<PAGE>
As filed with the Securities and Exchange Commission on July 6, 2000
Registration No. 333-95051
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------
AMENDMENT NO. 8
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------
AMERICA ONLINE LATIN AMERICA, INC.
(Exact name of registrant as specified in its charter)
Delaware 7370 65-0963212
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
6600 N. Andrews Avenue
Suite 500
Fort Lauderdale, FL 33309
(954) 229-2100
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------
Charles M. Herington
Chief Executive Officer
America Online Latin America, Inc.
6600 N. Andrews Avenue
Suite 500
Fort Lauderdale, FL 33309
(954) 229-2100
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------
With copies to:
Michael L. Fantozzi, Esq. Marc S. Rosenberg, Esq.
Peter S. Lawrence, Esq. Cravath, Swaine & Moore
Mintz, Levin, Cohn, Ferris, Worldwide Plaza
Glovsky and Popeo, P.C. 825 Eighth Avenue
One Financial Center New York, NY 10019
Boston, MA 02111 (212) 474-1000
(617) 542-6000
------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered or
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two separate prospectuses. The first
prospectus relates to an underwritten public offering by America Online Latin
America, Inc. of an aggregate of 28,750,000 shares of class A common stock. The
second prospectus relates to a concurrent distribution of an aggregate of
2,057,950 shares of class A common stock by one of our principal stockholders,
the Cisneros Group of Companies, to some current and former employees of
companies within the Cisneros Group of Companies. The prospectus for the
underwritten public offering and the Cisneros Group of Companies distribution
will be identical in all material respects with the exception that the Cisneros
Group prospectus will have an alternative front cover page and an alternative
"Plan of Distribution" section in place of the "Underwriting" section for the
underwritten public offering prospectus. Additional non-substantive conforming
changes will also be made to the Cisneros Group prospectus to reflect that the
initial public offering is being made by a separate prospectus. The alternative
pages appear in this registration statement immediately following the complete
prospectus for the underwritten public offering. Final forms of each prospectus
will be filed with the Securities and Exchange Commission under Rule 424(b).
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY 6, 2000
PROSPECTUS
[COMPANY LOGO]
25,000,000 Shares
America Online Latin America, Inc.
Class A Common Stock
$ per share
--------
America Online Latin America, Inc. is selling 25,000,000 shares of its class
A common stock. The underwriters named in this prospectus may purchase up to
3,750,000 additional shares of class A common stock to cover over-allotments.
This is our initial public offering of class A common stock. All of the
shares of class A common stock are being sold by America Online Latin America,
Inc. No public market exists for the class A common stock. We anticipate that
the initial public offering price will be between $15.00 and $17.00 per share.
We have applied to have the class A common stock included for quotation on the
Nasdaq National Market under the symbol .
--------
Investing in our class A common stock involves risks. See the risk factors
section beginning on page 10.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
In a concurrent distribution made by a separate prospectus, one of our
principal stockholders, the Cisneros Group of Companies, intends to give up to
2,057,950 shares of our class A common stock to some current and former
employees of companies within the Cisneros Group of Companies. Neither we nor
the Cisneros Group of Companies will receive any proceeds from the distribution
by the Cisneros Group of Companies.
--------
<TABLE>
<CAPTION>
Per Share Total
--------- ------
<S> <C> <C>
Initial Public Offering Price $ $
Underwriting Discount $ $
Proceeds to America Online Latin America, Inc., before ex-
penses $ $
</TABLE>
The underwriters are offering the shares in the initial public offering
subject to various conditions. The underwriters expect to deliver the shares to
purchasers in the initial public offering on or about , 2000.
--------
Salomon Smith Barney Donaldson, Lufkin & Jenrette
--------
Lehman Brothers
Cazenove & Co.
