expects these payments to continue
in the future but the amounts to gradually decrease over time as per
the terms of the revised marketing agreement. Should the Company cease operations, such payments may cease
or differ materially from currently projected payments. AOLA has the
right to redeploy or reinstate some F-17




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements of the promoters in the branches in the future, in which case it would forego such payments
from Banco Itaú. Such payments from Banco Itaú are accounted for as funds from financing activities
in the accompanying consolidated statements of cash flows and will reduce future marketing expense
by lowering the amortization expense associated with the shares issued to Banco Itaú. Payments we
receive from Banco Itaú in lieu of marketing activities it is obligated to make serve to offset
amounts that may be owed as reference payments, since such amounts are considered revenues for
purposes of calculating Banco Itaús performance under revenue targets. Banco Itaús customers who register for the co-branded services currently are entitled to a
one-month free trial period, the length of which may be changed in the future and, if they
subscribe to the co-branded AOLA country service on a monthly, bundled unlimited-use plan, are
entitled to a 20% discount. Banco Itaú, at its option, may subsidize hours for certain customers
who were subscribers to the co-branded service prior to December 14, 2002. For the year ended
December 31, 2003, AOLA received $0.9 million in subsidies for its members from Banco Itaú as
compared with $4.2 million in 2002. For the year ended December 31, 2004 the amount received as
subsidies for its members from Banco Itau was not material. 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, based on the original valuation of the penalties. AOLA is expensing 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 Itaú strategic alliance
was $37.0 million in the year ended December 31, 2004, and $41.2 million and $41.8 million in the
years ended December 31, 2003 and 2002, respectively. This expense is included in the accompanying
consolidated statements of operations as part of sales and marketing expenses. On March 16, 2005, the Companys management concluded that AOLA is not a going concern for financial reporting purposes and
eventually will not have sufficient funds to continue operations. In light of that conclusion,
management reviewed current contracts in effect and determined that
the recording of a full
impairment of the remaining unamortized balance of unearned services recorded as a result of its
strategic marketing agreement with Banco Itaú was necessary. Management estimates that the amount
of this non-cash impairment is approximately $52.5 million. This
impairment will be recorded by the
Company in the first quarter of 2005. The AOL Warrant On August 7, 2000, the Company issued a warrant to AOL to purchase 16,541,250 shares in any
combination of its series B preferred, class A common or class B common stock at a per share
exercise price equal to the IPO price of $8.00 per share. The warrant was immediately exercisable
and has a ten-year term. The number of shares issuable under the warrant may be increased if AOL or
the Cisneros Group admits one or more strategic stockholders. No other warrants are outstanding. Stock Option Plan In July 2000, AOLAs board of directors and shareholders adopted AOLAs 2000 Stock Option Plan
(the Stock Plan). Under the Stock Plan, AOLA may grant incentive stock options and non-qualified
stock options to its employees, consultants, and directors at fair market value at the date of
grant. The options generally vest 25% per year over four years and have a maximum term of ten
years. A total of 13,208,333 shares of class A common stock were initially authorized for grant
under the Stock Plan. The number of shares available for issuance under the Stock Plan was
increased, effective as of March 2001, to a total number of 17,808,333 shares of class A common
stock. Stockholder approval was not sought for this increase, although AOLAs Compensation
Committee and Board of Directors approved it. The number of shares available for issuance under the
plan was increased a third time to 22,808,333 shares of class A common stock in July 2002.
Stockholder approval was obtained for this increase. Stock options granted to non-employees are
accounted for based on their fair value. The activity in AOLAs stock options for the years ended
December 31, 2004, 2003 and 2002 is set forth below: F-18




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements Year EndedDecember 31, 2004
    
