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Filed Pursuant to Rule 424(b)(4)
Registration No. 333-91263
PROSPECTUS
8,200,000 SHARES
[LOGO]
WWW.ELSITIO.COM
EL SITIO, INC.
(INCORPORATED IN THE BRITISH VIRGIN ISLANDS)
COMMON SHARES
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This is our initial public offering of common shares. We are offering 8,200,000
common shares. No public market currently exists for our common shares.
Our common shares have been approved for listing on the Nasdaq National Market
under the symbol "LCTO."
INVESTING IN THE COMMON SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 12.
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Per Share Total
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Public offering price....................................... $16.00 $131,200,000
Underwriting discount....................................... $ 1.12 $ 9,184,000
Proceeds, before expenses, to us............................ $14.88 $122,016,000
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We have granted the underwriters a 30-day option to purchase up to 1,230,000
additional common shares from us on the same terms and conditions set forth
above solely to cover over-allotments, if any.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
We expect to deliver the common shares on or about December 15, 1999.
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JOINT LEAD MANAGERS
CREDIT SUISSE FIRST BOSTON LEHMAN BROTHERS
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MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
WIT CAPITAL CORPORATION
December 9, 1999
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[Artwork consisting of El Sitio's medallion, a pre-Colombian stone, and a brief
description of El Sitio.]
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TABLE OF CONTENTS
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PAGE
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SUMMARY............................... 5
RISK FACTORS.......................... 12
USE OF PROCEEDS....................... 28
DIVIDEND POLICY....................... 28
CAPITALIZATION........................ 29
DILUTION.............................. 31
SELECTED FINANCIAL DATA............... 33
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 35
BUSINESS.............................. 50
MANAGEMENT............................ 71
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PAGE
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PRINCIPAL SHAREHOLDERS................ 77
RELATED PARTY TRANSACTIONS............ 80
SHARES ELIGIBLE FOR FUTURE SALE....... 82
DESCRIPTION OF SHARE CAPITAL.......... 84
TAXATION.............................. 87
UNDERWRITING.......................... 92
NOTICE TO CANADIAN RESIDENTS.......... 95
LEGAL MATTERS......................... 96
EXPERTS............................... 96
WHERE YOU CAN FIND ADDITIONAL
INFORMATION......................... 96
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
NEITHER WE NOR ANY UNDERWRITER HAS AUTHORIZED ANY PERSON TO PROVIDE YOU WITH
DIFFERENT OR ADDITIONAL INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL NOR
IS IT SEEKING AN OFFER TO BUY THE SECURITIES IN ANY JURISDICTION WHERE SUCH
OFFER OR SALE IS NOT PERMITTED.
DEALER PROSPECTUS DELIVERY REQUIREMENT
UNTIL JANUARY 3, 2000 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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[This Page Intentionally Left Blank.]
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SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION AND OUR CONSOLIDATED FINANCIAL STATEMENTS APPEARING ELSEWHERE IN
THIS PROSPECTUS.
EXCEPT AS OTHERWISE INDICATED OR AS THE CONTEXT MAY OTHERWISE REQUIRE, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND ASSUMES THAT ALL OF OUR OUTSTANDING CLASS A
CONVERTIBLE PREFERRED SHARES HAVE CONVERTED INTO OUR COMMON SHARES, WHICH WILL
AUTOMATICALLY OCCUR UPON THE CLOSING OF THIS OFFERING.
ALL INFORMATION IN THIS PROSPECTUS, UNLESS OTHERWISE INDICATED, GIVES EFFECT
TO A 2-FOR-1 SHARE SPLIT WHICH WILL BE COMPLETED PRIOR TO THE CLOSING OF THIS
OFFERING.
"EL SITIO" AND THE MEDALLION DESIGN ARE TRADEMARKS OF EL SITIO, INC. THIS
PROSPECTUS ALSO INCLUDES TRADEMARKS, SERVICE MARKS AND TRADE NAMES OF OTHER
COMPANIES.
EL SITIO, INC.
OUR BUSINESS
We are an Internet network providing country-specific and regional content
for Spanish- and Portuguese-speaking audiences in Latin America and the United
States. Recognizing that the countries in the Americas are diverse, we have
designed our network to consist of country Websites as well as a global Website.
We currently have country Websites for, and sales and content production offices
in, Argentina, Brazil, Mexico, the United States and Uruguay. We plan to
establish sales and content production offices in Colombia before the end of
1999, and sales and content production offices in Chile and Venezuela during
2000. By offering content and interactive resources designed to be responsive to
our users' preferences, we seek to make our network their "home on the Internet"
and, in so doing, to create communities of users, develop user loyalty and
increase traffic on our Websites. The launch of each country Website represents
a potential new community of users. By building substantial communities of
users, we are developing a platform for generating revenues from advertising,
branded retail dial-up Internet access, or "connectivity", service and, in the
future, e-commerce. We recently began to offer connectivity services in
Argentina and Brazil and expect to offer similar services in Colombia before the
end of 1999. We are also beginning to develop e-commerce services for Spanish-
and Portuguese-speaking audiences in Latin America and the United States.
Our founders believed that a scarcity of Spanish- and Portuguese-language
content was the principal factor limiting the growth of Internet usage in Latin
America. As a result, from our inception in mid-1997, we initially concentrated
on the development of a pilot Website for Argentina with quality content and
interactive resources in Spanish and, at the same time, carried out extensive
market testing to understand users' preferences. We then began to roll-out our
network of country Websites during 1998 and, most recently, launched our Website
in the United States in September 1999. Our registered users (meaning users who
have provided personal information such as name, e-mail address and address)
grew from 54,132 persons in June 1998 to 291,567 persons in July 1999. From
June 1998 to July 1999, the number of pages viewed by our users increased from
3.0 million to 21.0 million per month. On August 1, 1999, we launched our first
mass media-based branding and advertising campaign in Argentina, Brazil, Mexico
and Uruguay and, on September 9, 1999, launched the campaign in the United
States. In the first three months of this campaign (through October 31, 1999),
our registered users increased by approximately 69% to 498,515 at October 31,
1999 and the number of pages viewed per month by our users increased by over
250% to 73.9 million in that month. In March 1999, we also commenced measuring
unique visitors (meaning users who visit our Websites one or more times but who
are counted in the relevant period as having visited the Websites only one
time). The number of unique visitors has increased from 174,800 in March 1999 to
approximately 1.6 million in October 1999.
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We attribute this recent growth principally to our mass media-based branding and
advertising campaign, and cannot predict whether such growth will continue.
Our network is located at WWW.ELSITIO.COM for all of our Spanish-language
Websites and at WWW.OSITE.COM.BR for our Portuguese-language Website. An on-line
user accessing our network in any of the countries for which we operate a
country Website is directly linked to our Website for that user's home country;
other users are linked to our global Website. Our users encounter appealing
content and interactive resources in their native language and organized
according to eleven themes, which we call channels. These channels include,
among others, movies, music, news, relationships, shows, sports and technology.
Our users also receive access to free e-mail, chat rooms, bulletin boards,
personal home pages, contests and prizes. We regularly enhance our Websites'
features in response to user suggestions and our own service, content and
product developments. We provide content and community features on our Websites
to our users (including our registered users) free of charge.
Each of our country Websites is supported by a team of management,
marketing, sales and content production personnel based in the relevant country.
Each team is responsible for providing country-specific content and community
features adapted to the cultural and other tastes of the relevant market. Our
in-country teams are supported by our global team, which provides technical and
design support and global content for our network. This structure affords our
users the dual advantages of, first, the size and resources of our network and,
second, the country-specific content and community features most useful to them.
Operationally, it permits us to maximize economies of scale to efficiently
support multiple markets with differing content and features from a single
global platform.
In order to offer our users a broader range of Internet services and to
further foster user loyalty, we recently acquired IMPSAT Corporation's retail
dial-up access customers in Argentina and Brazil and are in the process of
acquiring its retail dial-up access customers in Colombia. The aggregate
purchase price for these acquisitions is $21.5 million. As a result of these
acquisitions, we expect to receive approximately 73,000 dial-up customers in the
three countries. These acquisitions should enable us to utilize our Websites in
Argentina, Brazil and Colombia as portals for our dial-up access customers, as
our connectivity customers will be directly linked to our Websites upon
connecting to the Internet, and to cross-market connectivity services to the
users of our network of Websites. To subscribe to our connectivity services, a
user pays a monthly fee to us in exchange for connectivity to the Internet. A
dial-up access subscriber automatically becomes a registered user of El Sitio's
network, although not vice versa. We will not acquire the telecommunications
infrastructure required to provide these services, but will instead outsource
that infrastructure from third-party providers--initially, under three-year
agreements with subsidiaries of IMPSAT Corporation. In conjunction with these
acquisitions, IMPSAT Corporation, which is a provider of private networks of
integrated data and voice communications systems in a number of countries of
Latin America, has become one of our major shareholders. We do not now offer or
intend to offer connectivity services in countries other than Argentina, Brazil
and Colombia.
Our results of operations for the nine months ended September 30, 1999
reflect that we continue to be in an early stage of operations. We continue to
build sales and marketing teams, establish advertising and sales offices, and
implement our media-based branding and advertising campaigns. We incurred
increased expenses that more than offset revenue growth during the nine months
ended September 30, 1999. We recorded net revenues of $1.5 million and a net
loss of $13.9 million in the nine months ended September 30, 1999, compared to
net revenues of $609,000 and a net loss of $1.8 million in the corresponding
period of 1998. Our increased net losses for the nine-month period ended
September 30, 1999 were primarily attributable to an increase in personnel and
other expenses necessary to support the roll-out or expansion of offices and
Websites in Brazil, Mexico and the United States and in anticipation of the
launch of commercial operations in these and other countries during the period.
For the nine months ended September 30, 1999, El Sitio generated 46.9%, 29.9%
and 22.2% of its revenues from Argentina, Uruguay and Mexico, respectively.
After taking into account our
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acquisitions of the three dial-up access businesses, approximately 50% of our
revenues in this nine-month period would have been generated from Brazil, 31%
from Argentina, 12% from Colombia, 4% from Uruguay and 3% from Mexico.
We were incorporated in July 1997 in the British Virgin Islands. We are a
holding company with operating subsidiaries in Argentina, Brazil, Mexico, the
United States and Uruguay. Our principal executive offices are located at
Avenida Belgrano 845, 1092 Buenos Aires, Argentina, and our telephone number is
011-5411-4343-6700.
OUR MARKET OPPORTUNITY
The Spanish- and Portuguese-speaking audiences in Latin America and the
United States together represent one of the fastest growing user groups on the
Web today. While we do not expect to have country Websites or operations for
every country in Latin America, our network is targeted to the entire Latin
American region. In the United States, we are currently targeting the
Spanish-speaking populations in Chicago, Houston, Los Angeles, Miami, New York,
San Antonio and San Diego. We are primarily targeting individual users, although
we anticipate that business and other entities will become important
participants in our communities of users.
We believe a large and growing market consisting of Spanish- and
Portuguese-speaking audiences exists in Latin America and the United States for
content, connectivity and e-commerce services, and that this market presents us
with a significant opportunity. Latin America had a total population at the end
of 1998 of 492.4 million people, of whom more than two-thirds are under
35 years of age. The region had an aggregate gross domestic product in 1998 of
$2.0 trillion, of which Brazil, Mexico and Argentina accounted for more than
three-fourths. The wealthiest 20% of the Latin American population accounts for
approximately two-thirds of the overall buying power in the region and
constitutes our primary target market in Latin America. Internet use in Latin
America is expected to increase from an estimated 4.8 million users in 1998 to
19.1 million users in 2003. Internet advertising targeting Latin America is
projected to grow from approximately $23.6 million in 1998 to approximately
$948.9 million in 2003. Similarly, on-line sales in Latin America are projected
to increase from approximately $166.8 million in 1998 to approximately
$8.0 billion in 2003. Internet penetration rates for 1999 are expected to be
1.5% in Argentina, 2.0% in Brazil, 0.6% in Colombia, 1.0% in Mexico and 2.9% in
Chile.
The United States has a total Hispanic population of approximately
31.4 million people, which has grown at a compound annual rate of 3.7% between
1996 and 1999. By 2000, the U.S. Hispanic population is expected to constitute
approximately 11% of the total U.S. population. Advertising targeting U.S.
Hispanics was $1.7 billion in 1998. As of January 1, 1998, U.S. Hispanics
represented $273.2 billion in annual buying power. As of May 1999, the Internet
penetration rate for the U.S. Hispanics was approximately 19.0%.
OUR STRATEGY
Our goal is to become the leading Internet network for Spanish- and
Portuguese-speaking audiences in Latin America and the United States. To achieve
our goal, and to take advantage of our market opportunity, we continue to
implement a strategy consisting of the following principal elements:
- BUILDING A MARKET-LEADING NETWORK. We seek to build a leading Internet
network by:
V further developing country-specific and regional content;
V incorporating additional community-building features; and
V strengthening our brand identity.
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- GENERATING REVENUES FROM OUR NETWORK. We seek to increase substantially
revenues from our network by:
V forging one-on-one relationships with advertisers;
V integrating connectivity services into our network; and
V developing our e-commerce business.
- LEVERAGING STRATEGIC RELATIONSHIPS. We intend to leverage our existing
relationships with shareholders and enter into new strategic relationships
to expand our network and enhance our content, marketing and sales.
OUR SHAREHOLDERS
Roberto Vivo-Chaneton, our chairman, and Roberto Cibrian-Campoy, our chief
executive officer, founded our company in 1997. Mr. Vivo is a co-founder and
deputy chief executive officer of IMPSAT Corporation. Mr. Cibrian was the
founder and the president of Cibrian-Campoy Creativos, S.A., an Argentine
company which engaged in electronic arts, computer animation and multimedia and
which was the predecessor entity for our Argentine subsidiary.
In July 1999, we completed a private placement of 6,334,004 Class A
convertible preferred shares for a gross purchase price of $44.4 million,
consisting of 5,477,088 shares sold for $38.4 million in cash and 856,916 shares
to be issued on a quarterly basis through January 2001 in exchange for
$6.0 million in non-cash advertising time credits. Each Class A convertible
preferred share will, after giving effect to a 2-for-1 share split, convert
automatically into two common shares upon completion of this offering.
Our principal shareholders, in addition to Mr. Vivo and Mr. Cibrian,
include:
- IAMP (El Sitio) Investments Ltd., an investment fund jointly controlled by
Hicks, Muse, Tate & Furst Incorporated and the Cisneros Group of
Companies;
- SLI.Com, an investment fund controlled by Guillermo Liberman, an Argentine
entrepreneur with interests in agribusiness, fisheries, telecommunications
and hotel development;
- GCC Investments, LLC, an indirect subsidiary of GC Companies Inc., which
owns and operates General Cinema Theatres; and
- IMPSAT Corporation, a Latin American telecommunications company.
In mid-November 1999, we completed a private placement of 1,111,111 Class B
convertible preferred shares for a purchase price of $10.0 million in cash, or
$9.00 per Class B convertible preferred share. Purchasers of the Class B
convertible preferred shares consisted of Intel Atlantic, Inc., a subsidiary of
Intel Corporation, and Latinvest Asset Management do Brasil, Ltda., an affiliate
of Globalvest Management Company, L.P. The Class B convertible preferred shares
have an annual dividend rate of 8%. Each Class B convertible preferred share
will automatically convert, on the date six months after the closing of this
offering, into one common share. The difference between the initial public
offering price per common share and $9.00 price per Class B convertible
preferred share will be amortized as a deemed dividend during the same six-month
period.
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THE OFFERING
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Common shares offered..................... 8,200,000 shares
Common shares outstanding immediately
after this offering..................... 38,574,460 shares (1)
Underwriters' over-allotment option....... Common shares offered and common shares outstanding
after this offering would each increase by 1,230,000
shares if the underwriters' over-allotment option is
exercised in full.
Use of proceeds........................... We intend to use the net proceeds from this offering as
follows:
- approximately $48.0 million to fund our sales and
marketing, and branding and advertising
activities;
- approximately $20.0 million to develop new
services and products, and to develop our network
infrastructure;
- approximately $1.3 million to pay dividends in
respect of our Class A convertible preferred shares
accrued as of the closing date of this offering;
and
- the balance for general corporate and working
capital requirements.
We have not definitively allocated any portion of the
net proceeds for the above specified purposes. We will
retain complete discretion in applying the proceeds of
this offering.
Nasdaq National Market symbol............. "LCTO"
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(1) Excludes the following:
- 2,268,600 common shares reserved for issuance upon exercise of options
granted under our 1999 share option plan at a weighted average exercise
price of $5.73 per share;
- 971,400 common shares reserved for issuance upon the exercise of options
that we may grant under our 1999 share option plan;
- 1,713,832 common shares issuable upon conversion of our Class A
convertible preferred shares, which will be issued on a quarterly basis
through January 2001 in exchange for $6.0 million of non-cash advertising
time credits;
- 239,936 common shares issuable upon exercise of a warrant issued to Bear,
Stearns & Co. Inc. as part of its fee in connection with the July 1999
private placement of our Class A convertible preferred shares; and
- 1,111,111 common shares issuable upon conversion of our Class B
convertible preferred shares, which were sold in a private placement in
mid-November 1999 for an aggregate purchase price of $10.0 million in
cash.
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SUMMARY FINANCIAL DATA
The following financial data should be read in conjunction with the
consolidated financial statements and the unaudited pro forma financial
information, "Selected Financial Data" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in this prospectus.
The pro forma financial information reflects:
- our acquisitions of the retail dial-up access customers in Argentina and
Brazil from IMPSAT Corporation, and our pending acquisition of its retail
dial-up access customers in Colombia, for approximately $21.5 million in
the aggregate and the related purchase by IMPSAT Corporation of 3,070,615
of our Class A convertible preferred shares for $21.5 million; and
- the private placement in mid-November 1999 of 1,111,111 Class B
convertible preferred shares for an aggregate purchase price of
$10.0 million in cash.
The selected pro forma as adjusted balance sheet data give effect to the
sale of the common shares at the initial public offering price of $16.00 per
share and the receipt of the net proceeds from this offering. The pro forma as
adjusted data also assume that all of our outstanding Class A convertible
preferred shares have been converted into our common shares, which will
automatically occur upon the closing of this offering.
We prepare our consolidated financial statements and the pro forma financial
information in U.S. dollars in accordance with generally accepted accounting
principles in the United States, which is commonly called "U.S. GAAP."
Results of operations for the periods presented are not necessarily
indicative of results of our operations for future periods.
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<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
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1997 1998 1998 1999
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ACTUAL ACTUAL PRO FORMA ACTUAL ACTUAL PRO FORMA
----------- ----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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STATEMENT OF OPERATIONS
DATA:
Net revenues............... $ 267 $ 780 $ 17,287 $ 609 $ 1,524 $ 11,541
Total costs and expenses... 1,171 4,277 22,784 2,371 14,909 27,068
Operating income (loss).... (904) (3,497) (5,497) (1,762) (13,385) (15,527)
Net loss attributable to
common shareholders...... (1,014) (3,517) (15,815) (1,792) (13,903) (25,713)
Basic and diluted net loss
per common share......... (10.14) (1.15) (5.19) (.87) (1.18) (2.18)
Shares used in computing
basic and diluted loss
per common share......... 100,000 3,050,000 3,050,000 2,066,667 11,777,516 11,777,516
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AT DECEMBER 31, AT SEPTEMBER 30, 1999
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PRO FORMA
1997 1998 ACTUAL PRO FORMA AS ADJUSTED
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BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 89 $ 246 $ 24,393 $ 34,493 $154,009
Working capital (deficit).................... (1,146) (42) 20,257 29,851 149,367
Total assets................................. 396 1,481 33,120 64,776 184,292
Total liabilities............................ 1,360 712 6,349 7,305 7,305
Class A convertible preferred shares......... -- -- 38,327 59,827 --
Class B convertible preferred shares......... -- -- -- 9,200 9,200
Total shareholder's equity (deficit)......... (964) 769 (11,556) (11,556) 167,787
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RISK FACTORS
AN INVESTMENT IN OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK. YOU
SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS AND THE OTHER INFORMATION
IN THIS PROSPECTUS BEFORE PURCHASING OUR SHARES.
FOR PURPOSES OF THIS "RISK FACTORS" SECTION OF THIS PROSPECTUS, WHEN WE
STATE THAT A RISK, UNCERTAINTY OR PROBLEM MAY, COULD OR WOULD HAVE AN "ADVERSE
EFFECT ON OUR COMPANY," WE MEAN THAT THE RISK, UNCERTAINTY OR PROBLEM MAY, COULD
OR WOULD HAVE AN "ADVERSE EFFECT ON THE BUSINESS, RESULTS OF OPERATIONS,
FINANCIAL CONDITION, CASH FLOW OR PROSPECTS OF OUR COMPANY," IN EACH CASE EXCEPT
AS OTHERWISE INDICATED OR AS THE CONTEXT MAY OTHERWISE REQUIRE. YOU SHOULD VIEW
SIMILAR EXPRESSIONS IN THIS SECTION AS HAVING A SIMILAR MEANING.
RISKS RELATED TO OUR COMPANY
WE HAVE ONLY BEEN IN BUSINESS FOR A SHORT PERIOD OF TIME, SO YOUR BASIS FOR
EVALUATING OUR COMPANY IS LIMITED.
We commenced operations in July 1997 and began the roll-out of our network
during 1998. We commenced our first mass media-based branding and advertising
campaign in August 1999 in an effort to generate a high volume of user traffic
on our Websites. Accordingly, we have a limited operating and financial history
upon which you can base your evaluation of an investment in our common shares.
We are subject to the risks, uncertainties and problems frequently
encountered by companies in early stages of operations, particularly companies
in new and rapidly developing markets, such as the Internet industry.
These risks, uncertainties and problems include, among others, the
following:
- any inability to maintain and increase levels of traffic on our Websites;
- any failure to continue to develop and extend the EL SITIO (in Brazil, O
SITE) brand;
- any inability to meet minimum guaranteed impressions under our advertising
agreements;
- any failure to anticipate and adapt to developing markets;
- any inability to upgrade and develop our systems and infrastructure and
attract new personnel in a timely and effective manner;
- any failure of our network to handle efficiently our Web traffic;
- any inability to generate significant revenues from e-commerce;
- any failure to manage rapidly expanding operations; and
- the level of use of the Internet and online services and consumer
acceptance of the Internet and other online services.
We cannot assure you that we will be successful or that we will be able
effectively to compete and achieve market acceptance or otherwise address the
risk factors disclosed in this prospectus.
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WE HAVE A HISTORY OF LOSSES AND EXPECT TO CONTINUE TO INCUR INCREASING LOSSES IN
THE NEXT SEVERAL YEARS.
We have not achieved profitability to date, and we anticipate that we will
incur substantial and increasing losses through 2002. We expect to incur a net
loss of approximately $30 million in 1999. Our business plan contemplates that
we will first become profitable in 2003. We believe that our revenues, chiefly
from advertising and connectivity services, will exceed our expenses in 2003 as
a result of our branding and advertising campaigns and related marketing efforts
prior to that year and the further development of our communities of users.
Until that year, we will continue to incur losses and negative cash flow as we
fund operating and capital expenditures in areas such as content and service
development, marketing and brand promotion, additional personnel and network
infrastructure. The extent of these losses will depend, in part, on the amount
of growth in our revenues. We cannot assure you that our losses will not further
increase in the future or that we will ever achieve or sustain profitability.
WE MAY FAIL TO IMPLEMENT SUCCESSFULLY OUR BUSINESS STRATEGY.
Our business strategy relies upon the creation of high quality content for
our Website for each country in which we operate and for each of our targeted
metropolitan areas in the United States. Our strategy assumes that consumers
will be attracted to the country-specific content and community features on our
Websites, which will, in turn, allow us to sell advertising, sponsorships and
connectivity services and, in the future, to develop relationships with
merchants for e-commerce designed to reach those consumers. Our strategy remains
unproven and, among other things, could entail higher operating expenses than
are or may be incurred by competitors which are pursuing a more pan-Latin
American approach with limited country-specific content.
Our strategy may not be successful, and if not successful, we may not be
able to modify it in a timely and successful manner in the rapidly evolving
Internet industry. In addition, we could fail to develop strategies to
capitalize on opportunities in new and unproven areas.
WE WILL NOT BECOME PROFITABLE IF WE DO NOT ATTRACT A SUBSTANTIAL NUMBER OF USERS
AND ADVERTISERS.
We must continually enhance and improve our Website content and services to
attract, and to meet the expectations of, our users and advertisers. We also
must continue to:
- improve the features and functionality of our Websites and our dial-up
access businesses; and
- develop other services and products to attract users, advertisers and
e-commerce partners.
In the countries for which we establish new Websites, we believe we will
encounter the same challenges in attracting users and advertisers as in the
countries where we currently conduct operations.
We constantly seek to deliver the content, features and functionality
desired by our target audience. If other Websites or networks, or Internet
service providers, present more desirable content, features or functionality,
our user traffic could be adversely affected. We cannot assure you that we can
successfully identify new service opportunities and develop and bring new
services and products to market in a cost-efficient and timely manner. Any
failure to develop and introduce new services and service enhancements that are
compatible with industry standards and satisfy customer requirements would have
a material adverse effect on our company.
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WE MUST DEVELOP OUR BRAND AND GENERATE INCREASED ADVERTISING REVENUES IN ORDER
TO CREATE A VIABLE BUSINESS.
We must continue to establish and develop our EL SITIO (in Brazil, O SITE)
brand. Brand loyalty is critical to our ability to expand our user base and our
advertising, connectivity services and e-commerce revenues. We believe that the
importance of brand recognition will increase as the number of Spanish-and
Portuguese-language Websites targeting Latin America and the U.S.
Spanish-speaking market increases. We intend to devote considerable resources
for marketing campaigns, both on-line and in traditional media, to promote our
brand. However, unlike our on-line advertising, which gives us immediate
feedback and allows us to adjust promptly our marketing messages, the
effectiveness of advertising in traditional print and broadcast media is more
difficult to assess. If our marketing efforts are unsuccessful, we may fail to
establish EL SITIO and O SITE as leading brands in our markets. We cannot assure
you that our brand building initiatives and expenditures for this purpose will
prove effective.
Our success in promoting and enhancing our brand will also depend on our
ability to provide high quality content, features and functionality. If we fail
to promote successfully our brand, if users of our Websites, or our connectivity
services or if advertisers or e-commerce partners do not perceive our services
to be of high quality, the value of our brand could be diminished, which would
have a material adverse effect on our company.
OUR GROWTH AND EXPANSION MAY STRAIN OUR ABILITY TO MANAGE OUR OPERATIONS AND OUR
FINANCIAL RESOURCES.
We are undergoing rapid growth and plan to continue to grow rapidly, both in
existing markets and by means of expansion into new geographic markets. Rapid
growth places significant strains on our network infrastructure, our managerial,
technical and editorial personnel, and our financial and other resources. To
support growth, we must implement new or upgraded operating and financial
systems, procedures and controls for our existing operations in Argentina,
Brazil, Mexico, the United States and Uruguay, as well as in additional
countries in which we may seek to develop our business. Any failure to expand
and integrate these areas in an efficient manner could have a material adverse
effect on our company.
We have acquired the retail dial-up access customers of IMPSAT Corporation
in Argentina and Brazil and are in the process of acquiring its retail dial-up
access customers in Colombia. We expect to complete the Colombia acquisition by
the end of 1999. Prior to these acquisitions, our company had no experience in
operating a connectivity services business. In addition, any failure to
integrate these acquisitions, or any other acquired business, could have an
adverse effect on our company.
The aggregate $21.5 million purchase price for the acquisitions of these
retail dial-up access customers has been allocated principally to an intangible
asset consisting of the newly acquired customer base. This intangible asset will
be amortized over the next five years and, as such, will be reflected as an
expense in our statement of operations in future periods. To the extent that we
fail to retain this customer base during this period, this intangible asset
could be deemed to be impaired, in which case an amount in excess of the
anticipated amortization expense would be charged to our results of operations
and could result in substantially increased losses or, in later years, reduced
profits. As a result, our future financial performance could be materially and
adversely affected if we are not successful in preserving and developing our
newly acquired connectivity customer base.
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Our ability to achieve and to manage planned growth will depend upon, among
other factors, our success in:
- hiring and retaining qualified management, technical and marketing
personnel;
- maintaining the high levels of customer service required to retain users
while undertaking expansion; and
- expanding our network infrastructure to service a growing user base.
If we fail to achieve and manage growth, our company, as well as the market
price of our common shares, could be adversely affected.
WE MUST INCREASE OUR ADVERTISING AND OTHER REVENUES IN CASH IN ORDER TO EXPAND
OUR BUSINESS.
As a network of Websites, our business model is predicated upon our ability
to increase significantly our advertising revenues. Although we will derive
subscriber-based revenues from our acquisitions of the retail dial-up access
customers of IMPSAT Corporation in Argentina and Brazil and our pending
acquisition of its retail dial-up access customers in Colombia, our branded
connectivity services are complementary to the development of communities of
users. Our business model emphasizes growth in advertising revenues through
country-specific and regional advertising agreements. Our growth of advertising
revenues will depend, among other factors, on:
- the level of acceptance that Internet advertising achieves in Latin
America, and the growth of the aggregate amount spent on Internet
advertising in our markets;
- the market recognition and prestige of our brand and trademarks;
- the attractiveness of our advertising pricing schedules;
- the effectiveness of our advertising sales personnel in each of our
markets; and
- our ability to generate and continue to grow a large community of loyal
users in our markets.
Our five largest advertisers accounted for approximately 40.7% of our total
revenues in the nine months ended September 30, 1999 and approximately 77% of
our total revenues for the nine months ended 1998. Our largest advertiser alone
accounted for approximately 12.8% and 20.4% of our total revenues in the first
nine months of 1999 and 1998, respectively. The loss of any of our major
existing advertisers, unless replaced by other advertisers, could have a
material adverse effect on our company.
We have received a significant portion of our historical net revenues from
reciprocal services arrangements, pursuant to which we exchange advertising
space on our network for advertising space on television and radio or for
telecommunications services, in lieu of cash payments. In the nine months ended
September 30, 1999, we derived advertising revenues valued at approximately
$554,000, or 36% of our total net revenues for this period, from these non-cash
reciprocal services arrangements. For the year ended December 31, 1998, we
derived approximately $180,000, or 23% of our total net revenues, from these
arrangements. We expect that non-cash revenues from reciprocal services
arrangements will continue to account for a significant portion of our revenues
in the foreseeable future.
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WE MUST MAINTAIN ACCESS TO QUALITY CONTENT PROVIDED BY THIRD PARTIES IN ORDER TO
DEVELOP OUR SUBSCRIBER BASE.
Although we seek to produce or edit a substantial portion of the content for
our Websites, we continue to rely upon third parties, such as Reuters, Notimex
and Infosic, to provide global content to complement our own content and thus
make our Websites more attractive to users and, by extension, advertisers. Most
of our arrangements with third-party providers of content are not exclusive, are
short-term and may be terminated at the discretion of the other party. Any
termination of any of our arrangements with some of these providers of content
could have an adverse effect on our company.
OUR BUSINESS DEPENDS UPON STABLE RELATIONSHIPS WITH KEY SUPPLIERS.
We have no long-term contracts with our suppliers. We are dependent on
third-party suppliers for our leased-line connections and bandwidth. Some of
these suppliers are or may become competitors of our company, and they are not
subject to any contractual restrictions upon their ability to compete with us.
If these suppliers change their pricing structures, we may be adversely
affected. Moreover, any failure or delay on the part of our network providers to
deliver bandwidth to us or to provide operations, maintenance and other services
with respect to such bandwidth in a timely or adequate fashion could adversely
affect our company.
In connection with our acquisitions of retail dial-up access customers from
IMPSAT Corporation, we are not acquiring the telecommunications infrastructure
to provide these services and will instead outsource that infrastructure from
third-party providers--initially, under three-year services agreements with
subsidiaries of IMPSAT Corporation. Our agreements with these subsidiaries of
IMPSAT Corporation, pursuant to which they will provide telecommunications
infrastructure for our dial-up access customers, do not restrict IMPSAT
Corporation from competing directly with us or providing better rates to other
dial-up access providers. These agreements, however, permit us to terminate the
agreements without any penalties after one year if we receive an offer from a
lower-price service provider and IMPSAT Corporation does not match that service
provider's price. If IMPSAT Corporation competes directly with us, charges us
above-market rates for telecommunications infrastructure or offers cut-rate
telecommunications infrastructure to our competitors in the retail dial-up
access business, our business could be adversely affected.
WE MUST FURTHER DEVELOP STRATEGIC RELATIONSHIPS TO STRENGTHEN OUR COMPETITIVE
POSITION.
In our initial stage of operations, we focused upon understanding our target
markets and delivering high quality services and products designed for such
markets. More recently, we have sought to establish strategic relationships with
leading content providers, dial-up access providers, e-commerce partners, and
technology and infrastructure providers. To date, our principal strategic
relationships have been with our shareholders and their affiliates, such as
Hicks, Muse, Tate & Furst Incorporated, the Cisneros Group of Companies, and
IMPSAT Corporation. We may depend, in part, upon strategic relationships to help
to develop our business. Our future growth will depend upon maintaining our
existing strategic relationships as well as our ability to establish new
relationships.
WE COULD EXPERIENCE CAPACITY CONSTRAINTS AND UNEXPECTED SYSTEM INTERRUPTIONS,
WHICH COULD IMPEDE THE DEVELOPMENT OF OUR BUSINESS.
The number of pages of information transmitted over our network, commonly
referred to as "page views," has continued to increase over time. We are
actively trying to increase our level of page views. As a result, our network
must accommodate a high volume of traffic, often at unexpected times. We
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have, to date, experienced limited capacity constraints in terms of our ability
to serve our increasing user volumes. We are in the process of improving our
network infrastructure to ensure that we will be able to handle future increases
in traffic. We are migrating our platform and our applications to a Unix
platform using Sun Microsystems servers. We do not anticipate that this
migration process, which is expected to be completed before the end of 1999,
will affect the continuous operations of our network. However, any break in the
continuous operations of our network could have a material adverse effect on our
company.
We make our Websites available using 17 Microsoft Windows NT servers and 3
Linux servers as our central production servers, which servers are currently
located at the server farm facilities of Exodus Communications in New Jersey. We
also have a redundant server located at the Miami, Florida server farm
facilities of IMPSAT Corporation. Any failure by Exodus Communications or IMPSAT
Corporation to protect our systems against damage from fire, weather, power
loss, telecommunications failure, break-ins or other events could have a
material adverse effect on our company.
We may also, from time to time, experience interruptions due to hardware
failures, unsolicited bulk e-mail and operating system failures. Because our
revenues depend on the number of users of our network, we will be adversely
affected if we experience frequent or long system delays or interruptions. If
delays or interruptions continue to occur:
- our users could perceive our network as being unreliable;
- traffic on our Website could deteriorate; and
- our brand could be adversely affected.
Any failure on our part to minimize or prevent capacity constraints or
system interruptions could have an adverse effect on our company.
WE MAY HAVE DIFFICULTY IN OBTAINING THE ADDITIONAL FINANCING REQUIRED TO DEVELOP
OUR BUSINESS.
As a company in an early stage of operations, and in order to develop and
expand our business, we anticipate that we will require substantial additional
equity and debt financing after this offering. Under our business plan, we
expect to require up to approximately $50 million of additional financing to
provide sufficient working capital during the period through 2003 when we expect
to become profitable. Obtaining additional financing will be subject to a number
of factors, including, without limitation, the following:
- the stage of operations of our company;
- our actual or anticipated results of operations, financial condition and
cash flow;
- investor sentiment towards companies conducting business in Latin America;
and
- generally prevailing market conditions.
These factors may make the timing, amount, terms and conditions of additional
financing unattractive for us.
If additional funds are raised through the issuance of equity securities,
the percentage ownership of our then current shareholders will be reduced, and
the new equity securities may have rights, preferences or privileges senior to
those of the holders of our common shares. If additional funds are
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raised through the issuance of debt securities, these securities would have some
rights, preferences and privileges senior to those of the holders of our common
shares, and the terms of this debt could impose restrictions on our operations
and result in significant interest expense to us.
In the event that we are unable to raise sufficient financing on
satisfactory terms and conditions in the future, our company would be adversely
affected.
WE MUST RETAIN KEY MANAGERS AND REQUIRE ADDITIONAL QUALIFIED PERSONNEL TO
DEVELOP OUR BUSINESS IN AN INDUSTRY IN WHICH IT IS DIFFICULT TO ATTRACT AND
RETAIN QUALIFIED PERSONNEL.
Our future performance depends, in large part, on the continued service of
our senior management. We rely, in particular, on the strategic guidance of
Roberto Vivo-Chaneton, co-founder and chairman of our company, and on the
services of Roberto Cibrian-Campoy, co-founder, president and chief executive
officer of our company. The loss, for any reason, of the services of either of
these individuals could have a material adverse effect on our company.
Our strategy of emphasizing country-specific content and advertising also
requires the hiring and retention of highly qualified personnel in each market.
After they are employed, the knowledge, expertise and relationships of our
personnel makes their retention important to our success. We expect to continue
to enter into share option and non-competition agreements with key personnel.
However, we cannot assure you that we will be able to retain our key personnel
or that we will be able to attract and retain such additional highly qualified
technical and managerial personnel in the future. Any inability to attract and
retain the personnel necessary to support the growth of our business could have
an adverse effect on our company.
WE WILL BE CONTROLLED AFTER THIS OFFERING BY A SMALL GROUP OF EXISTING
SHAREHOLDERS, WHOSE INTERESTS MAY DIFFER FROM THOSE OF OTHER SHAREHOLDERS.
Prior to this offering, our directors and officers and their respective
affiliates beneficially owned, in the aggregate, a significant majority of our
issued and outstanding share capital. We expect that these shareholders will
continue to own a significant portion of our share capital after this offering.
As a result, these shareholders will be able to control the outcome of all
matters requiring shareholder approval, including the election of directors and
approval of mergers, acquisitions and other significant corporate transactions.
You should understand that there may be circumstances in which interests of
these shareholders may conflict with your interests.
Commercial and other transactions between our company, on the one hand, and
our directors, officers and controlling shareholders and their affiliates, on
the other, create the potential for, or could result in, conflicting interests.
For example, Roberto Vivo-Chaneton, Ricardo Verdaguer and Sofia Pescarmona,
three of our directors, also serve as directors and senior officers of IMPSAT
Corporation. These relationships may give rise to conflicts of interest from
time to time relating to contracts, such as the telecommunications services
agreements that we are entering into with IMPSAT Corporation, corporate
opportunities and use of directors' time and expertise. We also have acquired
IMPSAT Corporation's retail dial-up access customers in Argentina and Brazil and
are in the process of acquiring its retail dial-up access customers in Colombia,
which are transactions involving our company and this related party. Our board
of directors is in the process of developing procedures with a view to
minimizing such potential conflicts of interest and has adopted guidelines
regarding related party transactions. We intend to enter into all related party
transactions on an arm's length basis (measured against terms that would be
offered by an unaffiliated third party). We cannot assure you, however, that all
of these future transactions will be free of conflicting interests.
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WE MUST PRESERVE OUR INTELLECTUAL PROPERTY RIGHTS, WHICH ARE ESSENTIAL TO THE
DEVELOPMENT OF OUR BUSINESS.
We consider our EL SITIO, O SITE and medallion design trademarks and service
marks to be important to our success. We are pursuing the registration of our
trademarks and service marks in the United States and in key countries of Latin
America as well as in Spain and Portugal. Although some of these countries have
registered our marks, we cannot predict with certainty whether the trademark
offices of the remaining countries will do the same. If we are unable to obtain
a registration in a particular country, we would have trademark or service mark
rights to the extent that we use the mark, but the rights would not be as strong
as if they were registered. Some companies, including other participants in the
Internet industry, use and/or may use trademarks or service marks in English or
other languages which, when translated, are similar or identical to certain of
our core marks. Usage of these marks by other parties could hinder our ability
to build a unique brand identity and may possibly lead to trademark disputes, in
that we may be sued for trademark infringement in court or we may have the
validity of our applications and/or registrations challenged at government
agencies. Although we do not believe that any proceedings against us ultimately
would be meritorious, we cannot provide any assurances to you in this regard. A
judgment against us in an intellectual property-based proceeding could result in
the loss of our ability to use one or more of our marks, as well as the
imposition of monetary damages. Should we lose the right to use a trademark or
service mark, we may be forced to adopt a new mark, which would result in the
loss of substantial resources and brand identity. In any event, whether
successful or not, litigating a trademark dispute would result in the
expenditure of monetary resources and the diversion of executives' time. Any
inability to protect, enforce or use our trademarks, service marks or other
intellectual property may have a material adverse effect on our company.
We also depend upon technology licensed from third parties for chat,
homepage, search and related Web services. Any dispute with a licensor of the
technology may result in our inability to continue to use that particular
technology. Additionally, there may be patents issued or pending that are held
by third parties and that cover significant parts of the technology, products,
business methods or services used to conduct our business. We cannot be certain
that our technology, products, business methods or services do not or will not
infringe valid patents or other intellectual property rights held by third
parties. In the event that a third party alleges infringement, we may be forced
to take a license, which we may not be able to obtain on commercially reasonable
terms. We may also incur substantial expenses in defending our company against
third-party infringement claims regardless of the merit of these claims.
