10-Q 1 g77776e10vq.txt AT&T LATIN AMERICA CORP. ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 Commission file number: 0-31010 AT&T LATIN AMERICA CORP. (Exact name of Registrant as Specified in its Charter) 22-3687745 DELAWARE (I.R.S. Employer (State or Other Jurisdiction of Incorporation) Identification No.) 2020 K STREET, WASHINGTON, D.C. 20006 (Address of principal executive offices) (Zip code) Registrant's telephone number including area code: (202) 689-6300 220 ALHAMBRA CIRCLE, CORAL GABLES, FLORIDA, 33134 (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of August 14, 2002, 45,659,017 shares of the registrant's Class A common stock, par value $0.0001 per share, and 73,081,595 shares of the registrant's Class B common stock, par value $0.0001 per share, were outstanding. ================================================================================ INDEX

2 Part I -- Financial Information Item 1. Financial Statements AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) CONSOLIDATED BALANCE SHEETS

The accompanying footnotes are an integral part of these consolidated financial statements. 3 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

The accompanying footnotes are an integral part of these consolidated financial statements. 4 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)

The accompanying footnotes are an integral part of these consolidated financial statements. 5 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS (UNAUDITED)

SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES: In connection with the restructuring of our facilities with AT&T Corp., we have characterized deferred interest at December 31, 2001 of $30.2 million plus the amount accrued from January 1, 2002 through June 30, 2002 of $25.8 million as part of the debt. During the six months ended June 30, 2002 we issued in non-cash transactions 435,000 restricted shares of class A common stock to employees in exchange for future services. The issuance of stock was accounted for as additional paid in capital with the corresponding unvested portion as unearned restricted stock in the stockholders' equity. During the six months ended June 30, 2001, we acquired property and equipment amounting to approximately $43.6 million through vendor financing arrangements. The accompanying footnotes are an integral part of these consolidated financial statements. 6 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1 -- NATURE OF THE BUSINESS AT&T Latin America Corp. was incorporated on October 13, 1999, under the laws of the State of Delaware, and along with its consolidated subsidiaries is referred to collectively in these consolidated financial statements and elsewhere in this quarterly report on Form 10-Q as "we," "our," the "Company," "AT&T Latin America," "ATTLA" and "us." We provide communications services under the "AT&T" brand name to major metropolitan business markets in Argentina, Brazil, Chile, Colombia and Peru. We deliver our services mainly through our own technologically advanced networks, which interconnect with third party networks. Our communication services include, among others, data-Internet, local and long distance voice, web hosting and managed network services. AT&T Corp. holds directly or indirectly 8,000,000 shares of our Class A common stock and all 73,081,595 outstanding shares of our Class B common stock, representing approximately 95.2% of the voting power and approximately 68.3% of the economic interests of our common stock as of June 30, 2002. The accompanying unaudited consolidated financial statements included in this quarterly report have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X. They do not include all information and notes required by generally accepted accounting principles for complete financial statements and should be read together with the audited financial statements and notes thereto included in our annual report on Form 10-K for the year ended December 31, 2001. The balance sheet data as of December 31, 2001 was derived from our audited financial statements but does not include all disclosures required by generally accepted accounting principles. Certain reclassifications have been made to conform to the 2002 presentation. The financial information furnished reflects all adjustments, consisting only of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the quarterly periods presented. The results of operations for the periods presented are not necessarily indicative of our future results of operations for the entire year. Our cumulative comprehensive loss was $712.2 million and $507.8 million as of June 30, 2002 and December 31, 2001, respectively. Comprehensive income was as follows (in thousands):

NOTE 2 -- LIQUIDITY The unaudited consolidated financial statements have been prepared on a basis that contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. We have incurred net losses of approximately $627.3 million from the period from inception (October 13, 1999) through June 30, 2002. As of June 30, 2002 we had a working capital deficit of $18.5 million. Our primary liquidity needs are for working capital, capital expenditures and debt service. Currently, our primary sources of liquidity are cash on hand, revenue, available funds under our senior secured vendor financing and unsecured bank facilities in local Latin American credit markets. Our business is capital intensive and, as such, has required substantial initial capital investment to date. We have been building a high capacity network in the countries in which we operate and are primarily focused on data-Internet and voice services. As of the end of 2001, we had completed a substantial portion of our planned capital deployment relating to core network infrastructure. We expect our capital expenditures in 2002 to range between $60.0 million and $70.0 million. We also expect our aggregate capital expenditures in 2002 and future periods will be reduced significantly from 2001 levels as we continue to increase the utilization of our existing networks. Moreover, we expect that our capital expenditures in 2002 and future periods will become more correlated to increases in revenue. We expect to continue incurring operating losses and to generate negative cash flows from operations for the next two years and to continue to generate net losses for the next several years. 7 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) We believe that our cash on hand together with our available borrowing capacity under the senior secured vendor financing and local bank credit facilities in Latin American markets will be sufficient to support our working capital needs, capital expenditures and debt service for the next several years. However, in the event that our future working capital is less than expected, as a result of lower than expected revenue, higher expenses or greater capital investment needs, or in the event that we are unable to renew or refinance existing local credit facilities when they become due, we may have cash needs greater than expected. Our inability to obtain additional financing to fund such cash needs would result in a material adverse effect on our business plan, our financial condition and results of operations. There is no assurance that we will be able to obtain additional cash we may need on acceptable terms and conditions or at all. Moreover, if in the future we were not able to meet certain operating and financial targets specified under financing agreements and were not able to obtain requisite waivers, including with respect to our senior secured vendor financing facility, our access to unused financing commitments could be restricted, or our creditors could choose to exercise remedies available to them under such financing agreements. NOTE 3 -- PROPERTY AND EQUIPMENT, NET Property and equipment, net is comprised of the following as of June 30, 2002 and December 31, 2001, respectively (in thousands):

Depreciation expense related to property and equipment was $37.5 million and $24.6 million for the six months ended June 30, 2002 and June 30, 2001, respectively. Depreciation expense related to property and equipment was $22.8 million and $12.7 million for the three months ended June 30, 2002 and June 30, 2001. 8 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 4 -- DEBT Debt is comprised of the following (in thousands):