    
    December 31, 2003
    
    
    December 31, 2002Number of
    
    
    Weighted Average
    
    
    Number of
    
    
    Weighted Average
    
    
    Number of
    
    
    Weighted AverageStock Options
    
    
    Exercise Price
    
    
    Stock Options
    
    
    Exercise Price
    
    
    Stock Options
    
    
    Exercise PriceBalance at the beginning of period
    
    
    10,433,186
    
    
    $
    5.31
    
    
    
    14,725,922
    
    
    $
    5.20
    
    
    
    15,848,099
    
    
    $
    6.14Options grantedAbove market price
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    At market price
    
    
    1,647,672
    
    
    $
    1.37
    
    
    
    242,452
    
    
    $
    0.98
    
    
    
    3,359,720
    
    
    $
    1.85Below market price
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,647,672
    
    
    $
    1.37
    
    
    
    242,452
    
    
    $
    0.98
    
    
    
    3,359,720
    
    
    $
    1.85Options exercised
    
    
    (74,520
    )
    
    $
    1.44
    
    
    
    (51,058
    )
    
    $
    1.32
    
    
    
    (15,351
    )
    
    
    2.72Options forfeited
    
    
    (1,327,070
    )
    
    $
    4.43
    
    
    
    (4,484,130
    )
    
    $
    4.76
    
    
    
    (4,466,546
    )
    
    $
    6.03Balance at the end of period
    
    
    10,679,268
    
    
    $
    4.84
    
    
    
    10,433,186
    
    
    $
    5.31
    
    
    
    14,725,922
    
    
    $
    5.20
 The following table summarizes the range and weighted average exercise prices and the weighed
average remaining contractual life of the options outstanding at December 31, 2004: OPTIONS OUTSTANDING
    
    
    OPTIONS EXERCISABLEWeighted AverageNumber
    
    
    Remaining

    
    Weighted
    
    
    Number
    
    
    WeightedRange of
    
    
    Outstanding
    
    
    Contractual Life

    
    Average
    
    
    Exercisable
    
    
    AverageExercise Prices
    
    
    As of 12/31/2004
    
    
    (in Years)

    
    Exercise Price
    
    
    As of 12/31/2004
    
    
    Exercise Price$0.01
    
    $
    2.12
    
    
    
    3,356,713
    
    
    
    8.2
    
    
    $
    1.49
    
    
    
    1,084,062
    
    
    $
    1.53$2.24
    
    $
    2.72
    
    
    
    2,025,393
    
    
    
    6.1
    
    
    $
    2.72
    
    
    
    1,629,714
    
    
    $
    2.72$2.77
    
    $
    7.98
    
    
    
    1,168,387
    
    
    
    6.1
    
    
    $
    6.53
    
    
    
    1,087,311
    
    
    $
    6.64$8.00
    
    $
    8.00
    
    
    
    4,070,925
    
    
    
    5.6
    
    
    $
    8.00
    
    
    
    4,070,925
    
    
    $
    8.00$8.07
    
    $
    9.44
    
    
    
    57,850
    
    
    
    6.1
    
    
    $
    8.31
    
    
    
    49,675
    
    
    $
    8.30$0.01
    
    $
    9.44
    
    
    
    10,679,268
    
    
    
    6.6
    
    
    $
    4.84
    
    
    
    7,921,687
    
    
    $
    5.84
 Note 5. Computation of Loss Per Common Share: The calculation of basic and diluted loss per common share for the years ended December 31,
2004, 2003 and 2002 is shown below (in thousands, except per share amounts): Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Net loss
    
    $
    (76,190
    )
    
    $
    (100,739
    )
    
    $
    (161,867
    )Less: Dividends on Series B and C preferred shares
    
    
    16,481
    
    
    
    15,869
    
    
    
    18,724Net loss applicable to common stockholders
    
    $
    (92,671
    )
    
    $
    (116,608
    )
    
    $
    (180,591
    )Weighted average number of common shares outstanding
    
    
    135,246
    
    
    
    132,903
    
    
    
    67,068LOSS PER COMMON SHARE, Basic and diluted
    
    $
    (0.69
    )
    