, 2000
<PAGE>
Outside front cover and outside back cover of prospectus:
. watermark of the AOL-LA logo
Inside front cover of prospectus:
. AOL-LA logo
. screen shot of America Online Brazil online service welcome screen
. text: "Online Service Welcome Screen
. Internet access
. In-depth local content
. Community building tools
. Personalization and control features
. Access to global AOL content and community
. E-commerce opportunities"
. screen shot of America Online Brazil portal
. text: "America Online Brazil Portal
. Local content
. Community features
. Connection to worldwide portal network
. E-commerce opportunities"
. text: "Hi you are online," "Welcome," "You've got mail," "Ready" and
"Downloading completed" in English and Portuguese
Inside back cover of prospectus:
. AOL-LA logo
. text: "Our mission is to be a leader in the development in Latin America
of the global interactive medium that is changing the way people
communicate, stay informed, are entertained, learn, shop and conduct
business. We began offering our interactive services in Brazil in
November 1999 and plan to offer our services in Mexico and Argentina in
the third quarter of this calendar year and then in additional countries
in Latin America."
. map of Latin America
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 4
Risk Factors............................................................... 10
Forward-Looking Statements................................................. 23
Use of Proceeds............................................................ 24
Dividend Policy............................................................ 24
Capitalization............................................................. 25
Dilution................................................................... 26
Selected Financial Data.................................................... 28
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................................................ 29
Business................................................................... 35
Management................................................................. 54
Related Party Transactions................................................. 64
Principal Stockholders..................................................... 76
Description of Provisions of Our Restated
Certificate of Incorporation that Affect the
Scope of Our Business..................................................... 78
Description of Capital Stock............................................... 79
Shares Eligible For Future Sale............................................ 86
U.S. Tax Consequences to Non-U.S. Holders.................................. 88
Underwriting............................................................... 91
Legal Matters.............................................................. 94
Experts.................................................................... 94
Where You Can Find Additional Information.................................. 94
Index to the Consolidated Financial Statements............................. F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The following summary contains a general discussion of our business, the
offering of class A common stock and summary financial information. It does not
contain all of the information that is important to you in making a decision to
purchase shares of class A common stock. Before deciding to invest in our class
A common stock, you should read this entire prospectus, including the risk
factors section and our consolidated financial statements and related notes.
America Online Latin America, Inc.
America Online Latin America seeks to become the leading provider of
interactive services in Latin America. We intend to bring to the Latin American
market localized AOL-branded interactive services and the opportunity to join
AOL's global online community of approximately 23 million subscribers in 15
countries and seven languages. We believe that our relationships with our
founders and principal stockholders, America Online, Inc. and the Cisneros
Group of Companies, give us significant competitive advantages. We believe that
we will benefit from the technology, brand name, infrastructure and
relationships of AOL, the world's leader in branded interactive services, and
will draw on the relationships, regional experience and extensive media assets
of the Cisneros Group, one of the leading media groups in the Americas.
Our Opportunity
We believe that Latin America is one of the fastest growing markets for
Internet use. International Data Corporation projects that the number of
Internet users in Latin America will increase at a compound annual growth rate
of 41% from 1998 to 2003 and the number of Internet accessing devices will
increase at a compound annual growth rate of 49% over the same period. Our
three core target markets are Brazil, Mexico and Argentina. In November 1999,
we concurrently launched our first AOL-LA country service, America Online
Brazil, and our first AOL-LA country Internet portal, our Brazilian portal at
www.americaonline.com.br. In the third calendar quarter of this year, we plan
to introduce localized versions of the AOL-LA country services and portals in
Mexico and Argentina, as well as our Latin American regional portal. After
that, we intend to introduce our interactive services in additional countries
in Latin America.
Our Services
Our family of AOL-branded interactive services will include the AOL-LA
country services, our comprehensive online services which will be available to
subscribers, and the AOL-LA country Internet portals and our Latin American
regional Internet portal. We believe that our AOL-LA country services will be
unique in their seamless integration of local, regional and global interactive
communities and the Internet, and in their array of interactive tools, content
and e-commerce opportunities. Our network of Internet portals will offer
content, community and e-commerce opportunities to all Internet users. We
expect to derive our revenues principally from subscriptions to our AOL-LA
country services and generate additional revenues from advertising and e-
commerce.