SENIOR SECURED VENDOR FINANCING In December 2001 we entered into senior secured credit facilities, governed by common terms, with our strategic equipment vendors, in an aggregate principal amount of $298.5 million. These facilities became effective on March 27, 2002. The facilities are divided into two portions comprised of a first tranche of up to $199.2 million to be used to finance the purchase of equipment and related software and services from the three vendors, and a second tranche of up to $99.3 million to finance duties, taxes and interest on the facility during the availability period. At closing, approximately $143.3 million was drawn under the facilities, of which $73.8 million was used to pay outstanding interim notes. Draws under this facility are available through June 2004. After that time principal of the facilities amortizes on a scheduled quarterly basis until final maturity in June 2008. We have available $147.9 million under this facility as of June 30, 2002. Interest on loans under the facilities accrues at LIBOR plus 5.625% or, at our election, on a prime rate basis and is payable quarterly. We have paid an up front facility fee and are obligated to pay commitment fees quarterly based on the unused portion of the facility. Under the terms of the facilities, a portion of the net proceeds of any future equity and debt offerings by us must be directed to prepay outstanding amounts under the facilities. The facilities are guaranteed by AT&T Latin America Corp. and our operating subsidiaries, and are also collateralized by a pledge of the shares of our operating subsidiaries and of substantially all of our and our subsidiaries' material assets other than our rights to the AT&T brand and under certain other agreements with AT&T Corp. The facilities contain customary covenants restricting our ability to engage in certain activities, including limitations on debt, liens, investments (including acquisitions), restricted payments, transactions with affiliates, asset dispositions and changes in corporate existence. We are also required to meet certain financial tests over the term of the facilities, relating to minimum revenue, minimum EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the governing agreements), maximum capital expenditures, minimum liquid assets and 9 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) available undrawn credit, ratios of debt to equity and to EBITDA and minimum on-network ports. The facilities provide for events of default in the event of non-payment, failure to comply with covenants, occurrence of a material adverse effect, inability, at any time on or after June 30, 2003, to make loan repayments from Argentina without the need to obtain further governmental approvals or declaration of a debt moratorium in any of the principal countries in which we operate, and other, customary events, except that in the case of Argentina, the certain events occurring before the effective date will not constitute a moratorium. SUBORDINATED CREDIT FACILITIES (RELATED PARTIES) During the first quarter of 2002, we signed an agreement with AT&T Corp. for the restructuring of the financing provided under the $100.0 million and $200.0 million credit facilities as well as $98.0 million provided under demand notes. The restructuring provided additional borrowings of $150.0 million, which included the refinancing of $87.0 million available via demand notes as of December 31, 2001 (of which $77.8 million was outstanding) and additional financing of up to $63.0 million. The restructuring and additional financing became effective concurrently with the senior secured vendor financing on March 27, 2002. While the senior secured vendor financing is outstanding, we are entitled to defer payment of all accrued and future interest through the maturity date of the loans of October 2008 and we are also entitled to defer payment of accrued and future dividends on the Mandatorily Redeemable 15% Series B Preferred Stock through that date. A portion of $100.0 million, plus capitalized interest, (Tranche "A") of the loans bear interest at LIBOR plus 3.75% until August of 2002, and 14.0% thereafter. The $200.0 million and $98.0 million portions, plus capitalized interest (Tranches "B" and "C") are fixed at 15.0% interest rate. The remaining $150.0 million portion pays a fixed interest of 15.3%. The weighted average interest rate as of June 30, 2002 was 13.4%. In connection with the restructuring of our facilities with AT&T Corp., we have included deferred interest at December 31, 2001 of $30.2 million plus the amount accrued from January 1, 2002 through June 30, 2002 of $25.8 million as part of the debt. As of June 30, 2002 we have borrowed the full available amounts under these AT&T Corp. facilities. As part of the restructuring, we issued to AT&T Corp. warrants to acquire approximately 4.9 million shares of our Class A common stock. Half of these warrants are exercisable at a price of $8.00 per share and the other half are exercisable at a price of $0.01 per share. The warrants have been valued using the Black-Scholes pricing model with the following assumptions: 6 years expected life; a volatility factor of 132.0%; and a risk-free interest rate of 5.2%. The fair value of the warrants was included as part of our loss on debt restructuring. The warrants are exercisable immediately and the total amount of the warrants was included as part of the determination of the loss on debt restructuring. The debt restructuring resulted in an extraordinary loss of $6.3 million. The debt facilities with AT&T Corp. include customary covenants that are based on certain of the covenant provisions contained in our senior secured vendor financing. NOTES PAYABLE TO OTHER VENDORS In November 1998 a subsidiary of FirstCom (which we acquired in the FirstCom merger) entered into a vendor financing agreement with one of its equipment vendors. This vendor financing agreement, as amended, provided for a maximum financing amount of $29.5 million, an interest rate of LIBOR plus 5.5% and is repayable in 20 consecutive quarterly payments of principal and interest from the date of the related borrowings. The financed equipment collateralizes this vendor financing. As of June 30, 2002, there was approximately $6.9 million outstanding under this vendor financing bearing interest at a weighted average annual rate of 8.1%. The availability period for drawings under this financing agreement expired on December 31, 2000. In July, August and September 2001, we entered into several vendor financing agreements with an equipment vendor maturing at various dates through April 2004 bearing interest at LIBOR plus 7.0%, or 10.9 % as of June 30, 2002. In June 2002, we signed an agreement with the vendor for the restructuring of the financing provided under these vendor financing agreements. Under the restructuring agreement it was agreed to reduce the principal outstanding from $9.5 million to $8.6 million as well as a reduction of interest rate from LIBOR plus 7.0% to 10 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) LIBOR plus 0.0%. The restructuring also provided for quarterly payment of interest commencing in August 2002 with a maturity of the principal in April 2004. After payment of $1.0 million the outstanding amount as of June 30, 2002 was $7.6 million. The debt restructuring resulted in an extraordinary gain of $1.8 million, resulting from the reduction of principal and accrued interest. We entered into several short-term vendor financing agreements maturing in various dates through March 2003 for the development of our networks in Argentina. Borrowings under this agreement bear interest at fixed rates ranging from 11.9% to 17.5% per annum and variable rates based on LIBOR plus 8.0%. At June 30, 2002, there was an aggregate of $21.4 million outstanding under these facilities. OTHER BANK FACILITIES AT&T do Brasil is party to several local bank facilities providing for borrowings of an aggregate amount of $37.4 million maturing through February 2004. At June 30, 2002, there was an aggregate of $31.4 million outstanding under these facilities. Borrowings under these facilities bear interest at fixed rates ranging from 2.2% to 13.0% per annum and variable rates based upon LIBOR plus a margin ranging from 1.2% to 1.9%. AT&T Colombia is party to several local bank facilities providing for borrowings of an aggregate amount of $14.9 million maturing through May 2006. At June 30, 2002, there was an aggregate of $12.6 million outstanding under these facilities. Borrowings under these facilities bear interest at fixed rates ranging from 12.5% to 13.0% per annum and variable rates based upon Deposito Tasa Fijo (DTF) plus a margin ranging from 4.5% to 7.0%. The average rate for Colombian peso interest rate or DTF for the six months ended June 30, 2002 was 9.6%. AT&T Peru is party to several local bank facilities providing for borrowings of an aggregate amount of $19.8 million, maturing on various dates through June 2011. At June 30, 2002, there was an aggregate of $7.4 million outstanding under these facilities. Borrowings under these facilities bear interest at fixed and variable rates ranging from 6.0% to 12.5% per annum. AT&T Argentina and AT&T Chile are each party to several local bank facilities providing for borrowings (including certain capital leases) of an aggregate amount of $6.0 million, maturing on various dates through October 2010. At June 30, 2002 there was an aggregate of $0.9 million outstanding under these facilities bearing interest at fixed interest rates ranging from 9.0% to 17.5%. As of June 30, 2002 we have approximately $52.4 million outstanding under these bank facilities. We have an additional availability under these bank facilities of approximately $24.0 million. Although we expect to be able to renew or refinance most of the existing amounts outstanding as they become due, and to maintain most of the existing additional availability to use as needed, there is no assurance that we will be able to renew or refinance these outstanding amounts or maintain the additional availability on acceptable terms or at all. NOTE 5 -- REDEEMABLE PREFERRED AND CAPITAL STOCK On August 28, 2000, we issued to Global Card Holdings, Inc., a wholly-owned subsidiary of AT&T Corp., 100,000 shares of our non-voting, non-convertible and non-participating Mandatorily Redeemable 15% Series B Preferred Stock having an aggregate liquidation value as of June 30, 2002 and December 31, 2001 of $231.2 million and $215.2 million, respectively. The shares of Mandatorily Redeemable 15% Series B Preferred Stock entitle Global Card Holdings to receive dividends at an annual rate of 15%, payable semi-annually. In March 2002 Global Card Holdings agreed to certain amendments to the terms of the redeemable preferred stock. The amendments provided that the first date of redemption at the option of any holder would be deferred until October 2008 and that dividends would not be payable in cash unless permitted under the Subordination Agreement related to our senior secured vendor financing, in each case subject to certain exceptions as permitted under the vendor financing agreements. The accompanying statements of operations for the six months ended June 30, 2002 and 2001 include $16.0 million and $13.8 million, respectively, recorded as interest expense related to the dividend on our Mandatorily Redeemable 15% Series B Preferred Stock. The amount recorded as interest expense for the three months ended June 30, 2002 and 2001 was $8.1 million and $7.0 million, respectively. 11 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) We are authorized to issue 460,000,000 shares of capital stock, consisting of 300,000,000 shares of Class A common stock, par value $0.0001 per share, 150,000,000 shares of Class B common stock, par value $0.0001 per share, and 10,000,000 shares of preferred stock, par value $.0001 per share. At June 30, 2002 and December 31, 2001, 45,659,017 and 45,224,017 shares, respectively, of Class A common stock were issued and outstanding. At June 30, 2002 and December 31, 2001, we had 73,081,595 shares of Class B common stock issued and outstanding. Holders of AT&T Latin America's Class A common stock have one vote per share, and holders of Class B common stock have ten votes per share, on all matters to be voted on by stockholders, including the election of directors. Class B shares are convertible into Class A shares on a share-for-share basis at the option of the holder at any time, or automatically upon transfer to a person or entity which is not a permitted transferee. Permitted transferees include AT&T Corp. and any person or entity in which it owns directly or indirectly 50% or more of the equity securities. NOTE 6 -- OPERATIONS BY GEOGRAPHIC AREAS AND SEGMENTS We measure our operations by country and present revenue segmented by data-Internet and voice services. We currently derive a substantial portion of our revenue from data-Internet services. For the three months ended June 30, 2002 and 2001 approximately 64.7% and 60.9%, respectively, were generated from data-Internet services. For the six months ended June 30, 2002 and 2001 approximately 62.3% and 59.6%, respectively, were generated from data-Internet services. No single customer or group of customers accounted for more than 10% of total revenue for the periods presented. Our chief operating decision makers measure our operating results by country and use EBITDA as an important measure of our country operating results and performance. We calculate EBITDA as gain or loss from operations plus depreciation and amortization expense. Management believes EBITDA is meaningful to investors because it enables them to evaluate operating results using the same measure used by our chief operating decision makers. In addition, we believe that EBITDA allows investors a means to evaluate the financial results of each country operation in relation to our total operations. Our calculation of EBITDA may or may not be consistent with the calculation of this measure by other public companies. EBITDA should not be viewed by investors as an alternative to generally accepted accounting principles (GAAP) measures of income, as an indicator of performance, or cash flows from operating activities as an indicator of liquidity. In addition EBITDA does not take into account changes in certain assets and liabilities as well as interest and income taxes, which can affect cash flows. DATA-INTERNET SERVICES. Our data-Internet services feature local, national and international reach, high availability and high security, with varying degrees of managed features, using our common ATM/IP, or asynchronous transfer mode/Internet protocol multi-service network platform. These services are accessible via single connections (one port per location) to our broadband network. Our data services consist of basic connection services, such as point-to-point dedicated private lines, and private multipoint network services, which include offering and managing communications links among a number of locations, as wide area network services, enabling intranet and extranet connectivity. The basic infrastructure plus supporting services allow us to implement different communications applications to support a wide range of customers' needs. As part of our data services, we provide secured private IP services, frame relay, ATM and clear channel services. Our Internet services consist of dial-up and high-speed dedicated access services offered primarily to businesses, as well as to Internet service providers and content providers. Our integrated package to Internet service providers and portals allows these customers to purchase and/or lease their entire access infrastructure and access to the Internet from us. Our managed service offerings include managed data, Internet and web hosting services. VOICE SERVICES. Our portfolio of voice services includes local telephony and long distance services, pre-paid and calling card services and 800 and operator assistance services, depending on our competitive situation and regulatory restrictions in each country. We package these services differently depending on the customer we are targeting. Voice services are an important complement to our existing data-Internet product portfolio. Voice services are also an important point of entry for other services, particularly with small and medium sized enterprises for business customers. To the 12 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) consumer mass-market, we offer primarily through distribution channels a more selective set of services, which require little or no customization, and minimum employee resources, which enables us to use available network capacity, particularly during non-business hours. The following tables set forth, for the three and six months ended June 30, 2002 and 2001, certain information about segment results of operations and segment assets (in thousands):