    $
    (0.88
    )
    
    $
    (2.69
    )
 The loss per share does not include any accretion to liquidation value of AOLAs
series B and C preferred stock since AOLA has the option of redeeming the series B and series C
preferred stock in common stock rather than cash. Additionally, AOLA has the intention and
unconditional 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 as of December 31, 2004 and 2003 are set forth on the table
below: F-19




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements As ofDecember 31,
    
    
    December 31,2004
    
    
    2003Series B Preferred Stock
    
    
    140,146,172
    
    
    
    115,244,559Series C Preferred Stock
    
    
    79,518,702
    
    
    
    79,518,702AOL Warrant
    
    
    16,541,250
    
    
    
    16,541,250TW Senior Convertible Notes
    
    
    44,150,105
    
    
    
    44,150,105Stock Options
    
    
    10,679,268
    
    
    
    10,433,186291,035,497
    
    
    
    265,887,802
 Note 6. Segment Information AOLA considers markets in which it has launched its AOLA country and web-based 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 subscription fees to its
interactive services and from advertising and other revenues. Interactive services consist
primarily of the delivery of the AOLA country services and web-based interactive services. The
accounting policies of the reportable segments are the same as those described in the summary of
significant accounting policies. AOLA launched its first country operations in December 1999 in
Brazil. In July 2000, it launched its AOLA country service in Mexico, launched its AOLA country
service in Argentina in August 2000, and began marketing the AOL-branded service in Puerto Rico in
December 2000. It subsequently launched its web-based interactive services in Brazil and Argentina
in the third quarter of 2003, and in Puerto Rico in the first quarter of 2004. For purposes of the segment presentation below, amounts included in revenues under the
corporate and other segment represent amounts are related to the programming services AOLA provides
to America Online for its Latino content area and to revenues for CompuServe Classic in countries
where the AOLA country services are not present. The CompuServe Classic service was largely
terminated in the first quarter of 2002. No single customer accounted for 10% or more of AOLAs
total revenues for any of the periods presented. The following table provides a reconciliation of reportable segment revenues to the
consolidated financial statement totals and presents revenues by
service type (in thousands): F-20




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Revenues:Subscription- Brazil
    
    $
    16,861
    
    
    $
    22,883
    
    
    $
    25,229- Mexico
    
    
    16,499
    
    
    
    21,152
    
    
    
    24,906- Argentina
    
    
    1,359
    
    
    
    1,675
    
    
    
    1,856- Puerto Rico
    
    
    14,033
    
    
    
    13,595
    
    
    
    10,855- Corporate and other
    
    
    64
    
    
    
    110
    
    
    
    15248,816
    
    
    
    59,415
    
    
    
    62,998Advertising and other- Brazil
    
    
    1,489
    
    
    
    2,384
    
    
    
    5,526- Mexico
    
    
    928
    
    
    
    1,574
    
    
    
    2,258- Argentina
    
    
    668
    
    
    
    344
    
    
    
    445- Puerto Rico
    
    
    336
    
    
    
    593
    
    
    
    519- Corporate and other
    
    
    181
    
    
    
    864
    
    
    
    3613,602
    
    
    
    5,759
    
    
    
    9,109Total- Brazil
    
    
    18,350
    
    
    
    25,267
    
    
    
    30,755- Mexico
    
    
    17,427
    
    
    
    22,726
    
    
    
    27,164- Argentina
    
    
    2,028
    
    
    
    2,019
    
    
    
    2,301- Puerto Rico
    
    
    14,369
    
    
    
    14,188
    
    
    
    11,374- Corporate and other
    
    
    244
    
    
    
    974
    
    
    
    513$
    52,418
    
    
    $
    65,174
    
    
    $
    72,107
 The following table provides a reconciliation of reportable segment loss or profit
from operations to the consolidated financial statement totals (in thousands): Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Income (loss) from operations- Brazil
    