Successful infringement claims against us could result in substantial monetary
liability and/or being prevented by a court from conducting all or a part of our
business that falls within the scope of the asserted patent, leading to
substantial expenditures to redesign and/or license technology.
OUR RESULTS OF OPERATIONS MAY FLUCTUATE DUE TO SEASONALITY.
The level of use of our network may be seasonal in nature. Historically,
telecommunications use in Latin America has been significantly lower during the
first calendar quarter of the year because:
- it includes the summer months in much of Latin America;
- affluent segments of the population tend to take extended vacations during
these months; and
- schools and universities are generally closed.
Our advertising revenues may also be subject to seasonal fluctuations.
Advertisers in traditional media have spent less in the first and second
calendar quarters. We believe that these seasonal trends may affect our results
of operations.
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THE MULTI-COUNTRY NATURE OF OUR BUSINESS EXPOSES US TO ADDITIONAL
INTERNATIONAL-BASED RISKS.
We are subject to a broad range of risks inherent in businesses with
operations in multiple countries, including, among others, the following:
- unexpected changes in governmental laws and regulations;
- difficulties and costs of staffing and managing international operations;
- potentially adverse tax consequences;
- uncertain protection for intellectual property rights;
- trade barriers for goods which may be sold over our network;
- difficulties in maintaining and upgrading our systems;
- export restrictions and controls;
- currency fluctuation and exchange risks; and
- economic, political and other conditions in the countries in which we
currently, or may seek to, conduct business.
Any of these factors, many of which are outside our control, could have a
material adverse effect on our company.
RISKS RELATED TO OUR INDUSTRY
WE OPERATE IN AN EXTREMELY COMPETITIVE MARKET AND FACE COMPETITION FROM MORE
DEVELOPED COMPANIES WITH GREATER RESOURCES.
Many companies already provide Website and on-line destinations targeted to
Spanish- and Portuguese-speaking audiences in Latin America, the United States
and elsewhere. Competition for users, advertisers and e-commerce partners is
intense and is expected to increase significantly in the future, particularly
because there are no substantial barriers to entry in our industry.
We face competition on both country and regional levels. Our primary
competitors include, among others, StarMedia and Terra Networks (in most of
Latin America and the United States), Quepasa.com and Yupi (in the United
States), Clarin Digital (in Argentina) and Universo Online (in Brazil). We also
face competition from Spanish- and/or Portuguese-language versions of services,
such as Yahoo!, America Online and Prodigy Communications. Our competitors may
develop content that is better than ours or that achieves greater market
acceptance. It is also possible that new competitors may emerge and acquire
significant market share. Some of our established competitors and potential new
competitors may have better brand recognition and significantly greater
financial, technical, and marketing resources than our company. Any significant
loss of users to our competitors could have a material adverse effect on our
company.
As a result of our completed or pending acquisitions of the retail dial-up
access customers in Argentina, Brazil and Colombia of IMPSAT Corporation, we
will be entering the connectivity services market, which is extremely
competitive and is characterized by rapidly changing technology and evolving
standards. As a result of these acquisitions, we will be amortizing an
intangible asset relating to our customer base in subsequent periods. To the
extent that we fail to retain this customer base, this intangible asset could be
deemed to be impaired, in which case we could sustain substantially increased
losses or, in later years, reduced profits. We also do not own
telecommunications assets and will, therefore, depend upon telecommunications
providers to carry our Internet traffic. Increased competition could require us
to lower our prices, increase our selling and marketing expenses, and raise
subscriber acquisition costs. New technologies permitting faster connectivity
may make our newly acquired retail dial-up access businesses obsolete. We may
not be able to retain our subscribers or, if we do, we may not be able to offset
the effect of increased costs through an increase in subscribers, subscriber
revenues or revenues from other sources.
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If low-cost or free connectivity is offered in Latin America, our
subscribers will have cost-effective alternatives to our service, and they may
have more than one Internet account or may switch to another dial-up access
provider in their country if they are unable to gain access to our service. As a
result, usage of our services by subscribers may decrease; our customer
turnover, which is known as "churn," could increase; and we may be compelled to
reduce our prices further.
Recently, various cable and telephone companies have made announcements
regarding the planned deployment of broadband services for high-speed Internet
access. These services would include new technologies, such as cable modems,
wireless communications and digital subscriber line, commonly known as DSL. In
addition, a number of free Internet access services have recently been
introduced, particularly in non-U.S. markets, and some Internet access providers
are now offering subsidized or free personal computers to their subscribers.
These trends, if they materialize in Latin America or the U.S., could have a
material adverse effect on our company.
WE WILL BE ADVERSELY AFFECTED IF THE INTERNET DOES NOT BECOME WIDELY ACCEPTED AS
A MEDIUM FOR ADVERTISING AND E-COMMERCE.
Advertising revenues will continue to be an important component of our total
revenues. In order for us to generate these revenues, advertisers and
advertising agencies must direct a portion of their advertising budgets to the
Internet and, specifically, to our network. Many of our current or potential
advertising and e-commerce partners have limited experience using the Internet
to advertise or to sell their products and services and have not devoted a
significant portion of their budgets to Internet-based advertising and commerce.
The adoption of Internet advertising, particularly in Latin America, requires
the acceptance of a new method of conducting business and exchanging
information. Advertisers that have invested substantial resources in other media
forms may be reluctant to adopt a new method that may limit or compete with
their existing efforts. These businesses may find Internet advertising to be
less effective for promoting and selling their products and services than is
traditional print and broadcast media. We will be adversely affected if Internet
advertising and e-commerce fail to develop or develop slowly in Latin America.
CHANGES IN THE LEGAL AND REGULATORY ENVIRONMENT FOR OUR INDUSTRY COULD INCREASE
OUR COSTS AND LENGTHEN THE PERIOD FOR US TO BECOME PROFITABLE.
Government regulation has not materially restricted use of the Internet in
our markets to date. However, the legal and regulatory environment pertaining to
the Internet remains relatively undeveloped and may change. New laws and
regulations could be adopted, and existing laws and regulations could be applied
to the Internet and, in particular, to e-commerce. New and existing laws and
regulations could cover issues, including, among others, the following:
- sales and other taxes;
- user privacy;
- pricing controls;
- characteristics and quality of products and services;
- consumer protection;
- cross-border commerce;
- libel and defamation;
- copyright, trademark and patent infringement; and
- other claims based on the nature and content of Internet materials.
Changes in government regulation in any of the countries in which we operate
could increase our costs and prevent us from delivering our services and
products over the Internet. It could also slow the
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growth of the Internet, which could, in turn, delay growth in demand for our
network and adversely affect our company.
WE MAY BECOME SUBJECT TO LEGAL LIABILITY BASED ON THE CONTENT PROVIDED THROUGH,
AND THE PRODUCTS SOLD OVER, OUR NETWORK.
The laws in the United States and in Latin American countries relating to
the liability of on-line service providers, such as our company, for activities
of their users remains unsettled. Claims have been made against other on-line
service providers for defamation, negligence, copyright or trademark
infringement, obscenity or other grounds based on the nature and content of
information that was posted on-line by these providers or their visitors. We
could become subject to similar claims. It is also possible that, if information
provided through our services contains errors, third parties could make claims
against us for losses incurred in reliance on the information. Finally, we could
face personal injury or other product liability claims arising from the use of
products sold through our Website.
We offer e-mail services, which expose us to potential liabilities or claims
resulting from:
- unsolicited e-mail;
- lost or misdirected messages;
- illegal or fraudulent use of e-mail; or
- interruptions or delays in e-mail service.
Investigating and defending these claims may involve substantial expenses, even
if they do not result in liability.
Although we carry general liability insurance, our insurance may not cover
all potential claims to which we are exposed or may not be adequate to indemnify
us for all liabilities that may be imposed. Any imposition of liability that is
not covered by insurance or is in excess of insurance coverage could have a
material adverse effect on our company. In addition, the increased attention
focused on liability issues as a result of these lawsuits and legislative
proposals could impact the overall growth of Internet use.
WE WILL BE ADVERSELY AFFECTED IF WE FAIL TO RESPOND EFFECTIVELY AND ON A TIMELY
BASIS TO RAPID TECHNOLOGICAL CHANGE.
The Internet industry is characterized by rapidly changing technology,
evolving industry standards, frequent new product and service announcements,
introductions and enhancements, and changing consumer demands. Our future
success will depend on our ongoing ability to improve the performance, features
and reliability of our Internet services and products in response to competitive
product, feature and service offerings and the evolving demands of the
marketplace. New services, products and technologies may be superior to the
services and technologies that we use, and may render our services and
technologies obsolete or require us to incur substantial expenditures to modify
or adapt our services, products or technologies.
OUR NETWORK OPERATIONS MAY BE VULNERABLE TO HACKING, VIRUSES AND OTHER
DISRUPTIONS.
Internet usage could decline if any well-publicized compromise of security
occurs. "Hacking" involves efforts to gain unauthorized access to information or
systems or to cause intentional malfunctions or loss or corruption of data,
software, hardware or other computer equipment. Hackers, if successful, could
misappropriate proprietary information or cause disruptions in our services. In
August 1999, the Microsoft Windows NT operating system employed by our servers
was subject to a disruption, which may have been caused by either unusually
heavy traffic on our network or a hacking attack. This disruption, which
occurred intermittently over a two-day period, caused a significant
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reduction in the speed at which our servers could transmit data, resulting in
delays for our users in accessing our Websites and features on our Websites. To
address this particular situation, we implemented a number of general security
measures, including migrating our operating system to a Unix platform that we
consider more stable and hiring an Internet security company. We cannot assure
you that these measures will be effective. Security breaches could have a
material adverse effect on our business. In addition, the inadvertent
transmission of computer viruses could expose us to a material risk of loss or
litigation and possible liability.
OUR COMPUTER SYSTEMS AND THOSE OF OUR BUSINESS PARTNERS MAY NOT BE YEAR 2000
COMPLIANT, WHICH MAY CAUSE SYSTEM FAILURES AND DISRUPTIONS OF OPERATIONS.
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies need to be upgraded to
comply with such Year 2000 requirements or risk system failure or
miscalculations which may cause disruptions to normal business activities.
We have conducted an inventory, and developed testing procedures, for all
software and other systems that we believe might be affected by Year 2000
issues. We have tested our computers, servers and other equipment. If we
discover any Year 2000 issues with our equipment or the equipment acquired from
IMPSAT, we expect to replace the necessary hardware and/or software with
versions that will resolve the difficulties. Because third parties developed and
currently support many of these systems that we use, a significant part of this
effort is directed to ensuring that these third-party systems are Year 2000
compliant. We are unable to test certain systems, such as our telephone centers
and routers. We are seeking certification from these third parties as to the
Year 2000 compliance status of their products. We anticipate that we will have
the certification of all relevant third parties in December 1999.
The failure of any of our systems or systems maintained by third parties to
be Year 2000 compliant could:
- cause us to incur major expenses to remedy any problems;
- affect the availability and performance of our network; or
- otherwise significantly damage our operations.
Year 2000-related disruptions to our network could cause our users,
advertisers or e-commerce partners to become dissatisfied with our network or
could impose an unmanageable burden on our technical support staff. Any failure
by us to correct a major Year 2000 problem would have a material adverse effect
on our company.
RISKS RELATED TO LATIN AMERICA
OUR FUTURE SUCCESS DEPENDS UPON SUBSTANTIAL GROWTH IN USE OF THE INTERNET IN
LATIN AMERICA.
The timing and the degree of our future success will depend on the continued
growth of the market for on-line content, services and e-commerce in Latin
America. The market in the region for our services has only recently begun to
develop and is evolving. The commercial potential for the Internet in Latin
America also remains uncertain. Major issues concerning the use of the Internet,
such as security, intellectual property rights, reliability, cost, ease of
deployment and administration, and quality of service, remain largely unresolved
and may adversely affect our growth and market acceptance.
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Each country in Latin America has its own telephone rate tariff regime
which, if too costly, may make consumers less likely to sign up for and access
the Internet. As a result of broad privatization and deregulation of the
telecommunications industry in Latin America and increased competition, tariffs
have been reduced recently in some countries. However, we cannot assure you that
this trend will continue. Unfavorable tariff developments could have a material
adverse effect on our company.
E-COMMERCE TRANSACTIONS IN LATIN AMERICA CONTINUE TO BE IMPEDED BY THE LACK OF
SECURE PAYMENT METHODS, HIGH CUSTOMS DUTIES AND UNRELIABLE PARCEL DELIVERY
SYSTEMS.
Unlike in the United States, consumers and merchants in Latin America can be
held fully liable for credit card and other losses due to third-party fraud. As
secure methods of payment for e-commerce transactions have not been widely
adopted in Latin America, both consumers and merchants generally have a
relatively low confidence level in the integrity of e-commerce transactions. In
addition, many banks and other financial institutions have generally been
reluctant to give merchants the right to process on-line transactions due to
these concerns about credit card fraud. Unless consumer fraud laws in Latin
American countries are modified to protect e-commerce merchants and consumers,
and until secure, integrated on-line payment processing methods are fully
implemented across the region, our ability to generate revenues from e-commerce
may be limited, which could have a material adverse effect on our company.
Heavy customs duties and taxes are imposed on deliveries of international
parcels in many countries in Latin America. Many countries also do not have
systems in place to ensure speedy and reliable delivery of parcels once they
have cleared customs. These problems may deter many merchants and consumers from
engaging in e-commerce transactions. For example, merchants who are familiar
with these barriers to the development of e-commerce may not seek to advertise
or sell their products and services until these problems are addressed. If
governmental authorities in Latin American countries fail to deregulate customs
duties, or if deregulation occurs slowly, our ability to generate meaningful
revenues from e-commerce will be reduced, which could have a material adverse
effect on our company.
ADVERSE LATIN AMERICAN POLITICAL AND ECONOMIC CONDITIONS COULD AFFECT OUR
FINANCIAL PERFORMANCE.
We currently operate in Argentina, Brazil, Mexico, the United States and
Uruguay. We are planning to expand into Chile, Colombia and Venezuela in the
near future, and we are also considering other markets in Latin America. Our
financial performance and the market price for our common shares may be affected
generally by inflation, exchange rates and controls, price controls, interest
rates, changes in governmental economic policy, taxation and other political,
economic or other developments in or affecting the Latin American countries in
which we operate.
LOCAL CURRENCIES USED IN THE CONDUCT OF OUR BUSINESS ARE SUBJECT TO DEPRECIATION
AND VOLATILITY.
The currencies of many countries in Latin America have experienced
substantial depreciation and volatility, particularly against the U.S. dollar,
in recent years. Currency movements, as well as higher interest rates, have
materially and adversely affected the economies of many Latin American
countries, including countries which account or are expected to account for a
significant portion of our revenues.
Our reporting currency is the U.S. dollar. However, customers of our
connectivity services and some advertisers in Latin America may be billed in
local currencies. In Brazil, for example, commercial billing is required to be
in REAIS, the local currency. Our accounts receivable from these subscribers and
advertisers will decline in value if the local currencies depreciate relative to
the U.S. dollar. Similarly, any decline in the value of local currencies
relative to the U.S. dollar is likely to reduce the U.S. dollar prices that we
will be able to charge our advertisers. In addition, we may be subject to
exchange control
24
<PAGE>
regulations which might restrict our ability to convert local currencies into
U.S. dollars. Any imposition of exchange controls could adversely affect our
company.
RISKS RELATED TO OUR COMMON SHARES
MARKET PRICES OF, AND TRADING VOLUMES IN, OUR COMMON SHARES MAY BE VOLATILE.
This offering constitutes the initial public offering of our common shares,
and no public market for our common shares currently exists. We cannot assure
you that an active trading market will develop or be sustained after the
offering is completed. The initial public offering price will be determined
through negotiations between us and the underwriters based on several factors
and may not be indicative of the market price for the common shares after the
offering.
The market price of our common shares may be significantly affected by,
among others, the following factors:
- our actual or anticipated results of operations;
- new services or products offered, or new contracts entered into, by our
company or our competitors;
- changes in, or our failure to meet, securities analysts' expectations;
- legislative and regulatory developments affecting the Internet industry;
- developments in the Internet industry and technological innovations;
- investor perceptions of investments relating to Latin America; and
- general market conditions and other factors beyond our control.
U.S. and non-U.S. stock markets have periodically experienced significant
price and volume fluctuations that have especially affected the market prices of
common shares of Internet companies. These changes have often been unrelated to
the financial performance of particular companies. These broad market
developments may also adversely affect the market price of our common shares.
WE WILL RETAIN COMPLETE DISCRETION AS TO THE USE OF THE NET PROCEEDS OF THIS
OFFERING.
We intend to use the net proceeds from this offering for a broad range of
corporate purposes to support and accelerate the development of our company. We
will retain complete discretion in using the net proceeds, including uses with
which shareholders may disagree. Any failure to apply the net proceeds of this
offering in an effective manner could adversely affect our company.
OUR SHAREHOLDERS MAY FACE DIFFICULTIES IN PROTECTING THEIR INTERESTS BECAUSE WE
ARE A BRITISH VIRGIN ISLANDS COMPANY.
Corporate governance matters for our company are principally determined by
our memorandum of association and articles of association and the International
Business Companies Act, 1984 (Cap. 291) of the British Virgin Islands. The
rights of shareholders and the fiduciary responsibilities of directors, officers
and controlling shareholders under British Virgin Islands law have not been
extensively developed, particularly when compared with statutes and judicial
precedents of most states and other jurisdictions in the United States. As a
result, our shareholders may have more difficulty in protecting their interests
in the case of actions by our directors, officers or controlling shareholders
than would shareholders of a corporation incorporated in a state or other
jurisdiction in the United States.
25
<PAGE>
YOU MAY EXPERIENCE DIFFICULTY IN ENFORCING CIVIL LIABILITIES AGAINST OUR
COMPANY.
We are a British Virgin Islands company, and a substantial portion of our
assets is located outside of the United States. In addition, most of our
directors and executive officers, as well as other persons controlling our
company, reside or are located outside of the United States. As a result, it may
not be possible for investors to effect service of process within the United
States upon us or these persons or to enforce judgments obtained against us or
these persons in U.S. courts predicated solely upon the civil liability
provisions of the U.S. federal or state securities laws. We have been advised by
Conyers Dill & Pearman, our British Virgin Islands counsel, that there is doubt
as to the enforceability in the British Virgin Islands in original actions or in
actions for enforcement of judgments of U.S. courts, of civil liabilities
predicated upon the U.S. federal or state securities laws. There is also doubt
as to enforceability of judgments of this nature in several of the jurisdictions
in which we operate and our assets are located.
FUTURE SALES OF OUR COMMON SHARES COULD ADVERSELY AFFECT MARKET PRICES OF OUR
COMMON SHARES.
Upon the closing of this offering, we will have outstanding 38,574,460
common shares, or 39,804,460 common shares if the underwriters' over-allotment
option is exercised in full. Of these shares, the common shares sold in this
offering will be freely tradeable except for any shares purchased by our
"affiliates" as defined in Rule 144 under the Securities Act of 1933. Of the
remaining common shares held by our existing shareholders, 27,121,294 common
shares will be subject to 180-day "lock-up" agreements with the underwriters
and, in addition, will be eligible for sale only if registered or if they
qualify for an exemption from registration under the Securities Act of 1933.
After the 180-day lock-up period, these shares may be sold in the public market,
subject to prior registration or qualification for an exemption from
registration and, in the case of shares held by affiliates, to compliance with
applicable volume restrictions. Some of our shareholders are entitled, pursuant
to contractual provisions providing for registration rights, to require our
company to register our securities owned by them for public sale. Sales of a
large number of shares could have an adverse effect on the market price of our
common shares.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
Investors purchasing our common shares in this offering will suffer
immediate and substantial dilution of their investment. The initial public
offering price per share will significantly exceed the net tangible book value
per share. You will, in other words, pay a higher price per share than the
amount of our total tangible assets, minus our total liabilities, divided by the
total number of outstanding shares. In addition, you and other investors
participating in this offering will provide approximately 67.3% of the total
equity contributions made to our company, but will own only approximately 21.3%
of our total outstanding shares. If we issue additional common shares in the
future for any reason, or if outstanding or future options or warrants to
purchase our common shares are exercised, you could suffer further dilution.
DATA REGARDING USAGE OF, AND GROWTH PROSPECTS FOR, THE INTERNET MAY NOT BE
ACCURATE.
The general market and similar data in this prospectus relating to the
Internet industry in Latin America and the United States, including with respect
to projected increases in users of, and advertising and e-commerce on, the
Internet, have been based upon information published by or obtained from
independent market research firms, in each case, except as otherwise indicated.
These research firms include International Data Corporation and Forrester
Research. The market forecasts by these firms are based to a large extent upon
assumptions, including assumptions about the growing acceptance of the Internet
as a medium for commercial activity and continuing advances in computing and
telecommunications technology. We cannot assure you that these assumptions will
prove to be correct or, even if they do, that the forecasts will prove to be
accurate.
26
<PAGE>
FORWARD-LOOKING STATEMENTS CONTAINED IN THIS PROSPECTUS MAY NOT BE REALIZED.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements relate to, among other things,
our business model, strategy, plans and timing for the introduction or
enhancement of our services and products, plans for entering into strategic
relationships and joint ventures, and other expectations, intentions and plans
contained in this prospectus that are not historical fact.
When used in this prospectus, the words "expects," "anticipates," "intends,"
"plans," "may," "believes," "seeks," "estimates" and similar expressions
generally identify forward-looking statements. These statements reflect our
current expectations. They are subject to a number of risks and uncertainties,
including but not limited to, changes in technology and changes in the Internet
marketplace. In light of the many risks and uncertainties surrounding the
Internet marketplace, you should understand that we cannot assure you that the
forward-looking statements contained in this prospectus will be realized.
27
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the common shares in this offering are
estimated to be approximately $119.5 million (after deduction of underwriting
discounts and estimated transaction expenses). The term "net proceeds"
represents the amount that we will receive after payment of underwriting
discounts and commissions and other transaction expenses related to this
offering.
We also received net proceeds (after payment of a private placement fee to
the agent and transaction expenses) of $9.2 million from the private placement
of our Class B convertible preferred shares in mid-November 1999.
We intend to use the net proceeds from this offering and the private
placement as follows:
- approximately $48.0 million to fund our sales and marketing, and
branding and advertising activities;
- approximately $20.0 million to develop new services and products, and
our network infrastructure;
- approximately $1.3 million to pay dividends in respect of the Class A
convertible preferred shares accrued as of the closing date of this
offering; and
- the balance for general corporate and working capital requirements,
including strategic investments.
We have not definitively allocated any portion of these net proceeds for the
above specified purposes. Instead, we will retain complete discretion in
applying the proceeds of this offering. Pending any use, we intend to invest the
net proceeds in short-term money market and other market-rate instruments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common shares. We
currently intend to retain our future earnings, if any, to fund the development
and growth of our business and, therefore, do not anticipate paying any cash
dividends on common shares in the foreseeable future.
The declaration and payment of any dividends on our common shares, whether
in cash or shares, will be subject to the discretion of our board of directors.
We anticipate that any future dividends would be paid in U.S. dollars. Any
future determination to pay dividends, will depend on our results of operations,
financial condition, capital requirements, contractual restrictions and other
factors considered relevant by our board of directors.
28
<PAGE>
CAPITALIZATION
The following table presents our capitalization:
- at September 30, 1999;
- at September 30, 1999 on a pro forma basis to give effect to:
V our acquisitions from IMPSAT Corporation of its retail dial-up access
customers in Argentina and Brazil and our pending acquisition of its
retail dial-up access customers in Colombia for an aggregate purchase
price of $21.5 million and the related purchase by IMPSAT Corporation
of 3,070,615 of our Class A convertible preferred shares for
$21.5 million; and
V the private placement in mid-November 1999 of 1,111,111 Class B
convertible preferred shares for an aggregate purchase price of
$10.0 million; and
- at September 30, 1999 on a pro forma basis as adjusted to give effect to:
V the sale of 8,200,000 common shares at the initial public offering
price of $16.00 per share and the receipt of the net proceeds from
this offering; and
V the conversion of all of our outstanding Class A convertible preferred
shares into common shares. Each Class A convertible preferred share
will convert automatically into two common shares upon completion of
this offering.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
--------------------------------
PRO FORMA
AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 24,393 $ 34,493 $154,009
======== ======== ========
Long-term debt, installment loan............................ $ 22 $ 472 $ 472
======== ======== ========
Class A convertible preferred shares--redeemable, $.01 par
value, 40,000,000 shares authorized, 5,832,566 shares
outstanding on an actual basis and 8,903,181 shares
outstanding on a pro forma basis.......................... 38,327 59,827 --
Class B convertible preferred shares--redeemable, $.01 par
value, 1,888,889 shares authorized, no shares outstanding
on an actual basis and 1,111,111 shares outstanding on a
pro forma and pro forma as adjusted basis................. -- 9,200 9,200
Shareholders' equity (deficit):
Common shares, $.01 par value, 200,000,000 shares
authorized, 12,568,098 outstanding on an actual and pro
forma basis and 38,574,460 outstanding on a pro forma as
adjusted basis............................................ 126 126 386
Additional paid-in capital.................................. 13,943 21,721 200,804
Deferred share-based compensation........................... (7,286) (7,286) (7,286)
Accumulated other comprehensive income...................... 95 95 95
Accumulated deficit......................................... (18,434) (18,434) (18,434)
Discount on Class B convertible preferred shares............ -- (7,778) (7,778)
-------- -------- --------
Total shareholders' equity (deficit).................. $(11,556) $(11,556) $167,787
-------- -------- --------
Total capitalization (Class A convertible preferred
shares, Class B convertible preferred shares plus
shareholders' equity (deficit))..................... $ 26,771 $ 57,471 $176,987
======== ======== ========
</TABLE>
The deferred share-based compensation in the above table relates to share
options that were granted in August and September 1999. This deferred
compensation will be amortized for financial reporting purposes over the vesting
periods for these options. See note 11 to our consolidated financial statements.
Each Class B convertible preferred share will automatically convert, on the
date six months after the closing date of this offering, into one common share.
The difference between the initial public
29
<PAGE>
offering price per common share and the $9.00 price per Class B convertible
preferred share will be amortized as a deemed dividend during the same six-month
period.
The above table assumes that none of the options outstanding at
September 30, 1999 or proposed to be granted prior to the closing of this
offering has been or will be exercisable prior to the closing of this offering.
See "Management--1999 Share Option Plan."
The above table should be read in conjunction with the financial statements
and pro forma financial information included elsewhere in this prospectus.
30
<PAGE>
DILUTION
Dilution is the amount by which the initial public offering price paid by
the purchasers of common shares in this offering exceeds the net tangible book
value per share after this offering. Net tangible book value per share is
determined by subtracting our total liabilities from the total book value of our
tangible assets and dividing the difference by the number of common shares
deemed to be outstanding on the date as of which the book value is determined.
The pro forma net tangible book value deficit at September 30, 1999 has been
determined as follows (dollars in thousands):
<TABLE>
<S> <C>
Historical book value (deficit)............................. $(11,556)
Less: licenses and permits held by us....................... (98)
--------
Historical net tangible book value (deficit)................ $(11,654)
Less: intangible assets acquired or to be acquired from
IMPSAT Corporation........................................ (21,440)
--------
Pro forma net tangible book value (deficit)................. $(33,094)
========
</TABLE>
Pro forma net tangible book value per share is determined by using
12,568,098 common shares outstanding on a pro forma basis and before giving
effect to this offering and the conversion of our Class A convertible preferred
shares into common shares. Pro forma as adjusted net tangible book value per
share is determined by using 38,574,460 common shares outstanding, which is the
sum of:
- the common shares outstanding on a pro forma basis;
- the 8,200,000 common shares to be sold in this offering; and
- the 17,806,362 common shares issuable upon conversion of all of our
outstanding Class A convertible preferred shares.
The pro forma net tangible book value deficit of our shares at
September 30, 1999 was approximately $2.63 per share. After giving effect to the
receipt of the net proceeds of this offering, based upon the initial public
offering price of $16.00 per share and the conversion of the Class A convertible
preferred shares into common shares, our pro forma as adjusted net tangible book
value at September 30, 1999 would have been $146.2 million, or $3.79 per share.
These transactions represent an immediate increase in net tangible book value of
$6.42 per share to existing holders of common shares and an immediate dilution
of $12.21 per share to new public investors. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share...... $16.00
Pro forma net tangible book value (deficit) per share at
September 30, 1999...................................... $(2.63)
Increase attributable to new public investors............. 6.42
------
Pro forma as adjusted net tangible book value............... 3.79
------
Dilution to new public investors............................ $12.21
======
</TABLE>
If the underwriters' over-allotment option is exercised in full, the pro
forma as adjusted net tangible book value per common share after giving effect
to this offering would be $4.13 per share. After deducting underwriting
discounts and commissions and estimated transaction expenses, the increase in
the net tangible book value per share to existing shareholders would be $6.76,
and the dilution to new public investors would be $11.87 per share.
After giving further effect to the conversion of all of our Class B
convertible preferred shares into common shares (which will automatically occur
on the date six months after the closing date of this offering), the pro forma
as adjusted net tangible book value per common share would be $4.25 per share
and the dilution to new investors would be $11.75 per share.
31
<PAGE>
The following table summarizes, on a pro forma as adjusted basis, at
September 30, 1999, after giving effect to the sale of common shares in this
offering, the number of common shares purchased from our company, the total
consideration paid and the average price per share paid by the existing
shareholders and new public investors:
<TABLE>
<CAPTION>
AVERAGE
SHARES PURCHASED TOTAL CONSIDERATION PRICE
--------------------- ----------------------- PER
NUMBER PERCENT AMOUNT PERCENT SHARE
---------- -------- ------------ -------- --------
<S> <C> <C> <C> <C> <C>
Existing shareholders....................... 30,374,460 78.7% $ 63,654,000 32.7% $ 2.10
New public investors........................ 8,200,000 21.3% 131,200,000 67.3% $16.00
---------- ----- ------------ -----
Total................................... 38,574,460 100.0% $194,854,000 100.0%
========== ===== ============ =====
</TABLE>
After giving effect to the conversion of all of our Class B convertible
preferred shares into common shares (which will automatically occur on the date
six months after the closing date of this offering), the number of common shares
purchased by existing shareholders, including the holders of the converted Class
B convertible preferred shares, would increase to 31,485,572 shares, the total
consideration paid by them would increase to $72,854,000 and the average price
per share paid by them would increase to $2.31 per share.
The above tables and calculations assume that none of the options
outstanding at November 1, 1999 have been or will be exercised prior to
completion of this offering and exclude common shares reserved for future
issuance under our 1999 share option plan. At November 1, 1999, there were
2,268,600 options outstanding to purchase a total of common shares with a
weighted average exercise price of $5.73 per share. To the extent that any of
these options are exercised, there will be further dilution to new investors.
32
<PAGE>
SELECTED FINANCIAL DATA
The following financial data should be read in conjunction with the
consolidated financial statements, the unaudited pro forma consolidated
financial information, "Summary Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in this prospectus.
The selected balance sheet data at December 31, 1997 and 1998 and
September 30, 1999 and the selected statement of operations data for the period
from July 16, 1997 (date of inception) through December 31, 1997, the year ended
December 31, 1998 and the nine months ended September 30, 1999 have been derived
from our audited consolidated balance sheets and statements of operations
included elsewhere in this prospectus. The statement of operations data for the
nine months ended September 30, 1998 have been derived from our unaudited
consolidated statement of operations included elsewhere in this prospectus. The
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments, which in the opinion of management, are necessary
for the fair presentation of our consolidated financial condition and results of
operations for those periods. Results of operations for the nine months ended
September 30, 1999 are not necessarily indicative of the results that may be
expected for the entire year or for any future period.
The selected pro forma balance sheet data and the pro forma statement of
operations data at and for the nine months ended September 30, 1999 and at and
for the year ended December 31, 1998 have been derived from the unaudited pro
forma consolidated financial information included elsewhere in this prospectus.
The pro forma financial information reflects:
- our recent acquisitions of retail dial-up access customers of IMPSAT
Corporation in Argentina and Brazil and our pending acquisition of its
retail dial-up access customers in Colombia from IMPSAT Corporation for an
aggregate purchase price of $21.5 million and the related purchase by
IMPSAT Corporation of 3,070,615 of our Class A convertible preferred
shares for $21.5 million; and
- the private placement in mid-November 1999 of 1,111,111 Class B
convertible preferred shares for an aggregate purchase price of
$10.0 million.
The selected pro forma as adjusted balance sheet data give effect to the
sale of the common shares at the initial public offering price of $16.00 per
share and the receipt of the net proceeds from this offering. The pro forma as
adjusted data also assume that all of our outstanding Class A convertible
preferred shares have been converted into our common shares. The conversion will
automatically occur upon the closing of this offering.
We prepare our financial statements and the pro forma financial statements
in U.S. dollars in accordance with generally accepted accounting principles in
the United States, which is commonly called "U.S. GAAP."
33
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ------------------------------------
1997 1998 1998 1999
---------- ----------------------- ---------- -----------------------
ACTUAL ACTUAL PRO FORMA ACTUAL ACTUAL PRO FORMA
---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues................. $ 267 $ 780 $ 17,287 $ 609 $ 1,524 $ 11,541
Costs and expenses:
Product, content and
technology............... 221 1,556 10,988 848 3,181 9,608
Marketing and sales........ 142 674 2,815 320 7,157 8,614
Corporate, general and
administrative........... 727 1,940 4,574 1,144 3,736 4,786
Depreciation and
amortization............. 81 107 4,407 59 336 3,561
Share-based compensation... -- -- -- -- 499 499
---------- ---------- ---------- ---------- ---------- ----------
Total costs and
expenses............. 1,171 4,277 22,784 2,371 14,909 27,068
---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)...... (904) (3,497) (5,497) (1,762) (13,385) (15,527)
Total other income
(expense).................. (110) (20) (20) (30) 266 266
Dividends on Class A and
Class B convertible
preferred shares (1)....... -- -- (10,298) -- (784) (10,452)
---------- ---------- ---------- ---------- ---------- ----------
Net loss attributable to
common shareholders........ $ (1,014) $ (3,517) $ (15,815) $ (1,792) $ (13,903) $ (25,713)
========== ========== ========== ========== ========== ==========
Basic and diluted net loss
per common share........... $ (10.14) $ (1.15) $ (5.19) $ (.87) $ (1.18) $ (2.18)
Shares used in computing
basic and diluted loss per
common share............... 100,000 3,050,000 3,050,000 2,066,667 11,777,516 11,777,516
</TABLE>
<TABLE>
<CAPTION>
AT DECEMBER 31, AT SEPTEMBER 30, 1999
------------------- ---------------------------------
PRO
PRO FORMA
1997 1998 ACTUAL FORMA AS ADJUSTED
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................... $ 89 $ 246 $ 24,393 $ 34,493 $154,009
Working capital (deficit).................... (1,146) (42) 20,257 29,851 149,367
Total assets................................. 396 1,481 33,120 64,776 184,292
Total liabilities............................ 1,360 712 6,349 7,305 7,305
Class A convertible preferred shares......... -- -- 38,327 59,827 --
Class B convertible preferred shares (1)..... -- -- -- 9,200 9,200
Total shareholder's equity (deficit)......... (964) 769 (11,556) (11,556) 167,787
</TABLE>
- ------------------------
(1) The difference between the initial public offering price per common share
and the $9.00 price per Class B convertible preferred share will be
amortized as a deemed dividend during the six-month period after the closing
of this offering.
34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements, the unaudited pro forma financial information and the
other information appearing elsewhere in this prospectus.
OVERVIEW
We are an Internet network providing country-specific and regional content
for Spanish- and Portuguese-speaking audiences in Latin America and the United
States. Recognizing that the countries in the Americas are diverse, we have
designed our network to consist of country Websites as well as a global Website.
We currently have country Websites for, and sales and content production offices
in, Argentina, Brazil, Mexico, the United States and Uruguay. We plan to
establish sales and content production offices in Colombia before the end of
1999, and sales and content production offices in Chile and Venezuela during
2000. By offering content and interactive resources designed to be responsive to
our users' preferences, we seek to make our network their "home on the Internet"
and, in so doing, to create communities of users, develop user loyalty and
increase traffic on our Websites. The launch of each country Website represents
a potential new community of users. By building substantial communities of
users, we are developing a platform for generating revenues from advertising,
branded retail dial-up Internet access, or "connectivity", service and, in the
future, e-commerce. We recently began to offer connectivity services in
Argentina and Brazil and expect to offer similar services in Colombia before the
end of 1999. We are also beginning to develop e-commerce for Spanish- and
Portuguese-speaking audiences in Latin America and the United States.
We were incorporated in the British Virgin Islands, and commenced commercial
operations in Argentina, in 1997. For the period from inception through
October 1998, we focused our activities on developing our network of Websites
and opening content production and sales offices in Brazil, Mexico, the United
States and Uruguay.
Prior to the commercial roll-out of our network of Websites in
November 1998, we did not generate meaningful revenues, but achieved growth in
terms of registered users and monthly page views by users. Since that time, we
have focused on developing our network to incorporate new content channels and
value-added and interactive resources, recruiting sales and marketing staff,
raising capital, preparing our first mass media-based branding and advertising
campaign and expanding our technological infrastructure. Our registered users
(meaning users who have provided personal information such as name, e-mail
address and address) grew from 54,132 persons in June 1998 to 291,567 persons in
July 1999. From June 1998 to July 1999, the number of pages viewed by our users
increased from 3.0 million to 21.0 million per month. On August 1, 1999, we
launched our first mass media-based branding and advertising campaign in
Argentina, Brazil, Mexico and Uruguay and, on September 9, 1999, in the United
States. In the first three months of this campaign, our registered users
increased by approximately 69% to 498,515 on October 31, 1999 and the number of
pages viewed per month by our users increased by over 250% to 73.9 million pages
in that month. In addition, we commenced measuring unique visitors in March
1999. The number of unique visitors has increased from 174,800 in March 1999 to
approximately 1.6 million in October 1999. We attribute this recent growth
principally to our media-based branding and advertising campaign and cannot
predict whether such growth will continue.
In July 1999, we completed a private placement of 6,334,004 Class A
convertible preferred shares for a gross purchase price of $44.4 million in
cash, consisting of 5,477,088 shares sold for $38.4 million in cash and an
additional 856,916 shares to be issued on a quarterly basis through
January 2001 in exchange for $6.0 million in non-cash advertising time credits.
Strategic investors in the private placement included Hicks, Muse, Tate & Furst
Incorporated and the Cisneros Group of Companies (through IAMP (El Sitio)
Investments Ltd.) and GC Companies Inc. (through GCC Investments, LLC).
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Some of our founders purchased $6.5 million of our Class A convertible preferred
shares in the private placement.
In August 1999, we entered into a framework agreement with IMPSAT
Corporation, a provider of private networks of integrated data and voice
communications systems in a number of countries in Latin America, to acquire its
retail dial-up access customers in Argentina, Brazil and Colombia. Under this
agreement, we have acquired or will acquire these customers for an aggregate of
$21.5 million, which is based on a price of approximately $294 per subscriber.
IMPSAT Corporation will be purchasing a total of 3,070,615 Class A convertible
preferred shares for an aggregate purchase price of $21.5 million. The Argentine
and Brazilian acquisitions were consummated in November and October 1999,
respectively, and we expect to close the acquisition in Colombia before the end
of 1999. We are not acquiring the telecommunications infrastructure required to
provide connectivity services, which we intend to outsource from third-party
telecommunications providers--initially, under services agreements with
subsidiaries of IMPSAT Corporation under which they will provide us with
telecommunications infrastructure for a three-year term for agreed-upon fees.
Our connectivity customers subscribe to our dial-up operations by paying a
monthly fee to us in exchange for connectivity to the Internet.
In August 1999, we also entered into an arrangement with TV Azteca, S.A. de
C.V., the second leading television network in Mexico, under which we issued to
TV Azteca 355,478 shares of our Class A convertible preferred shares, then
valued at approximately $2.5 million, in exchange for $3.5 million in
advertising time on TV Azteca. This advertising time will be made available over
a three-year period.
In mid-November 1999, we completed a private placement of 1,111,111 Class B
convertible preferred shares for a purchase price of $10.0 million in cash, or
$9.00 per Class B convertible preferred share. Purchasers of the Class B
convertible preferred shares consisted of Intel Atlantic, Inc., a subsidiary of
Intel Corporation, and Latinvest Asset Management do Brasil, Ltda., an affiliate
of Globalvest Management Company, L.P. The Class B convertible preferred shares
have an annual dividend rate of 8%. Each Class B convertible preferred share
will automatically convert, on the date six months after the closing date of
this offering, into one common share. The difference between the initial public
offering price per common share and the $9.00 price per Class B convertible
preferred share will be amortized as a deemed dividend during the same six-month
period.
We have a limited operating and financial history for you to use as a basis
for evaluating an investment in our common shares. We are subject to the risks,
uncertainties and problems frequently encountered by companies in early stages
of development, particularly companies in new and rapidly developing markets,
such as the Internet industry. Our historical results of operations are not
necessarily indicative of the results of operations to be expected in the
future.