Our Strategy
Our strategy is to develop AOL-LA brand recognition, grow our subscriber and
user base and expand beneficial relationships with advertisers, content
providers and e-commerce merchants. As part of this strategy, in Brazil we have
entered into a strategic marketing alliance with Banco Itau, one of the largest
banks in Latin America with approximately seven million customers and one
million users of its interactive financial services. We have agreed to create a
co-branded, customized version of our America Online Brazil service that Banco
Itau will market to its customers. We will issue 31,700,000 shares of our class
A common stock at the closing of this offering to Banco Itau in exchange for
its commitment to achieve various subscriber and revenue levels during a five
year period. If Banco Itau fails to meet these subscriber and revenue levels,
then it has agreed to make substantial cash payments to us. We believe that our
relationship with Banco Itau will significantly expand our presence in Brazil.
4
<PAGE>
We believe that our relationships with AOL, the Cisneros Group and Banco
Itau are essential to our success and provide us with significant competitive
advantages. Nonetheless, you should be aware that these relationships involve
numerous risks, including limitations on the scope of our rights to offer AOL's
interactive services, which are discussed more fully in the risk factors
section.
------------
Our principal executive offices are located at 6600 N. Andrews Avenue, Suite
500, Fort Lauderdale, Florida 33309 and our telephone number at that address is
(954) 229-2100.
------------
5
<PAGE>
The Offering
<TABLE>
<S> <C> <C>
Class A common stock offered by this
prospectus.................................. 25,000,000 shares
Capital stock to be outstanding after this
offering, our concurrent issuance of shares
to Banco Itau, the concurrent distribution
by the Cisneros Group and the conversion of
series C preferred stock into class A common
stock by two of our directors and one of our
executive officers: Number of Shares Voting Power
---------------- ------------
Class A common stock
. sold in this offering ................ 25,000,000 1.21%
. issued to Banco Itau.................. 31,700,000 1.54%
. given by the Cisneros Group to some of
its current and former employees under
a separate prospectus................. 2,057,950 0.10%
. held by two of our directors and one
of our executive officers............. 1,996,424 0.10%
Series B preferred stock................... 101,858,334 49.51%
Series C preferred stock................... 97,803,960 47.54%
Total.................................... 260,416,668 100.00%
</TABLE>
Following this offering, all outstanding shares of series B preferred stock
will be held by AOL and all outstanding shares of series C preferred stock will
be held by the Cisneros Group. The two directors and one executive officer will
receive shares of series C preferred stock in the corporate reorganization
described below. These shares will immediately convert into class A common
stock. Shares of our series B preferred stock are convertible into shares of
class B common stock, which are convertible into class A common stock at any
time on a one-for-one basis. Shares of our series C preferred stock are
convertible into shares of class C common stock, which are convertible into
class A common stock at any time on a one-for-one basis. No shares of class B
or class C common stock are currently outstanding.
Concurrently with this offering, we intend to issue to Banco Itau 31,700,000
shares of our class A common stock in exchange for Banco Itau agreeing to enter
into and perform its obligations under the strategic interactive services and
marketing agreement with us.
Concurrently with this offering, the Cisneros Group intends to give up to
2,057,950 shares of our class A common stock to some of its current and former
employees. These shares were issued by us to the Cisneros Group as series C
preferred stock and will automatically convert into shares of class A common
stock upon their distribution to the current and former employees of the
Cisneros Group.
Throughout this prospectus, the term B stock refers collectively to our
series B preferred stock and our class B common stock and the term C stock
refers collectively to our series C preferred stock and our class C common
stock.
The number of shares of capital stock outstanding after this offering, the
issuance of shares to Banco Itau and the concurrent distribution by the
Cisneros Group does not include:
. 8,000,000 shares of class A common stock issuable upon exercise of
options that we expect to grant to our employees, directors and
consultants under our stock plan on or before the effective date of this
offering with an exercise price equal to the initial public offering
price;
. 5,208,333 shares of class A common stock available for future issuance
under our stock plan; and
6
<PAGE>
. 16,642,500 shares of our series B preferred, class A common or class B
common stock issuable to AOL upon its exercise of an immediately
exercisable warrant to be granted upon the effective date of this
offering with an exercise price equal to the initial public offering
price.
Use of proceeds................. Expansion of our interactive services and
telecommunications network capacity,
capital expenditures and for working
capital and general corporate purposes.
Voting rights................... Each holder of class A common stock is
entitled to one vote per share.