    $
    (41,502
    )
    
    $
    (60,458
    )
    
    $
    (95,447
    )- Mexico
    
    
    (2,020
    )
    
    
    (7,649
    )
    
    
    (37,268
    )- Argentina
    
    
    (5,190
    )
    
    
    (1,683
    )
    
    
    (3,141
    )- Puerto Rico
    
    
    4,530
    
    
    
    2,495
    
    
    
    956- Corporate and other
    
    
    (14,684
    )
    
    
    (16,366
    )
    
    
    (21,729
    )$
    (58,866
    )
    
    $
    (83,661
    )
    
    $
    (156,629
    )
 During the second quarter of 2004, based on projections of the Companys taxable revenue in Argentina, it was determined that it was not likely that the Company would be able to recover a value-added tax (VAT) receivable from the Argentine government with a value of approximately
$4.0 million at June 30, 2004. This receivable, which arose in the normal conduct of business, can only be recovered as AOLA makes sales in Argentina and collects from its customers. As a result, in the quarter ended June 30, 2004, a non-cash charge was recorded to establish an allowance in order to reduce the value of this VAT asset to zero. Argentinas 2004 results include the effect of writing-off this VAT receivable of $4.0 million. The following table presents a reconciliation of reportable segment assets and long-lived
assets to the consolidated financial statement totals (in thousands): F-21




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AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements As ofDecember 31,
    
    
    December 31,2004
    
    
    2003Total assets- Brazil
    
    $
    13,531
    
    
    $
    10,069- Mexico
    
    
    1,371
    
    
    
    3,575- Argentina
    
    
    470
    
    
    
    4,421- Puerto Rico
    
    
    209
    
    
    
    569- Corporate and other
    
    
    22,143
    
    
    
    37,105$
    37,724
    
    
    $
    55,739Property
and equipment, net- Brazil
    
    $
    1,455
    
    
    $
    2,381- Mexico
    
    
    301
    
    
    
    593- Argentina
    
    
    188
    
    
    
    282- Puerto Rico
    
    
    137
    
    
    
    232- Corporate and other
    
    
    531
    
    
    
    1,283$
    2,612
    
    
    $
    4,771
 Argentinas 2004 decrease in assets includes the effect of writing-off its Value
Added Tax receivable of $4.0 million. Net assets (liabilities)
at December 31, 2004 were $1.5 million, $(5.4)
million, $(0.4) million, and $(0.8) million for Brazil, Mexico,
Argentina and Puerto Rico,
respectively. Year EndedDecember 31,2004
    
    
    2003
    
    
    2002Depreciation and amortization- Brazil
    
    $
    1,151
    
    
    $
    1,347
    
    
    $
    2,580- Mexico
    
    
    315
    
    
    
    675
    
    
    
    1,222- Argentina
    
    
    91
    
    
    
    156
    
    
    
    352- Puerto Rico
    
    
    135
    
    
    
    207
    
    
    
    80- Corporate and other
    
    
    677
    
    
    
    1,309
    
    
    
    794$
    2,369
    
    
    $
    3,694
    
    
    $
    5,028Capital spending- Brazil
    
    $
    110
    
    
    $
    998
    
    
    $
    1,059- Mexico
    
    
    24
    
    
    
    259
    
    
    
    249- Argentina
    
    
    31
    
    
    
    136
    
    
    
    7- Puerto Rico
    
    
    23
    
    
    
    157
    
    
    
    133- Corporate and other
    
    
    112
    
    
    
    9
    
    
    
    578$
    300
    
    
    $
    1,559
    
    
    $
    2,026
 Note 7. Property and Equipment and Product Development Costs Property and Equipment Property and equipment are stated at cost less accumulated depreciation and amortization as
follows (in thousands): F-22




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements  Useful Life
    
    December 31,(years)
    