INTRODUCTION TO RESULTS OF OPERATIONS
NET REVENUES
We expect to derive our future net revenues from three principal sources:
- advertising on our network of Websites;
- connectivity to the Internet; and
- e-commerce.
ADVERTISING. To date, we have derived substantially all of our net revenues
from the sale of advertisements and sponsorships on our network. Advertising
revenues are received principally from:
- advertising arrangements under which we receive fixed fees for banners
placed on our Websites for specified periods of time;
- reciprocal services arrangements, under which we exchange advertising
space on our network for advertising or services from other parties;
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<PAGE>
- sponsorship arrangements which allow advertisers to sponsor an area on our
network in exchange for a fixed payment; and
- Web design and Web hosting services.
As the Latin American Internet market continues to develop, we believe that an
increasing proportion of our advertising revenues will be derived from
cost-per-thousand impression-based arrangements, under which advertisers will
pay us a specified amount for every 1,000 times their advertisements are viewed
on our network. We expect that our revenues derived from Web design or hosting
activities for other companies will decline significantly beginning in the
fourth quarter of 1999. In future periods, we expect to outsource these
activities and, in any event, intend to offer these services only to customers
purchasing at least $120,000 in yearly advertising on our Websites.
Advertising revenues are recognized ratably in the period in which the
advertisement is displayed, so long as no significant obligations remain and
collection of the resulting receivable is probable. To the extent that minimum
guaranteed impression levels are not met, we defer recognition of the
corresponding revenues until guaranteed levels are achieved. Payments received
from advertisers prior to displaying their advertisements on our network are
recorded as deferred revenues. Revenues from exclusive sponsorship arrangements
are also recognized ratably. Our contracts with advertisers and advertising
agencies range from one to twelve months in length.
We have entered into reciprocal services arrangements with various media
companies, such as MGM Networks Latin America, pursuant to which we exchange
advertising on our network for advertising or other services from these media
companies. We do not receive any cash payments pursuant to these arrangements.
Revenues and expenses relating to these arrangements are recorded at the
estimated fair value of the goods or services received or the estimated fair
value of the advertisements given, whichever is more readily determinable.
Expenses are recorded when services are received, which is typically in the same
period as the advertisements are run on our network. These expenses are included
in our marketing and sales expenses.
CONNECTIVITY. We have recently taken steps to expand our revenue base
through our acquisitions of the retail dial-up access customers of IMPSAT
Corporation in Argentina and Brazil and our pending acquisition of its retail
dial-up access customers in Colombia. Under these acquisitions, we have a total
of approximately 66,000 dial-up access customers in Argentina and Brazil and
expect to acquire approximately 7,000 customers in Colombia. We expect to derive
revenues from monthly access fees charged to our dial-up access subscribers.
Approximately 70% of our dial-up access subscribers are expected to be billed on
a monthly basis to subscribers' credit cards, which should result in automatic
payment to us by the relevant credit card provider of the billed amounts.
E-COMMERCE. We currently do not derive revenues from e-commerce. We are
evaluating several joint venture opportunities with e-commerce merchants in the
United States and Latin America to develop electronic retail operations in the
flower, gifts, books, music and software and hardware businesses. We recently
added a "shopping channel" to our Websites, through which a limited offering of
books, flowers, music, gifts and technology products will be made available from
local and U.S.-based e-merchants. Despite our pending e-commerce initiatives, we
do not expect to derive meaningful revenues from e-commerce activities until at
least 2001.
OPERATING EXPENSES
Our principal operating costs and expenses consist of:
- product, content and technology expenses;
- marketing and sales expenses;
- corporate, general and administrative expenses; and
- depreciation and amortization expenses.
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PRODUCT, CONTENT AND TECHNOLOGY EXPENSES. Product, content and technology
expenses consist of personnel costs associated with the development, testing and
upgrading of our network of Websites and systems, purchases of content and
specific technology, particularly software, and telecommunications links and
access charges. As a result of our recent acquisitions of the retail dial-up
access customers in Argentina and Brazil from IMPSAT Corporation and our pending
acquisition of its retail dial-up access customers in Colombia, we expect to
incur, in the future, significant expenses relating to telecommunications. In
connection with these acquisitions, we have entered into services agreements
with subsidiaries of IMPSAT Corporation under which, in exchange for an access
fee linked to a number of dial-up access customers and levels of usage, IMPSAT
Corporation will provide the connections and the telecommunication
infrastructure necessary for our users to connect to the Internet. We currently
estimate that the aggregate fee payable to subsidiaries of IMPSAT Corporation
for these services will be approximately $500,000 per month. Except for hardware
(which is depreciated), we expense product, content and technology costs and
telecommunications infrastructure costs as they are incurred. We believe that
increased investment in new and enhanced features and technology is critical to
attaining our strategic objectives and remaining competitive. Accordingly, we
intend to continue recruiting and hiring experienced product, content and
technology personnel and to make additional investments in product, content and
technology development. We expect that product, content and technology expenses
will continue to increase significantly in future periods.
MARKETING AND SALES EXPENSES. Our marketing and sales expenses consist
primarily of salaries and expenses of marketing and sales personnel,
commissions, and sales force and other marketing-related expenses including,
most significantly, our mass media-based branding and advertising activities. We
expect these marketing and sales expenses to continue to increase significantly
for the foreseeable future as a result of:
- our mass media-based branding and advertising strategy; and
- the expansion of our sales force and marketing personnel.
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES. Corporate, general and
administrative expenses consist primarily of costs related to corporate
personnel, occupancy costs, general operating costs and corporate professional
fee expenses, such as legal and accounting fees. We expect that we will incur
additional corporate, general and administrative expenses as we hire additional
personnel and incur additional costs related to the growth of our business and,
after this offering, our operation as a public company. Accordingly, we
anticipate that these expenses will continue to increase significantly in future
periods.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses
consist primarily of depreciation of servers and other computer equipment,
office furniture and leasehold improvements. Investments in property, plant and
equipment are recorded at cost and depreciated using the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
- - computers, software and other equipment 3 years
- - leasehold improvements 5 years (lease term)
- - furniture, fixtures and other fixed assets 5 - 10 years
</TABLE>
As a result of our recent acquisitions of retail dial-up access customers of
IMPSAT Corporation in Argentina and Brazil and our pending acquisition of its
retail dial-up access customers in Colombia, we expect to incur significant
amortization expense related to intangible assets, consisting primarily of the
newly acquired customer base. The aggregate $21.5 million purchase price for the
acquisitions of these retail dial-up access customers has been allocated
principally to this intangible asset. This intangible asset will be amortized
over the next five years on a straight-line basis and, as such, will be
reflected as an expense in our statement of operations in future periods. To the
extent that we fail to retain this customer base during this period, this
intangible asset could be deemed to be impaired, in which case
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<PAGE>
an amount in excess of the anticipated amortization expense would be charged to
our results of operations and could result in substantially increased losses or,
in later years, reduced profitability. As a result, our future financial
performance could be materially and adversely affected if we are not successful
in preserving and developing our newly acquired connectivity customer base.
SHARE-BASED COMPENSATION. Our share-based compensation expense relates to
share options granted in August and September 1999. These options were granted
at an exercise price based on the purchase price paid by investors in our July
1999 private placement of Class A convertible preferred shares. Because this
exercise price is well below the initial public offering price for this
offering, we recorded total deferred share-based compensation expense of
$7.8 million, which we will amortize over the respective three-year vesting
periods for these options. See note 11 to our consolidated financial statements.
The total deferred share-based compensation amount and the expense for future
periods may increase depending upon the exercise prices and other terms for
subsequent grants of options. See note 14 to our consolidated financial
statements.
OTHER INCOME (EXPENSE)
Other income (expenses) consists primarily of interest expense, net of
interest earned, foreign exchange losses, net of any gains, and other
miscellaneous income and expense items. As a result of the net proceeds of the
offering, we expect that for the foreseeable future our interest income will
exceed our interest expense. Immediately after this offering most of our assets
will be in cash or cash equivalents, which we expect to principally maintain in
U.S. dollars. As our assets in each country of operation increase, so will our
exposure to foreign exchange losses on the translation of assets into U.S.
dollars.
NET LOSSES
We have incurred net losses and have experienced negative cash flow from
operations in each quarterly and annual period since our inception. Our overall
strategy is to develop our position as a full-service Internet network providing
country-specific content, connectivity services and e-commerce targeting
Spanish- and Portugese-speaking audiences in Latin America and the United
States. This strategy contemplates that we will make significant expenditures
for, among other things, marketing and sales, equipment, customer support and
personnel. This strategy also envisions that we may make significant investments
involving acquisitions, strategic relationships and joint ventures. Because of
this strategy, we expect that our net losses and negative cash flows from
operations on a quarterly and annual basis will increase significantly for at
least the next several years.
HISTORICAL RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
Our results of operations for the nine months ended September 30, 1999 were
characterized by increased expenses that more than offset revenue growth during
the period. We recorded a net loss of $13.9 million for the nine months ended
September 30, 1999, compared to a net loss of $1.8 million for the corresponding
period of 1998. During the first nine months of 1999, in addition to the
continued development of quality, content and interactive resources, we expanded
our operations and hired additional personnel to support the roll-out of offices
and Websites in Brazil, Mexico and the United States and the launch of our first
mass media-based branding and advertising campaign. We plan to establish new
sales and content production offices in Chile and Venezuela during 2000. We have
recently acquired a total of approximately 66,000 retail dial-up access
customers from IMPSAT Corporation in Argentina and Brazil, and expect to acquire
approximately 7,000 customers in Colombia by the end of 1999. We anticipate that
these recent developments will contribute to an increase in our revenues in
future periods.
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<PAGE>
NET REVENUES
Our net revenues increased by 146% to $1.5 million for the nine months ended
September 30, 1999 from $609,000 for the corresponding period in 1998. Of our
net revenues for the first nine months of 1999, approximately 78% was comprised
of advertising and the balance to Web design or hosting services. We expect that
our revenues derived from Web design or hosting activities for other companies
will decline significantly in the fourth quarter of 1999. In future periods, we
expect to outsource these activities and, in any event, will offer these
services only to customers who agree to purchase at least $120,000 in yearly
advertising on our Websites. Although most of our advertising revenues are
currently derived from fixed banners and page sponsorships, we believe that an
increasing portion of our advertising revenues will be derived from
cost-per-thousand impression-based arrangements. Under these arrangements
advertisers pay us a specified amount for every 1,000 times their advertisements
are viewed on our network.
We attribute the increase in advertising revenues principally to the growth
of our network in terms of registered users and page views together with the
expansion of our marketing and sales force. Of these revenues 47% was derived
from Argentina, 22% from Mexico and 30% from Uruguay, as our operations in other
countries were still in the early stages of operations. In the future, we also
expect to derive significant revenues from Brazil, Mexico and the United States
where we have launched commercial operations during 1999. In the nine months
ended September 30, 1999, our largest client, TV Azteca, accounted for 13% of
total net revenues. During this period, 36% of our total net revenues was
derived from reciprocal services arrangements compared to 22% of total net
revenues in the corresponding period in 1998. We do not receive any cash
payments from these arrangements.
COSTS AND EXPENSES
PRODUCT, CONTENT AND TECHNOLOGY EXPENSES. Our product, content and
technology expenses increased to $3.2 million for the nine months ended
September 30, 1999 from $848,000 for the corresponding period in 1998. Our
product, content and technology expenses as a percentage of revenues increased
to 209% for the nine months ended September 30, 1999 from 139% in the
corresponding period in 1998. The period-to-period increase was principally
attributable to:
- an increase in personnel costs relating to the development of content and
technological support to $2.2 million in the nine months ended
September 30, 1999 from $600,000 in the corresponding period in 1998;
- an increase in expenses for telecommunications links to $385,000 in the
nine months ended September 30, 1999 from $165,000 in the corresponding
period in 1998; and
- an increase of third-party content expenses to $130,000 in the nine months
ended September 30, 1999 from no such expense in the corresponding period
in 1998.
We believe that continued development of, and increased investment in, new
and enhanced features and technology is critical to attaining our strategic
objectives and remaining competitive. Accordingly, we intend to continue
recruiting and hiring experienced product, content and technology personnel and
to make additional investments in product, content and technology development.
We expect that product, content and technology expenses will continue to
increase significantly in future periods.
MARKETING AND SALES EXPENSES. Our marketing and sales expenses increased to
$7.2 million for the nine months ended September 30, 1999 from $320,000 for the
corresponding period in 1998. Our marketing and sales expenses as a percentage
of net revenues increased to 470% for the nine months ended September 30, 1999
from 53% in the corresponding period in 1998. This increase was principally
attributable to:
- $5.9 million in costs of our initial mass media-based branding and
advertising campaign; and
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- an increase in marketing and sales personnel costs to $784,000 in the nine
months ended September 30, 1999 from $34,000 in the corresponding period
in 1998, due mainly to opening or expanding offices in Mexico, Brazil and
the United States.
We expect these sales expenses to continue to increase significantly for the
foreseeable future as a result of:
- our mass media-based branding and advertising strategy; and
- the expansion of our sales force and marketing personnel.
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES. Our corporate, general and
administrative expenses increased to $3.7 million for the nine months ended
September 30, 1999 from $1.1 million for the corresponding period in 1998. Our
corporate, general and administrative expenses as a percentage of net revenues
increased to 245% for the nine months ended September 30, 1999 from 188% in the
corresponding period in 1998. This increase was principally attributable to:
- an increase in corporate and administrative personnel costs to
$1.3 million in the nine months ended September 30, 1999 from $320,000 in
the corresponding period in 1998, which resulted primarily from the
expansion of our network and financing activities; and
- an increase in overhead costs to support the expansion of our business
activities.
We expect that we will incur additional corporate, general and
administrative expenses as we hire additional personnel and incur additional
costs related to the growth of our business. Accordingly, we anticipate that
these expenses will continue to increase significantly in future periods.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expenses
increased to $336,000 for the nine months ended September 30, 1999 from $59,000
for the corresponding period in 1998. Our depreciation and amortization expenses
as a percentage of net revenues increased to 22% for the nine months ended
September 30, 1999 from 9.7% in the corresponding period in 1998. This increase
was principally attributable to an increase of $1.7 million in fixed assets
(principally servers and personal computers).
As a result of our acquisitions of retail dial-up access customers of IMPSAT
Corporation in Argentina and Brazil and our pending acquisition of its retail
dial-up access customers in Colombia, we expect to incur significant
amortization expense related to intangible assets, consisting primarily of this
newly acquired customer base.
SHARE-BASED COMPENSATION. We incurred share-based compensation expense of
$499,000 for the nine months ended September 30, 1999. This amount represents
the amortization in this period of our total deferred share-based compensation
relating to share options granted in August and September 1999. See notes 11 and
14 to our consolidated financial statements. We did not incur share-based
compensation expense in the corresponding period in 1998.
OTHER INCOME (EXPENSE)
Other income (expense), which consists of net interest income (expense),
foreign exchange gain or loss, and other income (expense), net, consisted of
income of $266,000 for the nine months ended September 30, 1999 compared with a
loss of $30,000 for the corresponding period in 1998. This change resulted
primarily from interest income earned on the proceeds of the July 1999 private
placement. We expect that for the foreseeable future our interest income will
exceed our interest expense. As our assets in each country of operation
increase, so will our exposure to foreign exchange losses on the translation of
assets into U.S. dollars.
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<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PARTIAL YEAR 1997 (FROM INCEPTION IN
JULY 1997 THROUGH DECEMBER 31, 1997)
Following our inception in July 1997 until the roll-out of our network of
country Websites during 1998, we concentrated on the development of quality
content and interactive resources in Spanish, and on market testing to
understand users' preferences. As a result, our results of operations for 1998
were characterized by increasing expenses and mostly flat revenues on a
quarter-to-quarter basis. We recorded a net loss of $3.5 million for 1998,
compared to a net loss of $1.0 million for 1997. Our results of operations for
1997 reflect a partial year consisting of six months.
NET REVENUES
Our net revenues increased 192% to $780,000 for 1998 from $267,000 for
partial year 1997. The increase in revenues resulted from the expansion of our
marketing efforts and sales force, as well as the increase in the number of
channels and services available on our network. For 1998, we had four customers,
Arcor S.A., Compaq Corporation, IMPSAT S.A. and Antel (Uruguay), which each
exceeded 10% of total revenues and in the aggregate represented 72% of total
revenues. By contrast, for partial year 1997, we had five customers, Miniphone,
Compaq Corporation, Arcor S.A., Telam S.A., and IMPSAT S.A., which each exceeded
10% of total revenues and in the aggregate represented 89% of total revenues.
Non-cash reciprocal services arrangements accounted for approximately 23% of our
total revenues in 1998 as compared with approximately 14% for partial year 1997.
COST AND EXPENSES
PRODUCT, CONTENT AND TECHNOLOGY EXPENSES. Our product, content and
technology expenses increased to $1,556,000 for 1998 from $221,000 for partial
year 1997. Our product, content and technology expenses as a percentage of net
revenues increased to 200% for 1998 from 83% for partial year 1997. The
year-to-year increase was principally attributable to:
- an increase in personnel costs dedicated to the development of content and
technological support to $1.1 million in 1998 from $167,000 in partial
year 1997; and
- an increase in expenses for telecommunications links for our network to
$284,000 in 1998 from $30,000 in partial year 1997.
MARKETING AND SALES EXPENSES. Our marketing and sales expenses increased to
$674,000 for 1998 from $142,000 for partial year 1997. Our marketing and sales
expenses as a percentage of revenues increased to 86% for 1998 from 53% for
partial year 1997. The year-to-year increase was principally attributable to:
- an increase in personnel costs dedicated to marketing and sales to
$274,000 in 1998 from $7,000 in partial year 1997; and
- an increase in advertising expenses and sales commissions to $209,000 in
1998 from $29,000 in partial year 1997.
CORPORATE, GENERAL AND ADMINISTRATIVE EXPENSES. Our corporate, general and
administrative expenses increased to $1.9 million for 1998 from $727,000 for
partial year 1997. Our corporate, general and administrative expenses as a
percentage of net revenues amounted to 249% for 1998 from 272% for partial year
ended 1997. The year-to-year increase was principally attributable to:
- an increase in personnel costs in corporate and administrative functions
to $480,000 in 1998 from $61,000 in partial year 1997; and
- increases to $627,000 from $362,000 in professional fees, to $373,000 from
$104,000 in rent and utilities and to $215,000 from $40,000 in travel and
entertainment expenses.
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DEPRECIATION AND AMORTIZATION. Our depreciation and amortization expenses
increased to $107,000 for 1998 from $81,000 for partial year 1997. However, our
depreciation and amortization expenses as a percentage of net revenues decreased
to 14% for 1998 from 30% for partial year 1997. The absolute increase in these
expenses was principally attributable to an increase of $508,000 in fixed assets
(principally servers and personal computers). The relative decrease in
depreciation and amortization expenses was attributable to a more substantial
increase in net revenues when compared with the absolute increase in these
expenses.
OTHER INCOME (EXPENSE)
Other expenses decreased to $20,000 for 1998 from $110,000 for partial year
1997. This decrease primarily reflected a decrease in interest expense in 1998
due to a decrease in the debt.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth unaudited consolidated statement of
operations data for each of the seven quarters ended September 30, 1999. This
data has been derived from unaudited interim consolidated financial statements
prepared on the same basis as the audited consolidated financial statements
contained in this prospectus. In the opinion of management, this data includes
all adjustments, consisting only of normal recurring adjustments, that are
considered necessary for a fair presentation of this information when read in
conjunction with the consolidated financial statements appearing elsewhere in
this prospectus.
<TABLE>
<CAPTION>
QUARTER ENDED (UNAUDITED)
-------------------------------------------------------------------------------
1998 1999
-------------------------------------------- --------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER
31 30 30 31 31 30 30
-------- -------- ---------- --------- -------- -------- ----------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Net revenues.................................... $ 196 $ 229 $ 184 $ 171 $ 276 $ 488 $ 760
Costs and expenses:
Product, content and technology............... 156 237 455 708 616 1,066 1,499
Marketing and sales........................... 38 93 189 354 355 672 6,130
Corporate, general and administrative......... 186 373 585 796 740 1,013 1,983
Depreciation and amortization................. 16 19 24 48 66 101 169
Share-based compensation...................... -- -- -- -- -- -- 499
----- ----- ------- ------- ------- ------- -------
Total costs and expenses........................ 396 722 1,253 1,906 1,777 2,852 10,280
----- ----- ------- ------- ------- ------- -------
Loss from operations............................ (200) (493) (1,069) (1,735) (1,501) (2,364) (9,520)
Total other income (expense) net................ (6) (8) (16) 10 (14) 56 224
----- ----- ------- ------- ------- ------- -------
Net loss before dividends on Class A convertible
preferred shares.............................. $(206) $(501) $(1,085) $(1,725) $(1,515) $(2,308) $(9,296)
===== ===== ======= ======= ======= ======= =======
</TABLE>
The results of operations for any quarter are not necessarily indicative of
the results of operations for any future period. In particular, because of our
limited operating and financial history, we have limited meaningful financial
data to estimate revenues and operating expenses.
OVERVIEW OF RESULTS OF OPERATIONS FOR NEWLY-ACQUIRED CONNECTIVITY OPERATIONS
We have acquired IMPSAT Corporation's retail dial-up access customers in
Argentina and Brazil and are in the process of acquiring its retail dial-up
access customers in Colombia. The aggregate purchase price of these three
acquisitions is $21.5 million. As a result of these acquisitions, we recently
began to provide connectivity services in Argentina and Brazil and expect to
provide connectivity services in Colombia by the end of 1999. In connection with
these acquisitions, we have acquired approximately 66,000 retail dial-up access
customers in Argentina and Brazil and expect to acquire an aggregate of
approximately 7,000 dial-up customers in Colombia. We hired a total of 48
employees who previously worked for IMPSAT Corporation in Argentina and Brazil
and expect to hire an additional
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five employees from IMPSAT Corporation in Colombia. These employees will perform
tasks which they previously performed for IMPSAT Corporation and which are not
currently performed by our employees. Because of the significance of these
acquisitions relative to our company's current assets and results of operations,
we have included the following brief discussion of the results of operations for
these acquisitions for 1998 and for the nine months ended September 30, 1999.
The stand-alone financial information for these businesses included in this
prospectus was derived from IMPSAT Corporation's accounting records and based
upon the estimates of IMPSAT Corporation's management. This discussion should be
read in conjunction with the stand-alone audited financial information for the
acquired businesses and the unaudited pro forma consolidated financial
information included elsewhere in this prospectus. The historical results of
operations of these businesses are not necessarily indicative of the results of
operations to be expected in the future. However, in the brief period (since
October 7, 1999) during which we have provided connectivity services to our
retail dial-up access customers, we have generated net revenues and incurred
costs and expenses which are consistent with those reflected in the audited
financial information for the acquired dial-up access businesses included in
this prospectus.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1998
NET REVENUES
For the three dial-up access businesses of IMPSAT Corporation, total net
revenues decreased to $10.0 million for the nine months ended September 30, 1999
from $12.1 million for the corresponding period in 1998.
In Argentina, net revenues for the dial-up access business increased to
$2.9 million for the nine months ended September 30, 1999 from $2.3 million for
the corresponding period in 1998. This increase resulted from the following
factors:
- an increase in paying subscribers to 15,646 at September 30, 1999 from
13,223 at September 30, 1998; and
- a partially offsetting decline in the average gross subscription fee per
customer to $24.80 for the month of September 1999 from $33.29 for the
month of September 1998.
The number of paying subscribers in Argentina increased by 9.2% during the
course of the nine months ended September 30, 1999 (as measured from the
beginning to the end of such nine-month period) as compared with a 13.3%
increase during the course of the corresponding period of 1998.
In Brazil, net revenues for the dial-up access business decreased to
$5.8 million for the nine months ended September 30, 1999 from $8.0 million for
the corresponding period in 1998. This decrease resulted from the following
factors:
- a decline in the average gross subscription fee per customer (in U.S.
dollar terms) to $12.39 for the month of September 1999 from $22.19 for
the month of September 1998, which decline was largely due to a 63%
decline in the value of the Brazilian REAL to 1.94 REAIS per U.S. dollar
at September 30, 1999 from 1.19 REAIS per U.S. dollar at September 30,
1998; and
- a partially offsetting increase in paying subscribers to 55,449 at
September 30, 1999 from 48,960 at September 30, 1998.
The number of paying subscribers in Brazil increased by 14% during the course of
the nine months ended September 30, 1999 (as measured from the beginning to the
end of such nine-month period) as compared with a 57% increase during the course
of the corresponding period of 1998.
In Colombia, net revenues for the dial-up access business decreased to
$1.4 million for the nine months ended September 30, 1999 from $1.7 million for
the corresponding period in 1998. This decrease resulted from the following
factors:
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- a decline in the average gross subscription fee per customer (in U.S.
dollar terms) to $19.95 for the month of September 1999 from $25.80 for
the month of September 1998, partially due to a 29.3% decline in the value
of the Colombian PESO to 2005 PESOS per U.S. dollar at September 30, 1999
from 1550 PESOS per U.S. dollar at September 30, 1998; and
- a decrease in paying subscribers to 6,817 at September 30, 1999 from 6,899
at September 30, 1998.
We anticipate that our connectivity services business will experience
declining average subscription fees in the future. We cannot predict the rate of
decline. However, we believe that our connectivity services business will
benefit from our overall mass media-based branding and advertising campaigns. We
also intend to dedicate significant resources to increasing our base of
connectivity customers. Accordingly, we believe that the rate of growth in
paying subscribers should increase within the next few months. We also
anticipate that the cost of telecommunications infrastructure services provided
by third parties should decrease in future periods. We believe that the retail
dial-up access businesses were not core businesses of IMPSAT Corporation and, as
a result, did not receive managerial focus during the months leading up to our
acquisition of these businesses. We cannot predict the actual rate of increase
in paying customers or whether any increase will occur or, if it occurs, will
continue.
DIRECT COSTS AND EXPENSES
The principal direct costs and expenses of our dial-up access businesses
consist of product, content and technology costs and marketing and sales
expenses. These costs and expenses together include costs of telecommunications
infrastructure to provide the services, personnel costs, outsourced product
support, such as a 24-hour help desk, and administrative costs. Direct costs and
expenses for these businesses decreased to $8.9 million for the nine months
ended September 30, 1999 from $10.3 million for the corresponding period in
1998. Direct costs and expenses as a percentage of total net revenues was 88%
for the nine months ended September 30, 1999 and 85% for the corresponding
period in 1998.
EXCESS OF NET REVENUES OVER DIRECT COSTS AND EXPENSES.
Excess of net revenues over direct costs and expenses decreased to
$1.2 million for the nine months ended September 30, 1999 from $1.8 million for
the corresponding period in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PARTIAL YEAR ENDED DECEMBER 31, 1997.
NET REVENUES
Total net revenues for the three dial-up access businesses of IMPSAT
Corporation increased to $16.5 million for 1998 from $11.5 million in partial
year 1997. Total paying subscribers increased to 68,646 at December 31, 1998,
representing a 40% increase from 48,909 at December 31, 1997.
In Argentina, net revenues for the dial-up access business increased to
$3.0 million in 1998 from $2.6 million for partial year 1997. This increase
resulted from the following factors:
- an increase in paying subscribers to 14,329 at December 31, 1998 from
11,668 at December 31, 1997; and
- a partially offsetting decline in the average gross subscription fee per
customer to $30.78 for December 1998 from $36.98 for December 1997.
In Brazil, net revenues for the dial-up access business increased to
$11.4 million for 1998 from $7.0 million for partial year 1997. This increase
resulted from the following factors:
- an increase in paying subscribers to 48,603 at December 31, 1998 from
31,119 at December 31, 1997;
- a partially offsetting decline in the average gross subscription fee (in
U.S. dollar terms) per customer to $23.31 for December 1998 from $27.79
for December 1997, partially due to a 8.0%
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decline in the value of the Brazilian REAL to 1.21 REAIS per U.S. dollar
at December 31, 1998 from 1.12 REAIS per U.S. dollar at December 31, 1997.
In Colombia, net revenues for the dial-up access business increased to
$2.1 million for 1998 from $1.8 million for partial year 1997. This decrease was
primarily attributable to the following factors:
- a decline in the average gross subscription fee per customer to $25.80 for
December 1998 from $32.43 for December 1997 partially due to a 20% decline
in the value of the Colombian PESO to 1,550 PESOS per U.S. dollar at
December 31, 1998 from 1,295 PESOS per U.S. dollar at December 31, 1997;
and
- a decrease in paying subscribers to 5,714 at December 31, 1998 from 6,122
at December 31, 1997.
DIRECT COSTS AND EXPENSES
Direct costs and expenses for these businesses increased to $14.1 million
for 1998 from $9.7 million for partial year 1997. Direct costs and expenses as a
percentage of total net revenues was 86% for 1998 as compared to 84% in partial
year 1997.
EXCESS OF NET REVENUES OVER DIRECT COSTS AND EXPENSES
Due to the factors noted above, the excess of net revenues over direct costs
and expenses was $2.4 million for 1998 as compared to $1.8 million for partial
year 1997.
LIQUIDITY AND CAPITAL RESOURCES
We continue to be a company in an early stage of operations. We have
substantial liquidity and capital resource requirements, but limited sources of
liquidity and capital resources. We have generated net losses and negative cash
flows from our inception and anticipate that we will experience substantial and
increasing net losses and negative cash flows for at least the next several
years. As we implement our strategy and seek to take advantage of our market
opportunity, we anticipate that our liquidity and capital resource requirements
will increase significantly.
From our inception to date, we have relied principally upon equity
investments to support the development of our business. We expect to continue to
rely mainly on further equity offerings to provide financing, including this
offering which constitutes, by far, the major capital-raising initiative in our
history.
We received total capital contributions of approximately $1.2 million in
1997 and $4.1 million in 1998. In the nine months ended September 30, 1999 we
received total capital contributions in cash of $36.8 million, which consisted
primarily of the proceeds of a private placement of 6,334,004 Class A
convertible preferred shares for a total purchase price of $44.4 million. This
private placement consisted of 5,477,088 shares sold for $38.4 million in cash
in July 1999 and 856,916 shares to be issued on a quarterly basis through
January 2001 in exchange for $6.0 million in non-cash advertising time credits.
In addition, in connection with our recent acquisitions of retail dial-up access
customers from IMPSAT Corporation in Argentina and Brazil and our pending
acquisition of its retail dial-up access customers in Colombia, IMPSAT
Corporation will purchase approximately $21.5 million of our Class A convertible
preferred shares. Furthermore, in connection with our arrangement with TV
Azteca, S.A. de C.V., we issued to TV Azteca 355,478 Class A convertible
preferred shares in exchange for approximately $3.5 million of advertising time,
which will be made available over a three-year period beginning on July 1999.
As part of the July 1999 private placement, we entered into an agreement
with Washburn Enterprises, an affiliate of one of our shareholders, under which
we also agreed to purchase at least $4.0 million of advertising time on the
media networks owed by Washburn's affiliate Ibero-American Media Partners
II Ltd. and its affiliates, and Washburn agreed that it and its affiliates would
purchase as least $2.0 million of advertising time on our network, all during
the period through January 2001.
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In mid-November 1999, we completed a private placement of 1,111,111 Class B
convertible preferred shares for a purchase price of $10.0 million in cash, or
$9.00 per Class B convertible preferred share. Purchasers of the Class B
convertible preferred shares consisted of Intel Atlantic, Inc., a subsidiary of
Intel Corporation, and Latinvest Asset Management do Brasil, Ltda., an affiliate
of Globalvest Management Company, L.P. Each Class B convertible preferred share
will automatically convert, on the date six months after the closing date of
this offering, into one common share. The difference between the initial public
offering price per common share and the $9.00 price per Class B convertible
preferred share will be amortized as a deemed dividend during the same six-month
period.
Net cash used in operating activities was $11.2 million for the nine months
ended September 30, 1999, $3.2 million for the year ended December 31, 1998 and
$875,000 for the partial year ended December 31, 1997. We have experienced and
expect to continue to experience significant negative cash flows from operating
activities. Net cash used in operating activities resulted primarily from our
net operating losses.
Net cash used in investing activities was $1.5 million for the nine months
ended September 30, 1999, $733,000 for the year ended December 1998 and $261,000
for the partial year ended December 31, 1997. Net cash used in investing
activities resulted primarily from purchases of capital assets.
Net cash provided by financing activities was $36.8 million for the nine
months ended September 30, 1999, $4.1 million for the year ended December 31,
1998 and $1.2 million for the partial year ended December 31, 1997. Net cash
provided by financing activities consisted primarily of the net proceeds from
short-term borrowings and the sale of our common shares.
We expect to make capital expenditures of approximately $3.0 million in
1999, including $1.5 million spent in the nine months ended September 30, 1999,
and a total of approximately $5.0 million for 2000 and 2001. The capital
expenditures in 1999 principally consist of purchases of, or investments in,
technical equipment. We expect that our capital expenditures will increase
significantly in the future as we make technological improvements to our network
of Websites and technical infrastructure and enter into strategic joint ventures
or acquisitions.
We expense many of our expenditures related to improvements to our Websites
such as new channels and interactive features. These expenditures are estimated
to be approximately $4.0 million during 2000. We expect to spend a total of
$1.0 million in 2001 on the development of content with respect to our country
Websites for Chile, Colombia and Venezuela. We have not projected any
expenditures related to business combinations other than content and marketing
alliances, which are included in the product, content and technology expenses
and the marketing and sales expenses.
Our liquidity and capital resource requirements will depend on numerous
factors, including:
- market acceptance of our services and products;
- the level of resources that we devote to investments in our network;
- marketing and sales of our services and products; and
- our branding and advertising activities.
We believe that the net proceeds of this offering and of our mid-November
1999 private placement of our Class B convertible preferred shares, together
with our current cash and cash equivalents balance of $24.4 million at
September 30, 1999 (which includes the remaining unused net proceeds from our
July 1999 private placement of our Class A convertible preferred shares) will be
sufficient to meet our liquidity and capital resource requirements through early
2001. We expect to require up to approximately $50 million of additional
financing during the period through 2003, when we expect to achieve
profitability. If our cash resources prove to be insufficient to satisfy these
requirements, we may seek to sell additional equity or debt securities or to
obtain a credit facility. The sale of additional equity or convertible debt
securities could result in additional dilution to our shareholders. The
incurrence of indebtedness would result in increased fixed obligations and most
likely would subject us
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to covenants that would restrict our operations. We cannot assure you that
financing will be available in amounts or on terms acceptable to us, if at all.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept or recognize only two digit entries in the date code field. These systems
and software products will need to accept four digit entries to distinguish 21st
century dates from 20th century dates. As a result, computer systems and/or
software used by many companies and governmental agencies may need to be
upgraded to comply with such Year 2000 requirements or risk system failure or
miscalculations which may cause disruptions to normal business activities.
We are in the process of conducting an internal review to ensure that our
services and products are Year 2000 compliant. Year 2000 problems may originate
within our own systems and products or within the systems of our third party
suppliers or our customers. Some of our non-information technology systems, such
as equipments or machinery, may also be affected by Year 2000 problems.
Our internal verification process consists of:
- component inventory and assessment, including vendor and third party
evaluation;
- component remediation;
- component testing;
- system testing; and
- contingency planning.
We have conducted an inventory, and developed testing procedures, for all
software and other systems that we believe might be affected by Year 2000
issues. We have tested our computers, servers and other equipment. We have
sought written confirmation from each of our third-party suppliers and service
providers as to their respective readiness. We expect to complete upgrades and
testing by the end of 1999. We also expect to receive confirmation as to Year
2000 compliance from all key vendors and suppliers in December 1999. In
connection with our acquisitions of the retail dial-up access customers of
IMPSAT Corporation in Argentina and Brazil and our pending acquisition of its
retail dial-up access customers in Colombia, we are in the process of verifying
Year 2000 compliance of these businesses.
We have also identified and have begun assessing non-information technology
embedded systems such as voice mail, office security, fire prevention and other
systems. We generally believe that our non-information technology embedded
systems do not present significant Year 2000 issues.
To date, we have spent an immaterial amount on Year 2000 compliance issues,
but may incur up to approximately $350,000 in connection with identifying and
solving any Year 2000-related problems. We anticipate that most of our expenses
will relate to personnel costs associated with time spent by employees in the
assessment process and Year 2000 compliance matters.
As discussed above, we are engaged in an ongoing Year 2000 assessment and
have developed no contingency plans to address the worst-case scenario that
might occur if the technologies we are dependent on actually are not Year 2000
compliant. The results of our Year 2000 simulation testing and the responses
received from all third-party suppliers and service providers will be taken into
account in determining the need for, and the nature and extent of, any
contingency plans.
To the extent that our assessment is finalized without identifying any
additional material non-compliant information technology systems operated by us
or by third parties, the most reasonably likely worst case Year 2000 scenario is
a systemic failure beyond our control, such as a prolonged communications or
electrical failure. Any failure of this type could prevent us from accessing our
network, or change the behavior of advertising customers or persons accessing
our network. We believe that the primary business risks, in the event of such
failure, would include but not be limited to, lost
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advertising revenues, increased operating costs, loss of customers or persons
accessing our network, and other business interruptions of a material nature, as
well as claims of mismanagement, misrepresentation or breach of contract.
MARKET RISKS
We have not had meaningful interest rate exposure because we have maintained
small debt balances to date. Our Class A convertible preferred shares, which
carried an annual dividend rate of 8%, will be automatically converted into
common shares upon completion of this offering. We will pay accumulated
dividends in cash on or about the date of conversion. Our Class B convertible
preferred shares will also carry an annual dividend rate of 8%. We should not,
however, experience significant interest rate risks until such time as we have
material balances of indebtedness or preferred shares.
Our principal foreign currency exposure has related to our asset base, which
has consisted principally of monetary assets and liabilities, in the countries
in which we operate. Our company's asset base in countries with foreign currency
exposures is summarized as follows:
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
---------------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C>
Argentina.......................................... $ 2,906
Brazil............................................. 13,109
Mexico............................................. 4,956
Uruguay............................................ 345
-------
$21,316
=======
</TABLE>
Our subsidiaries have generally used the U.S. dollar as their functional
currency because the sale of advertising has historically been priced and billed
in U.S. dollars. As a result, the financial statements of the subsidiaries have
been remeasured, or translated into U.S. dollars. The effects of foreign
currency transactions and of remeasuring our subsidiaries' financial condition
and results of operations into U.S. dollars have been included as net gain or
loss on foreign exchange. However, our Brazilian subsidiary uses the REAL as its
functional currency and, as such, the effects of foreign currency transactions
and remeasuring are included as an adjustment to shareholders' equity. The
method of accounting for the effects of foreign currency transactions and of
remeasuring for our subsidiaries' financial condition and results of operations
will change in the event that the functional currencies for our subsidiaries
change. For example, due to our recent acquisitions of IMPSAT Corporation's
retail dial-up access customers in Argentina and Brazil and our pending
acquisition of its retail dial-up access customers in Colombia, the principal
source of revenues for several of our subsidiaries will be connectivity services
which will generally be priced and billed in local currency.
We do not currently hedge against currency exchange transaction risks, but
could in the future engage in hedging activities against specific foreign
currency transaction risks. Because of uncertainties involving exchange rate
movements, we cannot quantify the effect of exchange rate movements on our
future financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board, which is commonly
called FASB, issued Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
establishes accounting and reporting standard for derivative instruments,
including derivative instruments embedded in other contracts, and for hedging
activities. In June 1999, FASB issued SFAS 137, "Accounting for Derivative
Instruments and Hedging Activities Deferral of Effective Date of FASB Statement
No. 133," which deferred the effective date of SFAS 133 to all fiscal quarters
of fiscal years beginning after June 15, 2000. We are currently evaluating the
effect that adoption of SFAS No. 133 will have on our financial statements.
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BUSINESS
OVERVIEW
We are an Internet network providing country-specific and regional content
for Spanish- and Portuguese-speaking audiences in Latin America and the United
States. Recognizing that the countries in the Americas are diverse, we have
designed our network to consist of country Websites as well as a global Website.
We currently have country Websites for, and sales and content production offices
in, Argentina, Brazil, Mexico, the United States and Uruguay. We plan to
establish sales and content production offices in Colombia before the end of
1999, and sales and content production offices in Chile and Venezuela during
2000. By offering content and interactive resources designed to be responsive to
our users' preferences, we seek to make our network their "home on the Internet"
and, in so doing, to create communities of users, develop user loyalty and
increase traffic on our Websites. The launch of each country Website represents
a potential new community of users. By building substantial communities of
users, we are developing a platform for generating revenues from advertising,
branded retail dial-up Internet access, or "connectivity", service and, in the
future, e-commerce. We recently began to offer connectivity services in
Argentina and Brazil and expect to offer similar services in Colombia before the
end of 1999. We are also beginning to develop e-commerce for Spanish- and
Portuguese-speaking audiences in Latin America and the United States.