As the holder of B stock, AOL is entitled
to ten votes for each share of its B
stock and entitled to elect five of our
14 directors.
As the holder of C stock, the Cisneros
Group is entitled to ten votes for each
share of its C stock and entitled to
elect five of our 14 directors.
Banco Itau will be entitled to nominate
one of our directors and AOL and the
Cisneros Group have agreed to vote in
favor of Banco Itau's nominee.
Following this offering, the issuance of
the shares to Banco Itau and the
concurrent distribution by the Cisneros
Group, AOL will control 49.51% and the
Cisneros Group will control 47.54% of the
voting power of all our capital stock.
Because of their respective ownership
percentages, AOL and the Cisneros Group
will determine the outcome of all
corporate matters requiring stockholder
approval, including the election of all
our directors, merger transactions and
the sale of all or substantially all our
assets.
Our restated certificate of incorporation
requires the approval of both AOL and the
Cisneros Group to amend a number of
important provisions and to undertake a
wide variety of corporate actions.
Proposed Nasdaq National Market
symbol....................
Corporate Reorganization
Currently, our business is conducted by affiliates of AOL Latin America,
S.L., a joint venture between AOL and the Cisneros Group formed in December
1998. Upon the effectiveness of this offering, we will indirectly own all of
AOL Latin America, S.L. and its affiliates through a corporate reorganization.
In the reorganization, AOL-LA will acquire all of the ownership interests in
the two holding companies that own AOL Latin America, S.L. and its affiliates
in exchange for shares of AOL-LA's preferred stock. At the time of the
reorganization:
AOL will receive 101,858,334 shares of our series B preferred stock in
exchange for its interest in one of the holding companies that owns AOL Latin
America, S.L. and its affiliates. AOL will also receive the AOL warrant.
The Cisneros Group will receive 99,861,910 shares of our series C preferred
stock in exchange for its interests in one of the holding companies that owns
AOL Latin America, S.L. and its affiliates, prior to its concurrent
distribution of 2,057,950 shares to current and former employees.
7
<PAGE>
Also, Cristina Pieretti and Steven Bandel, executives of the Cisneros Group
and members of our board of directors, and Eduardo Hauser, a former executive
officer of the Cisneros Group and now our vice president of corporate
development, will receive an aggregate of 1,996,424 shares of our series C
preferred stock in exchange for their interests in one of the two holding
companies that own AOL Latin America, S.L. and its affiliates. Upon receipt,
these 1,996,424 shares of series C preferred stock issued to these individuals
will immediately convert into 1,996,424 shares of class A common stock.
America Online-Time Warner Merger
On January 10, 2000, AOL entered into a merger agreement with Time Warner,
Inc. Under the agreement, a new holding company, AOL Time Warner, Inc., will
form two wholly-owned subsidiaries that will merge with each of AOL and Time
Warner. After the merger, AOL and Time Warner will be wholly-owned subsidiaries
of AOL Time Warner. The merger is not expected to close until the last quarter
of 2000 and is subject to closing conditions. Although the merger will result
in changes in the stockholders, management and assets of AOL, we do not believe
that the merger will have a material effect on us. Although we recently entered
into agreements to distribute Turner Broadcasting and Time Inc. content on our
services in Latin America, no decisions have been made about whether other
assets of AOL Time Warner will be made available to us.
About This Prospectus
Unless the context otherwise requires, throughout this prospectus:
. AOL-LA, we, us, and our refer to America Online Latin America, Inc., our
subsidiaries, and our predecessor, AOL Latin America, S.L. and its
affiliates;
. AOL refers to America Online, Inc; and
. the Cisneros Group refers to the Cisneros Group of Companies, a group of
companies and joint ventures that are associated with two of our
directors, Ricardo and Gustavo Cisneros, and their families.
. Banco Itau refers to Banco Itau S.A. and its affiliate, Banco Banerj
S.A., both Brazilian banks.