    2004
    
    
    2003Leasehold and network improvements
    
    4
    
    $
    3,554
    
    
    $
    3,415Furniture and fixtures
    
    5
    
    
    2,809
    
    
    
    2,707Equipment and automobiles
    
    5
    
    
    1,578
    
    
    
    1,590Computer equipment and internal software
    
    2-5
    
    
    9,743
    
    
    
    9,18317,684
    
    
    
    16,895Less: accumulated depreciation and amortization
    
    
    
    
    (15,072
    )
    
    
    (12,124
    )Property and equipment, net
    
    
    
    $
    2,612
    
    
    $
    4,771Capitalized development and localization costs
    
    
    
    $
    1,934
    
    
    $
    1,934Less: accumulated depreciation and amortization
    
    
    
    
    (1,910
    )
    
    
    (1,884
    )Product development costs, net
    
    
    
    $
    24
    
    
    $
    50
 Depreciation and amortization expense, excluding amortization of unearned services
related to Banco Itaú under the Companys strategic marketing agreement, amounted to $2.4 million
for the year ended December 31, 2004, as compared to $3.7 million for the year ended December 31,
2003 and to $5.0 million in the year ended December 31, 2002. Note 8. Other Accrued Expenses and Liabilities At December 31, 2004 and 2003, the components of other accrued expenses and liabilities were
as follows (in thousands): December 31,2004
    
    
    2003Telecommunications
    
    $
    1,704
    
    
    $
    3,891Marketing and Advertising
    
    
    1,719
    
    
    
    3,202Member Services
    
    
    674
    
    
    
    1,104Other
    
    
    1,423
    
    
    
    1,475Totals
    
    $
    5,520
    
    
    $
    9,672
 Note 9. Income Taxes The United States and foreign components of loss from continuing operations before income
taxes and dividends on the Series B and Series C preferred stock are as follows: Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002United States
    
    $
    (27,283
    )
    
    $
    (32,469
    )
    
    $
    (22,756
    )Foreign
    
    
    (48,783
    )
    
    
    (68,266
    )
    
    
    (139,036
    )$
    (76,066
    )
    
    $
    (100,735
    )
    
    $
    (161,792
    )
 The components of the provision for income taxes are as follows: F-23




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements  Year Ended December 31,(in thousands)
    
    2004
    
    
    2003
    
    
    2002Current:
    
    $
    
    
    
    $
    
    
    
    $
    Federal
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    124
    
    
    
    4
    
    
    
    75State
    
    
    
    
    
    
    
    
    
    
    124
    
    
    
    4
    
    
    
    75Deferred
    
    
    $
    124
    
    
    $
    4
    
    
    $
    75
 For U.S. tax purposes, elections were made to treat foreign operating entities as branches as
those subsidiaries were formed. AOLA acquired the foreign operating entities on August 7, 2000.
Therefore, the consolidated operating losses arising in periods after August 7, 2000 are available
for carry forward by AOLA. Net operating loss carry forwards totaling $778.4 million at December
31, 2004 are being carried forward and are available to reduce future taxable income. These net
operating losses expire as follows: $187.0 million in 2020; $284.3 million in 2021; $166.4 million
in 2022; $81.4 million in 2023 and $59.4 million in 2024. Tax losses generated by AOLA in foreign jurisdictions will be available to be carried forward
against future foreign taxable income, subject to local tax restrictions, if any. AOLAs operations
in Brazil, Mexico, Spain, Puerto Rico and Argentina generated net operating loss carry forwards
totaling $1.054 billion at December 31, 2004, which are being carried forward and are available to
reduce future taxable income of certain foreign tax jurisdictions. At December 31, 2004, AOLAs net
operating loss carry forwards (by operating country) expire as follows (in thousands): Year EndedDecember 31,
    
    Argentina
    
    
    Puerto Rico
    
    
    Spain
    
    
    Mexico
    
    
    Brazil
    
    
    Total2005
    
    $
    246
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2462006
    
    
    17,601
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    17,6012007
    
    
    7,429
    
    
    