Our founders believed that a scarcity of Spanish- and Portuguese-language
content was the principal factor limiting the growth of Internet usage in Latin
America. As a result, from our inception in mid-1997, we initially concentrated
on the development of a pilot Website for Argentina with quality content and
interactive resources in Spanish and, at the same time, carried out extensive
market testing to understand users' preferences. We then began to roll-out our
network of country Websites during 1998 and, most recently, launched our Website
in the United States in September 1999. Our registered users (meaning users who
have provided personal information such as name, e-mail address and address)
grew from 54,132 persons in June 1998 to 291,567 persons in July 1999. From
June 1998 to July 1999, the number of pages viewed by our users increased from
3.0 million to 21.0 million per month. On August 1, 1999, we launched our first
mass media-based branding and advertising campaign in Argentina, Brazil, Mexico
and Uruguay and, in September 1999, in the United States. In the first three
months of this campaign (through October 31, 1999), our registered users
increased by approximately 69% to approximately 498,515 at October 31, 1999 and
the number of pages viewed by our users increased by over 250% to approximately
73.9 million pages in that month. In March 1999, we also commenced measuring
unique visitors. The number of unique visitors has increased from 174,800 in
March 1999 to approximately 1.6 million in October 1999. We attribute this
recent growth principally to our mass media-based branding and advertising
campaign, and cannot predict whether such growth will continue.
OUR MARKET OPPORTUNITY
The Spanish- and Portuguese-speaking audiences in Latin America and the
United States together represent one of the fastest growing user groups on the
Web today. While we do not expect to have country Websites or operations for
every country in Latin America, our network is targeted to the entire Latin
American region. In the United States, we are currently targeting the
Spanish-speaking populations in Chicago, Houston, Los Angeles, Miami, New York,
San Antonio and San Diego. We are primarily targeting individual users, although
we anticipate that business and other entities will become important
participants in our communities of users.
We believe a large and growing market consisting of Spanish- and
Portuguese-speaking audiences exists in Latin America and the United States for
content, connectivity and e-commerce services, and that this market presents us
with a significant opportunity. Latin America had a total population at the end
of 1998 of 492.4 million people, of whom more than two-thirds are under
35 years of age. The
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region had an aggregate gross domestic product in 1998 of $2.0 trillion, of
which Brazil, Mexico and Argentina accounted for more than three-fourths. The
wealthiest 20% of the Latin American population accounts for approximately
two-thirds of the overall buying power in the region and constitutes our primary
target market. As a result, we believe that the Latin American market has a
highly desirable demographic profile for advertisers and businesses.
Internet usage has only begun to penetrate Latin America, but its growth is
expected to be dramatic. Internet users in Latin America have grown from
approximately 2.3 million at year-end 1997 to 4.8 million at year-end 1998, and
are projected to increase to 19.1 million by year-end 2003, representing an
increase in Internet penetration of 0.6% to 3.7% (measured in relation to the
total population of the region). According to industry reports, the Internet
penetration rate in 1998 was 0.8% in Argentina, 1.1% in Brazil, 0.4% in
Colombia, 0.6% in Mexico and 1.9% in Chile.
The United States has a total Hispanic population of approximately
31.4 million people, which has grown at a compound annual rate of 3.7% from 1996
to 1999. By 2000, the U.S. Hispanic population is expected to constitute
approximately 11% of the total U.S. population. Advertising targeting U.S.
Hispanics was $1.7 billion in 1998. As of May 1999, the Internet penetration
rate for U.S. Hispanics was approximately 19.0%.
ADVERTISING. Latin America represents an attractive market for advertisers.
Internet advertising in Latin America continues to grow as an advertising medium
because the Internet is being increasingly used by a desirable segment of the
Latin American population. Although Internet advertising is still in an
incipient stage in Latin America, it is expected to account for an increasing
share of total advertising expenditures in the region. Internet advertising in
Latin America totaled $23.6 million in 1998 and is projected to grow to
$948.9 million in 2003.
CONNECTIVITY. Connectivity services permit customers to access the Internet
through a local telephone call. At year-end 1998, there were approximately
3.0 million Internet subscriber accounts in Latin America, a number which is
projected to grow to 14.8 million by year-end 2003.
Dial-up access charges have been declining in Latin America and at year-end
1998 averaged $31.48 per month. In addition to dial-up access charges, Internet
users are required to pay per minute telephone charges to connect to the
Internet. While per minute charges have not declined as rapidly as monthly
charges, we believe that they will trend downward as the effects of
telecommunications deregulation spread. Nonetheless, the all-in cost of dial-up
access remains significantly higher in Latin America than in the United States.
We believe that this cost has been a factor in limiting Internet penetration in
Latin America. However, the declining cost of dial-up access in Latin America is
a contributor to the projected growth of Internet use in Latin America.
E-COMMERCE. We believe that Latin America will, in the long-term, adopt
e-commerce as an increasing number of businesses and consumers embrace the
Internet as a viable method of selling and purchasing goods and services.
On-line expenditures in Latin America totaled $166.8 million in 1998 and are
expected to increase to $8.0 billion for 2003.
THE EL SITIO VISION
Our founders envisioned an Internet network that would provide quality
country-specific content to Spanish- and Portuguese-speaking audiences in the
countries of Latin America, the United States and elsewhere. From our inception,
our philosophy has been to "Think regional, be local." Consistent with this
philosophy, we have opened offices in five countries in Latin America and in the
United States and have, to date, launched country Websites in each of these
countries. We believe that the combination of country Websites supported by
in-country management, marketing, sales and content production personnel will
enable us to implement the EL SITIO vision and to build the premier Internet
network for
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Spanish- and Portuguese-speaking audiences in Latin America, the United States
and, over the long-term, Spain and Portugal.
We believe our network should provide access for our users to a broad range
of Internet services as a means of further fostering our users' loyalty to our
network. Accordingly, we recently acquired the retail dial-up access customers
of IMPSAT Corporation in Argentina and Brazil, and expect to acquire its retail
dial-up access customers in Colombia by the end of 1999. We intend to utilize
our Websites as gateways to the Internet for subscribers to our connectivity
services. To further enhance the appeal of our network, we are also
incorporating a Web search engine into our network so that our users can utilize
our Websites as portals to search the Web.
We believe our network provides a platform for generating revenues from the
following principal sources:
- advertising;
- connectivity services; and
- e-commerce.
To implement the EL SITIO vision, we have assembled a management team
experienced in building and operating pan-Latin American businesses. Our
management team is comprised largely of Latin Americans who provide us with
essential market knowledge and cultural insights. We believe that our local
presence allows us to better understand the needs of local Internet users,
advertisers and businesses, and to maintain strong relationships with them. Our
management team is drawn from diverse fields and includes professionals with
backgrounds in computer technology and design, sales, marketing and finance.
OUR STRATEGY
Our goal is to become the leading Internet network for Spanish- and
Portuguese-speaking audiences in Latin America and the United States. To achieve
our goal, and to take advantage of our market opportunity, we continue to
implement a strategy consisting of the following principal elements:
- BUILDING A MARKET-LEADING NETWORK
Our strategy is driven by our views, first, that the countries in Latin
America are diverse and, second, that the scarcity of Spanish- and
Portuguese-language content has been the principal factor limiting the growth of
Internet usage in Latin America. As a result, we seek to build a leading
Internet network by:
V FURTHER DEVELOPING COUNTRY-SPECIFIC AND REGIONAL CONTENT. From our
inception, we have focused on developing quality country-specific and
regional Spanish- and Portuguese-language content. At September 30,
1999, we had 67 employees dedicated to content development in the five
countries in which we currently operate. During 2000, we expect to
commence production of content for our planned country Websites for
Chile, Colombia and Venezuela. We also provide content to our viewers
under agreements with well-known content providers such as Agence
France Presse, Reuters and The Weather Channel. In addition, the
community features on our Websites are designed to encourage our users
to contribute content to our network. By continuously expanding and
enhancing our production of proprietary and user-generated content,
and, by entering into arrangements with leading third-party content
providers we intend to maintain our position as a market leader in
Spanish- and Portuguese-language content.
V INCORPORATING ADDITIONAL COMMUNITY-BUILDING FEATURES. Our experience
indicates a strong preference on the part of Latin American users for
community-building features, such as chat,
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CUPIDO NET, an interactive meeting place for users, e-mail and other
interactive resources. Consistent with our user-focused business
philosophy, prior to the roll-out of our network, we launched a pilot
Website and engaged in an extensive period of market testing to
identify the preferences of Internet users in each of our target
markets. In response to those preferences, we have developed and
continuously seek to enhance our content channels and interactive
resources in order to further build our community of users and foster
their loyalty to our network. One recent example is the launch of
CUPIDO NET, which at September 30, 1999, three months after its
inception, had 43,924 members. We continue to seek to better
understand the needs and preferences of our users through on-line
surveys and analysis of traffic patterns and usage of services.
V STRENGTHENING OUR BRAND IDENTITY. After first dedicating our resources
to develop our content and network, we launched our first mass
media-based branding and advertising campaign on August 1, 1999. We
expect to spend approximately $15.5 million through December 31, 1999
and approximately $40.0 million in 2000 on this campaign. We seek to
create the leading network brand among Spanish- and
Portuguese-speaking Internet users and to expand our presence as a
mass market Internet network by building strong brand awareness. We
have positioned our image as user-friendly, informative and
entertaining. We believe that the essence of our brand is summed up in
our marketing campaign theme: EL SITIO: TU LUGAR EN INTERNET ("EL
SITIO: Your Home on the Internet"). To build upon our brand, we plan
to continue to advertise on the Internet to on-line users, and to
allocate a significant portion of our resources to advertising,
marketing and communications in traditional advertising media.
- GENERATING REVENUES FROM OUR NETWORK
While our country-specific and regional content, community-building features
and brand identity are the building blocks to our becoming the premier Internet
network for Spanish- and Portuguese-speaking audiences, our revenue-generation
strategy is the key to our long-term success. We intend to capitalize on our
network to generate substantial revenues by:
V FORGING ONE-ON-ONE RELATIONSHIPS WITH ADVERTISERS. The market for
advertising on the Internet by Latin American companies is still in
its infancy, with limited market awareness of the benefits of Internet
advertising. As a result, an important part of our sales strategy is
to forge one-on-one relationships with advertisers in which we educate
companies regarding the full commercial advantages of the Internet as
an advertising medium, emphasizing the attractive demographics of
Latin American Internet users, and thereby attract advertisers to our
network. With offices in each of our principal markets, at
September 30, 1999, we had a total of 83 sales and marketing personnel
dedicated to developing long-term relationships with potential
advertisers and expanding our advertising revenues. Our structure
permits us to develop relationships not only with multinationals
purchasing advertising on all of our Websites, but also with
country-specific advertisers interested in advertising targeted to
users in their country. We are generating advertising revenue
currently in Argentina, Brazil, Mexico, the United States and Uruguay.
V INTEGRATING CONNECTIVITY INTO OUR NETWORK. In order to broaden the
services that we offer and to foster user loyalty, we have acquired
from IMPSAT Corporation its retail dial-up access customers in
Argentina and Brazil and are in the process of acquiring its retail
dial-up access customers Colombia. We believe that offering EL
SITIO-branded connectivity services will increase user loyalty to our
network. We intend to utilize our Websites as the gateways to the
Internet for our subscribers. To further enhance the appeal of our
network, we are incorporating a Web search engine into our network so
that our users can utilize our Websites as portals to search the Web.
By establishing a commercial relationship with our users, particularly
through billing their monthly dial-up access fees to their credit
cards, we expect
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that resistance to commercial purchases on our network will decline.
We are currently generating subscription fee-based revenue in
Argentina and Brazil from the provision of connectivity services.
V DEVELOPING OUR E-COMMERCE BUSINESS. We believe our e-commerce
opportunities will, over the long term, expand as an increasing number
of Latin American businesses and consumers embrace the Internet as a
viable method of purchasing goods and services, and we intend to
capitalize on these opportunities. We recently added an e-shopping
channel to our network. We also concluded a non-exclusive letter of
intent with From2.com, a Miami-based e-commerce logistics company,
which will provide logistics and fulfillment services for
international e-commerce transactions conducted on our network. We are
pursuing several revenue-sharing relationships and joint venture
opportunities with e-commerce merchants in the United States and Latin
America to develop e-commerce retail operations in the flower, gifts,
books, music and software and hardware areas. We do not expect to
derive meaningful revenues from e-commerce activities until at least
2001.
- LEVERAGING STRATEGIC RELATIONSHIPS
We intend to leverage our existing relationships with shareholders and enter
into new strategic relationships to expand our network and enhance our content,
marketing and sales. In the months following our July 1999 private placement,
our key strategic shareholders, Hicks, Muse, Tate & Furst Incorporated, the
Cisneros Group of Companies and GC Companies Inc., have facilitated a variety of
new commercial relationships, including introduction to potential advertising
customers and e-commerce partners.
OUR NETWORK
We are an Internet network providing country and regional content for
Spanish- and Portuguese-speaking audiences in Latin America and the United
States. Our network currently consists of a global Website and five
country-specific Websites focused upon Argentina, Brazil, Mexico, the United
States and Uruguay. We believe we are distinguished by our strong focus on
country-specific and regional content. We have grown our network by opening
local offices and hiring staff to develop content that is specific to the
countries in which we operate.
We commenced operations in Argentina in mid-1997 and shortly thereafter
launched a pilot Website for that country. We opened our Montevideo office in
November 1997 and our Mexico City office in May 1998. After extensive market
testing and development of our content production capacity, we launched the
ELSITIO.COM network in November 1998 in Argentina, Mexico and Uruguay. We
currently have 148 employees in Buenos Aires, 58 in Mexico City and 16 in
Montevideo. We opened our office in Brazil in September 1998, launched the
Brazilian OSITE.COM.BR Website in the Portuguese language in July 1999 and now
have 35 employees in Sao Paulo. We opened our office in Miami in May 1998,
launched our U.S. Website in September 1999 and now have 28 employees in Miami.
We believe our local presence allows us to better understand the needs of local
advertisers and businesses. We plan to establish sales and content production
offices in Colombia before the end of 1999 and sales and content production
offices in Chile and Venezuela during 2000. We will hire a total of 53 employees
who previously worked for IMPSAT Corporation or its subsidiaries in connection
with our acquisitions of its retail dial-up access customers in Argentina,
Brazil and Colombia.
Our offices and country-specific content afford our users the dual
advantages of, first, the size and resources of a regional network and, second,
the country-specific content and community features most useful to them.
Operationally, this structure permits us to maximize economies of scale to
support efficiently multiple markets with differing content and features from a
single global platform.
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Our global content and design team, in consultation with our country
offices, designs our homepage and community features, acquiring or developing
software required to offer the features that our market research indicates will
most appeal to our users. This global team also generates a large volume of
global content, both proprietary and from third-party providers such as Reuters,
Notimex and Infosic. Technological, financial and administrative functions are
also carried out at the global level.
The content and community features prepared by our global team provides the
starting point from which our in-country production teams adapt our global
Website to their local market preferences. Our local and regional production
offices in Buenos Aires, Mexico City, Miami, Montevideo and Sao Paulo cultivate
our users' preferences by adapting the content and community features on our
channels to local preferences. Local managers and their staff have autonomy to
select the stories and features that are headlined on our channels, to add
country-specific proprietary or third-party content and to add channels or
features with a local focus. For example, the editorial manager of EL SITIO
Mexico might select news items specific to Mexico or enhance a story without a
Mexican focus by including reactions in Mexico to the news item. Similarly, the
editorial manager of O SITE in Brazil might provide reviews of local restaurants
in Sao Paulo or Rio de Janeiro and might add, during February of each year, a
channel on CARNAVAL.
PRODUCT DESCRIPTION
We have developed a network of country Websites that provide original
proprietary and third-party content and user-friendly interactive resources,
including free e-mail, auctions, chat rooms, personal home pages, bulletin
boards, contests and prizes, that bring our own style to our user base.
Based on our market research activities, we believe there are four key areas
of interest that attract our targeted users: interactive news; relationships;
technology; and entertainment. These four areas of interest are reflected in our
core channels in each country Website.
We believe that our core channels define the personality and vision of our
products. Our core channels currently are:
- INTERACTIVE NEWS--Our staff transforms relevant daily news in each country
into an interactive experience for our users. User interest is encouraged
through presentation of the news in an entertaining style. News articles
include debates, polls, forums and trivia, which allow our readers and
editors to become part of the articles. In addition to our daily news, we
have global and local third-party news coverage.
- RELATIONSHIPS--We cover relationship topics that interest our users, such
as love, family, friendship, society, sex, politics. We want our users to
communicate and share important life experiences with our community of
users. In addition to interactive responses that we generate from polls
and forums, we typically receive over 500 narratives each day from our
users from which we select some responses to display on our channels.
- TECHNOLOGY--Our staff produces technology-related content with both the
new and the experienced Internet user in mind. Tutorials, guides and news
about technology and the Internet are provided to assist new users in
learning how to navigate the Internet. We also cater to more experienced
users through, among other things, sophisticated materials, software and
application downloads and technology-related news. Our free technology
newsletter, which now has over 100,000 subscribers, gives us an
opportunity to interact with our users on a weekly basis.
- ENTERTAINMENT--We provide our users with entertainment-related content in
areas such as music, fashion, TV and movies. We also create an interactive
environment for our users through interviews, polls and forums. For
example, our users act as journalists and moderators during interviews
with top models or TV stars. We also provide our users a variety of games,
contests and prizes on a daily basis.
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In addition to our four core channels, we recently began to provide an
e-shopping channel:
- E-SHOPPING--We anticipate that e-shopping opportunities will originate
from our core channels. Once in the e-shopping channel, our users will
encounter a user-friendly environment that helps them shop, provides them
with merchant and product comparisons, and gives them shopping ideas.
We also provide a series of general and country-specific channels. Our
general channels include:
- NOTICIAS/NOTICIAS ("NEWS")--provides news sources by a variety of
strategic partners. Third-party content is complemented by editorials,
opinion articles and columns produced with local flavor by our journalists
and staff members in Buenos Aires, Mexico City, Miami, Montevideo and Sao
Paulo. Our strategic partners in News include Reuters, Notimex and
Infosic.
- COMUNIDAD/COMUNIDADE ("COMMUNITY")--encourages interaction of our users
through a series of user-friendly resources that allow them to chat, voice
their opinions and express their creativity through their own pages on the
Internet.
- SERVICIOS/SERVICOS ("SERVICES")--provides a local experience for our users
through restaurant, hotel and movie recommendations, as well as local
listings of theaters, museums and the arts in Buenos Aires, Mexico City,
Miami, Montevideo and Sao Paulo. We expect to develop similar content for
other major Latin American cities and our targeted cities in the United
States that have large Spanish-speaking populations.
- JUEGOS/JOGOS ("GAMES")--offers users a variety of multimedia, action,
arcade and promotional games, in which users compete for prizes awarded by
many of the companies advertising on our Websites. Our local writers
contribute to the channel by providing editorials on Web games. Our users
have the ability to download games directly from this channel.
- DEPORTES/ESPORTES ("SPORTS")--provides up-to-date news, analysis,
interviews and opinions on a broad range of sports. This year, users will
able to watch live sports events utilizing our multimedia capabilities.
Users will also be able to search a reference library with features,
statistics and other information about sports personalities in Latin
America.
- NEGOCIOS/NEGOCIOS ("BUSINESS")--through a short-term agreement with Zona
Financiera, a major Latin American producer of business and financial
information, our users currently have access to the latest business news
and services such as stock market quotations, exchange rates, interest
rates, mortgage and car loan rates, and insurance rates. In addition to
Zona Financiera, we have an agreement with Patagon.com, a leading business
content site in the region, under which Patagon.com will pay us to be a
non-exclusive provider of co-branded business content inside our Website
after the Zona Financiera agreement ends in the first quarter of 2000.
- EL TIEMPO/O TEMPO ("THE WEATHER")--offers our users comprehensive and
up-to-the minute weather information, including weather conditions and
forecasts for over 4,700 cities worldwide. The content is provided through
an agreement with The Weather Channel.
We also provide our users in each country with a list of country-specific
channels that are available on some of our country Websites, including the
following:
- HOMETOWN (USA)--provides local news for each of our targeted cities with
large Spanish-speaking populations in the United States. News articles are
produced by our own writers for our targeted markets: Chicago; Houston;
Los Angeles; Miami; New York; San Antonio; and San Diego.
- BELEZA (BRAZIL)--is a channel devoted to men and women with interests in
fashion and beauty topics. Users can find articles that deal with issues
usually found in fashion magazines. This
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channel is created with interactivity in mind so users can share their
ideas and experiences on these topics.
- GEOSFERA (BRAZIL)--is devoted to extreme sports, including hiking,
skydiving, trekking, mountain climbing and other rigorous outdoor sports.
- GASTRONOMIA (URUGUAY)--provides news and forums regarding local and
international cuisine. Users can read and share experiences and recipes
and also learn about the latest developments in the gastronomical world.
- ASTROWEB (MEXICO)--is a channel on astrology topics. It includes studies
and analysis on birth, early childhood, karma, horoscopes and
compatibility.
- VIDA (USA)--consists of a compilation of proprietary articles that deal
with day-to-day issues and concerns of Hispanic populations in the United
States. This channel covers topics such as race and identity, sex and
politics, health, art, literature, second generation issues, food and
nutrition, and others.
Our user-friendly interactive resources include:
- CHAT--provides entry to a "virtual community" in which our users interact
in real-time group or one-on-one discussions. Users may voice their
opinions on a variety of topics, such as sports, politics, relationships
and current events. Our users create special interest chat rooms and can
also participate in moderated chat rooms. On average, each chat user stays
in our chat rooms for approximately 20 minutes.
- CUPIDO NET--is an interactive meeting place on our network where users can
search for new friends or special relationships. Users from different
backgrounds and experiences share their interests through CUPIDO NET. As
of September 30, 1999, three months after its launch, CUPIDO NET has
generated approximately 43,924 members.
- E-MAIL--permits users to sign up for free e-mail services in Spanish,
Portuguese and English through our recently signed agreement with USA.Net,
a leading provider of e-mail and messaging services. As part of this
alliance, users will benefit from enhanced customization tools that will
offer them control over their e-mail account, including customization of
their e-mail interface. Since access to e-mail requires user registration,
e-mail is expected to be a significant source of registered users and user
data in the future. As of September 30, 1999, which is three months after
its launch, we have generated approximately 46,790 EL SITIO e-mail
accounts and 8,860 O SITE e-mail accounts.
- AUCTIONS--enables sellers in Latin America and the United States to post
their products inside our channel and take advantage of our expanding user
base. Buyers and sellers give us their personal information in order to
register as users of our auctions channel. We act as a meeting place for
sellers and bidders, while final transactions are executed outside the El
Sitio network. We closely monitor the information from our sellers. Our
company does not receive any fee for transactions, but benefits from
increased traffic to our network and from advertising revenues generated
from the channel.
- BUSCADOR/BUSCADOR ("SEARCH")--is an internal search engine which enables
users to search our library of over 90,000 pages. To further improve the
functionality and appeal of our network, we recently reached an agreement
with Inktomi, a leader in search technology with a library of over
110 million sites, in which we use their search engine software and have
access to their database. These search features will enable our users to
utilize our network to surf the Web.
- TU SITIO PERSONAL/SEU SITE PESSOAL ("PERSONAL HOME PAGE")--offers our
users the ability to create their own content through their personalized
home pages in Spanish and Portugese. We provide
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the proprietary tools that help our users create their own ideas on the
Web in order to share their content with others. We believe that affinity
between us and our users increases as they share their own experiences
through our network.
- BULLETIN BOARDS--offer our users the ability to post their own views and
opinions on a variety of topics to be read by other users on our Websites.
In that way, our users promote dialogue on relevant issues, topics or
events of interest to other users on our network.
- PREMIOS/PREMIOS ("CONTESTS")--uses contests as a marketing tool to attract
visitors to our network. A recent campaign with nearly 12,000 registered
users participating is "SUBETE AL TREN DE EL SITIO" ("Climb Aboard the EL
SITIO Train") in which e-mail users provide us with the e-mail addresses
of their friends who ride with them in their "trains," thereby increasing
their chances of winning a trip to one of many destinations in Latin
America.
Our network of Websites is designed to be the home of our users on the
Internet. We are positioning ourselves as the friendly Internet network that
informs and entertains. As a result, we are able to develop communities of
interest, fostering user loyalty, increased usage and longer stays at our
Websites. In addition, the interactive resources on our Websites help us to
create communities of interest which are valuable to advertisers and e-commerce
merchants seeking to attract customers with specific interests.
OUR COMMUNITY
We are developing a substantial community of users, based in large part on
the content and community features of our network.
Users accessing our Websites are encouraged to register with us on either a
full or partial basis. Full registration requires users to provide us with the
user's name, e-mail address, home address, telephone number, occupation and
other personal information. A partial registration requires a user to provide
only a name and e-mail address. To encourage full registration, some of our
network's most popular features require prior registration, such as private chat
rooms, CUPIDO NET, our interactive meeting place, free e-mail and participation
in games and other promotions. Once a user is registered with our network, we
are able to communicate with the user by e-mail and otherwise seek to involve
the user in our community. Although historically we have been unable to track
the frequency with which a particular user accesses our Websites, we have
recently implemented technology that will permit us to measure more precisely
the activity levels of our registered users.
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We track our user traffic principally on the following basis:
- REGISTERED USERS--measures the cumulative number of users that have
registered with our network by providing information such as name, e-mail
address and address. Some of these registered users may no longer be
active users. Most of our users have not yet registered with our network.
- PAGE VIEWS--measures the number of pages opened by our users in a given
period and is a useful indicator for advertisers.
- VISITS--measures the number of visits to our Websites in a given period.
- UNIQUE VISITORS--measures the number of individual visitors in a given
period, such that an individual user that visits our Websites multiple
times in the relevant period is only counted one time.
We have generated statistics concerning our registered users. Our page view
data is supplied by I/Pro Netline reports. Our unique visitor numbers are
audited by I/Pro.
The table below sets forth, on a monthly basis over the last thirteen months
(September 1998 through October 1999) the evolution in our registered user base
and page views on a monthly basis:
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
MONTHLY PAGE VIEWS REGISTERED USERS
<S> <C> <C>
Sept 3,071,700 86,173
Oct 3,317,900 95,515
Nov 2,558,400 100,360
Dec 3,125,500 107,118
Jan 8,656,800 234,030
Feb 9,316,300 242,975
Mar 12,896,100 251,343
Apr 18,057,500 261,113
May 17,634,900 269,797
Jun 18,273,400 281,255
Jul 21,011,200 294,363
Aug 42,500,000 379,812
Sept 69,000,000 440,000
Oct 73,900,000 498,000
</TABLE>
We increased our registered user base from approximately 54,132 persons in
June 1998 to 291,567 in July 1999. From June 1998 to October 1999, the number of
pages viewed by our users increased from 3.0 million to 73.9 million per month.
We achieved a significant increase in registered users and user traffic in
January and February 1999, in part as a result of our purchase for $223,000 in
December 1998 from Mandic S.A. of its chat rooms in Brazil and their integration
into our network. In August 1999, our number of registered users and our user
traffic increased significantly. This latter increase was attributable, in part,
to the launching on August 1, 1999 of our first mass media-based branding and
advertising campaign. In the first three months of this campaign, our registered
users increased by approximately 69% to 498,515 at October 31, 1999 and the
number of pages viewed by our users increased by over 250% to 73.9 million in
the month of October 1999. We commenced measuring unique visitors in
March 1999. The number of unique visitors has increased from 174,800 in
March 1999 to approximately 1.6 million in October 1999.
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CONNECTIVITY
In order to broaden the services that we offer and to foster user loyalty,
we recently acquired the retail dial-up access subscribers of IMPSAT Corporation
in Argentina and Brazil and are in the process of acquiring its retail dial-up
access subscribers in Colombia. The total purchase price for these acquisitions
will be $21.5 million. As a result of these acquisitions, we have acquired
approximately 52,000 dial-up subscribers in Brazil and 14,000 dial-up
subscribers in Argentina and expect to acquire approximately 7,000 dial-up
subscribers in Colombia, for an aggregate total of approximately 73,000
subscribers.
We believe our connectivity services will enable us to develop an additional
source of revenue and to create closer ties with Internet users in Latin
America. We also anticipate that our dial-up access service will enhance the
content and e-commerce aspects of our business, because we should be able to
attract our dial-up subscribers to our Websites. We believe that increased use
of our Websites will increase advertisers' interest in placing advertisements
and sponsorships on our network and will encourage e-commerce merchants to
partner with us and drive our e-commerce revenues. For example, a substantial
majority of the dial-up subscribers that we expect to acquire from IMPSAT
Corporation currently are not registered users of our network. We intend to
market to these subscribers by, among other things, having our homepage appear
automatically when they connect to the Internet through our dial-up access
service.
We have begun an evaluation process to determine the most effective method
of migrating the IMPSAT Corporation Websites, which are currently used as the
homepages for some of these subscribers, to our Websites. We expect to continue
using the existing IMPSAT Corporation Websites during a transition period of
approximately nine months. During this transition, we anticipate that we will
gradually integrate our brand name and features onto these Websites before
migrating these subscribers entirely to our network of Websites.
We are not acquiring the telecommunications infrastructure, such as
points-of-presence, switches and backhaul capacity, required to provide retail
Internet dial-up access. The acquisitions will be limited to the subscribers and
staff required to provide retail dial-up access. We have entered into three-year
services agreements with subsidiaries of IMPSAT Corporation under which it will
provide to us the necessary telecommunications infrastructure for a fee per port
or "channel" made available to our customers for the transmission of data.
We plan initially to outsource help desk operations and technical support
for our dial-up access businesses. This approach should enable us to minimize
our fixed costs and respond more flexibly to changes in demand.
MARKETING
We depend upon advertising to develop our brand and to attract users to our
Websites and subscribers to our connectivity services. We believe that we have
already achieved significant brand name recognition and market share principally
due to positive word-of-mouth resulting from our country-specific content,
without conducting an aggressive marketing campaign in mass media. From our
inception in June 1997 until September 30, 1999, we spent an aggregate total of
approximately $8.0 million on marketing, sales and advertising (including
advertising received in barter transactions in exchange for advertising on our
network). By contrast, we expect to spend $15.5 million in the five months from
August 1, 1999 to year-end 1999. In the future, we expect our branding and
advertising expenses to represent the largest single component of our expenses
and have budgeted approximately $40 million for 2000.
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MARKETING EFFORTS UP TO AUGUST 1, 1999. During our first two years of
operations, we focused our resources upon the development of quality content in
Spanish and Portuguese and attractive interactive resources for our network. Our
marketing was limited to low-budget initiatives, including:
- targeted e-mail advertising;
- banner advertising on the Web with hyperlinks to our Websites; and
- special games and promotions on our Websites.
Our advertising seeks to position us as the friendly Internet network that
informs and entertains with quality content, ease of use and responsiveness to
user preferences. Our marketing campaigns communicate these values using the
advertising logo with the tag line underneath: EL SITIO: TU LUGAR EN INTERNET
("EL SITIO: Your Home on the Internet"). These brand values, together with our
country-specific content and interactive resources, are designed to personalize
the on-line experience of our users, so that they may develop a one-to-one
relationship with us. We conduct direct marketing to our registered users
through e-mail campaigns.
MARKETING EFFORTS SINCE AUGUST 1, 1999. We launched our first mass
media-based branding and advertising campaign on August 1, 1999. Principally as
a result of this campaign, during the first three months of this campaign
(through October 31, 1999), we experienced an approximately 69% increase in
registered users and an over 250% increase in page views during those three
months. This campaign seeks to build our brand by creating brand recognition in
our target markets, attracting new users to our network and increasing our
exposure and visibility to potential advertisers. To achieve these objectives,
the campaign emphasizes the user friendly attributes of our network with the
theme that EL SITIO SE ADAPTA A VOS ("EL SITIO adapts to you"). The spots and
print media utilize humor to communicate the idea that EL SITIO is a network
that is responsive to its users and provides information and resources useful to
their daily lives.
Our mass media-based branding and advertising campaign is under way in the
five countries for which we have launched country-specific Websites: Argentina,
Brazil, Mexico, Uruguay and the United States. Our campaign utilizes the
following media:
- broadcast media, including both television and radio;
- print media, including general circulation magazines, computer industry
advertising and business magazines and general circulation newspapers;
- on-line banner advertising with hyperlinks to our Websites;
- targeted e-mail;
- advertising and computer industry trade shows;
- billboard and other outdoor advertising; and
- general public relations to generate favorable free news media coverage.
The content and implementation of our branding and advertising campaign is being
coordinated by major advertising agencies in each of our markets under the
umbrella of WPP Group PLC. This campaign is targeting both potential users and
potential advertisers on our network.
In September 1999, we entered into an agreement with Sammy Sosa, the
renowned baseball player, and Player's Choice International L.L.C. under which
we will have the exclusive right to utilize, modify, reproduce, distribute,
display and transmit Sammy Sosa's name in electronic form for use on the
Internet. Sammy Sosa has agreed to use his best efforts to increase awareness of
our Internet portals by wearing clothing and accessories bearing our logo on at
least four nationally televised events during the term of the agreement and by
attending three of our promotional events per year. Sammy Sosa has also agreed
to make himself available for at least one television show, one radio show and
one still photo advertisement, and for at least three chat sessions per year. As
consideration for entering into
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the agreement, Sammy Sosa will receive a total of $1.0 million and 25,000 common
shares of our company, with an option to purchase on or before January 31, 2001
an additional 25,000 common shares at a 25% discount from the closing trading
price of the common shares on January 29, 2001. Additionally, Sammy Sosa and
Player's Choice International L.L.C. will receive a percentage of the
advertising revenues generated and actually received as a result of the
agreement. The initial amount of the discount will be remeasured, on a quarterly
basis, based on the fair value of the common shares at the time they are issued.
Our marketing strategy seeks, among other things, to build advertising
relationships and generate revenues. Our sales force is focused on major
advertisers and advertising agencies. We believe that relationships with Latin
American advertising agencies are important because they influence advertising
buying decisions by companies in the region.
In October 1999, we entered into a letter of intent to establish an
arrangement with J. Walter Thompson Argentina S.A., under which it will purchase
advertising from us on each of our country-specific Websites and on our global
Website. We will advertise J. Walter Thompson's products and services, using
banners, sponsorships and other techniques. J. Walter Thompson has agreed to
place $3 million of advertising by its clients on El Sitio's network of
Websites, with a commission of $1 million to J. Walter Thompson. The revenues
recognized by El Sitio under this arrangement will be recognized net of this
commission. In addition, we have agreed to obtain approximately $20 million of
the advertising that we intend to purchase during 2000 in Argentina, Brazil,
Chile, Colombia, Mexico, the United States and Venezuela, using J. Walter
Thompson as our advertising agency.
SALES
We expect to generate sales from three different sources:
- advertising;
- connectivity; and
- e-commerce.
The following table sets forth, for the periods indicated, our net revenues
by country of operation (in thousands):
<TABLE>
<CAPTION>
EL SITIO EL SITIO EL SITIO EL SITIO EL SITIO CONSOLIDATED
PERIOD OR YEAR ARGENTINA URUGUAY MEXICO BRAZIL USA TOTAL
- -------------- --------- -------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
1997 (partial year)............................ $267 $ -- $ -- $ -- $ -- $ 267
1998........................................... $657 $106 $ 17 $ -- $ -- $ 780
Nine months ended September 30, 1999........... $715 $455 $339 $ 12 $ 3 $1,524
</TABLE>
ADVERTISING. At September 30, 1999, we had an internal sales organization
of 30 professionals, who are based at our offices in Buenos Aires (10 persons),
Sao Paulo (6), Mexico City (6), Miami (6) and Montevideo (2). We plan to open
additional offices in Colombia during the fourth quarter of 1999 and in Chile
and Venezuela in 2000. A significant portion of our sales personnel's income is
commission-based. All of our sales personnel sell advertising exclusively for
us. We are also seeking representation agreements with advertising agencies for
the sale of advertisements on our Websites. Our sales personnel focus on both
selling advertisements on the Websites and developing long-term strategic
relationships with clients.
We seek to attract corporate advertisers by educating and communicating with
them regarding the benefits of the Internet as a business tool. Advertising on
the Internet by Latin American companies is still in an early stage of
development. Many Latin American companies have not developed a Website or an
Internet strategy and need advice on how to implement such a strategy. We help
companies to develop and implement Internet strategies.
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Our relationship with Arcor S.A., the world's largest hard sweets producer,
exemplifies our approach with advertisers. In May 1997, we approached Arcor
regarding an advertising program on the Internet. The plan evolved into a
complete on-line campaign consisting of a tri-lingual Website, Web pages for its
products, games, promotions, and interactive press management and maintenance.
We have produced over 1,400 Web pages for Arcor and have an advertising contract
with Arcor for all of Latin America. Arcor advertisements have appeared on our
Websites in Argentina, Brazil and Mexico.
We offer an assortment of advertising options to our clients, including the
following:
- banner advertising;
- sweepstakes and promotions;
- button advertising and sponsorships;
- content development;
- contextual links to merchandise;
- opt-in direct marketing/lead generation;
- e-mail sponsorship programs;
- pre- and post-campaign market research; and
- celebrity event sponsorships.
We offer our advertisers the option to display their advertisements on one
or more of our country Websites, or on a regional basis. Our advertisers also
have the flexibility to specify the channels on our network and the Website
pages on which they wish their messages to appear.
Some of our advertising clients include:
- MGM Networks Latin America;
- Nortel Networks;
- Lucent Technologies;
- Wall Street Journal Interactive;
- Arcor S.A.;
- Intel Corporation;
- Supermercados Norte;
- Sun Microsystems; and
- Banco de Galicia y Buenos Aires.
We have derived a substantial majority of our revenues to date from the sale
of advertisements and sponsorships. In the nine months ended September 30, 1999,
we had 116 advertisers, representing an increase from 18 advertisers in the
corresponding period of 1998. In the nine months ended September 30, 1999, three
of our customers, Gastardelli, Perez y Gaudio Publicidad, an Argentine publicity
company, IMPSAT S.A. and Gramatur accounted for 7.8%, 7.9% and 6.3%,
respectively, of total revenues. In 1998, each of four advertisers, IMPSAT S.A.,
Arcor, S.A., Compaq Corporation and Antel (Uruguay), accounted for more than 10%
of our revenues. Gastardelli, Perez y Gaudio Publicidad acquired a large block
of advertising to resell to its advertising customers. We intend to pursue
similar relationships with other advertising agencies and brokers.
Prior to November 1998, we sold advertising primarily at a fixed price per
month for a fixed banner. Currently, our markets are evolving and appear to be
developing along the lines of the U.S. Internet industry model, in which
advertising is sold on a cost-per-thousand impressions, or "CPM,"
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basis. The cost of our advertising products varies according to the product. For
example, a banner with "click-through" or "hyper-link" capabilities is more
costly than a simple textual banner. Similarly, sponsorship of a channel or page
is more costly than acquiring a fixed number of CPMs. Our contracts with
advertisers and advertising agencies range from one to twelve months. Our
advertisers have tended to receive a guaranteed number of impressions for a
fixed fee. In the future, we expect that an increasing portion of our
advertising contracts will be long-term CPM-based contracts.
We provide our advertisers with statistics related to the traffic on our
network provided by ABC Interactive. Receipt of audited statistics enables our
advertisers to assess more accurately the market penetration of their
advertising message. We believe our provision of audited statistics to
advertisers gives us a competitive advantage over networks which do not provide
such statistics to advertisers.
CONNECTIVITY. In light of our acquisitions of IMPSAT Corporation's retail
dial-up access customers in Argentina and Brazil and our pending acquisition of
its retail dial-up access customers in Colombia, we are integrating the sales
personnel in each country into our network's existing sales team. We expect to
gain economies of scale as we eliminate overlapping functions and integrate
sales strategies and resources. We are currently assessing our sales strategy
and personnel to determine the best way to integrate our connectivity services
into our mass media-based branding and advertising campaign. By initially
focusing on the connectivity services market in Argentina, Brazil and Colombia
more effectively than IMPSAT Corporation had done before, we hope to increase
our subscriber base. To that end, we expect to expand our sales activities
beyond telemarketing and word-of-mouth advertising to increase our visibility.
We expect to price our connectivity services in response to market
conditions. We are also likely to launch new pricing initiatives in an effort to
increase the loyalty of subscribers to our network. Initially, we anticipate
maintaining the current sales and pricing strategies for our dial-up access
subscribers. Although we will vary pricing and sales strategies by country, the
connectivity businesses that we are acquiring offer a range of plans ranging
from unlimited access with e-mail accounts to e-mail access only plans. The
following illustrates the principal products, each of which includes an e-mail
account, offered at August 31, 1999 in Argentina and Brazil, our two principal
markets for connectivity services:
<TABLE>
<CAPTION>
Argentina Brazil
- --------- ------
<S> <C>
- - unlimited access (with three e-mail - unlimited access;
accounts);
- - unlimited access; - 20 hours per month;
- - 15 hours per month; - ten hours per month;
- - six hours per month; and - one hour per month; and
- - e-mail access only. - e-mail access only.
</TABLE>
For Internet use above the pre-paid access levels, subscribers are charged
per-minute rates. In Argentina, at September 30, 1999, the prices for
connectivity services ranged from $45.00 per month (plus VAT) for unlimited
access with three e-mail accounts to $5.00 per month (plus VAT) for e-mail
access only. In Brazil, at September 30, 1999, the prices for connectivity
services ranged from approximately R$34.90 per month for unlimited access to
approximately R$4.95 per month for e-mail access only. In Colombia, at
September 30, 1999, the prices for connectivity services ranged from
approximately 40,000 Colombian pesos per month for unlimited access to 29,800
Colombian pesos per month for limited access. The average monthly subscription
fee in Argentina in September 1999 was $24.80 per month, in Brazil was R$12.41
per month and in Colombia was $19.95 per month. The weighted average
subscription fee in September 1999 for the subscribers to be transferred in
Argentina, Brazil and Colombia was $15.74.