13 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED)

(1) Consists primarily of corporate operations, inter-company eliminations and the results of operations and related assets of the executive management Rabbi trust. All material inter-company accounts and transactions have been eliminated. (2) EBITDA is an important measure used by our chief operating decision makers to measure our country operating results and performance. (3) We calculate CAPEX, or capital expenditures, as gross property and equipment purchased, net of any cash proceeds from the sale of property and equipment, but excluding translation adjustments resulting from our countries that use local currencies as functional currencies. CAPEX includes property and equipment acquired through vendor financing arrangements of approximately $43.6 million in 2001. There are no significant transfers between geographic areas or segments. Revenue among our country operations amounted to $0.8 million and $0.9 million in Chile, $0.5 million and $0.5 million in Argentina, and $0.0 million and $0.2 million in Peru for the three to six months ended June 30, 2002, respectively. Revenue for the three and six months ended June 30, 2001 among our country operations amounted to $0.2 million and $0.4 million in Peru and $0.1 million and $0.3 million in Chile. Revenue by country as presented in the tables above includes revenue generated among our country operations; but excluded and eliminated under the "Other" column on our reported consolidated revenue amount. Loss from operations consists of revenue less operating expenses and does not include interest expense, interest income and other income (expense), minority interest and income taxes. Total assets are those assets used in our operations in each geographic area. Corporate assets, which are included under the "Other" column, include cash and cash equivalents, property and equipment and other assets. 14 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) NOTE 7 -- COMMITMENTS AND CONTINGENCIES We have operating lease agreements for our premises and equipment that expire on various dates through 2010. Amounts due under the operating agreements are subject to increases in accordance with their terms. In the normal course of business, we are subject to proceedings, lawsuits and other claims. These matters are subject to many uncertainties and outcomes that are not predictable with assurance. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters. While these matters could affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to us would not be material to our consolidated financial position or annual results of operations. Our current and future operations and investments in certain foreign countries are generally subject to the risks of political, economic or social instability, including the possibility of expropriation, confiscatory taxation, hyper-inflation or other adverse regulatory or legislative developments, or limitations on the repatriation of investment income, capital and other assets. We cannot predict whether any of such factors will occur in the future or the extent to which such factors would have a material adverse effect on our international operations. NOTE 8 -- NEW ACCOUNTING PRONOUNCEMENTS Effective July 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires business combinations initiated after June 30, 2001, to be accounted for using the purchase method. SFAS No. 141 also further clarifies the criteria for recognition of intangible assets separately from goodwill. Our adoption of this standard did not have any effect on our accounting for prior business combinations. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 stops the amortization of our goodwill, which is allocated through our country operations, and requires an annual, or when events or circumstances dictate a more frequent, impairment review of our goodwill. Accordingly, as of January 1, 2002, we no longer amortize our goodwill. We are currently assessing the impact of the adoption of this standard and based on our preliminary identification of our reporting unit's goodwill carrying and fair values we expect an impairment of our goodwill in connection with the initial transitional impairment test. Although we are not yet able to reasonably determine our actual goodwill impairment amount we expect a goodwill impairment to be in the range of $200.0 million to $300.0 million. We have completed the identification and the determination of carrying value and fair value of each of our reporting units, which indicates that the fair value is lower than our carrying value. We are now completing the process of comparing the implied fair value of our reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. We expect to complete the final determination during the third quarter and the transitional impairment loss will be recognized as cumulative effect of a change in accounting principle on our consolidated statement of operations effective for the first quarter in 2002. There has been no change to our goodwill carrying amount since December 31, 2001, other than the change which resulted from using a different foreign currency translation rate at June 30, 2002 compared to December 31, 2001. If goodwill amortization had not been recorded in our second quarter of 2001, our second quarter of 2001 adjusted net loss and basic and diluted adjusted loss per share would have been $62.2 million and $0.53 per share, respectively, instead of $73.0 million and $0.63 per share, respectively. For the six months ended June 30, 2002 and 2001, the adjusted net loss and basic and diluted adjusted loss per share would have been $124.3 million and $1.07 per share, respectively, instead of $146.0 million and $1.26 per share, respectively. 15 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) Our intangibles subject to amortization amount to $20.9 million and $24.1 million (net of accumulated amortization of $13.9 million and $10.6 million), as of June 30, 2002 and December 31, 2001 respectively. Our intangibles do not have residual value and the weighted average amortization period is 5.6 years. Our intangible assets are divided as follows:

The aggregate amortization expense related to customers contracts for the three and six months ended June 30, 2002 amounted to $1.4 million and $3.1 million, respectively. The aggregate amortization expense related to other intangibles for the three and six months ended June 30, 2002 amounted to $0.1 million and $0.2 million, respectively. The estimated aggregate amortization expense of intangibles for the next five years is estimated to be as follows: AMOUNT ---------- 2003...................... $ 5,641 2004...................... 5,641 2005...................... 3,907 2006...................... 441 2007 and thereafter ...... 1,644 Effective January 1, 2002 we also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 applies to all long-lived assets, including discontinued operations and consequently amends APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS No. 144 did not have any effect on our accounting for long-lived assets on the adoption date. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting of certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. We will adopt SFAS No. 145 on January 1, 2003. We are currently assessing the impact of SFAS No. 145 on our financial position and results of operations. NOTE 9 - EXTRAORDINARY GAIN (LOSS) ON DEBT RESTRUCTURING As part of the restructuring of our financing with AT&T Corp., we issued to AT&T Corp. warrants to acquire approximately 4.9 million shares of our Class A common stock. Half of these warrants are exercisable at a price of $8.00 per share and the other half are exercisable at a price of $0.01 per share. The warrants have been valued using the Black-Scholes pricing model. The 16 AT&T LATIN AMERICA CORP. (A MAJORITY OWNED SUBSIDIARY OF AT&T CORP.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED) (UNAUDITED) warrants are exercisable immediately and the total amount of the warrants was included as part of the determination of the loss on debt restructuring. The debt restructuring resulted in an extraordinary loss of $6.3 million for the period ended March 31, 2002. In June 2002, we signed an agreement with one of our vendors for the restructuring of the financing provided under certain vendor financing agreements with the vendor. Under the restructuring agreement it was agreed to reduce the principal outstanding from $9.5 million to $8.6 million as well as a reduction of interest rate from LIBOR plus 7.0% to LIBOR plus 0.0%. The restructuring also provided for quarterly payment of interest commencing in August 2002 with a maturity of the principal in April 2004. The debt restructuring resulted in an extraordinary gain of $1.8 million, resulting from the reduction of principal and accrued interest. NOTE 10 - OTHER EXPENSE (INCOME), NET We use derivative instruments, currently forward contracts, to reduce our exposure to fluctuations in foreign currency exchange rates. We do not use derivatives instruments for speculative purposes. Our most significant contracts to buy United States ("U.S.") dollars are forward contracts entered into to fix the cost in foreign currency or in U.S. dollars of our U.S. dollars denominated debt obligations in Brazil. As of June 30, 2002, we had foreign currency forward contracts that hedge certain transactions with notional amounts of $535.0 million, maturing in various dates through November 2003. The total $3.8 million fair value of forward currency contract assets, which are included as prepaid expenses and other current assets on our June 30, 2002 balance sheet, represents unrealized gains on certain of our forward currency contracts selling foreign currencies as result of the strengthening of the dollar compared to the currencies that we hedge. In addition, the total $1.0 million of fair value of forward contract liabilities which are included in other current liabilities on our June 30, 2002 balance sheet represents unrealized losses on certain of our forward currency in our various countries in which we operate, which are mainly used to fix the cost of our commitments. Derivative gains and losses included in accumulated other comprehensive income ("AOCI") are reclassified into earnings at the same time the underlying hedged transaction is recorded in earnings. During the six months ended 2002, net changes in the fair value of our cash flow hedges amounted to unrealized losses of $9.1 million. During the six months ended June 30, 2002 we discontinued cash flows hedge accounting for certain forward contracts and concurrently designated the respective underlying loans as a long-term investment. The forward contracts that were accounted for as cash flows hedges are now being accounted for as undesignated forward contracts and the change in the fair value of these contracts is accounted for as other expenses in the statement of operations. With the designation of the underlying loans as long-term investment the amount of $12.6 million previously deferred in other comprehensive income (loss) was reclassified to other expense in the accompanying statement of operations during the six months ended June 30, 2002. We also discontinued hedge accounting and settled certain other cash flows hedges resulting in a charge to other expense of $3.9 million. The remaining components of other expense were foreign currency transaction losses, fair value changes on our undesignated forward contracts and amortization of forward points on forward contracts accounted for as cash flows hedges. 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Some of the statements under "Management's Discussion & Analysis of Financial Condition and Results of Operations" and elsewhere in this quarterly report on Form 10-Q are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are based on management's beliefs as well as on a number of assumptions concerning future events made by, and information currently available to, management. These statements involve known and unknown risks, uncertainties and other factors, that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed in or implied by the forward-looking statements. Forward-looking statements include but are not limited to statements and references about the following matters: o expectations and estimates of completion dates, construction costs, subsequent maintenance expenses and network expansion; o expectations and estimates as to the amount of cash requirements to implement our growth strategy and as to our ability to obtain financing; o expectations about the sources of revenues and the percentage breakdown of sources of revenues; and o future financial performance, including growth in sales and income. In addition to matters that are described in this quarterly report on Form 10-Q and our Annual Report on Form 10-K, the following factors, among others, could cause AT&T Latin America's actual results to differ materially from those expressed in or implied by any forward-looking statements contained in this quarterly report on Form 10-Q or its exhibits: o inaccurate forecasts of customer or market demand; o the rate of expansion of our networks and customer base; o changes in communications technology and/or the pricing of competitive products and services; o highly competitive market conditions; o access to financing on acceptable terms and conditions; o our ability to implement our planned consolidation of key functions of our operations in the manner we currently expect and in the time-frames we contemplate; o loss of one or more important customers; o acquisitions by us and our ability to integrate successfully any acquired businesses or technologies into our operations; o changes in or developments under laws, regulations and licensing requirements in the countries in which we operate; o our ability to obtain and retain rights of ways and permits necessary for the expansion and maintenance of our networks; o volatility of our stock price; o currency fluctuations; and o changes in economic and political conditions in the countries in which we operate. AT&T Latin America undertakes no obligation to publicly release any updates or revisions to any forward-looking statements, which are made as of the date of this quarterly report on Form 10-Q, to reflect events or circumstances after the date of this quarterly report on Form 10-Q. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS QUARTERLY REPORT ON FORM 10-Q AND OUR ANNUAL REPORT ON FORM 10-K. CRITICAL ACCOUNTING POLICIES AND JUDGMENTS Our critical accounting policies are those which we believe require our most subjective or complex judgments; often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may ultimately affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. A discussion of our critical accounting policies, the underlying judgments and uncertainties are included in our Annual Report on Form 10-K. OVERVIEW We provide communications services under the "AT&T" brand to major metropolitan business in Argentina, Brazil, Chile, Colombia and Peru. Our local, domestic and international communications services include, among others, data-Internet, local and long distance voice, web hosting and managed services. We focus primarily on business customers with growing and diverse communications needs. These customers include multinational corporations, financial services companies, media and content providers, technology companies, government entities, Internet service providers and communications carriers, as well as small and medium size businesses. We deliver our services mainly through our own technologically advanced networks, which interconnect with third party networks. In addition, we use our installed network infrastructure to offer services to carriers, including inbound domestic and regional voice termination services and connectivity services. We also serve in the mass market through various distribution channels, offering domestic and international long distance, calling and prepaid cards and dial-up Internet services. These opportunities remain attractive because they provide additional revenues and margin as well as utilization of our existing network capacity. BASIS OF PRESENTATION. Our unaudited financial statements reflect operations for the three and six months ended June 30, 2002 and 2001 in accordance with generally accepted accounting principles in the United States of America. AT&T LATIN AMERICA. We were incorporated in October 1999 by AT&T Corp. The countries in which we may operate under our certificate of incorporation and the terms of our regional vehicle agreement with AT&T Corp. include the countries in South America and the Caribbean plus Panama, but excluding Cuba and Venezuela. RECENT EVENTS We intend to centralize key functions in order to coordinate and consolidate systems and processes currently employed individually in each country operation. The centralization is expected to be completed through the creation of a Regional Commercial Organization based in Washington, D.C., which will be designed to allow us to coordinate better with AT&T Corp. product offerings and to enhance our service to multinational customers. In addition, we are creating a Regional Service Center in Santiago, Chile that is intended to provide consistent services to the operating entities through the consolidation of key functions such as engineering, operations, customer care, information technology and human resources. 19 In July 2002 we obtained licenses from Anatel (AGENCIA NACIONAL DE TELECOMUNICACOES), Brazil's telecom regulatory agency, to provide local Switched Fixed Telephony Service (STFC) and domestic and international Multimedia Communications Services (SCM). The STFC license for local service includes the seven largest business centers in Brazil, (where the company already own metropolitan networks): Sao Paulo, Campinas, Rio de Janeiro, Brasilia, Belo Horizonte, Curitiba and Porto Alegre. We also recently filed with Anatel an application to obtain a license to provide domestic and international long distance telephony services. The license application is for the entire state of Sao Paulo and the largest business centers outside of the region, including Rio de Janeiro, Brasilia, Belo Horizonte, Curitiba and Porto Alegre. With the long distance telephony license, we expect to receive our own carrier selection code designation for the provision of services in these cities, which the company will use to compete in the domestic and international long distance market in Brazil. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 stops the amortization of our goodwill, which is allocated through our country operations, and requires an annual, or when events or circumstances dictate a more frequent, impairment review of our goodwill. Accordingly, as of January 1, 2002, we no longer amortize our goodwill. We are currently assessing the impact of the adoption of this standard and based on our preliminary identification of our reporting unit's goodwill carrying and fair values we expect an impairment of our goodwill in connection with the initial transitional impairment test. Although we are not yet able to reasonably determine our actual goodwill impairment amount we expect a goodwill impairment to be in the range of $200.0 million to $300.0 million. We have completed the identification and the determination of carrying value and fair value of each of our reporting units, which indicates that the fair value is lower than our carrying value. We are now completing the process of comparing the implied fair value of our reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. We expect to complete the final determination during the third quarter and the transitional impairment loss will be recognized as cumulative effect of a change in accounting principle on our consolidated statement of operations effective for the first quarter in 2002. There has been no change to our goodwill carrying amount since December 31, 2001, other than the change which resulted from using a different foreign currency translation rate at June 30, 2002 compared to December 31, 2001. If goodwill amortization had not been recorded in our second quarter of 2001, our second quarter of 2001 adjusted net loss and basic and diluted adjusted loss per share would have been $62.2 million and $0.53 per share, respectively, instead of $73.0 million and $0.63 per share, respectively. For the six months ended June 30, 2002 and 2001, the adjusted net loss and basic and diluted adjusted loss per share would have been $124.3 million and $1.07 per share, respectively, instead of $146.0 million and $1.26 per share, respectively. 20 RESULTS OF OPERATIONS The following table includes a summary of our consolidated statements of operations for the periods indicated below. AT&T LATIN AMERICA CORP. CONSOLIDATED STATEMENTS OF OPERATIONS