    73
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,5022008
    
    
    1,738
    
    
    
    4,077
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    5,8152009
    
    
    1,832
    
    
    
    2,352
    
    

    
    
    
    
    
    
    
    
    
    
    
    
    
    4,1842010
    
    
    
    
    
    
    2,660
    
    
    
    
    
    
    
    47,738
    
    
    
    
    
    
    
    50,3982011
    
    
    
    
    
    
    1,964
    
    
    
    
    
    
    
    42,364
    
    
    
    
    
    
    
    44,3282012
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    20,070
    
    
    
    
    
    
    
    20,0702013
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    22,341
    
    
    
    
    
    
    
    22,3412014
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,305
    
    
    
    
    
    
    
    6,3052015
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2016
    
    
    
    
    
    
    
    
    
    
    555,651
    
    
    
    
    
    
    
    
    
    
    
    555,6512017
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2018
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2019
    
    
    
    
    
    
    
    
    
    
    301
    
    
    
    
    
    
    
    
    
    
    
    301Indefinitely
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    319,000
    
    
    
    319,000$
    28,846
    
    
    $
    11,126
    
    
    $
    555,952
    
    
    $
    138,818
    
    
    $
    319,000
    
    
    $
    1,053,742
 Deferred income taxes reflect the net effect of temporary differences between the carrying
amounts of assets and liabilities for financial reporting and the amounts used for income tax
purposes. The significant components of AOLAs deferred tax assets and liabilities at December 31,
2004 and 2003 consisted of the following (in thousands): F-24




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements  December 31,(in thousands)
    
    2004
    
    
    2003Deferred tax assets, net of deferred tax liabilities:Accounts receivable allowances
    
    $
    89
    
    
    $
    137Depreciation and amortization
    
    
    1,428
    
    
    
    1,900Loss on securities
    
    
    610
    
    
    
    1,426Deferred revenues
    
    
    (125
    )
    
    
    (96
    )Accrued expenses
    
    
    3,636
    
    
    
    2,674Stock based compensation
    
    
    210
    
    
    
    157Net operating loss carryforwards
    
    
    345,452
    
    
    
    314,027Total
    
    
    351,300
    
    
    
    320,225Valuation allowance
    
    
    (351,300
    )
    
    
    (320,225
    )$
    
    
    
    $
    
 SFAS 109 requires a valuation allowance to reduce the deferred tax assets reported if, based
on the weight of the evidence, it is more likely than not that some portion or all of the deferred
tax assets will not be realized. After consideration of all the evidence, both positive and
negative, management has determined that a $351.3 million and $320.2 million valuation allowance at
December 31, 2004 and 2003, respectively, is necessary to reduce the deferred tax assets to the
amount that will more likely than not be realized. The valuation allowance increased by
approximately $31.0 million during the year ended December 31, 2004; approximately $41.9 million
during the year ended December 31, 2003 and approximately $55.0 million during the year ended
December 31, 2002. AOLAs operations in Brazil, Mexico, Argentina and Spain generated deferred tax
assets of approximately $52.5 million from foreign net operating losses relating to periods prior
to the August 7, 2000 reorganization. The foreign deferred tax assets were fully provided for with
a valuation allowance. A reconciliation of AOLAs income taxes to amounts calculated at the
statutory federal rate is as follows (in percentages): Year Ended December 31,2004
    
    
    2003
    
    
    2002Federal statutory taxes:
    
    
    (34.00
    )%
    
    
    (34.00
    )%
    
    
    (34.00
    )%State income taxes, net of federal tax benefit
    
    
    (3.63
    )
    
    
    (3.63
    )
    
    
    (3.63
    )Non-deductible items
    
    
    8.71
    
    
    
    0.16
    
    
    
    0.41Dividends received deductions
    
    
    (0.09
    )
    
    
    (0.24
    )
    