E-COMMERCE. We recently added an e-shopping channel to our network. This
channel provides links to other Websites for on-line sale by local and
U.S.-based e-merchants of books, flowers, music, gifts and technology products.
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CORPORATE ALLIANCES AND CONTENT AND APPLICATIONS PROVIDERS
In order to increase traffic at our Websites, expand our on-line community
and build our brand, we continue to pursue strategic relationships with business
partners that offer quality content, technology and distribution capabilities as
well as marketing and cross-promotional opportunities.
CONTENT. We have entered into agreements with leading content producers
such as Reuters, Notimex and Infosic, among others, under which such companies
provide content to us for publication on our network in return for a fixed fee
or revenue-sharing arrangement based on minimum page views.
CONNECTIVITY. In connection with our acquisitions of retail dial-up access
customers of IMPSAT Corporation in Argentina and Brazil, and our pending
acquisition of its retail dial-up access customers in Colombia, we have not
acquired, and will not acquire, the telecommunications infrastructure to provide
these services. Instead, we will outsource that infrastructure from third-party
providers, initially, from IMPSAT Corporation. We have entered into three-year
services agreements with subsidiaries of IMPSAT Corporation in Argentina and
Brazil, according to which, in exchange for a fee per port or "channel" made
available to our customers for the transmission of data, IMPSAT will provide us
with the telecommunications infrastructure and equipment installation and
maintenance services to provide Internet dial-up access to our subscribers on a
24-hour, 365-day basis using equipment owned by subsidiaries of IMPSAT
Corporation. We currently estimate that the aggregate fee payable by us for
these services will be approximately $500,000 per month. The terms of the
service agreements will be automatically extended for another period of three
years unless prior notice is given by either party to the contrary. The service
agreements do not restrict IMPSAT Corporation from providing better rates to
other dial-up access providers. However, each service agreement provides for a
price adjustment if after the first year of the agreement, we receive an offer
from a third party on more favorable terms. If the subsidiary of IMPSAT
Corporation is unable to match or exceed the offer we receive from such
third-party competitor, we have the right to terminate the agreement, with no
penalties for early termination. Each service agreement also contains quality
standards provisions. We plan to enter into a substantially similar agreement in
Colombia by the end of the fourth quarter 1999.
APPLICATIONS. We have recently entered into several important agreements
relating to the provision of a variety of third-party licenses and other
applications. For example, we have entered into an agreement with Inktomi, a
leading Internet company, under which we will acquire the search engine software
and access to the database of Inktomi, a leader in search technology with a
library of over 110 million sites. We also recently concluded a non-binding
letter of intent with From2.com, a Miami-based e-commerce logistics company, for
it to provide logistics and fulfillment services for international e-commerce
transactions conducted on our network. Finally, through our recently signed
agreement with USA.Net, a leading provider of e-mail and messaging services, our
users will have access to free e-mail services in Spanish, Portuguese and
English.
E-COMMERCE. We are pursuing several revenue-sharing relationships and joint
venture opportunities with e-commerce merchants in the United States and Latin
America to develop electronic retail operations in the flower, gifts, books,
music and hardware and software areas. We currently offer limited e-commerce
services by way of the links on our e-shopping channel to the websites of
various e-merchants. Our agreement with From2.com, once finalized, would allow
our users to calculate the actual cost of Internet purchases from locations
outside of their own country by calculating shipping, handling, taxes and
customs costs required to deliver the product.
RECENT STRATEGIC INVESTORS. On July 7, 1999, we completed a private
placement of our Class A convertible preferred shares to strategic investors,
including Hicks, Muse, Tate & Furst Incorporated and the Cisneros Group of
Companies (through their jointly owned IAMP (El Sitio) Investments, Ltd.), and
GCC Investments, LLC, an indirect subsidiary of GC Companies, Inc., which owns
and operates
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General Cinemas Theatres. In connection with our acquisitions of retail dial-up
customers from IMPSAT Corporation, IMPSAT Corporation will purchase
approximately $21.5 million of our Class A convertible preferred shares. On
August 31, 1999, we entered into an agreement with TV Azteca, S.A. de C.V.,
pursuant to which we will receive $3.5 million of advertising time on TV
Azteca's television network in return for approximately $2.5 million of Class A
convertible preferred shares.
In mid-November 1999, we completed a private placement of 1,111,111 Class B
convertible preferred shares for a purchase price of $10.0 million in cash, or
$9.00 per Class B convertible preferred share. Purchasers of the Class B
convertible preferred shares consisted of Intel Atlantic, Inc., a subsidiary of
Intel Corporation, and Latinvest Asset Management do Brasil, Ltda., an affiliate
of Globalvest Management Company, L.P. Each Class B convertible preferred share
will automatically convert, on the date six months after the closing date of
this offering, into one common share. The difference between the initial public
offering price per common share and $9.00 price per Class B convertible
preferred share will be amortized as a deemed dividend during the same six-month
period.
We believe these strategic investors present us with opportunities to build
strategic relationships, expand brand awareness and grow our network. For
example, our relationship with Hicks, Muse Tate & Furst Incorporated and the
Cisneros Group of Companies is expected to give us access to media in Latin
America in which these shareholders have significant interests, and on which we
can promote our Websites and build brand awareness, including six radio stations
and one television station in Chile, and a number of pan-Latin American cable
television programming networks including Much Music and the Playboy Channel.
The Cisneros Group of Companies also controls Venevision, the number one
television network in Venezuela, and has an interest in Univision, a leading
Spanish-language television network in the United States. In Argentina, Hicks,
Muse also has interests in Canal 11 and Canal Azul, two television channels; in
Cablevision; and in numerous magazines and various sports programming networks.
GCC Investments, LLC is expected to assist us, among other things, in our
marketing efforts by contributing its extensive retail expertise to help us
develop our e-commerce opportunities. In addition, TV Azteca is the number two
television network in Mexico. We intend to work closely with our strategic
investors in order to take advantage of the synergies created by our
relationships. For example, we have commenced discussions with a number of
potential clients or joint venture partners as a result of contacts established
through our strategic investors.
TECHNOLOGY
NETWORK OF WEBSITES. We make our Websites available using 17 Microsoft
Windows NT servers and three Linux servers as our central production servers,
which are currently located at the server farm facilities of Exodus
Communications in New Jersey. We also have a back-up production server at IMPSAT
Corporation's server farm facilities in Miami, Florida. In each of Argentina,
Brazil, Mexico, Uruguay and the United States, we maintain a data center for
development and staging.
We have implemented an environment in which each server can function
separately. Key components of our server architecture are served by multiple
redundant machines. As part of the Exodus server farm facilities, we have up to
100Mbps of bandwidth access over our Internet connections, which are fully
redundant so that if a failure in the network or equipment of one service
provider occurs, traffic is automatically routed through one of several other
providers. Each of Exodus Communications and IMPSAT Corporation provides
comprehensive facilities management services, including human and technical
monitoring of all production servers 24 hours per day, 7 days per week. All
facilities are protected by multiple power supplies. Our operations will depend
on the ability of IMPSAT Corporation and Exodus Communications to provide
adequate space, air-conditioning, telecommunication connectivity and protection
of their systems against damage from fire, hurricanes, power loss,
telecommunications failure, break-ins or other events.
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We employ in-house and third-party monitoring software for our servers,
processes and network connectivity. Reporting and tracking systems generate
daily traffic, demographic and advertising reports. All of our production
systems are copied to backup tapes each night and regularly stored in a storage
facility on Exodus's premises as well as in a storage facility at our offices in
Buenos Aires. We have implemented these various redundancies and backup systems
in order to minimize the risk associated with damage from fire, power, loss,
telecommunications failure, break-ins, computer viruses and other events beyond
our control.
Our network of Websites must accommodate a high volume of traffic and
deliver frequently updated information. Components or features of our network
have in the past suffered outages or experienced slower response times because
of equipment or software downtime. We are in the process of migrating our
platform and our applications to a Unix platform using Sun Microsystems servers,
which we believe will increase the reliability, availability and serviceability
of our network. We anticipate that this migration process, which we believe will
not affect the continuous operation of our network, will be completed by the end
of 1999.
CONNECTIVITY. In connection with our acquisitions of retail dial-up access
customers of IMPSAT Corporation in Argentina and Brazil, and our pending
acquisition of its retail dial-up access customers in Colombia, we have not
acquired and will not acquire the telecommunications infrastructure, such as
telecommunications bandwidth, points-of-presence, switches and backhaul
capacity, to provide these services. Instead, we will outsource that
infrastructure from third-party providers-- initially, from subsidiaries of
IMPSAT Corporation. We have entered into three-year services agreements with
subsidiaries of IMPSAT Corporation in Argentina and Brazil, according to which,
in exchange for a fee per port or "channel" made available to our customers for
the transmission of data, IMPSAT Corporation will provide us with the
telecommunications infrastructure and equipment installation and maintenance
services to provide connectivity services to our subscribers on a 24-hour,
365-day basis using equipment owned by subsidiaries of IMPSAT Corporation. We
currently estimate that the aggregate fee payable by us for these services will
be approximately $500,000 per month.
IMPSAT Corporation uses routers with average connectivity speed of 33Kbps,
with a majority of subscribers migrating to a speed of 56Kbps. IMPSAT S.A.
(Argentina) subscribers are able to connect to the Internet through special
Internet dedicated phone lines at rates significantly cheaper than connecting
through conventional phone lines.
COMPETITION
Many companies provide Websites, connectivity services and e-commerce
targeted to Spanish- and Portuguese-speaking audiences. All of these companies
compete with us for user traffic, advertising dollars and e-commerce
opportunities. The market for Internet content companies in Latin America is new
and rapidly evolving. Competition for users, advertisers and e-commerce
opportunities is intense and is expected to increase significantly in the future
because there are no substantial barriers to entry in our markets.
We compete with providers of content and services over the Internet,
including Web directories, portals, search engines, content sites, Internet
service providers and sites maintained by government and educational
institutions.
We face competition on both a country-specific and regional level. Our
primary competitors include, among others, StarMedia and Terra Networks (in most
of Latin America, the United States and the Iberian peninsula), Quepasa.com and
Yupi (in the United States), Clarin Digital (in Argentina) and Universo Online
(in Brazil). We also face competition from Spanish-and/or Portuguese-language
versions of U.S. services, such as Yahoo!, America Online and Prodigy
Communications. Our competitors may develop content that is better than ours or
that achieves greater market acceptance. It is also possible that new
competitors may emerge and acquire significant market share. Some of our
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established competitors and potential new competitors may have better brand
recognition and significantly greater financial, technical and marketing
resources than our company.
As a result of our completed and pending acquisitions of the retail dial-up
access customers in Argentina, Brazil and Colombia of IMPSAT Corporation, we
recently entered the dial-up access services market, which is extremely
competitive and is characterized by rapidly changing technology and evolving
standards. We do not own telecommunications infrastructure and, therefore, will
depend upon telecommunications providers to carry our Internet traffic.
Increased competition could require us to lower our prices, increase our selling
and marketing expenses, and raise subscriber acquisition costs. New technologies
permitting faster dial-up may make our connectivity services business obsolete.
We may not be able to retain our users or, if we do, to offset the effect of
increased costs through an increase in users, user revenues or revenues from
other sources.
We expect to experience increased competition from the traditional
telecommunications carriers. We believe that there is a move toward horizontal
integration by these carriers through acquisitions of, joint ventures with, or
the wholesale purchase of connectivity from Internet service providers in order
to meet the Internet connectivity requirements of their business customers.
We also compete with traditional forms of media, such as newspapers,
magazines, radio and televison, for advertisers and advertising revenue. If
advertisers perceive the Internet or our network to be a limited or an
ineffective advertising medium, they may be reluctant to devote a portion of
their advertising budget to Internet advertising or to advertising on our
network.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We consider our EL SITIO, O SITE and medallion design trademarks and service
marks to be important to our success. We are pursuing the registration of our
trademarks and service marks in the United States and in key countries of Latin
America as well as Spain and Portugal. Although some of the countries have
registered our marks, we cannot predict with certainty whether the trademarks
office of the remaining countries will do the same. If we are unable to obtain a
registration in a particular country, we would have trademark or service mark
rights to the extent that we use the mark, but the rights would not be as strong
as if they were registered. Some companies, including other participants in the
Internet industry, use and/or may use trademarks or service marks in English or
other languages which, when translated, are similar to certain of our core
marks. This usage may hinder our ability to build a unique brand identity and
may possibly lead to trademark disputes, in that we may be sued for trademark
infringement in court or we may have the validity of our applications and/or
registrations challenged at government agencies. Although we do not believe that
such proceedings against us ultimately would be meritorious, we cannot predict
that with certainty. Should we lose the right to use a trademark or service
mark, we may be forced to adopt a new mark which would result in the loss of
substantial resources and brand identity. In any event, whether successful or
not, litigating a trademark dispute would result in the expenditure of monetary
resources and the diversion of executives' time. Any inability to protect,
enforce or use our trademarks, service marks or other intellectual property may
have a material adverse effect on our company.
We also depend upon technology licensed from third parties for chat,
homepage, search and related Web services. Any dispute with a licensor of the
technology may result in our inability to continue to use that particular
technology. Additionally, there may be patents issued or pending that are held
by third parties and that cover significant parts of the technology, products,
business methods or services used to conduct our business. We cannot be certain
that our technology, products, business methods or services do not or will not
infringe valid patents or other intellectual property rights held by third
parties. In the event that a third party alleges infringement, we may be forced
to take a license, which we may not be able to obtain on commercially reasonable
terms. We may also incur substantial expenses in defending our company against
third party infringement claims, regardless of the merit of
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these claims. Successful infringement claims against us could result in
substantial monetary liability and/or being prevented by a court from conducting
all or a part of our business that falls within the scope of the asserted
patent, leading to substantial expenditures to redesign and/or license
technology.
GOVERNMENT REGULATION
There are currently few laws or regulations directly applicable to access to
or commerce on the Internet. However, due to the increasing use of the Internet,
a number of legislative and regulatory proposals are under consideration by
various governments and governmental agencies or bodies.
The following is a brief summary of the current regulatory framework for the
Internet industry in the countries in which we have or plan to have operations:
- ARGENTINA. There are no specific laws or regulations governing on-line
content providers in Argentina, but dial-up access providers must hold a
correspondent license from the national telecommunications authority. We
have applied for that license and expect to receive it in due course. The
timing for completion of this application process is unclear, particularly
given recent regulatory changes in Argentina. In the interim period prior
to our receipt of the required license we plan to operate the acquired
business pursuant to a management and reseller agreement. Dial-up access
providers are also required to include a legend on their invoices to
clients, stating that the national government does not control or regulate
the information on the Internet and to provide contact information for
help with blocking undesirable content.
- BRAZIL. There are no laws or regulations governing on-line content
providers or dial-up access providers in Brazil.
- COLOMBIA. There are no laws or regulations governing on-line content
providers. Telecommunications services are public services for which a
value-added license must be obtained from the Colombian government. We are
in the process of applying for that license and expect to receive it in
due course. In the interim period prior to our receipt of the required
license we plan to operate the acquired business pursuant to a management
and reseller agreement. A dial-up access provider must be incorporated as
a Colombian company, file an application with the national communications
authority and meet specific technical and economic criteria. Finally, a
dial-up access provider is required to pay a royalty for the license of 3%
of the net annual income.
- MEXICO. In Mexico, the federal telecommunications law requires that each
provider of any value-added services (which includes Internet access
services) register with the telecommunications registry of its national
telecommunications authority. This registration requires, among other
things, disclosure of foreign investments, a list of transmission
equipment and a technical description of the services provided. The
registration of El Sitio Mexico was declared effective by the Mexican
Federal Telecommunications Commission in early November 1999.
- URUGUAY. There are no laws or regulations governing on-line content
providers or dial-up access providers in Uruguay.
- UNITED STATES. There are currently few U.S. laws or regulations which
specifically regulate communications or commerce over the Internet.
On-line content providers may be subject to lawsuits for information that
they disseminate, such as lawsuits claiming defamation and infringement of
copyrighted materials.
It is possible that laws or regulations may be adopted or applied with
respect to the Internet relating to issues such as the following:
- sales and other taxes;
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- user privacy;
- pricing controls;
- characteristics and quality of services and products;
- consumer protection;
- cross-border e-commerce;
- libel and defamation;
- copyright, trademark and patent infringement; and
- other claims based on the nature and content of Internet materials.
The adoption or application of any of these laws or regulations may
negatively affect the growth in the use of the Internet, which could, in turn,
decrease the demand for our services and products, increase our costs of doing
business, or otherwise have a material adverse effect on our company.
EMPLOYEES
At September 30, 1999, we had 285 full-time employees, including 79 in
production and development, 83 in sales and marketing, 30 in technology and 93
in finance and administration. We believe that we have attracted an experienced
management team and a highly professional staff.
We have hired 48 employees, who previously worked for IMPSAT Corporation or
its subsidiaries, following our acquisition of its retail dial-up access
customers in Argentina and Brazil. We expect to hire five additional employees
who previously worked for IMPSAT Corporation or its subsidiaries after
completion of our pending acquisition of IMPSAT's retail dial-up access
customers in Colombia.
FACILITIES
Our headquarters are located in Buenos Aires, where we currently lease
approximately 1,300 square meters. We also are leasing additional premises for
our new corporate headquarters in that city, to which we anticipate moving in
before the end of 1999.
We lease approximately 240 square meters in Sao Paulo, 265 square meters in
Mexico City, 80 square meters in Montevideo and 230 square meters in Miami.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to our knowledge,
threatened against us.
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MANAGEMENT
DIRECTORS
Our articles of association provide for a minimum of nine directors. There
is currently one vacancy on our board of directors.
The following table presents the names and ages of each current member of
our board of directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Roberto Vivo-Chaneton..................... 46 Co-founder and Chairman of the Board
Roberto Cibrian-Campoy.................... 40 Co-founder and Director
Carlos Cisneros........................... 34 Director
Michael Greeley........................... 36 Director
Michael Levitt............................ 40 Director
Guillermo Liberman........................ 31 Director
Sofia Pescarmona.......................... 26 Director
Ricardo Verdaguer......................... 49 Director
</TABLE>
EXECUTIVE OFFICERS
The following table sets forth the names, ages and positions of each of our
executive officers. Executive officers are appointed by, and serve at the
discretion of, our board of directors.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- --------
<S> <C> <C>
Roberto Cibrian-Campoy.................... 40 Co-founder, President and Chief Executive Officer
Walter Forwood............................ 36 Chief Operating Officer
Daniel Rotsztain.......................... 37 Executive Vice President, Business Development and
Strategic Planning
Horacio Milberg........................... 52 Chief Financial Officer and Secretary
Alfredo Jimenez de Arechaga............... 46 Chief Administrative Officer, Controller and
Treasurer
Eduardo Weber............................. 38 Chief Technology Officer
Lucia Suarez.............................. 50 Vice President--Product Development
</TABLE>
ROBERTO VIVO-CHANETON is our co-founder and has served as Chairman of our
board of directors since our inception. Mr. Vivo was one of the founders of, and
since 1988 has served as a Director and Deputy Chief Executive Officer, of
IMPSAT Corporation, a provider of private networks of integrated data and voice
communications systems in a number of countries in Latin America. Mr. Vivo holds
LICENCIATURAS in Business Administration from Universidad Argentina de la
Empresa and Macroeconomics from Instituto Torcuato di Tella, both in Buenos
Aires.
ROBERTO CIBRIAN-CAMPOY is our co-founder and has served as the Chief
Executive Officer, President and a Director since our inception. In 1992,
Mr. Cibrian founded and served as President of Cibrian-Campoy Creativos, S.A., a
producer of computer animation and developer of multimedia projects. From 1989
to 1992, Mr. Cibrian served as Advisor to the Minister of Culture and Education
of Argentina. From 1982 to 1989, Mr. Cibrian practiced architecture at his own
firm and as a designer with a leading Buenos Aires architecture firm.
Mr. Cibrian holds a degree in Architecture from the Universidad de Belgrano,
Buenos Aires.
CARLOS CISNEROS has served as a Director since June 1999. In October 1996,
Mr. Cisneros founded and became Chief Executive Officer of the Cisneros
Television Group, a member of Ibero-American Media Partners, II, Ltd. In
January 1998, Mr. Cisneros was named Vice-Chairman of Ibero-American Media
Partners, II, Ltd., an investment fund jointly owned by the Cisneros Group of
Companies and
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Hicks, Muse, Tate & Furst Incorporated. From June 1993 to October 1996,
Mr. Cisneros was Vice-President of New Business Development at Venevision
International. Mr. Cisneros holds a Bachelor of Arts degree in Political Science
from American University in Washington, D.C.
MICHAEL GREELEY has served as a Director since July 1999. Since 1994,
Mr. Greeley has been a Senior Vice President of GCC Investments, Inc., the
private equity investment group of GC Companies, Inc., which owns and operates
General Cinema Theatres. Prior to 1994, Mr. Greeley was a Vice President at
Wasserstein Perella & Co., Inc., an international investment bank. Mr. Greeley
also currently serves as a director of American Capital Access Holdings, LLC,
Fuelman, Inc. and MotherNature.com, Inc. Mr. Greeley was previously a director
of Global TeleSystems Group, Inc. Mr. Greeley graduated from Williams College
with honors and has a Master of Business Administration degree from Harvard
Business School.
MICHAEL J. LEVITT has served as a Director since July 1999. Mr. Levitt has
been a partner of Hicks, Muse, Tate & Furst Incorporated since 1996. Mr. Levitt
serves as a director of Capstar Broadcasting Corporation, AMFM, Corp, Grupo MVS,
S.A. de C.V., International Home Foods, Inc., LIN Television Corp., Regal
Cinemas, Inc., STC Broadcasting, Inc., RCN Corporation, and Ibero American Media
Partners, L.P. Mr. Levitt received his undergraduate and Juris Doctor degrees
from the University of Michigan.
GUILLERMO LIBERMAN has served as a Director since July 1997. Mr. Liberman is
also a Director of Sociedad Latinoamericana de Inversiones, the parent company
of Grupo Liberman. Grupo Liberman is involved in agribusiness, fisheries,
telecommunications and hotel development. He holds a Bachelor of Science degree
in Business Administration from Babson College in Massachusetts and a Masters of
Business Administration degree from the University of Miami in Florida.
SOFIA PESCARMONA has served as a Director since October 10, 1999.
Ms. Pescarmona is Assistant to the Chief Executive Officer of IMPSAT
Corporation, and has also been a Director of IMPSAT since February 1996. From
1994 to January 1998, Ms. Pescarmona held various positions within IMPSAT
Corporation. Ms. Pescarmona holds a Bachelor of Arts degree from Tufts
University and a Masters of Business Administration degree from IAE University
in Argentina.
RICARDO VERDAGUER has served as a Director since July 1997. Mr. Verdaguer
has served as the President and Chief Executive Officer of IMPSAT Corporation
since 1988. In 1988, as a senior executive of Corporacion IMPSA, S.A., an
Argentina-based multinational company with holdings in manufacturing,
transportation and telecommications, Mr. Verdaguer was involved in the founding
of IMPSAT Corporation. From 1976 to 1988, Mr. Verdaguer occupied various
operational positions at Industrias Metalurgicas Pescarmona as an
electromechanical engineer. He holds an Engineering degree from the Universidad
Juan Agustin Mazza, Mendoza, Argentina.
WALTER FORWOOD has served as our Chief Operating Officer since November
1999. From July 1998 to October 1999, Mr. Forwood served as Managing Director
and Chief Financial Officer of Ibero-American Media Partners, II, Ltd., an
investment fund jointly owned by the Cisneros Group of Companies and Hicks,
Muse, Tate & Furst Incorporated. During the same period, Mr. Forwood also served
as Chief Financial Officer of Cisneros Television Group, a member of
Ibero-American Media Partners, II, Ltd. From September 1997 to October 1999, Mr.
Forwood was the Chief Financial Officer of Imagen Satelital, a programming
company owned by Cisneros Television Group. Mr. Forwood previously served as
Chief Financial Officer of Corporacion IMPSA S.A. in 1996 and 1997. Prior to
that time, beginning in 1993, he held various financial responsibility positions
with Industrias Metalurgicas Pescarmona S.A.I.C. y F., a subsidiary of
Corporacion IMPSA S.A., beginning in 1993. Mr. Forwood was an associate director
of Continental Bank in Buenos Aires, Argentina from 1988 through 1992. Mr.
Forwood holds a Bachelor of Science degree in Economics from the Universidad
Argentina de la Empresa and a Masters of Science in Finance from Florida
International University.
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DANIEL ROTSZTAIN has served as our Executive Vice President, Business
Development and Strategic Planning since October 1999. He served as our Chief
Operating Officer from September 1998 to October 1999. From September 1998 to
July 1999, Mr. Rotsztain also served as our Country Manager for Argentina. From
1995 to 1998, Mr. Rotsztain served as the South America Regional Director and
Country Manager-Argentina of GTECH Foreign Holdings Corporation, a company
specialized in software and data processing services for the gaming industry.
From 1994 to 1995, Mr. Rotsztain served as a strategic marketing executive for
IMPSAT Corporation. Mr. Rotsztain was founder, and from 1992 to 1994 served as
manager of, Nexus Urbanos S.R.L., a consulting and information services company
for Argentine municipalities. From June 1990 to September 1993, Mr. Rotsztain
served as Executive Director of World Trade Center S.A.
(Argentina-Chile-Paraguay), an international commerce services and real estate
company. Mr. Rotsztain holds a Bachelor of Science degree in Computer Science
from Escuela Tecnica ORT, Buenos Aires, Argentina and a Master in Computer
Science degree from Universidad de Belgrano, Buenos Aires.
HORACIO MILBERG has served as our Chief Financial Officer since July 1999
and served as a financial advisor to our board of directors from September 1998
to July 1999. From April 1993 to July 1999, Mr. Milberg served as an independent
financial advisor and investment manager. Mr. Milberg previously served as:
senior finance officer of Corporacion IMPSA, S.A.; Vice President, Investment
Banking, Latin America for CS First Boston Corporation, New York; and Vice
President and Director for Latin America for The Chase Manhattan Bank, N.A., New
York and London. Mr. Milberg holds an undergraduate degree from Universidad de
Buenos Aires and a Master of Business Administration degree with honors from the
J. L. Kellogg Graduate School of Management, Northwestern University, where
Mr. Milberg was a Fulbright Scholar.
ALFREDO JIMENEZ DE ARECHAGA has served as our Chief Administrative Officer
since July 1999 and also served as our Chief Financial Officer from
November 1998 to July 1999. From 1995 until November 1998, Mr. Jimenez served in
the Corporate Treasury of Corporacion IMPSA, S.A. From 1994 to 1998,
Mr. Jimenez served as the Administration Manager for both Resis Ingenieria,
S.A., and International Satellite Communication Holding Ltd. (Switzerland), each
a subsidiary of IMPSAT Corporation. From 1992 to 1994, Mr. Jimenez served as a
Financial Manager for Puentes and Construcciones Ltda. in Uruguay. Mr. Jimenez
holds an agricultural engineering degree from Universidad Republica Oriental del
Uruguay, a Masters degree in Project Evaluation and Economics, and a Master in
Business Administration degree from O.R.T. University in Uruguay.
EDUARDO WEBER has served as our Chief Technology Officer since August 1999.
From October 1997 to February 1999, Mr. Weber served as vice-president of
T/Subcero S.A., a consulting company and developer of digital media projects.
From August 1995 to August 1997, Mr. Weber served as Technical Manager of Clarin
Internet, the Website for a leading Argentine daily newspaper. From
January 1991 to August 1995, Mr. Weber was General Manager of Weber Terro
s.r.l., a multimedia company. Mr. Weber holds an engineering degree from
Universidad de Buenos Aires.
LUCIA SUAREZ has served as our Vice President--Product Development since
October 1999. From 1999 until the present, Ms. Suarez has served as president of
Suarez/Kirzner S.A., an independent production company which creates television
programs for Argentina and abroad. From 1996 to 1998, Ms. Suarez served as a
Program Director for America TV-Canal Dos. During this period, Ms. Suarez was
responsible for artistic direction, the supervision of internal and external
production, design, creation of program formats and direction of production
teams. From 1995 to 1996, Ms. Suarez served as News Director for Libertad-Canal
9 where she was responsible for managing the news department and general
production of daily news programs. From 1992 to 1995, Ms. Suarez was a Producer
and Director for Telefe-Canal 11 where she was the creator and producer of the
investigative news program Edicion Plus, for which she won a Martin Fierro
award. In addition to receiving six Emmy Awards, the Associated Press
International Award and the International Film Festival Award, Ms. Suarez is a
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member of the Directors Guild of America, Women in Communications and the
American Society of Composers and Publishers.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors has standing audit and compensation committees.
The audit committee consists of Messrs. Liberman, Levitt and Greeley. Among
other functions, the audit committee:
- makes recommendations to the board of directors regarding the selection of
independent auditors;
- reviews the results and scope of the audit and other services provided by
our independent auditors;
- reviews our financial statements; and
- reviews and evaluates our internal control functions.
The compensation committee consists of Messrs. Vivo, Cisneros and Greeley.
The compensation committee makes recommendations to the board of directors
regarding the following matters:
- executive compensation;
- salaries and incentive compensation for our employees and consultants; and
- the administration of our share option plans.
DIRECTOR COMPENSATION
Directors currently do not receive stated compensation from our company for
their service as members of our board of directors. However, by resolution of
the board of directors, directors may receive a fixed amount and reimbursement
for expenses in connection with the attendance at board of directors and
committee meetings.
Our directors did not receive any payments in connection with their services
as such in the year ended December 31, 1998.
Under a shareholders' agreement entered into in connection with the
July 1999 private placement of our Class A convertible preferred shares,
monitoring and directors' fees of $700,000 per year, in the aggregate, are
payable to IAMP (El Sitio) Investments Ltd., GCC Investments, LLC, Tower Plus
International, SLI.com Inc., Militello Limited and IMPSAT Corporation.
From time to time, some of our directors may be granted options to purchase
shares of common shares.
EXECUTIVE OFFICER COMPENSATION
The aggregate amount of compensation paid by us to our executive officers
was $131,637 for the year ended December 31, 1998.
We operate in an industry that is highly competitive in terms of
compensation to talented executive and technical staff. We believe that we have
been able to attract a group of experienced executives with proven track records
in their areas of expertise for our key management positions.
Some of our executive officers have employment agreements with our company
for three-year terms. Each of these agreements provides for a specified monthly
salary, a minimum annual bonus and share options.
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1999 SHARE OPTION PLAN
We view share options as a key financial incentive to attract, motivate and
retain our talented employees. Accordingly, we have adopted our 1999 share
option plan which, as amended, provides for the issuance of up to 1,240,000
common shares. An additional 2,000,000 common shares were reserved on
October 28, 1999. Our 1999 share option plan allows for the grant of incentive
share options qualified within the meaning of Section 422 of the U.S. Internal
Revenue Code of 1986 and non-qualified share options, which do not so qualify.
Each option granted under the plan shall be evidenced by an agreement that
specifies the terms and conditions of the grant. The plan also provides for the
issuance of share appreciation rights.
Our 1999 share option plan is administered by the compensation committee of
our board of directors. Subject to the limitations in our 1999 share option
plan, the compensation committee has authority to determine to whom options may
be granted and the terms of such options, including the exercise price, the
number of shares subject to each option, the conditions for vesting, the
expiration date and the form of consideration payable upon exercise of options.
All of our directors, employees and bona-fide consultants and advisors are
eligible for non-qualified share option grants; however, incentive share options
may only be granted to our employees. No individual may be granted options
totaling more than 15% of the total number of options issuable under the plan.
The exercise price of an incentive share option cannot be less than 100% of
the fair market value of a common share on the grant date, provided that no
person who owns, directly or indirectly, more than 10% of the total combined
voting power of all classes of our shares, referred to below as a "Ten-Percent
Shareholder," may receive incentive stock options unless the exercise price is
at least 110% of the fair market value of a common share on the grant date.
Options granted under the 1999 share option plan are not transferable by the
optionee, other than by will or by the laws of descent and distribution. All
options issued under the 1999 share option plan will have a term no longer than
10 years from the grant date, except that in the case of incentive stock options
granted to a Ten-Percent Shareholder, the term shall not exceed five years. The
1999 share option plan terminates on December 1, 2008 but such termination will
not affect the validity of any outstanding option.
At September 30, 1999, options to purchase 1,238,400 common shares were
outstanding under the 1999 share option plan and 1,600 shares remained available
for future option grants. The weighted average exercise price for these
outstanding options is $3.01 per share. Most of these outstanding options become
exercisable either (i) in tranches (as to 30% of the options on the first
anniversary of the grant date, as to 30% of the options on the second
anniversary of the grant date and as to the remaining 40% of the options, on the
third anniversary of the grant date) or (ii) on the third anniversary of the
grant date. These options terminate upon the earliest to occur of the following:
termination of an optionee's employment for good cause, 30 days after an
optionee's resignation, 180 days after an optionee's employment is terminated
for any other reason, including retirement, disability or death, and eight years
after the grant date. Notwithstanding the foregoing, upon a change of control
(for example, a merger or similar transaction or the removal of a majority of
the members of our current board of directors) of our company that occurs on or
after the first anniversary of the grant date, all unvested portions of options
then outstanding will vest in full on that date.
Our board of directors may amend, alter, suspend, or terminate the 1999
share option plan at any time, provided however, that the board must first seek
the approval of stockholders, if required by law or regulation, and that of each
affected optionee if such amendment, alteration, suspension or termination would
adversely affect his or her obligations under any option granted prior to that
date.
LIMITATION OF OFFICERS' AND DIRECTORS' LIABILITY
Under British Virgin Islands law, every director and officer of our company,
in performing his or her functions, is required to act honestly and in good
faith with a view to the best interests of our
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company and exercise the care, diligence and skill that a reasonably prudent
person would exercise in comparable circumstances. No provision in our
memorandum or articles of association or in any agreement entered into by us
relieves a director or officer from the duty to act in accordance with our
memorandum and articles of association or from any personal liability arising
from his or her management of the business and affairs of our company.
We may indemnify any director or officer against all expenses, including
legal fees, and against all judgments, fines and amounts paid in settlement and
reasonably incurred in connection with legal, administrative or investigative
proceedings. We may only indemnify a director or officer if the director or
officer acted honestly and in good faith with the view to the best interests of
our company and, in the case of criminal proceedings, the director or officer
had no reasonable cause to believe that his or her conduct was unlawful. The
decision of the board of directors as to whether the director or officer acted
honestly and in good faith with a view to the best interests of our company and
as to whether the director or officer had no reasonable cause to believe that
his or her conduct was unlawful, is in the absence of fraud sufficient for the
purposes of indemnification, unless a question of law is involved. The
termination of any proceedings by any judgment, order, settlement, conviction or
the entry of NO PLEA does not, by itself, create a presumption that a director
or officer did not act honestly and in good faith and with a view to the best
interests of our company or that the director or officer had reasonable cause to
believe that his or her conduct was unlawful. If a director or officer to be
indemnified has been successful in defense of any proceedings referred to above,
the director or officer is entitled to be indemnified against all expenses,
including legal fees, and against all judgments, fines and amounts paid in
settlement and reasonably incurred by the director or officer in connection with
the proceedings.
We may purchase and maintain insurance in relation to any director or
officer against any liability asserted against the director or officer and
incurred by the director or officer in that capacity, whether or not we have or
would have had the power to indemnify the director or officer against the
liability as provided in our articles of association.
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PRINCIPAL SHAREHOLDERS
The following table presents, as of November 15, 1999, the beneficial
ownership of our common shares by:
- each person or entity which, to our knowledge, owns beneficially more than
5% of the outstanding common shares;
- each of our directors and executive officers; and
- all of our directors and executive officers as a group.
Unless otherwise indicated, to our knowledge, all persons listed below have
sole voting and investment power with respect to their common shares, except to
the extent applicable law gives spouses shared authority.
The table assumes that all of our outstanding Class A convertible preferred
shares have been converted into our common shares, which will automatically
occur upon the closing of this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON SHARES(1)
-------------------
NUMBER BEFORE AFTER
BENEFICIAL OWNER OF SHARES OFFERING OFFERING
- ---------------- ---------- -------- --------
<S> <C> <C> <C>
PRINCIPAL SHAREHOLDERS
IAMP (El Sitio) Investments, Ltd............................ 6,284,050 20.7% 16.3%
SLI.com Inc................................................. 4,894,176 16.1% 12.7%
Militello Limited........................................... 4,607,010 15.2% 11.9%
IMPSAT Corporation(2)....................................... 6,141,230 20.2% 15.9%
Tower Plus International.................................... 2,309,674 7.6% 6.0%
DIRECTORS AND EXECUTIVE OFFICERS
Roberto A. Vivo-Chaneton(3)................................. 10,748,240 35.4% 27.9%
Ricardo Verdaguer(4)........................................ 8,450,904 27.8% 21.9%
Sofia Pescarmona(5)......................................... 6,141,230 20.2% 15.9%
Carlos Cisneros(6).......................................... 6,284,050 20.7% 16.3%
Michael Levitt(7)........................................... 6,284,050 20.7% 16.3%
Guillermo J. Liberman(8).................................... 4,894,176 16.1% 12.7%
Michael Greeley(9).......................................... 1,456,756 4.8% 3.8%
Roberto Cibrian-Campoy (10)................................. 792,360 2.6% 2.0%
Daniel Rotsztain(11)........................................ 42,846 * *
Walter Forwood(12).......................................... * * *
Horacio Milberg(13)......................................... 31,000 * *
Alfredo Jimenez de Arechaga(14)............................. 14,282 * *
Eduardo Weber(15)........................................... * * *
Lucia Suarez(16)............................................ * * *
All directors and executive officers as a group (14
persons).................................................. 26,573,384 87.5% 68.9%
</TABLE>
- ------------------------
* indicates less than 1%.
(1) Calculated according to Rule 13d-3(d) of the Securities Exchange Act of
1934. Under Rule 13d-3(d), shares not outstanding which are subject to
options, warrants, rights or conversion privileges exercisable within
60 days are deemed outstanding for the purpose of calculating the number and
percentage owned by the holder of the options, warrants, rights or
conversion privileges such person, but not deemed outstanding for the
purpose of calculating the percentage
(FOOTNOTES CONTINUED ON FOLLOWING PAGES)
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owned by any other person listed. As of September 30, 1999, we had 12,568,098
common shares outstanding.
(2) Includes 5,284,314 shares issued in connection with the acquisition of
IMPSAT Corporation's retail dial-up customers in Argentina and Brazil.
(3) Includes 4,607,010 common shares owned by Militello Limited in respect of
which Mr. Vivo has a controlling interest. Also includes 6,141,230 shares
owned by IMPSAT Corporation attributable to Mr. Vivo as a result of his
affiliation with IMPSAT Corporation. Mr. Vivo disclaims beneficial ownership
of all shares owned by IMPSAT Corporation. Excludes 400,000 options to
purchase common shares granted to Mr. Vivo under our 1999 share option plan.
(4) Includes beneficial ownership of 2,309,674 common shares attributable to
Mr. Verdaguer as a result of his controlling interest in Tower Plus
International. Also includes 6,141,230 shares owned by IMPSAT Corporation
attributable to Mr. Verdaguer as a result of his affiliation with IMPSAT
Corporation. Mr. Verdaguer disclaims beneficial ownership of all shares
owned by IMPSAT Corporation.
(5) Includes 6,141,230 shares owned by IMPSAT Corporation attributable to Ms.
Pescarmona as a result of her position as a director in IMPSAT Corporation.
Ms. Pescarmona disclaims beneficial ownership of all shares owned by IMPSAT
Corporation.
(6) Includes 6,284,050 common shares owned by IAMP (El Sitio)
Investments, Ltd., which are included as a result of Mr. Cisneros'
affiliation with the Cisneros Group of Companies, which has an indirect
joint ownership interest in IAMP (El Sitio) Investments, Ltd. Mr. Cisneros
disclaims beneficial ownership of all shares owned by IAMP (El Sitio)
Investments, Ltd.
(7) Includes 6,284,050 common shares owned by IAMP (El Sitio)
Investments, Ltd., which are included as a result of Mr. Levitt's
affiliation with Hicks Muse, Tate & Furst Incorporated, which has an
indirect joint ownership interest in IAMP (El Sitio) Investments, Ltd.
Mr. Levitt disclaims beneficial ownership of all shares owned by IAMP (El
Sitio) Investments, Ltd.
(8) Includes beneficial ownership of 4,894,176 common shares attributable to
Mr. Liberman as a result of his controlling interest in SLI.com Inc.
(9) Includes 1,456,756 common shares owned by GCC Investments, LLC, which are
included as a result of Mr. Greeley's affiliation with GCC
Investments, LLC. Mr. Greeley disclaims beneficial ownership of all shares
owned by GCC Investments, LLC.