The following table includes revenue by country and consolidated operating loss in dollars and as a percentage of revenue for the three and six months ended June 30, 2002 and 2001:

THREE MONTHS ENDED JUNE 30, 2002 COMPARED TO THREE MONTHS ENDED JUNE 30, 2001

REVENUE. Revenue for the three months ended June 30, 2002 was $42.0 million, compared to revenue of $33.6 million for the same period in 2001, representing an increase of $8.3 million or 24.7%. We experienced revenue increases in all our country operations, except for Chile where revenue decreased mainly due to a reduction of voice-wholesale revenue for the period. The increase in revenue resulted from increases in customers and ports in service, which reflected increased selling of services to both existing customers and new customers. The increase in revenue was partially offset by the translation effect of the weakening of foreign currency exchange rates versus the U.S. dollar in Argentina and Brazil. Our data-Internet services revenue grew from $20.5 million during the three months ended June 30, 2001, to $27.2 million for the same period in 2002, representing an increase of $6.7 million or 32.5%. The increase in our data-Internet services was mainly due to increased demand for our services from our existing business customers and to an increase in our customer base. Data-Internet services accounted for 64.7% of our revenue during the three months ended June 30, 2002. We anticipate that over the long-term, data-Internet services revenue will continue to represent a majority of total revenue. Revenue from voice services grew from $13.2 million during the three months ended June 30, 2001 to $14.8 million for the same period in 2002, representing an increase of $1.7 million or 12.7%. The increase in our voice-related revenue was mainly due to the increase in total minutes sold. Revenue growth from voice services was negatively affected by the decrease in wholesale revenue in Chile described above, as well as to a lesser extent the entrance of multi-carrier services competition in Peru during the three months ended June 30, 2002. COST OF REVENUE. Cost of revenue was $26.5 million for the three months ended June 30, 2002, compared to $28.4 million for the same period in 2001, representing a decrease of $1.9 million or 6.8%. Cost of revenue consists of leased line costs, interconnection costs, maintenance costs, and network and operating system costs, including certain labor and other direct costs. The decrease in cost of revenue was driven by lower connection costs in Brazil 22 as a result of newly agreed contracts, as well as lower reported cost of revenue in U.S. dollar terms in Argentina and Brazil due to the translation effect of the weakening of their local currencies compared to the U.S. dollar. We expect to continue to increase the amount and percentage of our services revenue that is delivered over our existing network capacity as well as to continue to benefit from better pricing recently obtained from third party network providers, resulting in continued gross margin improvement. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $28.7 million during the three months ended June 30, 2002, compared to $34.0 million for the same period in 2001, representing a decrease of $5.2 million or 15.4%. The decrease in selling, general and administrative expenses resulted primarily from the translation effect of the weakening of the Argentina peso and the Brazilian real compared to the U.S. dollar in the first part of 2002, and lower headcount when compared to the same period in 2001. We expect lower selling, general and administrative expenses for the remainder of 2002 and for these expenses to increase thereafter in absolute terms to the extent that we continue to experience growth and to expand our service offerings. We believe that the peso devaluation in Argentina will continue to have a positive impact on our selling, general and administrative expenses. We also anticipate selling, general and administrative expenses, as a percentage of revenue, will decrease in future periods. Selling, general and administrative expenses are comprised primarily of compensation, professional fees, travel expenses, marketing, office space and indirect labor expenses. DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $25.2 million during the three months ended June 30, 2002, compared to $24.8 million for the same period in 2001, representing an increase of $0.4 million. Depreciation and amortization was reduced as a result of the adoption of SFAS 142 during 2002, under which we no longer amortize goodwill but instead review it annually (or more frequently if impairment indicators arise) for impairment. This reduction was offset by depreciation expense on our increased deployed network infrastructure and one-time incremental depreciation expense on certain non-core assets that were fully depreciated during this quarter. If goodwill amortization would not have been recorded in our second quarter of 2001, then our second quarter of 2001 adjusted depreciation and amortization would have been $13.9 million, compared to $25.2 million in second quarter of 2002. We expect that depreciation expense will continue to increase on a quarterly basis as we continue to invest to support our business. INTEREST EXPENSE. Interest expense, net of $0.2 million of interest income, was $32.2 during the three months ended June 30, 2002, compared to $18.4 million during the same period in 2001, representing an increase of $13.9 million or 75.4%. This increase in interest expense was due mainly to higher debt outstanding during the period and higher interest rate on the restructured AT&T Corp. loans, partially offset by lower interest rates on the senior secured vendor financing. Interest expense is mainly comprised of dividends related to our Mandatorily Redeemable 15% Series B Preferred Stock and interest expense related to our subordinated credit facility with AT&T Corp., our senior secured vendor financing, notes payable to other vendors and other bank facilities. OTHER (EXPENSE) INCOME, NET. Other (expense) income, net was $34.5 million of expense for the three months ended June 30, 2002, compared to $1.4 million of expense for the same period in 2001, representing an increase of $33.2 million. During the three months ended June 30, 2002 we discontinued cash flows hedge accounting for certain forward contracts and concurrently designated the respective underlying loans as a long-term investment. The forward contracts that were accounted for as cash flow hedges are now being accounted for as undesignated forward contracts and the change in the fair value of these contracts is accounted for as other expenses in the statement of operations. With the designation of the underlying loans as long-term investment the amount of $12.6 million previously deferred in other comprehensive income (loss) was reclassified to other expense in the accompanying statement of operations during the three months ended June 30, 2002. We also discontinued hedge accounting and settled certain other cash flows hedges resulting in a charge to other expense of $3.8 million. All other expense was mainly due to foreign currency transaction losses, fair value changes on our undesignated forward contracts and amortization of forward points on forward contracts accounted for as cash flow hedges. EXTRAORDINARY GAIN ON DEBT RESTRUCTURING. We recognized a non-cash extraordinary gain of $1.8 million during the three months ended June 30, 2002 in connection with a restructuring of certain notes payable to other vendors. NET LOSS. Net loss was $103.3 million for the three months ended June 30, 2002, compared to net loss of $73.1 million for the same period in 2001, representing an increase of $30.2 million or 41.4%. The increase in net loss was 23 mainly due to increases in interest expense and other (expense) income, net. We expect to continue to incur net losses in the next several years. SIX MONTHS ENDED JUNE 30, 2002 COMPARED TO SIX MONTHS ENDED JUNE 30, 2001