    
    (0.10
    )Adjustment of prior net operating losses
resulting from tax examinations, exchange
rate differences and other adjustments
    
    
    (11.95
    )
    
    
    
    
    
    
    Change in valuation allowance
    
    
    40.85
    
    
    
    41.59
    
    
    
    33.99Other
    
    
    0.27
    
    
    
    (3.88
    )
    
    
    3.330.16
    %
    
    
    0.00
    %
    
    
    0.00
    %
 Note 10. Commitments and Contingencies Leases and Network Services Commitments AOLA has entered into various facilities and equipment operating leases, primarily under
long-term operating agreements, some of which contain renewal options. In addition, AOLA has
entered into third party telecommunications network capacity contracts, under which it is committed
to purchase a minimum amount of network capacity or to pay a fixed minimum cost for network
capacity. AOLA records expense related to these contracts up to the minimum commitments and
expenses any additional costs in the period that it is incurred. As of December 31, 2004, future
rental commitments and the fixed minimum costs for network capacity commitments under these
contracts for future periods are summarized as follows (in thousands): F-25




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements  (In thousands)For the year ended December 31,
    
    Leases
    
    
    Network
    
    
    Total2005
    
    $
    2,956
    
    
    $
    10,719
    
    
    $
    13,6752006
    
    
    1,842
    
    
    
    9,213
    
    
    
    11,0552007
    
    
    1,525
    
    
    
    9,818
    
    
    
    11,3432008
    
    
    10
    
    
    
    
    
    
    
    10After
    
    2009
    
    
    
    
    
    
    
    
    
    
    $
    6,333
    
    
    $
    29,750
    
    
    $
    36,083
 For the year ended December 31, 2004, rent expense under operating leases totaled
approximately $10.7 million. For the year ended December 31, 2003, rent expense under operating
leases totaled approximately $19.1 million. For the year ended December 31, 2002, rent expense
under operating leases totaled approximately $22.3 million (including a one-time impairment charge
of $0.9 million for leased space abandonment). The cessation of the
Companys operations could result in additional material liabilities. Legal Proceedings From time to time, AOLA may be involved in litigation relating to claims arising out of its
operations in the normal course of business. AOLA is not currently a party to any legal
proceedings, the adverse outcome of which, individually or in the aggregate, is expected to have a
material adverse effect on AOLAs financial position or results of operations. Note 11. Employee Savings Plan AOLA has a savings plan, which qualifies under Section 401(k) of the Internal Revenue Code,
covering all regular employees based in its Fort Lauderdale headquarters or in Virginia. AOLA
contributes a maximum contribution of 4% of a participants earnings. The cost of providing this
benefit in the year ended December 31, 2004 was $143,000, as compared to $174,000 and $258,000 for
the years ended December 31, 2003 and 2002, respectively. Note 12. Subsequent Events On
March 16, 2005, the Companys management concluded that
AOLA is not a going concern for financial reporting purposes and
eventually will not have sufficient funds to continue operations. In light of that conclusion,
management reviewed current contracts in effect and determined that
the recording of a full
impairment of the remaining unamortized balance of unearned services recorded as a result of its
strategic marketing agreement with Banco Itaú was necessary. Management estimates that the amount
of this impairment is approximately $52.5 million and that this impairment will not have an impact
on its cash balances. This impairment will be recorded by the Company in the first quarter of 2005. Note 13. Quarterly Financial Data (Unaudited): The table below presents selected unaudited quarterly information for the last two calendar
years. In managements opinion, all adjustments necessary to fairly present the results of
operations of such periods are reflected therein. F-26




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##### Table of Contents



AMERICA ONLINE LATIN AMERICA, INC.Notes to Consolidated Financial Statements  QUARTER ENDEDMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    December 31,
    