(10) Excludes options granted by Banco Nominees, Ltd. to Mr. Cibrian-Campoy in
respect of 114,254 common shares and options to purchase 210,000 common
shares granted to Mr. Cibrian-Campoy under our 1999 share option plan.
(11) Excludes options to purchase 334,000 common shares granted to
Mr. Rotsztain under our 1999 share option plan.
(12) Excludes options to purchase 90,000 common shares granted to Mr. Forwood
under our 1999 share option plan.
(13) Includes 31,000 common shares attributable to Mr. Milberg as a result of
their ownership by Summit Investment Management, of which Mr. Milberg is a
director. Mr. Milberg disclaims beneficial ownership of these shares.
Excludes options to purchase 210,000 common shares granted to Mr. Milberg
under our 1999 share option plan.
(14) Excludes options to purchase 40,000 common shares granted to Mr. Jimenez
under our 1999 share option plan.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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(15) Excludes options to purchase 50,000 common shares granted to Mr. Weber
under our 1999 share option plan.
(16) Excludes options to purchase 20,000 common shares granted to Ms. Suarez
under our 1999 share option plan.
The above table does not include the following transactions or arrangements
with respect to our common shares:
- 2,268,600 common shares reserved for issuance upon exercise of options
granted under our 1999 share option plan at a weighted average exercise
price of $5.73 per share;
- 971,400 common shares reserved for issuance upon the exercise of options
that we may grant under our 1999 share option plan;
- 1,713,832 common shares issuable upon conversion of our Class A
convertible preferred shares issuable on a quarterly basis through
January 2001 in exchange for $6 million of non-cash advertising time
credits;
- 239,936 common shares issuable upon exercise of a warrant issued to Bear,
Stearns & Co. Inc. as part of its fee in connection with our July 1999
private placement of our Class A convertible preferred shares; and
- 1,111,111 common shares issuable upon conversion of our Class B
convertible preferred shares for an aggregate purchase price of
$10.0 million in cash, which were sold in a mid-November 1999 private
placement.
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RELATED PARTY TRANSACTIONS
IMPSAT Corporation is controlled largely by the Pescarmona group, of which
Sofia Pescarmona, one of our directors, is a member. The Pescarmona group
indirectly owns approximately 75% of the capital stock of IMPSAT Corporation.
Roberto Vivo-Chaneton, our co-founder, and chairman, is a director and deputy
chief executive officer of IMPSAT Corporation. Mr. Vivo beneficially owns
approximately 6% of the capital stock of IMPSAT Corporation. Ricardo Verdaguer,
another of our directors, is the president and chief executive officer of IMPSAT
Corporation. Mr. Verdaguer owns approximately 3.5% of the capital stock of
IMPSAT Corporation. We have acquired the retail dial-up access customers of
IMPSAT Corporation in Argentina and Brazil and are in the process of acquiring
its retail dial-up access customers in Colombia. We will acquire a portfolio of
approximately 73,000 customers of these businesses in the three countries. In
connection with the acquisitions, IMPSAT Corporation will purchase a total of
3,070,615 Class A convertible preferred shares for approximately $21.5 million,
and we will enter into agreements with subsidiaries of IMPSAT Corporation, under
which they will provide us with the telecommunications infrastructure to provide
connectivity services to the acquired customers for approximately $500,000 per
month. Under services agreements with subsidiaries of IMPSAT Corporation, IMPSAT
Corporation provides us with links to the Internet in exchange for advertising
on our network. This arrangement accounted for $38,000, $165,000 and $123,000 of
our net revenues and corresponding amounts of our operating expenses in partial
year 1997, 1998 and the nine months ended September 30, 1999, respectively.
Guillermo Liberman is a director of Sociedad Latinoamericana de Inversiones,
the holding company of Grupo Liberman, which is involved in agribusiness,
fisheries, telecommunications and hotel development. An affiliate of Grupo
Liberman, Video Cable Comunicacion, or VCC, is a cable television system
operator which was sold to Tele-Communications, Inc. in 1997 in a series of
transactions for over $1 billion. Prior to the sale of VCC to
Tele-Communications, Inc., we entered into a reciprocal advertising agreement
with VCC pursuant to which each company provided the other with advertising
time. We previously leased offices from Grupo Liberman in Miami. Mr. Liberman
also is affiliated with one of our advertisers, TeleLatina, a start-up regional
telecommunications company in Latin America. TeleLatina accounted for
approximately $68,000 of our advertising revenues for the nine months ended
September 30, 1999.
In July 1998, we acquired 85% of the Class A shares and 100% of the Class B
shares of Cibrian-Campoy Creativos, S.A., in Argentina, from its shareholders,
who included the following directors and executive officers: Roberto
Cibrian-Campoy; Guillermo Liberman and Roberto Vivo-Chaneton. We paid $50,000
for 85% of the common shares, and issued 3,432,094 of our common shares for 100%
of the Class B shares, of Cibrian-Campoy Creativos, S.A. In October 1997, we
purchased, for an aggregate purchase price of $1,700, the majority of the shares
of Aalefranger, S.A., in Uruguay, from its shareholders, who included Roberto
Vivo-Chaneton and Roberto Cibrian-Campoy. These two companies are the
predecessors of our operating subsidiaries in Argentina and Uruguay.
Some of our directors have from time to time guaranteed short-term
indebtedness or other liabilities of our company. Mr. Vivo and Mr. Verdaguer
personally guaranteed payment of the monthly rent for our current headquarters
in Buenos Aires ($84,000 per year), as well as the rental of our new
headquarters at Azopardo in Buenos Aires ($228,000 per year).
On July 7, 1999, we completed a private placement of 5,447,088 Class A
convertible preferred shares for a gross purchase price of $38.4 million in
cash. Strategic investors included Hicks, Muse, Tate & Furst Incorporated and
the Cisneros Group of Companies (through IAMP (El Sitio) Investments Ltd.) and
GC Companies, Inc. (through GCC Investments, LLC). As a part of the private
placement, we entered into an agreement with Washburn Enterprises, an affiliate
of the Cisneros Television Group, under which we also agreed to purchase at
least $4.0 million of advertising time on the media networks owed by Washburn's
affiliate Ibero-American Media Partners II Ltd. and its
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affiliates, and Washburn agreed that it and its affiliates would purchase at
least $2.0 million of advertising time on our network, all during the period
through January 2001.
Under a shareholders' agreement entered into in conjunction with the
July 1999 private placement and our articles of association, we pay monitoring
fees and director fees of $700,000 per year, in the aggregate, to IAMP (El
Sitio) Investments Ltd., GCC Investments, LLC, Tower Plus International,
SLI.com, Inc., Militello Limited and IMPSAT Corporation. These monitoring fees
and director fees will continue to be payable after this offering and conversion
of the Class A convertible preferred shares into common shares.
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SHARES ELIGIBLE FOR FUTURE SALE
Sales of our common shares in the public market could adversely affect
market prices for our common shares. Because no shares will be available for
sale shortly after this offering due to the contractual and legal restrictions
on resale described below, sales of substantial numbers of our common shares
after these restrictions lapse could adversely affect market prices and our
ability to raise equity capital in the future.
Immediately upon completion of this offering, we will have outstanding an
aggregate of 38,574,460 common shares, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Of
these shares, all of the common shares sold in this offering will be freely
tradable without restriction or further registration under the Securities Act,
unless such common shares are purchased by "affiliates" as that term is defined
in Rule 144 under the Securities Act. Of the remaining common shares,
approximately 19,000,000 shares held by existing shareholders or issuable upon
conversion of our Class B convertible preferred shares will be "restricted
securities," as that term is defined in Rule 144 under the Securities Act.
Restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rule 144 or 701 under the
Securities Act, which rules are summarized below.
LOCK-UP AGREEMENTS
All of our directors and executive officers, some of our employees, and some
of our existing shareholders have entered into lock-up agreements under which
they agreed not to transfer or dispose of, directly or indirectly, any common
shares, subject to limited exceptions, or any securities convertible into or
exercisable or exchangeable for common shares, for a period of 180 days after
the date of this prospectus. Transfers or dispositions can be made prior to the
end of that 180-day period with the prior written consent of Credit Suisse First
Boston Corporation or in other limited circumstances. Subject to the provisions
of Rules 144, 144(k) and 701, a significant portion of the restricted shares
will be available for sale in the public market, subject in the case of shares
held by affiliates to compliance with certain volume restrictions, shortly after
the end of that 180-day period.
RULE 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned common shares
for at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
- 1% of the number of common shares then outstanding, which will equal
approximately 385,745 shares immediately after this offering; or
- the average weekly trading volume of the common shares on the NASDAQ
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
RULE 144(K)
Under Rule 144(k), a person who is not one of our affiliates at any time
during the three months preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years, including the holding period
of any prior owner other than an affiliate, is entitled to sell such shares
without complying with the manner of sale, public information, volume limitation
or notice provisions of Rule 144.
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RULE 701
In general, under Rule 701 of the Securities Act as currently in effect,
each of our employees, consultants or advisors who purchased common shares from
us in connection with a compensatory share plan or other written agreement is
eligible to resell such shares 90 days after the closing of this offering in
reliance on Rule 144, but without compliance with certain restrictions,
including the holding period, contained in Rule 144.
REGULATION S
Under Regulation S, holders of our common shares may be able to sell their
shares outside the United States without registration under the Securities Act.
Non-U.S. purchasers of those common shares who are not affiliates of our company
should, subject to compliance with Regulation S, be able to resell those shares
in the public market in the United States without restriction.
REGISTRATION RIGHTS
Upon completion of this offering, the holders of approximately 19,000,000
common shares, or their transferees, will be entitled to exercise rights to
cause us to register those shares for resale under the Securities Act of 1933.
These holders have these registration rights under the provisions of a
registration rights agreement that was entered into in connection with the
private placement of our Class A convertible preferred shares in July 1999.
1999 SHARE OPTION PLAN
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering 3,240,000 common shares reserved for issuance
under our 1999 share option plan. This registration statement is expected to be
filed as soon as practicable after the closing of this offering.
At September 30, 1999, options to purchase 1,238,400 shares were issued and
outstanding under our 1999 option plan. All of these shares will be eligible for
sale in the public market from time to time, subject to vesting provisions,
Rule 144 volume limitations applicable to our affiliates and, in the case of
some of the options, the expiration of lock-up agreements.
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DESCRIPTION OF SHARE CAPITAL
GENERAL
Our authorized capital consists of 200,000,000 common shares and 100,000,000
preferred shares, with 40,000,000 preferred shares designated as Class A
convertible preferred shares and 1,888,889 preferred shares designated as
Class B convertible preferred shares.
COMMON SHARES
As of September 30, 1999, we had 12,568,098 common shares issued and
outstanding. All outstanding shares of common shares are fully paid and
non-assessable.
The holders of common shares are entitled to one vote for each share held of
record on all matters submitted to a vote of our shareholders. Cumulative voting
is not permitted.
Subject to the prior rights of any series of shares that may be issued in
the future, holders of common shares are entitled to receive, ratably, such
dividends as may be declared by our board of directors from funds legally
available therefor and are entitled to share, ratably, in all our assets
available for distribution to holders of common shares upon the liquidation,
dissolution or winding up of our affairs.
Our board of directors or our shareholders by resolution may amend our
memorandum and articles of association except as limited by British Virgin
Islands law or in limited circumstances reserved to the holders of, as the case
may be, the common shares or preferred shares.
PREFERRED SHARES
Authorized preferred shares may be issued from time to time by our board of
directors, in one or more series. Subject to the provisions of our articles of
association and the limitations prescribed by law, our board of directors is
authorized to adopt resolutions to issue the authorized preferred shares, to fix
the number of shares and to change the number of shares constituting any series,
and to provide for or change the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions thereof, including dividend rights (including
whether dividends are cumulative), dividend rates, terms of redemption
(including sinking fund provisions), redemption prices, conversion rights and
liquidation preferences of the preferred shares of any class or series, in each
case without any further action or vote by the shareholders.
One of the effects of undesignated preferred shares may be to enable our
board of directors to render more difficult or to discourage an attempt to
obtain control of our company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect continuity of our management. The issuance
of preferred shares may adversely affect the rights of the holders of common
shares. For example, our preferred shares may rank prior to the common shares as
to dividend rights, liquidation preference or both, may have full or limited
voting, rights and may be convertible into common shares. Accordingly, the
issuance of preferred shares may discourage bids for the common shares at a
premium or may otherwise adversely affect the market price of the common shares.
CLASS A CONVERTIBLE PREFERRED SHARES
GENERAL. As of September 30, 1999, we had 5,832,566 Class A convertible
preferred shares outstanding. Upon the closing of this offering, each
outstanding Class A convertible preferred share will be automatically converted
into two common shares.
DIVIDENDS. The holders of the Class A convertible preferred shares are
entitled to receive cumulative preferential dividends at an annual rate equal to
8% of the liquidation preference per Class A convertible preferred share,
payable quarterly, in arrears.
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CONVERSION. The holders of Class A convertible preferred shares may, at
their option, convert these shares into common shares at any time in whole or in
part. These Class A convertible preferred shares will be automatically converted
into common shares upon the closing of this offering.
REDEMPTION. The Class A convertible preferred shares are subject to
redemption at the option of the holders, beginning in July 2004, at a price
equal to 100% of the liquidation preference thereof, plus any and all accrued
and unpaid cumulative dividends thereon.
VOTING. The holders of the Class A convertible preferred shares have the
right to vote, together with the holders of all the issued and outstanding
common shares and not by classes, except as otherwise required by British Virgin
Islands law, on all matters on which holders of common shares are entitled to
vote. Each holder of the Class A convertible preferred shares has the right to
cast one vote for each whole common share which would be issued to such holder
upon conversion of such holder's shares of Class A convertible preferred shares,
assuming that such conversion were to occur on the date immediately prior to the
record date for the determination of shareholders entitled to vote.
In addition, we may not take certain corporate actions without the
affirmative vote or consent of the holders of a majority of the Class A
convertible preferred shares, including amending our memorandum of association
in a manner adverse to the holders of the Class A convertible preferred shares,
issuing additional preferred shares and declaring and paying dividends on our
common shares.
Shareholder meetings may be convened by our board of directors or upon the
request of holders holding at least 50% of the outstanding voting shares of the
Company. Shareholder resolutions may be approved without a meeting by written
consent of a majority of the votes of the shares entitled to vote thereon.
LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution
or winding up of our company, holders of Class A convertible preferred shares
are entitled to be paid an amount equal to the liquidation preference per
preferred share out of our assets before any distribution is made to any holders
of common or other junior shares.
REGISTRATION RIGHTS. In connection with the private placement in July 1999
of Class A convertible preferred shares, we entered into a registration rights
agreement with some of our shareholders. Under the registration rights
agreement, these shareholders have specified rights after a qualified offering
to cause us to register their holdings of common shares of $15.0 million or more
under the Securities Act of 1933. We have requested, and expect, that these
shareholders will waive their registration rights in connection with this
offering. We will also seek a waiver from these shareholders of the minimum
dollar per share feature of the qualified offering definition contained in the
registration rights agreement. We are required to bear all registration expenses
other than underwriting discounts and commissions and fees related to any
exercise of these registration rights. In addition, we have agreed to indemnify
the registration rights recipients against, and provide contribution with
respect to, liabilities under the Securities Act of 1933 in connection with
registrations.
CLASS B CONVERTIBLE PREFERRED SHARES
GENERAL. As of the date of this prospectus, we have 1,111,111 Class B
convertible preferred shares outstanding.
DIVIDENDS. The holders of the Class B convertible preferred shares are
entitled to receive cumulative preferential dividends at an annual rate equal to
8% of the liquidation preference per Class B convertible preferred share,
payable quarterly, in arrears.
CONVERSION. Each Class B convertible preferred share will automatically
convert, on the date six months following the closing date of this offering into
one common share, subject to specified anti-
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dilution adjustments. If this offering is not consummated, the holders of
Class B convertible preferred shares may, after a period of six months, at their
option, convert these shares into common shares at any time in whole or in part.
REDEMPTION. The Class B convertible preferred shares are subject to
redemption at the option of the holders, beginning in July 2004, at a price
equal to 100% of the liquidation preference thereof, plus any and all accrued
and unpaid cumulative dividends thereon.
VOTING. The holders of the Class B convertible preferred shares have the
right to vote, together with the holders of all the issued and outstanding
common shares and not by classes, except as otherwise required by British Virgin
Islands law, on all matters on which holders of common shares are entitled to
vote.
Each holder of the Class B convertible preferred shares has the right to
cast one vote for each whole common share which would be issued to such holder
upon conversion of such holder's shares of Class B convertible preferred shares,
assuming that such conversion were to occur on the date immediately prior to the
record date for the determination of shareholders entitled to vote.
LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution
or winding up of our company, holders of Class B convertible preferred shares
are entitled to be paid an amount equal to the liquidation preference per
preferred share out of our assets before any distribution is made to any holders
of common or other junior shares.
REGISTRATION RIGHTS. In connection with the private placement of Class B
convertible preferred shares, we entered into a registration rights agreement
with those investors. Under the registration rights agreement, the investors
have specified rights after this offering to cause us to register their holdings
of common shares of $5.0 million or more under the Securities Act of 1933. Each
Class B convertible preferred share will be convertible into one common share,
subject to specified anti-dilution adjustments. We will be required to bear all
registration expenses other than underwriting discounts and commissions and fees
related to any exercise of these registration rights. In addition, we have
agreed to indemnify the registration rights recipients against, and provide
contribution with respect to, liabilities under the Securities Act of 1933 in
connection with registrations.
LISTING
Our common shares have been approved for listing on the Nasdaq National
Market under the trading symbol "LCTO."
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for our common shares is The Bank of New
York. Its address is The Bank of New York, Shareholder Relations, P.O. Box
11258, New York, New York 10286-1258, and its telephone number is
(800) 432-0140.
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TAXATION
BRITISH VIRGIN ISLANDS TAX CONSIDERATIONS
We are exempt from all provisions of the Income Tax Act of the British
Virgin Islands with respect to all dividends, interests, rents, royalties,
compensation and other amounts payable by our company to persons who are not
persons resident in the British Virgin Islands. Persons who are not persons
resident in the British Virgin Islands are also exempt from any capital gains
realized with respect to any shares, debt obligations or other securities,
including the common shares, of our company. No estate, inheritance, succession
or gift tax, rate, duty, levy or other charge is payable by persons who are not
persons resident in the British Virgin Islands with respect to any shares, debt
obligations or other securities, including the common shares, of our company.
There is no reciprocal tax treaty in force between the British Virgin Islands
and the United States.
U.S. FEDERAL INCOME TAXATION CONSIDERATIONS
The following discussion describes the material U.S. federal income tax
considerations that may be relevant to a prospective purchaser of shares to a
U.S. Holder (as defined below) of the receipt of distributions on, and the
disposition of, our common shares. This discussion is based on provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), on the regulations
promulgated thereunder and on published administrative rulings and judicial
decisions, all as of the date hereof. We cannot assure you that future
legislation, administrative rulings or court decisions will not modify the
conclusions set forth in this summary, possibly with retroactive effect. The
discussion is of a general nature only and prospective purchasers of our common
shares are advised to consult their own tax advisors with respect to U.S.
federal, state and local tax consequences and tax consequences in other
jurisdictions, of the ownership of shares applicable in their particular
situation. Except as specifically set forth herein, this discussion deals only
with common shares held by a U.S. Holder as capital assets within the meaning of
Section 1221 of the Code, and does not address tax considerations applicable to
holders that may be subject to special tax rules, such as banks, insurance
companies, dealers in securities or currencies, tax-exempt entities, persons
that will hold shares as a position in a "straddle" or as part of a "hedging" or
"conversion" transaction for tax purposes or persons that have a "functional
currency" (as defined in Section 985 of the Code) other than the U.S. dollar.
As used herein, a "U.S. person" is:
- a United States citizen or resident;
- a corporation, partnership or other entity created or organized in or
under the laws of the United States or any political subdivision thereof;
- an estate the income of which is subject to United States federal income
taxation regardless of its source; or
- a trust which is subject to the supervision of a court within the United
States and the control of a United States person as described in
Section 7701(a)(30) of the Code or that has a valid election in effect
under applicable U.S. Treasury regulations to be treated as a United
States person.
A "U.S. Holder" is a beneficial owner of common shares that is a U.S. person. A
"non-U.S. Holder" is a beneficial owner of common shares that is not a U.S.
Holder.
U.S. HOLDERS
DIVIDENDS. To the extent that a distribution on our common shares is paid
to a U.S. Holder out of our current or accumulated earnings and profits (as
determined for U.S. federal income tax purposes), that distribution will be
included in the U.S. Holder's gross income as foreign source dividend income
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in an amount equal to the U.S. dollar value of the distribution (without
reduction for any applicable foreign withholding tax). Therefore, in the event
that any foreign tax is withheld from a distribution on the common shares, a
U.S. Holder generally will be required to report gross income in an amount
greater than the cash received (although, as discussed below, that U.S. Holder
may be eligible to claim a deduction or a foreign tax credit in respect of such
foreign tax). To the extent that the amount of any distribution on the common
shares exceeds our current and accumulated earnings and profits (as determined
for U.S. federal income tax purposes), a U.S. Holder's pro rata share of the
excess amount would be treated first as a nontaxable return of capital that
would be applied against and would reduce the U.S. Holder's tax basis in its
common shares (but not below zero), and then as capital gain. Distributions in
excess of our current and accumulated earnings and profits (as determined for
U.S. federal income tax purposes) generally will not give rise to foreign source
income and a U.S. Holder may be unable to claim a foreign tax credit in respect
of any British Virgin Islands or other foreign withholding tax imposed on those
distributions unless, subject to applicable limitations, the U.S. Holder has
other foreign source income in the appropriate category for foreign tax credit
purposes. We believe that we do not have current or accumulated earnings and
profits for U.S. federal income tax purposes. However, we cannot predict whether
we will have any such earnings and profits for future taxable years.
Subject to certain conditions and limitations (including certain minimum
holding period requirements), the U.S. dollar value of the foreign income taxes,
if any, withheld from a distribution to a U.S. Holder on the common shares may
generally be claimed as a credit against the U.S. Holder's U.S. federal income
tax liability. Alternatively, a U.S. Holder may generally claim a deduction for
such amount of foreign income taxes withheld in a taxable year, but only if such
U.S. Holder does not elect to claim a foreign tax credit in respect of any
foreign taxes paid by it in the taxable year. Dividends on common shares
generally will constitute "passive income" or, in the case of some U.S. Holders,
"financial services income" for U.S. foreign tax credit purposes. Special rules
apply to some individuals whose foreign source income during the taxable year
consists entirely of "qualified passive income" and whose creditable foreign
taxes paid or accrued during the taxable year do not exceed $300 ($600 in the
case of a joint return).
The rules relating to foreign tax credits are extremely complex and the
availability of a foreign tax credit depends on numerous factors. Prospective
purchasers of our common shares should consult their own tax advisors concerning
the application of the U.S. foreign tax credit rules to their particular
situations.
The U.S. dollar value of any distribution to a U.S. Holder on shares that is
paid in a foreign currency will be calculated by reference to the exchange rate
in effect at the time the distribution is received by the U.S. Holder. If a U.S.
Holder that receives foreign currency from a distribution and does not convert
the foreign currency into U.S. dollars upon receipt, the U.S. Holder will
generally have foreign exchange gain or loss based on any appreciation or
depreciation of the value of the foreign currency against the U.S. dollar, which
will generally be U.S. source ordinary income or loss for U.S. foreign tax
credit purposes.
A corporate U.S. Holder will not be entitled to a dividends-received
deduction with respect to distributions on our common shares.
SALE OR EXCHANGE OF COMMON SHARES. A U.S. Holder generally will recognize
taxable gain or loss on any sale or exchange of a common share in an amount
equal to the difference between the amount realized for that common share and
the U.S. Holder's adjusted tax basis in that share. The gain or loss should be
capital gain or loss. Capital gains of individuals derived with respect to
capital assets held for more than one year are eligible for reduced rates of
taxation. The deductibility of capital losses is subject to limitations. Any
gain or loss recognized by a U.S. Holder will generally be treated as United
States source gain or loss for foreign tax credit purposes. As a result of
certain limitations under the
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foreign tax credit provisions of the Code, a U.S. Holder may be unable to claim
a foreign tax credit for British Virgin Islands withholding taxes, if any,
imposed on the proceeds received upon the sale, exchange, repurchase by us or
other disposition of common shares.
PASSIVE FOREIGN INVESTMENT COMPANY PROVISIONS. A foreign corporation will be
classified as a passive foreign investment company (a "PFIC") for U.S. federal
income tax purposes if 75% or more of its gross income for the taxable year is
passive income or on average for the taxable year, 50% or more of its assets, by
value (or, if it so elects, by adjusted basis), produce or are held for the
production of passive income. For this purpose, passive income generally
includes dividends, interest, royalties, rents (other than rents and royalties
derived in the active conduct of a trade or business and not derived from a
related person), annuities and gains from assets that produce passive income. If
a foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation and as
receiving directly its proportionate share of the other corporation's income. If
a foreign corporation is classified as a PFIC, in any year with respect to which
a U.S. Holder owns common shares, it generally will continue to be treated as a
PFIC, with respect to such shareholder in all succeeding years. We will notify
U.S. Holders by letter and provide them with the information as may be required
to make a "qualified electing fund" election effective.
Based upon our current and projected income, assets and activities, we do
not expect that our common shares will be considered shares of a PFIC for our
current fiscal year or for future years. This conclusion is a factual
determination made annually and thus is subject to change. In reaching the
conclusion that we do not believe that our company is a PFIC, we have valued our
company's assets based on the price per share of the common shares. For purposes
of applying the PFIC rules to our company, this valuation method results in
substantial value being given to intangible assets, including goodwill, that are
considered neither to produce nor to be held for the production of passive
income for purposes of the PFIC rules. The U.S. Internal Revenue Service (the
"IRS") has neither approved or disapproved of this valuation method, although we
believe that it constitutes a reasonable method of valuing our company's
non-passive assets. In addition, we believe that our passive income, as defined
under Section 1297 of the Code, does not, and should not, equal or exceed 75% of
our gross income. We will notify U.S. Holders if our company becomes a PFIC in
any taxable year. We will notify U.S. Holders by letter and provide them with
the information required to make a "QEF election," as described below.
If our company were treated as a PFIC, unless U.S. Holders make a "QEF
election" or a "mark-to-market election," each as described below:
- distributions made by our company during a taxable year with respect to
the common shares that are "excess distributions" (defined generally as
the excess of the amount received with respect to the shares in any
taxable year over 125% of the average received in the shorter of either
the three previous years or your holding period before the taxable year)
must be allocated ratably to each day of your holding period. The amounts
allocated to the current taxable year and to taxable years prior to the
first year in which our company was classified as a PFIC will be included
as ordinary income in gross income for that year. The amount allocated to
each other prior taxable year will be taxed as ordinary income at the
highest rate in effect for the U.S. Holder in that prior year and the tax
is subject to an interest charge at the rate applicable to deficiencies in
income taxes; and
- the entire amount of any gain realized upon the sale or other disposition
of common shares will be treated as an excess distribution made in the
year of sale or other disposition and as a consequence will be treated as
ordinary income and to the extent allocated to years prior to the year of
sale or disposition, will be subject to the interest charge described
above.
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These special PFIC tax rules will not apply if the U.S. Holder elects to
have our company treated as a "qualified electing fund" (a "QEF election") and
our company provides certain information required for the QEF election. If our
company is treated as a PFIC, we intend to notify U.S. Holders and provide them
with that information as may be required to make the QEF election effective.
If a U.S. Holder makes a QEF election, the U.S. Holder will be currently
taxable on its pro rata share of our company's ordinary earnings and net capital
gain (at ordinary income and capital gains rates, respectively) for each taxable
year of our company, regardless of whether or not distributions were received.
The U.S. Holder's basis in the common shares will be increased to reflect taxed
but undistributed income. Distributions of income that had previously been taxed
will result in a corresponding reduction in basis in the common shares and will
not be taxed again as a distribution.
Alternatively, if the common shares are treated as "marketable stock," a
U.S. Holder may make a mark-to-market election. If this election is made, the
U.S. Holder will not be subject to the PFIC rules described above. Instead, the
U.S. Holder generally will include in each year as ordinary income the excess,
if any, of the fair market value of the common shares at the end of the taxable
year over the U.S. Holder's adjusted basis in the shares and will be permitted
an ordinary loss in respect of the excess, if any, of the U.S. Holder's adjusted
basis in the common shares over its fair market value at the end of the taxable
year (but only to the extent of the net amount previously included in income as
a result of the mark-to-market election). Basis in the shares would be adjusted
to reflect any such income of loss amounts. The mark-to-market election is only
available with respect to stock traded on certain U.S. exchanges and other
exchanges designated by the U.S. Treasury. It is anticipated that such election
would be available to U.S. Holders.
U.S. Holders that own common shares during any year that our company is a
PFIC, must file IRS Form 8621. U.S. HOLDERS ARE URGED TO CONSULT THEIR TAX
ADVISERS CONCERNING THE U.S. FEDERAL INCOME TAX CONSEQUENCES OF HOLDING SHARES
OF OUR COMPANY IF IT IS CONSIDERED A PFIC.
CONTROLLED FOREIGN CORPORATIONS. If United States Shareholders in the
aggregate own more than 50% of the voting power or value of the shares of a
foreign corporation, it will be classified as a "controlled foreign corporation"
("CFC"). A "United States Shareholder" is any United States person that owns
(directly or through certain deemed ownership rules) at least 10% of the total
combined voting power of all classes of shares of a foreign corporation.
If a foreign corporation is a CFC for an uninterrupted period of 30 days or
more during the taxable year, the United States Shareholders of the CFC will
generally be subject to current U.S. tax on certain types of income of the
foreign corporation ("Subpart F income," which includes dividends, interest,
certain rents and royalties, gain from the sale of property producing such
income and certain income from sales and services) and, in certain
circumstances, on earnings of the CFC that are invested in U.S. property,
whether or not cash is distributed by the CFC. In addition, gain on the sale of
the CFC's shares by a United States Shareholder (during the period that the
corporation is a CFC and thereafter for a five-year period) will be ordinary
income in whole or in part.
If we are treated as a CFC, any U.S. Holder that acquires (directly or
through certain deemed ownership rules) 10% or more of the total combined voting
power of all classes of our shares will be required to include certain amounts
with respect to its investment in income currently. Our status as a CFC should
have no adverse effect on any U.S. Holder that is not a United States
Shareholder.
FOREIGN PERSONAL HOLDING COMPANIES. If five or fewer U.S. individuals own,
or are treated as owning under certain attribution rules, in the aggregate more
than 50% of the voting power or value of the shares of a foreign corporation,
and at least 60% (50% in certain circumstances) of the "gross income" of such
foreign corporation is made up of certain passive type income (for example,
dividends, interest, certain rents and royalties and gain from the sale of stock
or securities) for a taxable year, then such corporation will be a "foreign
personal holding company" ("FPHC"). If a foreign
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corporation is a FPHC, U.S. persons that own shares in the FPHC (regardless of
the size of their shareholding and regardless of whether they are individuals)
will generally be subject to current U.S. tax on a pro-rata portion of the
FPHC's undistributed foreign personal holding company income ("FPHCI") for the
taxable year or part thereof, although tax-exempt U.S. investors will not be
subject to tax on amounts attributable to FPHCI. In addition, U.S. persons that
are required under these rules to include undistributed taxable income for a
taxable year and that own at least 5% of the value of the FPHC's shares are
required to comply with certain reporting requirements under Code. In addition,
if our company became a FPHC, U.S. persons who acquire their shares from
decedents would not receive a "stepped-up" basis in such shares. Instead, such
U.S. persons would have a tax basis equal to the lower of fair market value or
the decedent's basis.
Based upon our current and projected income, assets and activities, we do
not expect the common shares to be considered shares of FPHC for our current
year or for future years. We will notify U.S. Holders if we become a FPHC in any
taxable year.
NON-U.S. HOLDERS
A non-U.S. Holder generally will not be subject to U.S. federal income tax
on dividends paid by us with respect to the common shares unless such income is
effectively connected with the conduct by the non-U.S. Holder of a trade or
business in the United States.
A non-U.S. Holder generally will not be subject to United States federal
income tax on any gain recognized on the sale or other disposition of the common
shares unless that gain is effectively connected with the conduct by the
non-U.S. Holder of a trade or business within the United States, or, in the case
of gains recognized by individual non-U.S. Holders, the individual is present in
the United States for 183 days or more and certain other conditions are met.
Effectively connected dividends and gains of a non-U.S. Holder generally
will be subject to tax in the same manner as a U.S. Holder. These dividends and
gains realized by a corporate non-U.S. Holder may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate or
such lower rate as may be specified by an applicable income tax treaty.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to dividends in
respect of the common shares or the proceeds received on the sale, exchange or
redemption of common shares paid within the U.S. (and in certain cases, outside
the United States) to U.S. Holders other than certain exempt recipients, such as
corporations, and a 31% backup withholding may apply to such amounts if the U.S.
Holder fails to provide an accurate taxpayer identification number or to report
interest and dividends required to be shown on its U.S. federal income tax
returns. The amount of any backup withholding from a payment to a U.S. Holder
will be allowed as credit against the U.S. Holder's U.S. federal income tax
liability.
Non-U.S. Holders are generally exempt from the information reporting and
backup withholding rules but may be required to comply with certification and
identification requirements in order to prove their exemption.
The rules for information reporting and backup withholding requirements have
been altered in certain respects with respect to payments after December 31,
2000. It is possible that we and other withholding agents may request a new
withholding certificate in order to qualify for continued exemption from backup
withholding under Treasury regulations when they become effective. Holders of
the common shares should consult their tax advisers concerning the possible
application of these alterations to any payments made with respect to the common
shares.
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UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement,
dated December 9, 1999, each of the underwriters named below, for which Credit
Suisse First Boston Corporation, Lehman Brothers Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, Salomon Smith Barney Inc. and Wit Capital
Corporation are acting as representatives, have severally agreed to purchase
from us the aggregate number of common shares set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER
OF COMMON
NAME SHARES
- ---- ---------
<S> <C>
Credit Suisse First Boston Corporation...................... 1,670,522
Lehman Brothers Inc......................................... 1,670,522
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................... 1,582,600
Salomon Smith Barney Inc.................................... 1,582,600
Wit Capital Corporation..................................... 527,532
ABN AMRO Incorporated....................................... 145,778
BancBoston Robertson Stephens Inc........................... 145,778
E*OFFERING Corp............................................. 145,778
Invemed Associates LLC...................................... 145,778
J.P. Morgan Securities Inc.................................. 145,778
Ramirez & Co., Inc.......................................... 145,778
Charles Schwab & Co., Inc................................... 145,778
Warburg Dillon Read LLC..................................... 145,778
---------
Total................................................... 8,200,000
=========
</TABLE>
The underwriting agreement provides that, the underwriters are obligated to
purchase and pay for all of the above common shares if any are purchased, other
than those common shares covered by the over-allotment option described below.
The underwriting agreement provides that, if an underwriter defaults, the
purchase commitments on non-defaulting underwriters may, in some circumstances,
be increased or the offering of common shares may be terminated.
The underwriters propose to offer the common shares initially at the public
offering price set forth on the cover page of this prospectus and at this price
less a concession not in excess of $0.67 per common share to other dealers who
are members of the National Association of Securities Dealers, Inc. The
underwriters may allow, and dealers may reallow, concessions not in excess of
$0.10 per common share to other dealers. After the offering, the offering price,
concessions and other selling terms may be changed by the underwriters.
We have granted an over-allotment option to the underwriters to purchase an
amount, up to an aggregate of 1,230,000 additional common shares, exercisable at
the initial public offering price less the underwriting discounts and
commissions, each as set forth on the cover page of this prospectus. If the
underwriters exercise this option in whole or in part, then each of the
underwriters will become obligated, subject to customary conditions, to purchase
approximately the same percentage of these additional common shares as is
approximately the percentage of common shares that it is obligated to purchase
of the total number of common shares under the underwriting agreement as shown
in the table set forth above.
92
<PAGE>
The following table summarizes the underwriting discount and estimated
expenses that we will pay:
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------------------------------- -------------------------------
WITHOUT WITH WITHOUT WITH
OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT OVER-ALLOTMENT
OPTION OPTION OPTION OPTION
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discount
paid by us............................ $ 1.12 7.0% $ 1.12 7.0% $9,184,000 $10,561,600
Expenses payable by us
in connection with this offering...... $ 0.30 1.9% $ 0.27 1.7% $2,500,000 $ 2,500,000
</TABLE>
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common shares being offered.
The underwriting agreement provides that we will indemnify the underwriters
against liabilities under the Securities Act or contribute to payments that the
underwriters may be required to make in respect thereof.
Our directors and executive officers and some of our existing shareholders
who collectively hold a total of 27,121,294 shares have agreed under lock-up
agreements not to sell or offer to sell or otherwise dispose of any common
shares, subject to limited exceptions, for a period 180 days after the date of
this prospectus without the prior written consent of Credit Suisse First Boston
Corporation.
Prior to the offering, there has been no public market for our common
shares. Consequently, the initial offering price for the common shares offered
hereby was determined by negotiations between us and the representative of the
underwriters. Among the factors considered in these negotiations were our
results of operations in recent periods, estimates of our prospects and the
industry in which we compete, an assessment of our management, the general state
of the securities markets at the time of the offering and the prices of similar
securities of generally comparable companies. Our common shares have been
approved for listing on the Nasdaq National Market under the symbol "LCTO." We
cannot assure you, however, that an active or orderly trading market will
develop for the common shares or that our common shares will trade in the public
markets subsequent to the offering at or above the initial offering price.
In order to facilitate the offering, persons participating in the offering
may engage in transactions that stabilize, maintain or otherwise affect the
price of the common shares during and after the offering. Specifically, the
underwriters may over-allot or otherwise create a short position in the common
shares for their own account by selling more common shares than we have actually
sold to them. The underwriters may elect to cover any short position by
purchasing common shares in the open market or by exercising the over-allotment
option granted to the underwriters. In addition, the underwriters may stabilize
or maintain the price of the common shares by bidding for or purchasing common
shares in the open market and may impose penalty bids, under which selling
concessions allowed to syndicate members or other broker-dealers participating
in the offering are reclaimed if common shares previously distributed in the
offering are repurchased in connection with stabilization transactions or
otherwise. The effect of these transactions may be to stabilize or maintain the
market price at a level above that which might otherwise prevail in the open
market. The imposition of a penalty bid may also affect the price of the common
shares to the extent that it discourages resales thereof. No representation is
made as to the magnitude or effect of these activities.
The underwriters have reserved for sale, at the initial public offering
price, up to 820,000 common shares for directors, officers, employees and other
persons associated with us who have expressed an interest in purchasing common
shares in the offering. The number of common shares available for sale
93
<PAGE>
to the general public in the offering will be reduced to the extent these
persons purchase reserved common shares. Any reserved common shares not
purchased by these persons will be offered by the underwriters to the general
public on the same terms as the other common shares offered in this offering.
Some of the employees and other persons who will be offered reserved common
shares will be required to agree not to sell or offer to sell or otherwise
dispose of any common shares, subject to limited exceptions, for a period of 90
days after the date of this prospectus without the prior written consent of
Credit Suisse First Boston Corporation and Lehman Brothers Inc.
A prospectus in electronic format is being made available on an Internet
Website maintained by Wit Capital Corporation, which is one of the underwriters
in this offering. In addition, all dealers purchasing common shares from Wit
Capital Corporation in this offering have agreed to make a prospectus in
electronic format available on a Website maintained by each of them. Other than
the prospectus in electronic format, the information on the Website and any
information contained on any other Website maintained by Wit Capital Corporation
or any dealer purchasing common shares from it is not part of this prospectus or
the registration statement of which this prospectus forms a part, has not been
approved and/or endorsed by us or any underwriter in its capacity as underwriter
and should not be relied on by prospective investors.
94
<PAGE>
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common shares in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each provinces where
trades of common shares are effected. Accordingly, any resale of the common
shares in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or pursuant
to a discretionary exemptions granted by the applicable Canadian securities
regulatory authority. Purchasers are advised to seek legal advice prior to any
resale of the common shares.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common shares in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common shares without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as agent
and (iii) such purchaser has reviewed the text above under "Resale
Restrictions".
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The common shares being offered are those of a foreign Issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common shares to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common shares acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common shares acquired on the same date and under
the same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common shares should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
shares in their particular circumstances and with respect to the eligibility of
the common shares for investment by the purchaser under relevant Canadian
legislation.
95
<PAGE>
LEGAL MATTERS
The validity of the common shares and certain other matters of British
Virgin Islands law in connection with this offering will be passed upon for us
by Conyers Dill & Pearman, our British Virgin Islands counsel.
Certain matters relating to this offering will be passed upon for us by
Paul, Hastings, Janofsky & Walker LLP, our U.S. counsel, and for the
underwriters by Simpson Thacher & Bartlett, U.S. counsel to the underwriters.
Some partners and associates of Paul, Hastings, Janofsky & Walker LLP will
be purchasing up to 8,075 common shares in the offering.