REVENUE. Revenue for the six months ended June 30, 2002 was $86.1 million, compared to revenue of $65.3 million for the same period in 2001, representing an increase of $20.8 million or 31.9%. This increase in revenue was mainly generated in Argentina, Brazil, Colombia and Peru, which combined accounted for $23.2 million revenue increase, offset by a decrease in Chile's revenue of $1.5 million. The increase in revenue resulted from increases in customers, ports in service and buildings connected which in turn reflected both up-selling of services to existing customers and additions of new customers. Our data-Internet services revenue grew from $39.0 million during the six months ended June 30, 2001, to $53.6 million for the same period in 2002, representing an increase of $14.7 million or 37.7%. The increase in our data-Internet services was mainly due to increased demand for bandwidth from our existing business customers and to an increase in our customer base. Data-Internet services accounted for 62.3% of our revenue in 2002. Revenue from voice services grew from $26.4 million during the six months ended June 30, 2001, to $32.5 million for the same period in 2002, representing an increase of $6.1 million or 23.3%. The increase in our voice-related revenue was mainly due to the increase in our customer base as well as an increase in total minutes sold, offset by a decrease in wholesale revenue in Chile. COST OF REVENUE. Cost of revenue was $55.0 million for the six months ended June 30, 2002, compared to cost of revenue of $54.3 million for the same period in 2001, representing an increase of $0.7 million or 1.2%. Cost of revenue consists of leased line costs, interconnection costs, maintenance costs, and network and operating system costs, including labor and other direct costs. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $57.9 million during the six months ended June 30, 2002, compared to selling, general and administrative expenses of $66.6 million for the same period in 2001, representing an decrease of $8.7 million or 13.1%. The decrease in selling, general and administrative expenses resulted primarily from a decrease in headcount and from the translation effect of the weakening of the Argentina peso and the Brazilian real compared to the U.S. dollar in the first part of 2002 when compared to the same period in 2001. DEPRECIATION AND AMORTIZATION. Depreciation and amortization was $42.4 million during the six months ended June 30, 2002, compared to depreciation and amortization of $49.5 million for the same period in 2001, representing a decrease of $7.1 million or 14.3%. The decrease in depreciation and amortization was due mainly to the adoption of SFAS 142, under which we no longer amortize goodwill but instead review it annually (or more frequently if impairment indicators arise) for impairment, offset by depreciation expense on our increased deployed network infrastructure. If goodwill amortization would not have been recorded in the six months ended June 30, 2001, then our six months ended June 30, 2001 adjusted depreciation would have been $27.8 million, compared to $42.4 million for the six months ended June 30, 2002. 24 INTEREST EXPENSE. Interest expense, net of $0.4 million of interest income, was $53.8 million during the six months ended June 30, 2002, compared to interest expense of $34.0 million during the same period in 2001, representing an increase of $19.9 million or 58.6%. This increase in interest expense was due mainly to the increase in interest bearing debt over the period. Interest expense is mainly comprised of dividends relating to our Mandatorily Redeemable 15% Series B Preferred Stock and interest expense related to our credit facilities provided by AT&T Corp., our senior secured vendor financing, notes payable to other vendors and other bank facilities. OTHER (EXPENSE) INCOME, NET. Other (expense) income, net was $53.6 million during the six months ended June 30, 2002. Other (expense) income, net was mainly due to foreign currency transaction losses, changes in fair value of certain hedges and amortization of forward points on hedge contracts, including the discontinuance of hedge accounting for certain forward contracts resulting in aggregate charges to other expenses of approximately $16.5 million. EXTRAORDINARY LOSS ON DEBT RESTRUCTURING. During the six months ended June 30, 2002, we have recorded a net extraordinary loss on debt restructuring of $4.5 million related to debt restructuring with our parent company and certain vendors. NET LOSS. Net loss was $180.8 million during the six months ended June 30, 2002, compared to net loss of $146.0 million for the same period in 2001, representing an increase of $34.8 million or 23.8%. The increase in net loss was mainly due to increases in interest expense and other (expense) income, net. We expect to continue to incur net losses for the next several years. Although we are not yet able to reasonably determine our actual goodwill impairment amount we expect a goodwill transitional impairment in the range of $200.0 million to $300.0 million, which we expect to recognize during third quarter as cumulative effect of a change in accounting principle on our consolidated statement of operations effective for the first quarter in 2002. LIQUIDITY AND CAPITAL RESOURCES Our primary liquidity needs are for working capital, capital expenditures and debt service. Currently, our primary sources of liquidity are cash on hand, revenue, available funds under our senior secured vendor financing and unsecured bank facilities in local Latin American credit markets. Our business is capital intensive and, as such, has required substantial initial capital investment to date. We have been building a high capacity network in the countries in which we operate and are primarily focused on data-Internet services. As of the end of 2001, we had completed a substantial portion of our planned capital deployment relating to core network infrastructure. We expect our capital expenditures in 2002 to range between $60.0 million and $70.0 million. We also expect our aggregate capital expenditures in 2002 and future periods will be reduced significantly from 2001 levels as we continue to increase the utilization of our existing networks. Moreover, we expect that our capital expenditures in 2002 and future periods will become more correlated to increases in revenue. We expect to continue incurring operating losses and to generate negative cash flows from operations for the next two years and to continue to generate net losses for the next several years. We currently expect to show positive cash flow from operations starting in 2004 and thereafter. We believe that our cash on hand together with our available borrowing capacity under the senior secured vendor financing and local bank credit facilities in Latin American markets will be sufficient to support our working capital needs, capital expenditures and debt service for the next several years. However, in the event that our future working capital is less than expected, as a result of lower than expected revenue, higher expenses or greater capital investment needs, or in the event that we are unable to renew or refinance existing local credit facilities when they become due, we may have cash needs greater than expected. Our inability to obtain additional financing to fund such cash needs would result in a material adverse effect on our business plan, our financial condition and results of operations. There is no assurance that we will be able to obtain additional cash we may need on acceptable terms and conditions or at all. Moreover, if in the future we were not able to meet certain operating and financial targets specified under financing agreements and were not able to obtain requisite waivers, including with respect to our senior secured vendor financing facility, our access to unused financing commitments could be restricted, or our creditors could choose to exercise remedies available to them under such financing agreements. 25 FUTURE COMMITMENTS AND FUNDING SOURCES At June 30, 2002, our contractual cash obligations, with initial or remaining terms in excess of one year, were as follows (in thousands)(a):