    
    TOTALCALENDAR YEAR 2004Revenues
    
    $
    14,019
    
    
    $
    12,710
    
    
    $
    12,801
    
    
    $
    12,888
    
    
    $
    52,418Cost and expenses
    
    
    27,349
    
    
    
    31,362
    
    
    
    27,803
    
    
    
    24,770
    
    
    
    111,284LOSS FROM OPERATIONS
    
    
    (13,330
    )
    
    
    (18,652
    )
    
    
    (15,002
    )
    
    
    (11,882
    )
    
    
    (58,866
    )Other income/(expense), net
    
    
    (4,033
    )
    
    
    (4,115
    )
    
    
    (4,316
    )
    
    
    (4,736
    )
    
    
    (17,200
    )LOSS BEFORE INCOME TAXES
    
    
    (17,363
    )
    
    
    (22,767
    )
    
    
    (19,318
    )
    
    
    (16,618
    )
    
    
    (76,066
    )Income taxes
    
    
    30
    
    
    
    29
    
    
    
    29
    
    
    
    36
    
    
    
    124NET LOSS
    
    
    (17,393
    )
    
    
    (22,796
    )
    
    
    (19,347
    )
    
    
    (16,654
    )
    
    
    (76,190
    )Dividends on Series B and C preferred shares
    
    
    3,661
    
    
    
    4,088
    
    
    
    4,259
    
    
    
    4,473
    
    
    
    16,481NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
    
    $
    (21,054
    )
    
    $
    (26,884
    )
    
    $
    (23,606
    )
    
    $
    (21,127
    )
    
    $
    (92,671
    )Basic and diluted loss per common share
    
    $
    (0.16
    )
    
    $
    (0.20
    )
    
    $
    (0.17
    )
    
    $
    (0.16
    )
    
    $
    (0.69
    )Average common shares outstanding
    
    
    135,210
    
    
    
    135,257
    
    
    
    135,257
    
    
    
    135,259
    
    
    
    135,246CALENDAR YEAR 2003Revenues
    
    $
    16,295
    
    
    $
    17,685
    
    
    $
    16,280
    
    
    $
    14,914
    
    
    $
    65,174Cost and expenses
    
    
    40,073
    
    
    
    39,207
    
    
    
    35,618
    
    
    
    33,937
    
    
    
    148,835LOSS FROM OPERATIONS
    
    
    (23,778
    )
    
    
    (21,522
    )
    
    
    (19,338
    )
    
    
    (19,023
    )
    
    
    (83,661
    )Other income/(expense), net
    
    
    (4,421
    )
    
    
    (4,477
    )
    
    
    (4,825
    )
    
    
    (3,351
    )
    
    
    (17,074
    )LOSS BEFORE INCOME TAXES
    
    
    (28,199
    )
    
    
    (25,999
    )
    
    
    (24,163
    )
    
    
    (22,374
    )
    
    
    (100,735
    )Income taxes
    
    
    (27
    )
    
    
    29
    
    
    
    (3
    )
    
    
    5
    
    
    
    4NET LOSS
    
    
    (28,172
    )
    
    
    (26,028
    )
    
    
    (24,160
    )
    
    
    (22,379
    )
    
    
    (100,739
    )Dividends on Series B and C preferred shares
    
    
    3,033
    
    
    
    3,882
    
    
    
    4,435
    
    
    
    4,519
    
    
    
    15,869NET LOSS APPLICABLE TO COMMON STOCKHOLDERS
    
    $
    (31,205
    )
    
    $
    (29,910
    )
    
    $
    (28,595
    )
    
    $
    (26,898
    )
    
    $
    (116,608
    )Basic and diluted loss per common share
    
    $
    (0.25
    )
    
    $
    (0.22
    )
    
    $
    (0.21
    )
    
    $
    (0.20
    )
    
    $
    (0.88
    )Average common shares outstanding
    
    
    125,304
    
    
    
    135,135
    
    
    
    135,136
    
    
    
    135,158
    
    
    
    132,903
 F-27