EXPERTS
The consolidated financial statements of our company as of December 31,
1997, December 31, 1998 and September 30, 1999 and for the period from July 16,
1997 (date of inception) through December 31, 1997, the year ended December 31,
1998 and the nine months ended September 30, 1999 included in this prospectus
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report appearing herein, and are included in reliance upon the report of
that firm given upon their authority as experts in accounting and auditing.
The statement of historical net assets to be sold by IMPSAT Corporation as
of September 30, 1999 included in this prospectus has been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein, and is included in reliance upon the report of that firm given upon
their authority, as experts in accounting and auditing.
The statements of net revenues and direct costs and expenses of IMPSAT
S.A.'s retail dial-up access business in Argentina for the years ended
December 31, 1997 and December 31, 1998 and the nine months ended September 30,
1999 included in this prospectus have been audited by Deloitte & Touche,
Argentina, independent auditors, as stated in their report appearing herein, and
are included in reliance upon the report of that firm given upon their authority
as experts in accounting and auditing.
The statements of net revenues and direct costs and expenses of MANDIC
INTERNET LTDA.'s retail dial-up access business in Brazil for the years ended
December 31, 1997 and December 31, 1998 and the nine months ended September 30,
1999 included in this prospectus have been audited by Deloitte Touche Tohmatsu,
Brazil, independent auditors, as stated in their report appearing herein, and
are included in reliance upon the report of that firm given upon their authority
as experts in accounting and auditing.
The statements of net revenues and direct costs and expenses of IMPSAT
S.A.'s, retail dial-up access business in Colombia for the years ended
December 31, 1997 and December 31, 1998 and the nine months ended September 30,
1999 included in this prospectus have been audited by Deloitte & Touche,
Colombia, independent auditors, as stated in their report appearing herein, and
are included in reliance upon the report of that firm given upon their authority
as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1, including exhibits, under the Securities Act of 1933 with
respect to the common shares to be sold in this offering. This prospectus, which
constitutes a part of the registration statement, does not contain all of the
information set forth in the registration statement or the exhibits which are a
part of the registration statement. For further information with respect to us
and the common shares, reference is made to the registration statement and the
exhibits.
96
<PAGE>
You may read and copy all or any portion of the registration statement or
other information in our files in the Commission's public reference room at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at Seven World Trade Center, 13(th)
Floor, New York, NY 10048 and 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You can request copies of these documents upon payment of a
duplicating fee, by writing to the Commission. Please call the Commission at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. EL SITIO'S COMMISSION FILINGS, INCLUDING THE REGISTRATION STATEMENT, WILL
ALSO BE AVAILABLE TO YOU ON THE COMMISSION'S INTERNET SITE (HTTP://WWW.SEC.GOV).
Please note that as a foreign private issuer, we are not subject to the same
disclosure requirements as a domestic registrant under the Securities Exchange
Act of 1934. For example, we are not required to prepare and issue quarterly
reports. However, we intend to furnish our shareholders with annual reports
containing financial statements audited by our independent auditors and to make
available to our shareholders quarterly reports containing unaudited financial
data for the first three quarters of each fiscal year. We intend to file
quarterly financial information with the SEC within two months of the end of the
first three quarters of our fiscal year, and we will file annual reports on
Form 20-F within the time period required by the SEC, which is currently six
months from the end of our fiscal year on December 31.
97
<PAGE>
[This Page Intentionally Left Blank]
98
<PAGE>
INDEX TO FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
<TABLE>
<S> <C>
EL SITIO, INC. AND SUBSIDIARIES
Independent Auditors' Report............................ F-2
Consolidated Balance Sheets at December 31, 1997 and
1998 and September 30, 1999............................. F-3
Consolidated Statements of Operations and Comprehensive
Loss for the period from July 16, 1997 (date of
inception) through December 31, 1997, the year ended
December 31, 1998 and the nine months ended
September 30, 1998 (unaudited) and 1999................. F-4
Consolidated Statements of Shareholders' Equity
(Deficit) for the period from July 16, 1997 (date of
inception) through December 31, 1997, the year ended
December 31, 1998 and the nine months ended
September 30, 1999...................................... F-5
Consolidated Statements of Cash Flows for the period
from July 16, 1997 (date of inception) through
December 31,1997, the year ended December 31, 1998 and
the nine months ended September 30, 1998 (unaudited) and
1999.................................................... F-6
Notes to Consolidated Financial Statements.............. F-7
IMPSAT CORPORATION
Independent Auditors' Report............................ F-18
Statement of Historical Net Assets to be Sold by IMPSAT
Corporation as of September 30, 1999.................... F-19
Notes to Statement of Historical Net Assets to be sold
by IMPSAT Corporation................................... F-20
IMPSAT S.A. (RETAIL DIAL-UP ACCESS BUSINESS IN ARGENTINA)
Independent Auditors' Report............................ F-21
Statements of Net Revenues and Direct Costs and Expenses
for the years ended December 31, 1997 and 1998 and the
nine months ended September 30, 1998 (unaudited) and
1999.................................................... F-22
Notes to Statements of Net Revenues and Direct Costs and
Expenses................................................ F-23
MANDIC INTERNET LTDA. (FORMERLY MANDIC.COM LTDA.) (RETAIL
DIAL-UP ACCESS BUSINESS IN BRAZIL)
Independent Auditors' Report............................ F-26
Statements of Net Revenues and Direct Costs and Expenses
for the years ended December 31, 1997 and 1998 and the
nine months ended September 30, 1998 (unaudited) and
1999.................................................... F-27
Notes to Statements of Net Revenues and Direct Costs and
Expenses................................................ F-28
IMPSAT S.A. (RETAIL DIAL-UP ACCESS BUSINESS IN COLOMBIA)
Independent Auditors' Report............................ F-31
Statements of Net Revenues and Direct Costs and Expenses
for the years ended December 31, 1997 and 1998 and the
nine months ended September 30, 1998 (unaudited) and
1999.................................................... F-32
Notes to Statements of Net Revenues and Direct Costs and
Expenses................................................ F-33
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION...... F-36
Pro Forma Statement of Operations for the nine months
ended September 30, 1999 and the year ended December 31,
1998.................................................... F-37
Pro Forma Balance Sheet at September 30, 1999........... F-39
Adjustments to Pro Forma Financial Information.......... F-40
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of El Sitio, Inc.:
We have audited the accompanying consolidated balance sheets of El
Sitio, Inc. and its subsidiaries (the "Company") as of December 31, 1997,
December 31, 1998 and September 30, 1999, and the related consolidated
statements of operations and comprehensive loss, shareholders' equity (deficit)
and cash flows for the period from July 16, 1997 (date of inception) through
December 31, 1997, the year ended December 31, 1998, and the nine months ended
September 30, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1997, December 31, 1998 and September 30, 1999, and the results of its
operations and its cash flows for the period from July 16, 1997 (date of
inception) through December 31, 1997, the year ended December 31, 1998, and the
nine months ended September 30, 1999 in conformity with generally accepted
accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
October 22, 1999 (October 28, 1999 as to the effects of
the share split described in Note 3 and November 5, 1999
as to the last sentence in the second paragraph in Note 14)
F-2
<PAGE>
\
EL SITIO, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 89 $ 246 $24,393
Trade accounts receivable, net............................ 48 105 976
Other receivables......................................... 72 307 1,078
Prepaid expenses.......................................... 5 12 137
------- ------- -------
Total current assets.................................. 214 670 26,584
PROPERTY AND EQUIPMENT, NET................................. 180 581 1,878
LICENSES AND PERMITS, NET................................... -- 223 98
OTHER ASSETS................................................ 2 7 4,560
------- ------- -------
TOTAL ASSETS................................................ $ 396 $ 1,481 $33,120
======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable--trade................................... $ 63 $ 336 $ 2,287
Accrued and other liabilities, including due to
shareholders............................................ 1,297 376 3,405
Current portion of installment loan....................... -- -- 7
Unearned revenues......................................... -- -- 628
------- ------- -------
Total current liabilities............................. 1,360 712 6,327
------- ------- -------
INSTALLMENT LOAN............................................ -- -- 22
COMMITMENTS AND CONTINGENCIES (Note 13)
CLASS A CONVERTIBLE PREFERRED SHARES
Redeemable, $.01 par value, 8% cumulative dividend,
40,000,000 shares authorized, 5,832,566 shares issued
and outstanding, liquidation preference $7.00186 per
share................................................... -- -- 38,327
------- ------- -------
SHAREHOLDERS' EQUITY (DEFICIT):
Common shares, $.01 par value; 200,000,000 shares
authorized; 100,000 and 6,000,000 shares issued and
outstanding at December 31, 1997 and 1998, respectively,
and 12,568,098 shares issued and outstanding at
September 30, 1999...................................... 1 60 126
Additional paid-in capital................................ 49 2,940 13,943
Irrevocable capital contribution.......................... -- 2,302 --
Deferred share-based compensation......................... -- -- (7,286)
Accumulated other comprehensive (loss) income............. -- (2) 95
Accumulated deficit....................................... (1,014) (4,531) (18,434)
------- ------- -------
Total shareholders' equity (deficit)...................... (964) 769 (11,556)
------- ------- -------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)........................................... $ 396 $ 1,481 $33,120
======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
PERIOD FROM JULY 16, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997, THE YEAR ENDED DECEMBER 31, 1998
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
PERIOD NINE MONTHS
ENDED YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -----------------------
1997 1998 1998 1999
------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES:
Advertising................................ $ 181 $ 527 $ 380 $ 1,195
Web design and hosting..................... 86 253 229 329
---------- ---------- ---------- ----------
Total.................................. 267 780 609 1,524
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Product, content and technology............ 221 1,556 848 3,181
Marketing and sales........................ 142 674 320 7,157
Corporate, general and administrative...... 727 1,940 1,144 3,736
Depreciation and amortization.............. 81 107 59 336
Share-based compensation................... -- -- -- 499
---------- ---------- ---------- ----------
Total costs and expenses............... 1,171 4,277 2,371 14,909
---------- ---------- ---------- ----------
Operating loss............................. (904) (3,497) (1,762) (13,385)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSES):
Interest income (expense), net............. (75) (42) (53) 264
Foreign exchange loss...................... (3) (44) (32) 5
Other income (expense), net................ (32) 66 55 (3)
---------- ---------- ---------- ----------
Total other (expenses) income, net..... (110) (20) (30) 266
---------- ---------- ---------- ----------
NET LOSS BEFORE DIVIDENDS ON CLASS A
CONVERTIBLE PREFERRED SHARES............... (1,014) (3,517) (1,792) (13,119)
DIVIDENDS ON CLASS A CONVERTIBLE PREFERRED
SHARES..................................... -- -- -- (784)
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS............................... (1,014) (3,517) (1,792) (13,903)
OTHER COMPREHENSIVE LOSS,
NET OF TAX:
Foreign currency translation adjustment.... -- (2) -- 97
---------- ---------- ---------- ----------
COMPREHENSIVE LOSS........................... $ (1,014) $ (3,519) $ (1,792) $ (13,806)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE:
Basic...................................... $ (10.14) $ (1.15) $ (.87) $ (1.18)
========== ========== ========== ==========
Diluted.................................... $ (10.14) $ (1.15) $ (.87) $ (1.18)
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF COMMON SHARES:
Basic...................................... 100,000 3,050,000 2,066,667 11,777,516
========== ========== ========== ==========
Diluted.................................... 100,000 3,050,000 2,066,667 11,777,516
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
PERIOD FROM JULY 16, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997, THE YEAR ENDED DECEMBER 31, 1998
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
ADDITIONAL IRREVOCABLE DEFERRED COMPREHENSIVE
COMMON PAID-IN CAPITAL SHARE-BASED (LOSS) ACCUMULATED
SHARES AMOUNT CAPITAL CONTRIBUTION COMPENSATION INCOME DEFICIT
---------- -------- ---------- ------------ ------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization...... 100,000 $ 1 $ 49 -- -- -- --
Net loss for the period..... -- -- -- -- -- -- $ (1,014)
---------- ------ ------- ------- ------- --- --------
BALANCE,
DECEMBER 31, 1997......... 100,000 1 49 -- -- -- (1,014)
Issuance of common shares in
exchange for Class B
shares of El Sitio
Argentina................. 3,432,094 34 1,682 -- -- -- --
Issuance of common shares... 2,467,906 25 1,209 -- -- -- --
Irrevocable capital
contribution.............. -- -- -- $ 2,302 -- -- --
Foreign currency translation
adjustment................ -- -- -- -- -- $(2) --
Net loss for the year....... -- -- -- -- -- -- (3,517)
---------- ------ ------- ------- ------- --- --------
BALANCE,
DECEMBER 31, 1998......... 6,000,000 60 2,940 2,302 -- (2) (4,531)
Issuance of common shares... 168,098 2 82 -- -- -- --
Irrevocable capital
contribution.............. -- -- -- 898 -- -- --
Capitalization of
irrevocable capital
contribution.............. 6,400,000 64 3,136 (3,200) -- -- --
Deferred compensation
related to share
options................... -- -- 7,785 -- $(7,785) -- --
Amortization of deferred
share-based
compensation.............. -- -- -- -- 499 -- --
Foreign currency translation
adjustment................ -- -- -- -- -- 97 --
Net loss for the nine months
ended..................... -- -- -- -- -- -- (13,903)
---------- ------ ------- ------- ------- --- --------
BALANCE,
SEPTEMBER 30, 1999........ 12,568,098 $ 126 $13,943 $ -- $(7,286) $95 $(18,434)
========== ====== ======= ======= ======= === ========
<CAPTION>
TOTAL
--------
<S> <C>
Initial capitalization...... $ 50
Net loss for the period..... (1,014)
--------
BALANCE,
DECEMBER 31, 1997......... (964)
Issuance of common shares in
exchange for Class B
shares of El Sitio
Argentina................. 1,716
Issuance of common shares... 1,234
Irrevocable capital
contribution.............. 2,302
Foreign currency translation
adjustment................ (2)
Net loss for the year....... (3,517)
--------
BALANCE,
DECEMBER 31, 1998......... 769
Issuance of common shares... 84
Irrevocable capital
contribution.............. 898
Capitalization of
irrevocable capital
contribution.............. --
Deferred compensation
related to share
options................... --
Amortization of deferred
share-based
compensation.............. 499
Foreign currency translation
adjustment................ 97
Net loss for the nine months
ended..................... (13,903)
--------
BALANCE,
SEPTEMBER 30, 1999........ $(11,556)
========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM JULY 16, 1997 (DATE OF INCEPTION)
THROUGH DECEMBER 31, 1997, THE YEAR ENDED DECEMBER 31, 1998
AND THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30,
------------ ------------ ------------------------
1997 1998 1998 1999
------------ ------------ ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................. $(1,014) $(3,517) $(1,792) $(13,903)
Adjustments to reconcile net loss to net cash used in
operating activities:
Amortization and depreciation.......................... 81 107 59 336
Amortization of deferred share-based compensation...... -- -- -- 499
Changes in assets and liabilities: Increase in trade
accounts receivable, net............................. (48) (57) (43) (871)
Increase in prepaid expenses......................... (5) (7) (33) (125)
Increase in other receivables and other non-current
assets............................................. (74) (240) (293) (2,768)
Increase in accounts payable--trade.................. 63 273 25 1,951
Increase in accrued and other liabilities............ 122 221 77 3,029
Increase in unearned revenues........................ -- -- -- 628
------- ------- ------- --------
Net cash used in operating activities.............. (875) (3,220) (2,000) (11,224)
------- ------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................... (261) (510) (367) (1,545)
Purchases of licenses and permits...................... -- (223) -- --
------- ------- ------- --------
Net cash used in investing activities.............. (261) (733) (367) (1,545)
------- ------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term borrowings.................... -- -- -- 3,875
Repayments of short-term borrowings.................... -- -- -- (3,875)
Shareholder loans to subsidiaries...................... 1,175 -- -- --
Capital contribution................................... 50 1,808 1,808 84
Irrevocable capital contribution....................... -- 2,302 900 898
Net proceeds from issuance of Class A convertible
preferred shares..................................... -- -- -- 35,837
------- ------- ------- --------
Net cash provided by financing activities.......... 1,225 4,110 2,708 36,819
------- ------- ------- --------
EFFECT OF EXCHANGE RATE ON CASH AND CASH EQUIVALENTS..... -- -- -- 97
------- ------- ------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................ 89 157 341 24,147
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD......... -- 89 89 246
------- ------- ------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............... $ 89 $ 246 $ 430 $ 24,393
======= ======= ======= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.......................................... $ 21
========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Capitalization of shareholder loans to subsidiaries.... $ 1,142
=======
Capitalization of irrevocable capital contributions.... $ 3,200
========
Motor vehicle acquired through an installment loan..... 29
========
Advertising time acquired from TV Azteca, S.A. de C.V.
through the issuance of 355,478 Class A
convertible preferred shares......................... 2,489
========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
1. BACKGROUND AND EVOLUTION
El Sitio, Inc., a British Virgin Islands holding company (the "Company"), is
an Internet network providing country-specific and regional content, for
Spanish- and Portuguese-speaking audiences in Latin America and the United
States. The Company recently began to offer connectivity services in Argentina
and Brazil and expects to offer similar services in Colombia before the end of
1999. The Company intends to provide e-commerce services for Spanish- and
Portuguese- speaking audiences in Latin America and the United States.
The Company was formed in July 1997 under the name Blasin International
Corporation. In October 1997 and July 1998, the Company acquired ownership of
interests in subsidiaries located in Uruguay and Argentina, respectively, which
were under common ownership. These acquired entities had been established in
Argentina and Uruguay on December 30, 1996 and February 24, 1997, respectively,
under the names of Cibrian Campoy Creativos S.A. ("El Sitio Argentina") and
Aalefranger S.A., an inactive entity ("El Sitio Uruguay"). During 1998,
operating subsidiaries have been established in Mexico ("El Sitio Mexico"), the
United States ("El Sitio USA") and Brazil ("El Sitio Brazil"). At September 30,
1999, the Company's operating subsidiaries were as follows:
<TABLE>
<CAPTION>
OWNERSHIP
COUNTRY OPERATING SUBSIDIARIES PERCENTAGE
- ------- --------------------------------------------- -----------
<S> <C> <C>
Argentina............... El Sitio Argentina 100%
Uruguay................. El Sitio Uruguay 100%
United States........... El Sitio USA 100%
Brazil.................. El Sitio Brazil 100%
Mexico.................. El Sitio Mexico 100%
</TABLE>
The Company's successful completion of its development program and,
ultimately, the attainment of profitable operations is dependent on future
events, including maintaining adequate financing to fulfill its development
activities and achieving a level of income adequate to support the Company's
cost structure. With the proceeds of the private placement in July 1999 and from
anticipated future offerings, the Company will fund its sales and marketing, and
branding and advertising activities, expand its sales force, improve its network
infrastructure, develop new services and products, make strategic investments or
acquisitions and fund other corporate purposes.
2. MERGERS AND ACQUISITIONS
In October 1997, the Company acquired 75% of the common shares of El Sitio
Uruguay, an inactive entity, for $1.7 in cash. This acquisition was accounted
for under the purchase method of accounting.
In July 1998, the Company acquired 85% of the Class A shares of El Sitio
Argentina for $50 and 100% of the Class B shares of El Sitio Argentina in
exchange for the issuance of 3,432,094 common shares of the Company. This
acquisition, as is generally the case for transactions among companies under
common control, has been accounted for in a manner similar to the pooling of
interests method of accounting, whereby all assets and liabilities have been
recorded at their historical carrying amounts.
F-7
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
2. MERGERS AND ACQUISITIONS (CONTINUED)
During the nine months ended September 30, 1999, the Company acquired the
remaining minority interest in El Sitio Argentina and El Sitio Uruguay. These
acquisitions were accounted for under the purchase method of accounting.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The financial statements are presented on a
consolidated basis and include the accounts of the Company and its subsidiaries.
All significant intercompany transactions and balances have been eliminated.
INTERIM FINANCIAL INFORMATION--The unaudited consolidated statements for the
nine months ended September 30, 1998 have been prepared on the same basis as the
audited consolidated financial statements. In the opinion of management, such
unaudited consolidated financial statements include all adjustments (consisting
only of normal recurring adjustments) necessary to present fairly the results
for such period. The results of operations for the nine month periods ended
September 30, 1998 and 1999 are not necessarily indicative of the results of
operations to be expected for the full fiscal year or for any future period.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS--Cash and cash equivalents are highly liquid
investments, including short-term investments and time deposits with maturities
of three months or less at the time of purchase. Cash equivalents and short-term
investments are stated at cost, which approximates market value.
REVENUE RECOGNITION--The Company's revenues are derived principally from the
sale of advertisements. The Company sells advertising primarily at a fixed price
per month. Revenues on these contracts are recognized ratably over the period of
time in which the advertisement is displayed. The Company also sells advertising
on a cost-per-thousand impressions, or "CPM" basis under which such advertisers
and advertising agencies receive a guaranteed number of "impressions,"or number
of times that an advertisement appears in pages viewed by users of the Company's
online properties, for a fixed fee. The Company's contracts with advertisers and
advertising agencies for these types of contracts cover periods ranging from one
month to one year. Advertising revenues are recognized ratably based on the
number of impressions displayed, provided that the Company has no obligations
remaining at the end of a period and collection of the resulting receivable is
probable. Company obligations typically include guarantees of minimum number of
impressions. To the extent that minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenues until the remaining
guaranteed impression levels are achieved. Payments received from advertisers
prior to displaying their advertisements on the Company's network are recorded
as deferred revenues. Revenues from exclusive sponsorship arrangements are
recognized ratably. Additional revenue is generated from Website design and Web
hosting. Website design revenues are recognized once the related activities are
F-8
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
performed and the customer's website is complete and operational. Web hosting
revenues are recognized ratably over the term of the contracts.
For the period ended December 31, 1997 and the year ended December 31, 1998,
the Company had five customers which each exceeded 10% of total revenue and
collectively represented 89% of revenues, and four customers which each exceeded
10% of total revenue and collectively represented 72% of revenues, respectively.
Three of the customers are common in both years. For the nine months ended
September 30, 1999, the Company had one customer which exceeded 10% of total
revenue and represented 13% of revenues.
The Company in the ordinary course of business enters into reciprocal
services arrangements whereby the Company provides advertising service to third
parties in exchange for telecommunications services and advertising services in
other media. Revenues and expenses from these agreements are recorded at the
fair value of services provided or received, whichever is more determinable in
the circumstances. The fair value represents market prices negotiated on an
arms' length basis. Revenue from reciprocal services arrangements is recognized
as income when advertisements are delivered on the Company's Websites. Expense
from reciprocal services arrangements is recognized when telecommunication
services are received or the Company's advertisements are run in other media
which are typically in the same period when the reciprocal service revenue is
recognized. Related expenses which include telecommunication charges are
classified as product, content and technology and advertising charges are
classified as marketing and sales in the accompanying statements of operations.
During the period ended December 31, 1997 and the year ended December 31, 1998,
revenues attributable to reciprocal services totaled approximately $38 and $180,
respectively. For the nine months ended September 30, 1999, revenues
attributable to reciprocal services totaled approximately $554. No gain or loss
was recognized on these reciprocal services arrangements for the period ended
December 31, 1997, the year ended December 31, 1998 and for the nine months
ended September 30, 1999.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost and
depreciated using the straight-line method over the following estimated useful
lives:
<TABLE>
<S> <C>
Computers, software and other equipment................. 3 years
Furniture, fixtures and other fixed assets.............. 5 - 10 years
Vehicles................................................ 5 years
Leasehold improvements.................................. 5 years (lease term)
</TABLE>
DEFERRED OFFERING COSTS--As of September 30, 1999, the Company had incurred
approximately $94 of transaction expenses relating to the initial public
offering which were included in prepaid expenses. Upon the successful closing of
the initial public offering, these costs will be netted against the proceeds of
the offering as part of additional paid-in-capital.
LICENSES AND PERMITS--Licenses and permits are being amortized on a
straight-line basis over periods not exceeding two years.
ADVERTISING EXPENSES--The Company expenses advertising costs as incurred.
Advertising expense was $17, $180 and $5,800 for the period ended December 31,
1997, the year ended December 31, 1998 and the nine months ended September 30,
1999, respectively.
F-9
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES--Deferred income taxes result from temporary differences in the
recognition of expenses for tax and financial reporting purposes and are
accounted for in accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards No. 109 ("SFAS No. 109"), ACCOUNTING
FOR INCOME TAXES, which requires the liability method of computing deferred
income taxes. Under the liability method, deferred taxes are adjusted for tax
rate changes as they occur.
SHARE SPLIT--On October 28, 1999, the Company's Board of Directors approved
a 2-for-1 share split. Retroactive restatement has been made to all share
amounts to reflect this share split.
NET LOSS PER COMMON SHARE--Basic net loss per share is computed based on the
average number of common shares outstanding and diluted net loss per share is
computed based on the average number of common shares outstanding and, when
dilutive, potential common shares from share options and warrants to purchase
common shares using the treasury stock method and from convertible securities
using the if-converted basis.
FOREIGN CURRENCY TRANSLATION--The Company's subsidiaries generally use the
U.S. dollar as the functional currency because their primary function, the sale
of advertising, is priced and billed in U.S. dollars. Accordingly, the financial
statements of the subsidiaries have been remeasured (or translated into U.S.
Dollars). The effects of foreign currency transactions and of remeasuring the
financial position and results of operations into U.S. dollars are included as
net gain or loss on foreign exchange, except for the Brazil subsidiary which
uses the local currency as its functional currency and the effects of the
translation is included in shareholders' equity.
SHARE-BASED COMPENSATION--SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION, encourages, but does not require, companies to record compensation
cost for employees under share-based compensation plans at fair value. The
Company has chosen to continue to account for share-based compensation to
employees using the intrinsic value method as prescribed by Accounting
Principles Board Opinion ("APB") No. 25, ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, and related interpretations. Accordingly, compensation cost for share
options issued to employees are measured as the excess, if any, of the fair
value of the Company's common shares at the date of grant over the amount an
employee must pay for the common shares.
IRREVOCABLE CAPITAL CONTRIBUTIONS--Irrevocable capital contributions
represented capital contributions received from existing shareholders from time
to time to fund operations and carried no obligation on the part of the Company
to issue common shares or repay such contributions. On January 29, 1999, the
Company's Board of Directors approved the issuance of 6,400,000 common shares to
capitalize the $3,200 in irrevocable capital contributions.
LONG-LIVED ASSETS--Long-lived assets are reviewed on an ongoing basis for
impairment based on comparison of carrying value against estimated undiscounted
future cash flows. If an impairment is identified, the assets carrying amount is
adjusted to fair value. No such adjustments were recorded for the years ended
December 31, 1997 and 1998 and during the nine months ended September 30, 1998
and 1999.
NEW ACCOUNTING PRONOUNCEMENTS--In June 1998, the FASB issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. Among other
provisions, SFAS No. 133 establishes
F-10
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
accounting and reporting standards for derivative instruments and for hedging
activities. It also requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. SFAS No. 133 is effective for financial statements
for fiscal years beginning after June 15, 2000. Management is currently
evaluating the effect that adoption of SFAS No. 133 will have on the Company's
financial statements.
4. TRADE ACCOUNTS RECEIVABLE
Trade accounts receivable, by operating subsidiaries, are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1997 1998 1999
--------- -------- -------------
<S> <C> <C> <C>
El Sitio Mexico.................................... $ -- $ -- $535
El Sitio Argentina................................. 48 96 258
El Sitio Uruguay................................... -- 29 103
El Sitio USA....................................... -- -- 78
El Sitio Brazil.................................... -- -- 2
--------- ---- ----
Total.............................................. 48 125 976
Less: allowance for doubtful accounts.............. -- (20) --
--------- ---- ----
Trade accounts receivable, net..................... $ 48 $105 $976
========= ==== ====
</TABLE>
The Company's subsidiaries provide trade credit to their customers in the
normal course of business. Prior to extending credit, a customer's financial
history is analyzed. The collection of a substantial portion of the trade
receivables is susceptible to changes in Latin American economic and political
conditions.
The Company provides its allowance for doubtful accounts on a specific
identification basis. The activity for the allowance for doubtful accounts is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1997 1998 1999
--------- --------- -------------
<S> <C> <C> <C>
Beginning balances................................. $ -- $ -- $20
Provision for doubtful accounts.................... -- 20 8
Write-offs, net of recoveries...................... -- -- (28)
--------- --------- ---
Ending balances.................................... $ -- $ 20 $--
========= ========= ===
</TABLE>
F-11
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
5. OTHER RECEIVABLES
Other receivables consist primarily of refunds or credits pending from local
governments for non-income taxes and other miscellaneous amounts due to the
Company and its operating subsidiaries and are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1997 1998 1999
--------- -------- -------------
<S> <C> <C> <C>
El Sitio Argentina................................. $ 65 $182 $ 678
El Sitio Uruguay................................... 7 48 113
El Sitio Mexico.................................... -- 76 281
All others......................................... -- 1 6
--------- ---- ------
Total.............................................. $ 72 $307 $1,078
========= ==== ======
</TABLE>
6. PROPERTY AND EQUIPMENT
Property and equipment consists of:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Computers, software and other equipment............ $153 $523 $1,706
Furniture and fixtures............................. 71 209 269
Motor vehicles..................................... -- -- 80
Leasehold improvements............................. -- -- 251
---- ---- ------
Total............................................ 224 732 2,306
Less: accumulated depreciation..................... (44) (151) (428)
---- ---- ------
Property and equipment, net........................ $180 $581 $1,878
==== ==== ======
</TABLE>
Accumulated depreciation is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1997 1998 1999
--------- -------- -------------
<S> <C> <C> <C>
Beginning balance.................................. $ -- $ 44 $151
Depreciation expense............................... 44 107 277
--------- ---- ----
Ending balance..................................... $ 44 $151 $428
========= ==== ====
</TABLE>
7. INCOME TAXES
The Company has not provided for income taxes because of its operating loss
position. Statutory tax rates range from 20% to 35% depending on the particular
country. Deferred tax assets associated with the net operating loss
carryforwards amounted to $266, $1,412, and $5,536 as of December 31, 1997, 1998
and September 30, 1999, respectively. No deferred tax assets have been
recognized for changes in exchange rates for foreign subsidiaries whose
functional currency is the U.S. dollar. Because there is no assurance that the
Company will generate sufficient tax earnings to utilize its available tax
assets derived from loss carryforwards, a corresponding valuation allowance has
been established to offset deferred tax assets.
F-12
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
8. INSTALLMENT LOAN
As of September 30, 1999, the Company had an installment loan, payable in
monthly installments of approximately six hundred dollars plus interest at a
rate of 2.90% due on September 29, 2003. The installment note is collateralized
by a motor vehicle.
9. SEGMENT INFORMATION
The Company's segment information is based on the geographic locations in
which its subsidiaries operate. Each operating subsidiary has a country manager
who reports to senior management of the Company. Each country manager is
currently responsible for managing the assets in his or her respective country,
generating revenues, and supervising results of operations. The Company's
segment information is as follows:
<TABLE>
<CAPTION>
EL SITIO EL SITIO EL SITIO EL SITIO EL SITIO EL SITIO, INC. CONSOLIDATED
PERIOD OR YEAR ARGENTINA URUGUAY MEXICO BRAZIL USA (PARENT COMPANY) ELIMINATION TOTAL
- -------------- --------- -------- -------- -------- -------- ---------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1997
- ---------------------
Total assets......... $ 344 $ 52 $ -- $ -- $ -- $ -- $ -- $ 396
Net revenues......... $ 267 $ -- $ -- $ -- $ -- $ -- $ -- $ 267
Operating loss....... $ (897) $ (7) $ -- $ -- $ -- $ -- $ -- $ (904)
DECEMBER 31, 1998
- ---------------------
Total assets......... $ 698 $ 121 $ 243 $ 317 $ 31 $ 80 $ (9) $ 1,481
Net revenues......... $ 657 $ 106 $ 17 $ -- $ -- $ -- $ -- $ 780
Operating loss....... $(2,322) $(118) $ (569) $ (51) $ (268) $ (169) $ -- $ (3,497)
SEPTEMBER 30, 1999
- ---------------------
Total assets......... $ 2,906 $ 345 $ 4,956 $13,109 $ 2,394 $11,900 $(2,490) $ 33,120
Net revenues......... $ 715 $ 455 $ 339 $ 12 $ 3 $ -- $ -- $ 1,524
Operating loss....... $(5,574) $(364) $(1,830) $(2,504) $(2,246) $ (867) $ -- $(13,385)
</TABLE>
The Company itself is a holding company which holds primarily cash and
incurs certain general and administrative expenses. The elimination entries
represent the elimination of intercompany balances in the normal course of
business.
10. RELATED PARTY TRANSACTIONS
The Company, in the normal course of business, provides advertising services
to related parties. During 1997 and 1998, such services totaled approximately
$38 and $165, respectively, and during the nine months period ended
September 30, 1999, such services totaled approximately $191.
11. SHARE OPTION PLAN
In May 1999, the Company adopted the 1999 Share Option Plan (the "Plan"),
pursuant to which 1,240,000 common shares were reserved for issuance upon
exercise of options. An additional 2,000,000 shares were reserved on
October 28, 1999. Options granted under the Plan shall be either incentive share
options or nonstatutory share options and will have an exercise term of no
longer than ten years from the grant date. The Plan is designed as a means to
retain and motivate key employees and directors. The Company's Compensation
Committee, or in the absence thereof, its Board of Directors, administers and
interprets the Plan and is authorized to grant options thereunder to all
eligible
F-13
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
11. SHARE OPTION PLAN (CONTINUED)
employees of the Company, including directors (whether or not they are
employees) and executive officers of the Company or affiliated companies. The
Plan will terminate on December 1, 2008, unless sooner terminated by the Board
of Directors.
In October 1998, the Company granted nonstatutory share options for 322,400
shares at an exercise price of $1.613, the fair value of the shares at the time
of grant. These options vest 30% after the first year, 30% after the second
year, and 40% after the third year.
In August and September 1999, the Company granted nonstatutory share options
for 292,400 and 623,600 shares, respectively, at an exercise price of $3.501.
These options vest 30% after the first year, 30% after the second year, and 40%
after the third year.
The following table summarizes information concerning outstanding options at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTION EXERCISABLE
------------------------------ ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.613 322,400 9.75 years $1.613 -- --
</TABLE>
The following table summarizes information concerning outstanding options at
September 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTION EXERCISABLE
------------------------------ ----------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICE OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE OUTSTANDING EXERCISE PRICE
- --------------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.613 322,400 9 years $1.613 -- --
3.501 916,000 9.89 years 3.501 -- --
</TABLE>
No options have been forfeited as of December 31, 1998 and September 30,
1999.
The Company applies APB No. 25 and related interpretations in accounting for
its share options plan to employees as described in Note 3. In connection with
the granting of share options in August and September 1999, the Company recorded
total deferred share-based compensation of approximately $7,785. Total deferred
share-based compensation is being amortized for financial reporting purposes
over the respective vesting periods of the share options. The amount recognized
as expense during the nine months ended September 30, 1999 amounted to
approximately $499.
For purposes of pro forma disclosures prescribed by SFAS No. 123, the fair
value of the options granted in 1999 was estimated using the minimum value
method for nonpublic entities with the following assumptions: no dividend
yields; no volatility; risk-free interest rate of 7.0%; and an expected term of
3 years. If compensation cost had been determined based on the fair value at the
date of grant consistent with the requirement of SFAS No. 123, the Company's net
loss and comprehensive loss would have increased by approximately $8 and $63
during the year ended December 31, 1998 and nine months ended September 30,
1999, respectively.
F-14
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
12. CLASS A CONVERTIBLE PREFERRED SHARES
On July 7, 1999, the Company completed a private placement of 5,477,088
Class A Convertible Preferred Shares (the "Class A Convertible Preferred
Shares") at $7.00186 per share for $35,837 (net of offering costs of $2,513)
under a stock purchase agreement. In addition, the Company has entered into an
arrangement whereby it agreed to issue 856,916 Class A Convertible Preferred
Shares in return for $6,000 in advertising time credit on media networks owned
and controlled by Washburn Enterprises, Inc., an affiliate of our shareholders.
Such advertising must be utilized during an eighteen-month period following the
closing date of the private placement. The Company will be required to issue and
deliver the number of Class A Convertible Preferred Shares equal to the
advertising time incurred on a quarterly basis. The Company currently
anticipates that it will recognize advertising expense based on the fair value
of such shares at the time of issuance. The Company has also agreed to purchase
at least $4,000 of advertising time on the media networks owned by affiliates of
Washburn Enterprises, Inc. in return for Washburn's commitment to purchase at
least $2,000 of advertising time on the Websites maintained by the Company and
its subsidiaries. As agreed in connection with the private placement, the
Company is required to pay annual monitoring fees to certain investor groups and
annual directors' fees to certain directors amounting to $600 per annum in the
aggregate. In addition, the Company issued to the placement agent a warrant
exercisable for the purchase of approximately 239,936 common shares for $1.
The following are principal terms of the Class A Convertible Preferred
Shares: (a) cumulative preferential dividends at the annual rate of 8% on the
liquidation preference per share, payable quarterly in cash or at the option of
the Board of Directors, in additional Class A Convertible Preferred Shares;
(b) mandatory redemption by the Company in 2004 (five years after issuance) at a
price equal to the liquidation preference per share plus accrued and unpaid
cumulative dividends; (c) convertible into two common shares of the Company at
any time at the option of the holder or automatically upon the closing of this
offering. For purposes of determining the number of common shares issuable upon
conversion, each Class A Convertible Preferred Share will be valued at
liquidation preference, which will be divided by the conversion price in effect
on the date of conversion; (d) the right of certain shareholders holding a
certain minimum number of outstanding Class A Convertible Preferred Shares to
appoint a maximum of three directors to the Company's Board of Directors;
(e) holders of Class A Convertible Preferred Shares have the right to vote,
together with the holders of outstanding common shares, except as otherwise
required by British Virgin Islands law, on all matters on which holders of
common shares are entitled to vote. Each holder of Class A Convertible Preferred
Shares will have the right to cast one vote for each whole share which would be
issued to such holder upon conversion of such holder's Class A Convertible
Preferred Shares to common shares, assuming that such conversion were to occur
on the date immediately prior to the record date for the determination of
shareholders entitled to vote; and (f) upon any liquidation, dissolution or
winding up of the Company, the holders of Class A Convertible Preferred Shares
are entitled to be paid an amount equal to the liquidation preference for each
share out of the assets of the Company before any distribution is made to any
common shares or other junior shares.
PREFERRED STOCK/BARTER ARRANGEMENT--On August 31, 1999, the Company entered
into an agreement relating to a three-year investment and reciprocal advertising
arrangement with TV Azteca, S.A. de C.V. ("TV Azteca"), Mexico's second largest
television network. Under this agreement, the Company will receive, over a
three-year period beginning in July 1999, $3,500 of advertising time on TV
Azteca's networks (which amounts shall be based on rates actually charged to
similarly situated clients of TV
F-15
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
12. CLASS A CONVERTIBLE PREFERRED SHARES (CONTINUED)
Azteca at the time), in return for 355,478 shares of Class A Convertible
Preferred Shares issued on August 31, 1999 at the same price per share as in the
July 1999 private placement. At September 30, 1999, approximately $2,500 of
prepaid advertising was included in other assets in the accompanying
consolidated balance sheet. In addition, as of September 30, 1999, TV Azteca has
not provided any advertising time on its network to the Company relating to this
agreement.
13. COMMITMENTS AND CONTINGENCIES
The Company has entered into a strategic alliance, for a term of two years
with renewal options, with a renowned baseball player whereby such baseball
player granted the Company the exclusive right to utilize such player's name,
likeness or any derivative thereof via the Internet within the Company's web
sites for the development of joint marketing campaigns, promotions, research and
e-commerce operations. The Company will pay this baseball player $1,000 cash in
four installments of $250. As of September 30, 1999, $750 remained to be paid in
future installments. In addition, the Company has committed to grant such
baseball player 25,000 common shares of the Company to be distributed on or
about the date of the initial public offering and also on or before January 31,
2001, such baseball player will be entitled to purchase an additional 25,000
common shares at the closing price on January 29, 2001 or the prior day if that
one is a holiday, less 25%. Approximately $1,375 is included in Other Assets and
$1,125 is included in Accrued and other liabilities in the accompanying
consolidated balance sheet as of September 30, 1999 to account for all of the
provisions of this alliance. The Other Asset will be amortized on a
straight-line basis over a two-year period. The initial amount of the discount
will be remeasured, on a quarterly basis, based on the fair value of the common
shares at the time that such shares are issued.
The Company has entered into employment agreements with various members of
senior management for periods extending for three years. Minimum annual
compensation approximates $1,024 in the aggregate.
The Company leases telecommunication links with rental commitments of
approximately $215 through July 2000.
The Company leases several facilities under non-cancellable leases for
varying periods through May 2004. Some of the Company's directors have from time
to time guaranteed short-term indebtedness or other liabilities of the Company.
Mr. Vivo and Mr. Verdaguer personally guaranteed payment of the monthly rent for
our current headquarters in Buenos Aires ($84) per year, as well as rental of
our new headquarters in Buenos Aires ($228 per year).
Rent expense for these operating leases was approximately $20, $144 and $272
for the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1999, respectively.