(a) See Note 4 to the consolidated financial statements for additional information regarding our debt. (b) The fair value of our forward contracts payable are reflected for informational purposes only. The fair value of our net forward contract payables is subject market rates changes and the ultimate liability at settlement may materially differ from the amount herein presented. (c) Reflects only contractual commitments at June 30, 2002. We expect capital expenditures to range from $60.0 million to $70.0 million in 2002, and to make capital expenditures in later years. (d) Reflects only commitments for the specific categories listed and does not reflect such items as trade payable obligations, payroll-related liabilities or contributions to employee-related benefit, savings or deferred compensation plans, employment contracts, or short-term lease obligations. CAPITAL USES During the six months ended June 30, 2002, our net cash increased by $43.7 million. The increase in cash reflected cash provided by financing activities of $125.7 million, offset by cash used in operating and investing activities of $82.0 million. Our uses of cash in operations were mainly as a result of our net loss of $180.8 million during the six months ended June 30, 2002, a net decrease in the changes of assets and liabilities of approximately $19.3 million, offset by non-cash activities of approximately $138.3 million. We expect to continue to make capital expenditures during the reminder of 2002 and thereafter relating to our existing and planned network development and operations. During 2002, we expect capital expenditures to be significantly lower than 2001 and to range from $60.0 million to $70.0 million. During the six months ended June 30, 2002 we invested approximately $20.1 million in the development of our networks and infrastructure. We also expect to use capital resources to fund our losses from operations and working capital needs. In addition, we expect non-cash interest expense to increase in the near term as a result of increased debt amounts. As a result of our debt restructuring with AT&T Corp., while the senior secured vendor financing is outstanding, payment of dividends on our Mandatorily Redeemable 15% Series B Preferred Stock and interest on the loans to us from AT&T Corp. will be deferred to the maturity date of these loans and the redemption date of the preferred stock, which will be October 2008. 26 CAPITAL RESOURCES SENIOR SECURED VENDOR FINANCING In December 2001 we entered into senior secured credit facilities, governed by common terms, with our strategic equipment vendors, in an aggregate principal amount of $298.5 million. These facilities became effective on March 27, 2002. The facilities are divided into two portions comprised of a first tranche of up $199.2 million to be used to finance the purchase of equipment and related software and services from the three vendors, and a second tranche of up to $99.3 million to finance duties, taxes and interest on the facility during the availability period. At closing, approximately $143.3 million was drawn under the facilities, of which $73.8 million was used to pay outstanding interim notes. Draws under this facility are available through June 2004. After that time principal of the facilities amortizes on a scheduled quarterly basis until final maturity in June 2008. We have available $147.9 million under this facility as of June 30, 2002. Interest on loans under the facilities accrues at LIBOR plus 5.625% or, at our election, on a prime rate basis and is payable quarterly. We have paid an up front facility fee and are obligated to pay commitment fees quarterly based on the unused portion of the facility. Under the terms of the facilities, a portion of the net proceeds of any future equity and debt offerings by us must be directed to prepay outstanding amounts under the facilities. The facilities are guaranteed by AT&T Latin America Corp. and our operating subsidiaries, and are also collateralized by a pledge of the shares of our operating subsidiaries and of substantially all of our and our subsidiaries' material assets other than our rights to the AT&T brand and under certain other agreements with AT&T Corp. The facilities contain customary covenants restricting our ability to engage in certain activities, including limitations on debt, liens, investments (including acquisitions), restricted payments, transactions with affiliates, asset dispositions and changes in corporate existence. We are also required to meet certain financial tests over the term of the facilities, relating to minimum revenue, minimum EBITDA (earnings before interest, taxes, depreciation and amortization as defined in the governing agreements), maximum capital expenditures, minimum liquid assets and available undrawn credit, ratios of debt to equity and to EBITDA and minimum on-network ports. The facilities provide for events of default in the event of non-payment, failure to comply with covenants, occurrence of a material adverse effect, inability, at any time on or after June 30, 2003, to make loan repayments from Argentina without the need to obtain further governmental approvals or declaration of a debt moratorium in any of the principal countries in which we operate, and other, customary events, except that in the case of Argentina, certain events occurring before the effective date will not constitute a moratorium. OTHER BANK FACILITIES AT&T do Brasil is party to several local bank facilities providing for borrowings of an aggregate amount of $37.4 million maturing through February 2004. At June 30, 2002, there was an aggregate of $31.4 million outstanding under these facilities. Borrowings under these facilities bear interest at fixed rates ranging from 2.2% to 13.0% per annum and variable rates based upon LIBOR plus a margin ranging from 1.2% to 1.9%. AT&T Colombia is party to several local bank facilities providing for borrowings of an aggregate amount of $14.9 million maturing through May 2006. At June 30, 2002, there was an aggregate of $12.6 million outstanding under these facilities. Borrowings under these facilities bear interest at fixed rates ranging from 12.5% to 13.0% per annum and variable rates based upon Deposito Tasa Fijo (DTF) plus a margin ranging from 4.5% to 7.0%. The average rate for Colombian peso interest rate or DTF for the six months ended June 30, 2002 was 9.6%. 27 AT&T Peru is party to several local bank facilities providing for borrowings of an aggregate amount of $19.8 million, maturing on various dates through June 2011. At June 30, 2002, there was an aggregate of $7.4 million outstanding under these facilities. Borrowings under these facilities bear interest at fixed and variable rates ranging from 6.0% to 12.5% per annum. AT&T Argentina and AT&T Chile are each party to several local bank facilities providing for borrowings (including certain capital leases) of an aggregate amount of $6.0 million, maturing on various dates through October 2010. At June 30, 2002 there was an aggregate of $0.9 million outstanding under these facilities bearing interest at fixed interest rates ranging from 9.0% to 17.5%. As of June 30, 2002 we have approximately $52.4 million outstanding under these bank facilities. We have an additional availability under these bank facilities of approximately $24.0 million. Although we expect to be able to renew or refinance most of the existing amounts outstanding as they become due, and to maintain most of the existing additional availability to use as needed, there is no assurance that we will be able to renew or refinance these outstanding amounts or maintain the additional availability on acceptable terms or at all. LIQUIDITY ASSESSMENT We expect to have additional capital requirements in the next several years related to funding our working capital needs, operating losses and debt service obligations and our development and expansion of our communications services and networks. Our cash needs in the next several years will be affected by several factors, including, but not limited to: o the amount of cash expected to be used in our operations; o our ability to increase revenue; o our ability to collect accounts receivable as expected and the timing of collection; o the level of competitive pressure on the pricing of our services; o our ability to manage and contain costs associated with our expected growth; o whether we change our plans for building and expanding our networks; o whether interest rates fluctuate materially and the resulting increase in interest obligations under our floating rate facilities; o the impact of fluctuations in currency exchange rates in the countries in which we operate on our operations, including the effect on any current or future hedging instruments; and o whether we use cash, issue common stock or increase our debt to complete acquisitions and ventures. As of June 30, 2002 we had cash and cash equivalents of $69.1 million, $147.9 million available under the secured vendor financing and $25.8 million available under our local bank facilities. We believe that our cash on hand together with our available borrowing capacity under the senior secured vendor financing and local bank credit facilities in Latin American markets will be sufficient to support our working capital needs, capital expenditures and debt service for the next several years. However, in the event that our future working capital is less than expected, as a result of lower than expected revenue, higher expenses or greater capital investment needs, or in the event that we are unable to renew or refinance existing local credit facilities when they become due, we may have cash needs greater than expected. Our inability to obtain additional financing to fund such cash needs would result in a material adverse effect on our business plan, our financial condition and results of operations. There is no assurance that we will be able to obtain additional cash we may need on acceptable terms and conditions or at all. Moreover, if in the future we were not able to meet certain operating and financial targets 28 specified under financing agreements and were not able to obtain requisite waivers, including with respect to our senior secured vendor financing facility, our access to unused financing commitments could be restricted, or our creditors could choose to exercise remedies available to them under such financing agreements. SEASONALITY To date we have not experienced significant seasonality in our services offerings; however, some reduced demand for our voice services was noted in the first quarter of 2002, or summer months, in the countries in which we operate. IMPACT OF INFLATION Inflation in the countries in which we operate may affect our business through increased labor costs and increases in the cost of third-party communications capacity and other third-party services. To date we have not experienced significant increases in these costs due to inflation. In addition to the effect of inflation, competition for qualified