F-16
<PAGE>
EL SITIO, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Future minimum payments under the various operating leases are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------
<S> <C>
1999........................................................ $ 533
2000........................................................ 455
2001........................................................ 418
2002........................................................ 418
2003 and thereafter......................................... 611
------
Total minimum lease payments................................ $2,435
======
</TABLE>
14. SUBSEQUENT EVENTS
FRAMEWORK AGREEMENT WITH IMPSAT CORPORATION--On August 4, 1999, the Company
entered into a framework agreement with IMPSAT Corporation ("IMPSAT") for the
purchase of IMPSAT's retail dial-up access customers in Argentina, Brazil and
Colombia for $21,500 (subject to adjustment based on the number of subscribers
actually acquired by the Company) and the related sale of 3,070,615 Class A
Convertible Preferred Shares of the Company for $21,500. In connection with
these transactions, El Sitio will also enter into telecommunications services
agreements with IMPSAT or its subsidiaries under which it will provide El Sitio
with telecommunication infrastructure to access the Internet.
The transactions contemplated by the framework agreement are subject to the
negotiation of definitive documentation and various other conditions, including
governmental approvals, and accordingly, there can be no assurance that these
transactions will be completed. Subject to the satisfaction of these conditions,
the transactions are expected to be consummated by the end of 1999. Effective
October 7, 1999, the transaction for the Brazil retail dial-up access business
was closed for $12,300. Effective November 5, 1999, the transaction for the
Argentina retail dial-up access business was closed for $6,200.
SHARE OPTIONS--On November 1, 1999, the Company granted additional share
options for 1,030,200 common shares to employees at an exercise price of $9.00
per share. In connection with the granting of these share options, the Company
will record total deferred share-based compensation of approximately $3,091 in
the fourth quarter of 1999.
PRIVATE PLACEMENT--In mid-November 1999, the Company completed a private
placement of 1,111,111 Class B convertible preferred shares for an aggregate
purchase price of $10.0 million in cash, or $9.00 per Class B convertible
preferred share. Purchasers of the Class B convertible preferred shares
consisted of Intel Atlantic, Inc., a subsidiary of Intel Corporation, and
Latinvest Asset Management do Brasil, Ltda., an affiliate of Globalvest
Management Company, L.P. The Class B convertible preferred shares have an annual
dividend rate of 8%. Each Class B convertible preferred share will automatically
convert, on the date six months after the closing date of this offering, into
one common share. The discount between the initial public offering price per
common share and the $9.00 price per Class B convertible preferred share will be
amortized as a deemed dividend during the same six-month period.
F-17
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Shareholders of IMPSAT Corporation:
We have audited the accompanying statement of historical net assets to be
sold in connection with IMPSAT Corporation's retail dial-up access business in
Argentina, Brazil and Colombia as of September 30, 1999. This statement is the
responsibility of management. Our responsibility is to express an opinion on
this statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement is free of material
misstatement. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of historical net assets to be sold by IMPSAT
Corporation was prepared for inclusion in the Form F-1 of El Sitio, Inc. on the
basis of presentation as described in Note 2, and is not intended to be a
complete presentation of the financial position of IMPSAT Corporation.
In our opinion, such statement presents fairly, in all materials respects,
the historical net assets to be sold in connection with IMPSAT Corporation's
retail dial-up access business in Argentina, Brazil and Colombia at
September 30, 1999 on the basis of presentation as described in Note 2, in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Certified Public Accountants
Miami, Florida
October 28, 1999 (November 5, 1999
as to the second sentence in Note 3)
F-18
<PAGE>
IMPSAT CORPORATION
(COMPRISING IMPSAT CORPORATION'S RETAIL DIAL-UP ACCESS BUSINESSES IN ARGENTINA,
BRAZIL AND COLOMBIA)
STATEMENT OF HISTORICAL NET ASSETS TO BE SOLD BY IMPSAT CORPORATION
AS OF SEPTEMBER 30, 1999 (IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
-------------
<S> <C>
ASSETS
PROPERTY AND EQUIPMENT, NET................................. $116
LESS: ACCRUED SALARIES--BRAZIL.............................. (56)
----
TOTAL HISTORICAL NET ASSETS TO BE SOLD BY IMPSAT
CORPORATION............................................... $ 60
====
</TABLE>
See notes to statement of historical net assets to be sold by Impsat
Corporation.
F-19
<PAGE>
IMPSAT CORPORATION
NOTES TO STATEMENT OF HISTORICAL NET ASSETS TO BE SOLD BY
IMPSAT CORPORATION
AS OF SEPTEMBER 30, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE DATA)
1. BACKGROUND
On August 4, 1999, IMPSAT Corporation ("IMPSAT") entered into a framework
agreement with El Sitio, Inc. ("El Sitio") for the sale of IMPSAT's retail
dial-up access customers in Argentina, Brazil and Colombia for approximately
$21,500 and the related purchase by IMPSAT of 3,070,615 of El Sitio's Class A
convertible preferred shares for $21,500. In connection with these transactions,
El Sitio will also enter into telecommunications services agreements with
subsidiaries of IMPSAT under which they will provide El Sitio with
telecommunications infrastructure. The transactions contemplated by the
framework agreement are subject to the negotiation of definitive documentation
and various other conditions, including governmental approvals.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The retail dial-up access business (the "Business")
is not a "stand-alone" division or subsidiary of IMPSAT and was not generally
accounted for separately. As a result, the distinct and separate accounts
necessary to present an individual balance sheet, income statement and cash flow
statement of the Business have not been maintained. The financial information
presented is limited to the statement of assets to be sold by IMPSAT and it is
not intended to present the financial position of the Business.
The statement of historical net assets to be sold include property and
equipment and certain accrued liabilities being acquired in accordance with the
contractual terms. Property and equipment consist of computer and office
equipment in Brazil and is recorded at cost. Depreciation is calculated using
the straight line method over the useful life which range from five to ten
years. Accumulated depreciation amounted to $130 at September 30, 1999.
3. SUBSEQUENT EVENTS
Effective October 7, 1999, the Brazil sale was completed at a sale price of
$12,300. Effective November 5, 1999, the Argentina sale was completed at a sale
price of $6,200. The Colombia sale, which is subject to governmental approvals,
is expected to be completed before the end of 1999.
F-20
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of IMPSAT S.A.:
We have audited the accompanying statements of net revenues and direct costs
and expenses of IMPSAT S.A.'s retail dial-up access business in Argentina (the
"Business"), for the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1999. These statements of net revenues and direct costs and
expenses are the responsibility of IMPSAT S.A.'s management. Our responsibility
is to express an opinion on these statements of net revenues and direct costs
and expenses based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
statements of net revenues and direct costs and expenses are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements of net revenues and direct costs
and expenses. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
statements of net revenues and direct costs and expenses presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the statements of net revenues and direct costs
and expenses, the Business comprises IMPSAT S.A.'s retail dial-up access
business in Argentina based on management's estimates. As a result, the net
revenues and direct costs and expenses of the Business may not be indicative of
conditions that would have existed or results that would have occurred had the
Business operated as an unaffiliated entity.
In our opinion, the statements of net revenues and direct costs and expenses
present fairly, in all material respects, the net revenues and direct costs and
expenses of the Business for the years ended December 31, 1997 and 1998 and the
nine months ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE
Buenos Aires, Argentina
November 5, 1999
F-21
<PAGE>
IMPSAT S.A.
(COMPRISING IMPSAT S.A.'S RETAIL DIAL-UP ACCESS BUSINESS IN ARGENTINA)
STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES............................................. $2,634 $2,982 $2,298 $2,880
------ ------ ------ ------
DIRECT COSTS AND EXPENSES:
Product, content and technology........................ 1,573 1,851 1,421 1,802
Marketing and sales.................................... 477 479 346 332
------ ------ ------ ------
Total direct costs and expenses.......................... 2,050 2,330 1,767 2,134
------ ------ ------ ------
EXCESS OF NET REVENUES OVER DIRECT COSTS AND EXPENSES.... $ 584 $ 652 $ 531 $ 746
====== ====== ====== ======
</TABLE>
See notes to statements of net revenues and direct costs and expenses.
F-22
<PAGE>
IMPSAT S.A.
(COMPRISING IMPSAT S.A.'S RETAIL DIAL-UP ACCESS BUSINESS IN ARGENTINA)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES
(IN THOUSANDS OF U.S. DOLLARS)
1. OPERATIONS
On August 4, 1999, El Sitio, Inc. ("El Sitio") entered into a framework
agreement with IMPSAT Corporation ("IMPSAT") for the purchase of IMPSAT's retail
dial-up access customers in Argentina, Brazil and Colombia for approximately
$21,500 and the related purchase by IMPSAT of 3,070,615 of El Sitio's Class A
convertible preferred shares for $21,500. In connection with these transactions,
El Sitio will also enter into a telecommunications services agreement with
IMPSAT under which it will provide El Sitio with telecommunications
infrastructure.
Effective November 5, 1999, the transaction for the Argentina retail dial-up
business was closed for $6,200.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The retail dial-up access business in Argentina (the
"Business") was part of the total Internet services provided by IMPSAT S.A.,
which also included dial-up access to corporate customers. The Business was not
a "stand-alone" division or subsidiary of IMPSAT S.A. and was not generally
accounted for separately. As a result, the distinct and separate accounts
necessary to present an individual balance sheet, income statement and cash flow
statement of the Business have not been maintained. The Business did not
maintain its own stand-alone treasury, legal, financial, information systems and
other similar corporate support functions. The financial information presented
is limited to the statement of net revenues and direct costs and expenses.
REVENUES--The retail dial-up access business represented 60% of IMPSAT's
S.A.'s total revenues associated with Internet services for the years ended
December 31, 1997 and 1998 and for the nine months ended September 30, 1998 and
64% for the nine months ended September 30, 1999. These percentages were
calculated based on information derived from the general ledger accounts as
follows: actual revenues for retail dial-up and corporate dial-up accounts were
specifically identified and then the revenues for corporate accounts were
subtracted from total actual revenues, resulting in net revenues associated with
retail dial-up customers.
DIRECT COSTS AND EXPENSES--IMPSAT S.A.'s management allocated direct costs
and expenses (other than credit card fees and bad debt expenses) to the retail
dial-up access business based on the proportionate share of retail dial-up
revenues to total Internet revenues.
Credit card fee and bad debt expenses associated with the retail dial-up
access business were specifically identified based upon billing and customer
information provided by IMPSAT S.A.'s management information system.
These allocations were based on, among other things, subscriber statistics
and the shared use by the retail dial-up and corporate dial-up portions of
IMPSAT S.A.'s assets and resources such as the following: call center, technical
and sales and marketing personnel; equipment such as servers, routers and
modems; and supplies. These allocations are believed to be reasonable under the
circumstances. However, the Business may not be indicative of conditions that
would have existed or results that would have occurred had the Business operated
as an unaffiliated entity.
The same allocation methodologies were used for each of the financial years
and periods presented in these statements.
F-23
<PAGE>
IMPSAT S.A.
(COMPRISING IMPSAT S.A.'S RETAIL DIAL-UP ACCESS BUSINESS IN ARGENTINA)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A statement of cash flow is not being presented as the Business does not
maintain its own cash accounts and components, such as the changes in working
capital, are not available to prepare the cash flow information.
INTERIM FINANCIAL INFORMATION--The unaudited statement of net revenues and
direct costs and expenses for the nine months ended September 30, 1998 has been
prepared on the same basis as the audited annual statements of net revenues and
direct costs and expenses. In the opinion of management, such unaudited
statement of net revenues and direct costs and expenses includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the results for such period. The results of operations for the nine months ended
September 30, 1998 are not necessarily indicative of the results of operations
to be expected for the full fiscal year or for any future period.
REVENUE RECOGNITION--Revenues represent month-to-month subscriptions for
pre-paid and per-minute usage of access levels. Subscription revenues are
recognized over the period that services are provided.
USE OF ESTIMATES--The preparation of the statements of net revenues and
direct costs and expenses in conformity with generally accepted accounting
principles in the United States requires management to make certain estimates
and assumptions that effect the amounts of the reported amounts of net revenues
and direct costs and expenses during the reporting period. Actual results could
differ from those estimates.
3. PRODUCT, CONTENT AND TECHNOLOGY
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1998 1998 1999
- ----------- ------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Telecommunication links.................... $ 362 $ 674 $ 509 $ 954
Personnel costs............................ 869 645 490 539
Depreciation and amortization.............. 93 149 96 154
Installation costs......................... 32 186 185 37
Supplies and other costs................... 217 197 141 118
------ ------ ------ ------
$1,573 $1,851 $1,421 $1,802
====== ====== ====== ======
</TABLE>
F-24
<PAGE>
IMPSAT S.A.
(COMPRISING IMPSAT S.A.'S RETAIL DIAL-UP ACCESS BUSINESS IN ARGENTINA)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
4. MARKETING AND SALES
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1998 1998 1999
- ----------- ------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Advertising and promotion.................. $220 $323 $231 $203
Credit card fees........................... 57 106 77 73
Bad debt expense........................... 200 50 38 56
---- ---- ---- ----
$477 $479 $346 $332
==== ==== ==== ====
</TABLE>
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of MANDIC INTERNET LTDA.:
We have audited the accompanying statements of net revenues and direct costs
and expenses of MANDIC INTERNET LTDA.'s (formerly known as MANDIC.COM LTDA.)
retail dial-up access business in Brazil (the "Business") for the years ended
December 31, 1997 and 1998 and the nine months ended September 30, 1999. These
statements of net revenues and direct costs and expenses are the responsibility
of MANDIC INTERNET LTDA.'s management. Our responsibility is to express an
opinion on these statements of net revenues and direct costs and expenses based
on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
statements of net revenues and direct costs and expenses are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements of net revenues and direct costs
and expenses. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
statements of net revenues and direct costs and expenses presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the statements of net revenues and direct costs
and expenses, the Business comprises MANDIC INTERNET LTDA.'s retail dial-up
access business in Brazil. Direct costs and expenses included in the statements
of net revenues and direct costs and expenses have been allocated to the retail
dial-up access business based on the proportionate share of retail dial-up
revenues. As a result, the net revenues and direct costs and expenses of the
Business may not be indicative of conditions that would have existed or results
that would have occurred had the Business operated as an unaffiliated entity.
In our opinion, the statements of net revenues and direct costs and expenses
present fairly, in all material respects, the net revenues and direct costs and
expenses of the Business for the years ended December 31, 1997 and 1998 and the
nine months ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE TOUCHE TOHMATSU
Sao Paulo, Brazil
November 5, 1999
F-26
<PAGE>
MANDIC INTERNET LTDA. (FORMERLY KNOWN AS MANDIC.COM LTDA.)
(COMPRISING MANDIC.INTERNET LTDA.'S RETAIL DIAL-UP ACCESS BUSINESS IN BRAZIL)
STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES............................................ $7,033 $11,394 $8,031 $5,766
------ ------- ------ ------
DIRECT COSTS AND EXPENSES:
Cost of services...................................... 3,259 6,157 4,708 3,590
Marketing and sales................................... 1,781 1,423 910 1,029
Corporate, general and administrative................. 1,286 2,128 1,389 657
------ ------- ------ ------
Total direct costs and expenses..................... 6,326 9,708 7,007 5,276
------ ------- ------ ------
EXCESS OF NET REVENUES OVER DIRECT COSTS AND EXPENSES... $ 707 $ 1,686 $1,024 $ 490
====== ======= ====== ======
</TABLE>
See notes to statements of net revenues and direct costs and expenses.
F-27
<PAGE>
MANDIC INTERNET LTDA. (FORMERLY KNOWN AS MANDIC.COM LTDA.)
(COMPRISING MANDIC.INTERNET LTDA.'S RETAIL DIAL-UP ACCESS BUSINESS IN BRAZIL)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES
(IN THOUSANDS OF U.S. DOLLARS)
1. OPERATIONS
On August 4, 1999, El Sitio, Inc. ("El Sitio") entered into a framework
agreement with IMPSAT Corporation ("IMPSAT") for the purchase of IMPSAT's retail
dial-up access customers in Argentina, Brazil and Colombia for approximately
$21,500 and the related purchase by IMPSAT of 3,070,615 of El Sitio's Class A
convertible preferred shares for $21,500. In connection with these transactions,
El Sitio has also entered into a telecommunications services agreement with an
affiliate of IMPSAT under which it will provide El Sitio with telecommunications
infrastructure.
Effective October 6, 1999, the transaction for the Brazil retail dial-up
access business was closed for $12,300.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The retail dial-up access business in Brazil (the
"Business") is not a "stand-alone" division or subsidiary of MANDIC
INTERNET LTDA. and was not generally accounted for separately. As a result, the
distinct and separate accounts necessary to present an individual balance sheet,
income statement and cash flow statement of the Business have not been
maintained. The Business does not maintain its own stand-alone treasury, legal,
financial, information systems and other similar corporate support functions.
The financial information presented is limited to the statement of net revenues
and direct costs and expenses.
For purposes of preparing these statements, revenues of MANDIC INTERNET
LTDA's retail dial up access businesses were specifically identified and
obtained from the general ledger. Direct costs and expenses associated with
MANDIC INTERNET LTDA.'s dial-up access businesses have been allocated to the
Business as follows:
COST OF SERVICES:
- telecommunications services expenses reflect direct expenses paid for
telecommunication links to EMBRATEL, a telecommunications services
provider. These expenses will be equivalent to El Sitio's cost of
telecommunication links under El Sitio's new service agreement with a
subsidiary of IMPSAT for Brazil;
- salaries and wages were allocated to the retail dial-up access business
based on the number of managers and employees responsible for the retail
dial-up access business, as a percentage of the total number of managers
and employees employed in the entire (i.e., retail plus corporate) dial-up
access business of IMPSAT in Brazil; and
- expenses relating to the call center were specifically identified and
obtained from the general ledger.
MARKETING AND SALES:
- credit card fees were specifically identified and obtained from the
general ledger; and
- advertising expenses for the Business were based on management's
good-faith estimates.
F-28
<PAGE>
MANDIC INTERNET LTDA. (FORMERLY KNOWN AS MANDIC.COM LTDA.)
(COMPRISING MANDIC.INTERNET LTDA.'S RETAIL DIAL-UP ACCESS BUSINESS IN BRAZIL)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CORPORATE, GENERAL AND ADMINISTRATIVE:
- depreciation and amortization expense was computed based on the assets
specifically identified by management as being used in the retail dial-up
access business;
- outsourced services were specifically identified and obtained from the
general ledger; and
- rent, utilities and services were allocated based on the space utilized by
the retail dial-up access business, as a percentage of the total space
used by the entire (i.e., retail plus corporate) dial-up access business.
Of total retail dial-up access direct costs and expenses for Brazil,
approximately 47% were directly obtained from the general ledger for 1997, 68%
in 1998, 63% in the nine months ended September 30, 1998 and 60% in the nine
months ended September 30, 1999. MANDIC INTERNET LTDA.'s retail dial-up
operations in Brazil accounts for approximately 52,000 of the approximately
73,000 retail dial-up access customers which El Sitio is acquiring from IMPSAT.
However, the Business may not be indicative of conditions that would have
existed or results that would have occurred had the Business operated as an
unaffiliated entity.
The same allocation methodologies were used for each of the financial years
and periods presented in these statements.
A statement of cash flow is not being presented as the Business does not
maintain its own cash accounts and components, such as the changes in working
capital, are not available to prepare the cash flow information.
INTERIM FINANCIAL INFORMATION--The unaudited statement of net revenues and
direct costs and expenses for the nine months ended September 30, 1998 has been
prepared on the same basis as the audited annual statement of net revenues and
direct costs and expenses. In the opinion of management, such unaudited annual
statement of net revenues and direct costs and expenses includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the results for such period. The operating results for the nine months ended
September 30, 1998 are not necessarily indicative of the operating results to be
expected for the full fiscal year or for any future period.
REVENUE RECOGNITION--Revenues represent month-to-month subscriptions for
pre-paid and per-minute usage of access levels. Subscription revenues are
recognized over the period that services are provided.
USE OF ESTIMATES--The preparation of the statements of net revenues and
direct costs and expenses in conformity with generally accepted accounting
principles in the United States of America requires management to make certain
estimates and assumptions that effect the amounts of the reported amounts of net
revenues and direct costs and expenses during the reporting period. Actual
results could differ from those estimates.
F-29
<PAGE>
MANDIC INTERNET LTDA. (FORMERLY KNOWN AS MANDIC.COM LTDA.)
(COMPRISING MANDIC.INTERNET LTDA.'S RETAIL DIAL-UP ACCESS BUSINESS IN BRAZIL)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
3. COST OF SERVICES
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1998 1998 1999
- ----------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Telecommunications services................ $2,221 $4,122 $3,125 $2,070
Salaries and wages......................... 1,038 1,378 1,108 994
Call center................................ -- 657 475 526
------ ------ ------ ------
Total.................................. $3,259 $6,157 $4,708 $3,590
====== ====== ====== ======
</TABLE>
4. MARKETING AND SALES
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1998 1998 1999
- ----------- ------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Credit card fees........................... $ -- $ 439 $279 $ 283
Advertising................................ 1,781 984 631 746
------ ------ ---- ------
Total.................................. $1.781 $1,423 $910 $1,029
====== ====== ==== ======
</TABLE>
5. CORPORATE, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1998 1998 1999
- ----------- ------------ ------------ -------------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Depreciation and amortization.............. $ 42 $ 73 $ 50 $ 55
Outsourced services........................ 749 1,404 554 288
Rent expenses.............................. 154 125 449 49
Utilities and services..................... 119 155 91 99
Other expenses............................. 222 371 245 166
------ ------ ------ ----
Total.................................. $1,286 $2,128 $1,389 $657
====== ====== ====== ====
</TABLE>
F-30
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of IMPSAT S.A.:
We have audited the accompanying statements of net revenues and direct costs
and expenses of IMPSAT S.A.'s retail dial-up access business in Colombia (the
"Business") for the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1999. These statements of net revenues and direct costs and
expenses are the responsibility of IMPSAT S.A.'s management. Our responsibility
is to express an opinion on these statements of net revenues and direct costs
and expenses based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
statements of net revenues and direct costs and expenses are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements of net revenues and direct costs
and expenses. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
statements of net revenues and direct costs and expenses presentation. We
believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the statements of net revenues and direct costs
and expenses, the Business comprises IMPSAT S.A.'s retail dial-up access
business in Colombia. Costs incurred directly are included in the statements of
net revenues and direct costs and expenses and operating expenses have been
allocated to the retail dial-up access business based on management's estimates.
As a result, the net revenues and direct costs and expenses of the Business may
not be indicative of conditions that would have existed or results that would
have occurred had the Business operated as an unaffiliated entity.
In our opinion, the statements of net revenues and direct costs and expenses
present fairly, in all material respects, the net revenues and direct costs and
expenses of the Business for the years ended December 31, 1997 and 1998 and the
nine months ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States of America.
DELOITTE & TOUCHE
Santafe de Bogota, Colombia
November 4, 1999
F-31
<PAGE>
IMPSAT S.A.
(COMPRISING IMPSAT S.A.'S RETAIL DIAL-UP ACCESS BUSINESS IN COLOMBIA)
STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ----------------------
1997 1998 1998 1999
-------- -------- ----------- --------
(UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES............................................. $1,817 $2,131 $1,741 $1,371
------ ------ ------ ------
DIRECT COSTS AND EXPENSES:
Product, content and technology........................ 871 1,424 1,015 1,035
Marketing and sales.................................... 137 239 189 96
Corporate, general and administrative.................. 283 406 302 318
------ ------ ------ ------
Total direct costs and expenses.......................... 1,291 2,069 1,506 1,449
------ ------ ------ ------
EXCESS (DEFICIENCY) OF NET REVENUES OVER DIRECT COSTS AND
EXPENSES............................................... $ 526 $ 62 $ 235 $ (78)
====== ====== ====== ======
</TABLE>
See notes to statements of net revenues and direct costs and expenses.
F-32
<PAGE>
IMPSAT S.A.
(COMPRISING IMPSAT S.A.'S RETAIL DIAL-UP ACCESS BUSINESS IN COLOMBIA)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES
(IN THOUSANDS OF U.S. DOLLARS)
1. OPERATIONS
On August 4, 1999, El Sitio, Inc. ("El Sitio") entered into a framework
agreement with IMPSAT Corporation ("IMPSAT") for the purchase of IMPSAT's retail
dial-up access customers in Argentina, Brazil and Colombia for $21,500 and the
related purchase by IMPSAT of 3,070,615 Class A Convertible Preferred Shares of
El Sitio for $21,500. In connection with these transactions, El Sitio will also
enter into a telecommunications services agreement with an affiliate of IMPSAT
under which it will provide El Sitio with telecommunications infrastructure.
The closing of the acquisition of retail dial-up access customers of IMPSAT
in Colombia is subject to the negotiation of definitive documentation and
various other conditions, including governmental approvals, and accordingly,
there can be no assurance that this transaction will be completed. Subject to
the satisfaction of these conditions, the transaction is expected to be
consummated by the end of 1999.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The retail dial-up access business in Colombia (the
"Business") is not a "stand-alone" division or subsidiary of IMPSAT S.A. and was
not generally accounted for separately. As a result, the distinct and separate
accounts necessary to present an individual balance sheet, income statement and
cash flow statement of the Business have not been maintained. The Business does
not maintain its own stand-alone treasury, legal, financial, information systems
and other similar corporate support functions. The financial information
presented is limited to the statement of net revenues and direct costs and
expenses.
For purposes of preparing these statements, revenues of IMPSAT S.A.'s retail
dial-up access business were specifically identified and obtained from the
general ledger. Product, content and technology costs were also specifically
identified and obtained from the general ledger. Operating expenses such as
marketing and sales and corporate, general and administrative associated with
IMPSAT S.A.'s retail dial-up access business have been allocated based on
management's estimates.
Product, content and technology expenses accounted for 67% of expenses in
Colombia in 1997, 68% in 1998, 67% in the nine months ended September 30, 1998
and 71% in the nine months ended September 30, 1999.
IMPSAT S.A.'s management allocated other direct costs and expenses related
to the Business based on the proportionate share of retail Internet revenue to
total Internet revenue. These allocations are based on, among other things,
subscriber statistics and the shared use by the retail dial-up and corporate
dial-up portions of IMPSAT S.A.'s assets and resources such as the following:
call center, technical and sales and marketing personnel; equipment such as
servers, routers and modems; and supplies. These allocations are believed to be
reasonable under the circumstances. However, the Business' may not be indicative
of conditions that would have existed or results that would have occurred had
the Business operated as an unaffiliated entity.
The same allocation methodologies were used for each of the financial years
and periods presented in these statements.
F-33
<PAGE>
IMPSAT S.A.
(COMPRISING IMPSAT S.A.'S RETAIL DIAL-UP ACCESS BUSINESS IN COLOMBIA)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
A statement of cash flow is not being presented as the Business does not
maintain its own cash accounts and components, such as the changes in working
capital, are not available to prepare the cash flow information.
INTERIM FINANCIAL INFORMATION--The unaudited statement of net revenues and
direct costs and expenses for the nine months ended September 30, 1998 has been
prepared on the same basis as the audited annual statements of net revenues and
direct costs and expenses. In the opinion of management, such unaudited
statement of net revenues and direct costs and expenses includes all adjustments
(consisting only of normal recurring adjustments) necessary to present fairly
the results for such period. The operating results for the nine months ended
September 30, 1998 are not necessarily indicative of the operating results to be
expected for the full fiscal year or for any future period.
REVENUE RECOGNITION--Revenues represent month-to-month subscriptions for
pre-paid and per-minute usage of access levels. Subscription revenues are
recognized over the period that services are provided.
CURRENCY TRANSLATIONS--The statements of net revenues and direct costs and
expenses of the Company contain currency translations of Colombian peso amounts
to U.S. dollars at the exchange rate at the date of the transactions reported by
the Superintendency of Banking. No representation is made that the Colombian
peso amounts have been, could have been, or could be converted into U.S.
dollars, at such a rate or any other rate.
USE OF ESTIMATES--The preparation of the statements of net revenues and
direct costs and expenses in conformity with generally accepted accounting
principles in the United States of America requires management to make certain
estimates and assumptions that effect the amounts of the reported amounts of net
revenues and direct costs and expenses during the reporting period. Actual
results could differ from those estimates.
3. PRODUCT, CONTENT AND TECHNOLOGY
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1998 1998 1999
- ----------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Maintenance................................ $283 $ 599 $ 450 $ 402
Satellite capacity......................... 398 612 443 498
Telephone.................................. 105 116 35 84
Communications fee surcharge............... 85 97 87 51
---- ------ ------ ------
Total.................................. $871 $1,424 $1,015 $1,035
==== ====== ====== ======
</TABLE>
F-34
<PAGE>
IMPSAT S.A.
(COMPRISING IMPSAT S.A.'S RETAIL DIAL-UP ACCESS BUSINESS IN COLOMBIA)
NOTES TO STATEMENTS OF NET REVENUES AND DIRECT COSTS AND EXPENSES (CONTINUED)
(IN THOUSANDS OF U.S. DOLLARS)
4. MARKETING AND SALES
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1998 1998 1999
- ----------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Marketing and promotion.................... $131 $191 $153 $50
Credit card fees........................... 6 48 36 46
---- ---- ---- ---
Total.................................. $137 $239 $189 $96
==== ==== ==== ===
</TABLE>
5. CORPORATE, GENERAL AND ADMINISTRATIVE
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
DESCRIPTION 1997 1998 1998 1999
- ----------- ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Salaries and wages......................... $172 $170 $127 $137
Other general and administrative........... 94 181 136 131
Depreciation and amortization.............. 17 55 39 50
---- ---- ---- ----
Total.................................. $283 $406 $302 $318
==== ==== ==== ====
</TABLE>
F-35
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following sets forth unaudited pro forma consolidated financial
information for our company at September 30, 1999 and for the year ended
December 31, 1998 and the nine months ended September 30, 1999 giving effect to
(i) our completed and pending acquisitions of the retail dial-up access
customers in Argentina, Brazil and Colombia from IMPSAT Corporation for
approximately $21.5 million in the aggregate and the related purchase by IMPSAT
Corporation of 3,070,615 Class A convertible preferred shares for $21.5 million
and (ii) our private placement in mid-November 1999 of 1,111,111 Class B
convertible preferred shares for an aggregate purchase price of $10.0 million in
cash.
The pro forma financial information assumes that the above transactions had
been completed at January 1, 1998 and January 1, 1999 in the case of the pro
forma statement of operations data for the year ended December 31, 1998 and the
nine months ended September 30, 1999, respectively, and at September 30, 1999 in
the case of the pro forma balance sheet data.
The pro forma financial information does not purport to present our
financial condition or results of operations had these transactions occurred on
those dates and is not necessarily indicative of our results of operations for
future periods.
The historical financial information for our company and for the dial-up
access customers in Argentina, Brazil and Colombia of IMPSAT Corporation has
been derived from the financial statements included in this prospectus. The pro
forma adjustments relating to the acquisition of these retail dial-up access
customers are based upon available information and assumptions that we consider
reasonable under the circumstances. Final adjustments could differ from these
adjustments.
F-36
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------------------------------------------------------
RETAIL DIAL-UP ACCESS
------------------------------------------ PRO FORMA
ACTUAL ARGENTINA BRAZIL COLOMBIA TOTAL TOTAL ADJUSTMENTS PRO FORMA
----------- --------- -------- -------- -------- -------- ----------- -----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES............. $ 1,524 $2,880 $5,766 $1,371 $10,017 $ 11,541 $ 11,541
COSTS AND EXPENSES:
Product, content and
technology........... 3,181 1,802 3,590 1,035 6,427 9,608 9,608
Marketing and sales.... 7,157 332 1,029 96 1,457 8,614 8,614
Corporate, general and
administrative....... 3,736 -- 657 318 975 4,711 75(b) 4,786
Depreciation and
amortization......... 336 -- -- -- -- 336 3,225(c) 3,561
Share-based
compensation......... 499 -- -- -- -- 499 499
----------- ------ ------ ------ ------- -------- -----------
Total costs and
expenses............. 14,909 2,134 5,276 1,449 8,859 23,768 27,068
----------- ------ ------ ------ ------- -------- -----------
Operating income
(loss)............... (13,385) 746 490 (78) 1,158 (12,227) (15,527)
OTHER INCOME (EXPENSES)
Interest income
(expense), net....... 264 -- -- -- -- 264 264
Foreign exchange
income............... 5 -- -- -- -- 5 5
Other income (expense),
net.................. (3) -- -- -- -- (3) (3)
----------- ------ ------ ------ ------- -------- -----------
Total other income
(expense)............ 266 -- -- -- -- 266 266
----------- ------ ------ ------ ------- -------- -----------
NET LOSS BEFORE DIVIDENDS
ON CLASS A AND CLASS B
CONVERTIBLE PREFERRED
SHARES................. (13,119) 746 490 (78) 1,158 (11,961) (15,261)
Dividends on Class A and 1,290(e)
Class B convertible 600(f)
preferred shares....... 784 -- -- -- -- 784 7,778(h) 10,452
----------- ------ ------ ------ ------- -------- -----------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS.... $ (13,903) $ 746 $ 490 $ (78) $ 1,158 $(12,745) $ (25,713)
=========== ====== ====== ====== ======= ======== ===========
NET LOSS PER COMMON
SHARE:
Basic and diluted........ $ (1.18) $ (2.18)
WEIGHTED AVERAGE NUMBER
OF COMMON SHARES:
Basic and diluted........ 11,777,516 11,777,516
</TABLE>
F-37
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------------------------
RETAIL DIAL-UP ACCESS
------------------------------------------ PRO FORMA
ACTUAL ARGENTINA BRAZIL COLOMBIA TOTAL TOTAL ADJUSTMENTS PRO FORMA
---------- --------- -------- -------- -------- -------- ----------- ----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET REVENUES............... $ 780 $2,982 $11,394 $2,131 16,507 $17,287 $ 17,287
COSTS AND EXPENSES:
Product, content and
technology............. 1,556 1,851 6,157 1,424 9,432 10,988 10,988
Marketing and sales...... 674 479 1,423 239 2,141 2,815 2,815
Corporate, general and
administrative......... 1,940 -- 2,128 406 2,534 4,474 100(b) 4,574
Depreciation and
amortization........... 107 -- -- -- -- 107 4,300(c) 4,407
---------- ------ ------- ------ ------ ------- ----------
Total costs and
expenses............... 4,277 2,330 9,708 2,069 14,107 18,384 22,784
---------- ------ ------- ------ ------ ------- ----------
Operating income
(loss)................. (3,497) 652 1,686 62 2,400 (1,097) (5,497)
OTHER INCOME (EXPENSES)
Interest income
(expense), net......... (42) -- -- -- -- (42) (42)
Foreign exchange loss.... (44) -- -- -- -- (44) (44)
Other income (expense),
net.................... 66 -- -- -- -- 66 66
---------- ------ ------- ------ ------ ------- ----------
Total other income
(expense).............. (20) (20) (20)
---------- ------ ------- ------ ------ ------- ----------
NET LOSS BEFORE DIVIDENDS
ON CLASS A AND CLASS B
CONVERTIBLE PREFERRED
SHARES................... (3,517) 652 1,686 62 2,400 (1,117) (5,517)
Dividends on Class A and 1,720(e)
Class B convertible 800(f)
preferred shares......... -- -- -- -- -- -- 7,778(h) 10,298
---------- ------ ------- ------ ------ ------- ----------
NET LOSS ATTRIBUTABLE TO
COMMON SHAREHOLDERS...... $ (3,517) $ 652 $ 1,686 $ 62 2,400 $(1,117) $ (15,815)
========== ====== ======= ====== ====== ======= ==========
NET LOSS PER COMMON SHARE:
Basic and diluted.......... $ (1.15) $ (5.19)
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES:
Basic and diluted.......... 3,050,000 3,050,000
</TABLE>
F-38
<PAGE>
PRO FORMA BALANCE SHEET
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1999
--------------------------------------
PRO FORMA
ACTUAL ADJUSTMENTS PRO FORMA
-------- ----------- ---------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 24,393 (20,600)(a) $ 34,493
21,500 (d)
9,200 (g)
Trade accounts receivable, net............................ 976 976
Other receivables......................................... 1,078 1,078
Prepaid expenses.......................................... 137 137
-------- --------
Total current assets...................................... 26,584 36,684
PROPERTY AND EQUIPMENT, NET............................... 1,878 116 (a) 1,994
LICENSES AND PERMITS, NET................................. 98 98
OTHER ASSETS.............................................. 4,560 4,560
INTANGIBLE ASSETS--Customer base.......................... -- 21,440 (a) 21,440
-------- --------
TOTAL ASSETS........................................ $ 33,120 $ 64,776
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable--trade................................... $ 2,287 $ 2,287
Unearned revenues......................................... 628 628
Accrued and other liabilities............................. 3,405 56 (a) 3,461
Current portion of installment loans...................... 7 450 (a) 457
-------- --------
Total current liabilities........................... 6,327 6,833
-------- --------
INSTALLMENT LOANS......................................... 22 450 (a) 472
-------- --------
CLASS A CONVERTIBLE PREFERRED SHARES...................... 38,327 21,500 (d) 59,827
CLASS B CONVERTIBLE PREFERRED SHARES...................... 9,200 (g) 9,200
SHAREHOLDERS' EQUITY (DEFICIT):
Common shares............................................. 126 126
Additional paid-in-capital................................ 13,943 7,778 (h) 21,721
Deferred share-based compensation......................... (7,286) (7,286)
Accumulated other comprehensive income.................... 95 95
Accumulated deficit....................................... (18,434) (18,434)
Discount on Class B convertible preferred shares.......... -- (7,778)(h) (7,778)
-------- --------
Total shareholders' equity (deficit)................ (11,556) (11,556)
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIT)......................................... $ 33,120 $ 64,776
======== ========
</TABLE>
F-39
<PAGE>
ADJUSTMENTS:
The following are the pro forma adjustments made for purposes of the pro
forma financial information:
(a) Reflects the acquisitions of IMPSAT Corporation's retail dial-up access
customers in Argentina for $6.2 million (of which $5.3 million was paid
in cash with the remainder due in 24 equal monthly installments), Brazil
for $12.3 million and Colombia for $3.0 million for a total purchase
price of $21.5 million. The purchase price has been allocated to the
assets acquired and liabilities assumed based on management's preliminary
estimates of fair value. In connection with these acquisitions, we will
enter into agreements for telecommunication services to be provided to us
by IMPSAT Corporation or its subsidiaries.
(b) Reflects monitoring fees of $100,000 per year payable to IMPSAT
Corporation pursuant to our acquisitions of retail dial-up access
customers of IMPSAT Corporation.
(c) Reflects depreciation and amortization over five years of the fixed and
intangible assets created in connection with acquisitions of retail
dial-up access customers in Argentina, Brazil and Colombia from IMPSAT
Corporation. The customer base will be reviewed on an ongoing basis for
impairment based on comparison of carrying value against estimated
undiscounted future cash flows. If an impairment is identified, the
assets carrying amount will be adjusted to fair value.
(d) Reflects the purchase of 3,070,615 Class A convertible preferred shares
by IMPSAT Corporation for $21.5 million in conjunction with the
acquisitions of its retail dial-up access customers in Argentina, Brazil
and Colombia.
(e) Reflects 8% dividend rate on Class A convertible preferred shares
calculated as follows:
<TABLE>
<CAPTION>
TRANSACTION AMOUNT
- ----------- -----------
<S> <C>
IMPSAT Corporation purchase................................. $21,500,000
===========
Dividend rate per annum..................................... 8%
Annual dividend............................................. $ 1,720,000
Nine-month dividend......................................... $ 1,290,000
</TABLE>
(f) Reflects 8% dividend rate on Class B convertible preferred shares as
follows:
<TABLE>
<CAPTION>
TRANSACTION AMOUNT
- ----------- -----------
<S> <C>
Private placement investors................................. $10,000,000
===========
Dividend rate per annum..................................... 8%
Annual dividend............................................. $ 800,000
Nine-month dividend......................................... $ 600,000
</TABLE>
(g) Reflects the net proceeds from the private placement in mid-November
1999 of Class B convertible preferred shares (total gross proceeds of
$10.0 million less $800,000 for private placement agent fee and
transaction expenses).
F-40
<PAGE>
(h) Reflects the recognition of the discount on sale of the Class B
convertible preferred shares and the amortization of such discount over
the six-month period after the closing of this offering. Each Class B
convertible preferred share will automatically convert, on the date six
months after the closing of this offering, into one common share. This
discount is calculated as follows:
<TABLE>
<CAPTION>
<S> <C>
Expected initial public offering price per common share..... $ 16.00
less: purchase price per Class B convertible preferred
share................................................. 9.00
----------
Discount per share.......................................... $ 7.00
==========
Number of Class B convertible preferred shares.......... 1,111,111
----------
Total amount of discount.............................. $7,777,777
==========
</TABLE>
F-41
<PAGE>
8,200,000 SHARES
[LOGO]
WWW.ELSITIO.COM
COMMON SHARES
------------
PROSPECTUS
DECEMBER 9, 1999
-----------------
CREDIT SUISSE FIRST BOSTON
LEHMAN BROTHERS
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
WIT CAPITAL CORPORATION