personnel could increase labor costs for us in the future. Our international operations may, at times in the future, expose our business to high inflation in certain foreign countries. We generate all of our revenue from international operations that are susceptible to currency fluctuations. The likelihood and extent of future currency fluctuations in the countries in which we operate in Latin America, future deteriorating economic conditions in those Latin American countries and the resulting impact on our results of operations, financial position and cash flows cannot now be determined. Our customer contracts as well as certain direct costs in Brazil provide for payment in local currency and are generally indexed to various inflation indicators specific to Brazil. Our customer contracts as well as certain direct costs in Argentina have been subject to local regulatory changes due to the recent political and economic crisis. The impact of the recent Argentina political and economic crisis resulted in a devaluation of the Argentina Peso during the six months ended June 30, 2002. It is uncertain the total impact of the devaluation in Argentina for the rest of the year; however, it is expected that our revenue growth in U.S. dollar terms in Argentina during the reminder of 2002 will continue to be significantly lower than anticipated prior to the devaluation. EFFECTS OF NEW ACCOUNTING STANDARDS Effective July 1, 2001, we adopted Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." SFAS No. 141 requires business combinations initiated after June 30, 2001, to be accounted for using the purchase method. SFAS No. 141 also further clarifies the criteria for recognition of intangible assets separately from goodwill. Our adoption of this standard did not have any effect on our accounting for prior business combinations. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 142 stops the amortization of our goodwill, which is allocated through our country operations, and requires an annual, or when events or circumstances dictate a more frequent, impairment review of our goodwill. Accordingly, as of January 1, 2002, we no longer amortize our goodwill. We are currently assessing the impact of the adoption of this standard and based on our preliminary identification of our reporting unit's goodwill carrying and fair values we expect an impairment of our goodwill in connection with the initial transitional impairment test. Although we are not yet able to reasonably determine our actual goodwill impairment amount we expect a goodwill impairment to be in the range of $200.0 million to $300.0 million. We have completed the identification and the determination of carrying value and fair value of each of our reporting units, which indicates that the fair value is lower than our carrying value. We are now completing the process of comparing the implied fair value of our reporting unit's goodwill, determined by allocating the reporting unit's fair value to all of its assets and liabilities in a manner similar to a purchase price allocation in accordance with SFAS No. 141, to its carrying amount, both of which would be measured as of the date of adoption. We expect to complete the final determination during the third quarter and the transitional impairment loss will be recognized as cumulative effect of a change in accounting principle on our consolidated statement of operations effective for the first quarter in 2002. 29 There has been no change to our goodwill carrying amount since December 31, 2001, other than the change which resulted from using a different foreign currency translation rate at June 30, 2002 compared to December 31, 2001. If goodwill amortization had not been recorded in our second quarter of 2001, our second quarter of 2001 adjusted net loss and basic and diluted adjusted loss per share would have been $62.2 million and $0.53 per share, respectively, instead of $73.0 million and $0.63 per share, respectively. For the six months ended June 30, 2002 and 2001, the adjusted net loss and basic and diluted adjusted loss per share would have been $124.3 million and $1.07 per share, respectively, instead of $146.0 million and $1.26 per share, respectively. Effective January 1, 2002 we also adopted SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets", which supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 applies to all long-lived assets, including discontinued operations and consequently amends APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions." Based on SFAS No. 121, SFAS No. 144 develops one accounting model for long-lived assets that are to be disposed of by sale, as well as addresses the principal implementation issues. SFAS No. 144 requires that long-lived assets that are to be disposed of by sale be measured at the lower of book value or fair value less cost to sell. Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. The adoption of SFAS No. 144 did not have any effect on our accounting for long-lived assets on the adoption date. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections", which provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting of certain lease modifications and various technical corrections that are not substantive in nature to existing pronouncements. We will adopt SFAS No. 145 on January 1, 2003. We are currently assessing the impact of SFAS No. 145 on our financial position and results of operations. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Our operations are exposed to market risks principally from fluctuations in foreign currency exchange rates and interest rates. We seek to minimize these risks through our regular operating and financing activities and when appropriate, through the use of derivative financial instruments. Our risk management policy is a transaction oriented policy and is not designed to use financial instruments for trading or other speculative purposes. EXPOSURE TO FOREIGN CURRENCY EXCHANGE RATES. Our primary foreign currency exchange risk relates to our operations in Latin America, where we conduct business with more than one currency. Management continues to monitor foreign currency risk to determine if any actions, such as the issuance of additional foreign currency denominated debt or other financial instruments, would be warranted to reduce such risk. At June 30, 2002, we had foreign currency forward contracts that hedge certain activities with notional amounts of $535.0 million, maturing in various dates through November 2003. Based upon a 10% strengthening or weakening of the U.S. dollar compared to the currencies that we currently hedge, the estimated fair value of undesignated forward contracts would have resulted in additional unrealized losses of $0.2 million or unrealized losses of $0.3 million, respectively, for the six months ended June 30, 2002. The effect upon a 10% strengthening or weakening of the U.S. dollar compared to the currencies that we currently hedge on our cash flows forward contracts, would have also resulted in additional other comprehensive gains of $8.0 million or additional unrealized other comprehensive losses of $8.3 million, respectively. Management considers its operations in foreign subsidiaries and affiliates to be long-term in nature. Accordingly, we do not hedge foreign currency exchange rate risk related to long-term transactions. EXPOSURE TO INTEREST RATES. Approximately 35.4% of our debt portfolio bears interest at variable rates. Any changes in the market interest rate will affect the amount of our interest expense and the ultimate cash paid to those lenders. To date we have not used interest rate swaps to fix the interest costs on these loans. Assuming a 30 hypothetical 10% interest rate increase or decrease from interest rates as of June 30, 2002, interest expense would have increased $0.8 million or decreased $0.8 million, respectively, for the six months ended June 30, 2002. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In the normal course of business, we are subject to proceedings, lawsuits and other claims. These matters are subject to many uncertainties and outcomes that are difficult to predict. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or financial impact with respect to these matters at June 30, 2002. However, while these matters could adversely affect operating results of any one quarter when resolved in future periods, it is management's opinion that after final disposition, any monetary liability or financial impact to us would not be material to our consolidated financial position or annual results of operations. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. None. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Our annual stockholders meeting was held on May 30, 2002. Holders of our Class A and Class B common stock voted on the following proposals which were set forth in our proxy statement dated May 8, 2002: (i) The following table sets forth the names of the nine persons nominated to serve as our directors until our next annual stockholders meeting or until their respective successors are elected and qualified or until death, resignation or removal along with the number of votes cast for or withheld with respect to each person: DIRECTORS FOR WITHHELD --------- --- -------- A. Gary Ames 768,319,408 158,589 Edward M. Dwyer 768,210,829 267,168 R. Reed Harrison, III 768,207,414 279,583 David C. Kleinman 768,316,358 161,639 Jorge P. Montoya 767,093,155 1,384,842 Patricio E. Northland 768,207,709 270,288 John C. Petrillo 767,085,090 1,392,907 Geoffrey S. Webster 768,211,679 266,318 Gary R. Weis 768,207,414 270,583 (ii) Ratification of the appointment of PricewaterhouseCoopers LLP as our auditors for the year 2002: For: 768,221,667 Against: 225,505 Abstain: 30,825 31 ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 10.1 Amended and Restated Promissory Note, dated as of November 27, 2001, superceding Promissory Note dated as of January 26, 2001, in each case by Patricio E. Northland as borrower. 10.2 Amended and Restated Security Agreement, dated as of November 27, 2001, between Patricio E. Northland and AT&T Latin America Corp. 10.3 Letter relating to retention bonus, dated as of November 27, 2001, between AT&T Latin America Corp. and Patricio E. Northland 10.4 Restricted Stock Agreement, dated as of November 27, 2001, between AT&T Latin America Corp. and Patricio E. Northland 10.5 Sample Stock Option Agreement under the AT&T Latin America Corp. 2000 Long-Term Incentive Plan. (b) Reports on Form 8-K None. 32 SIGNATURES Pursuant to the requirements of the Securities Exchange Act, as amended, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized on August 14, 2002. AT&T Latin America Corp. By: /s/ Nelson A. Murphy ---------------------------------------- Name: Nelson A. Murphy Title: Chief Financial Officer (Principal Financial Officer) By: /s/ Lourdes Z. Meneses ---------------------------------------- Name: Lourdes Z. Meneses Title: Corporate Controller (Principal Accounting Officer) 33

AT&T LATIN AMERICA CORP 10-Q