Unless otherwise indicated, all information contained in this prospectus:
. reflects the reorganization transaction and the adoption of our restated
certificate of incorporation, restated by-laws and stockholders'
agreement upon the effectiveness of this offering;
. reflects the conversion of 1,996,424 shares of series C preferred stock
into 1,996,424 shares of class A common stock by two of our directors
and one of our executive officers, who received shares of series C
preferred stock in the reorganization transaction;
. reflects the issuance of 31,700,000 shares of our class A common stock
to Banco Itau;
. reflects the concurrent distribution by the Cisneros Group of 2,057,950
shares of class A common stock to current and former employees of the
Cisneros Group under a separate prospectus; and
. excludes the possible issuance of additional shares of class A common
stock to the underwriters to cover over-allotments.
AOL, America Online, AOL Globalnet, AOL.com, AOL Instant Messenger, AOL
Netfind, AOL Buddy List, AOL Favorite Places and ICQ are trademarks of AOL.
This prospectus also contains trademarks of other companies.
We maintain the following web sites: www.americaonline.com.br.,
www.americaonline.com.mx and www.americaonline.com.ar. The information
contained at our web sites is not incorporated into and does not constitute
part of this prospectus, and the only information that you should rely on in
making your decision whether to invest in our common stock is the information
contained in this prospectus.
8
<PAGE>
Summary Financial Data
The following table presents our summary statement of operations data for:
. the period from December 15, 1998, the date of our inception, through
June 30, 1999, our first fiscal year end;
. the period from December 15, 1998, the date of our inception, through
March 31, 1999; and
. the nine months ended March 31, 2000.
Our summary balance sheet data is presented as of March 31, 2000, on an
actual, pro forma and pro forma as adjusted basis. Our pro forma balance sheet
data gives effect to:
. the conversion of 1,996,424 shares of series C preferred stock into
1,996,424 shares of class A common stock by two of our directors and one
of our executive officers, who received shares of series C preferred
stock in the reorganization transaction;
. the issuance of 31,700,000 shares of class A common stock to Banco Itau;
and
. the concurrent distribution of 2,057,950 shares of class A common stock
by the Cisneros Group.
Our pro forma as adjusted balance sheet data also gives effect to our
receipt of the net proceeds from our sale of 25,000,000 shares of class A
common stock in this offering at an assumed initial public offering price of
$16.00 per share, after deducting the underwriting discount and estimated
offering expenses.
You should read this information and our financial statements as well as the
notes to those financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
December
15, 1998
(date of
Period from inception) Nine Months
December 15, 1998 to March Ended
(date of inception) 31, 1999 March 31, 2000
to June 30, 1999 (unaudited) (unaudited)
------------------- ----------- --------------
(In thousands)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Subscriptions.................. $ 1,644 $ 889 $ 3,878
Advertising and e-commerce..... -- -- 1,333
------- ------- --------
Total revenues............... 1,644 889 5,211
Loss from operations............. (1,750) (587) (52,445)
Net loss......................... $(1,872) $ (622) $(51,244)
======= ======= ========
<CAPTION>
As of March 31, 2000
(unaudited)
----------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------------- ----------- --------------
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........ $34,584 $34,584 $408,584
Working capital.................. 22,390 22,390 396,390
Total assets..................... 49,199 49,199 423,199
Total stockholders' equity....... 30,001 30,001 404,001
</TABLE>
9
<PAGE>
RISK FACTORS
AOL and AOL-LA are two separate companies. An investment in AOL-LA is not an
investment in AOL, nor is AOL's investment in AOL-LA a recommendation for you
to purchase shares of AOL-LA's class A common stock. Before purchasing shares
of class A common stock offered by this prospectus, you should carefully
consider the risks described below, as well as the other information presented
in this prospectus.
RISKS RELATED TO CONTROL BY AOL AND THE CISNEROS GROUP
Because AOL and the Cisneros Group control AOL-LA, investors will not be able
to affect the outcome of any stockholder vote or exercise any influence over
our business
Following this offering, issuance of the shares to Banco Itau and the
concurrent distribution by the Cisneros Group, AOL will control approximately
49.51% and the Cisneros Group will control approximately 47.54% of the voting
power of our outstanding capital stock. Investors acquiring shares of class A
common stock in this offering, which has disparate voting rights compared to
the B stock and C stock held by AOL and the Cisneros Group, will control only
1.21% of the voting power. Because of their respective ownership percentages,
AOL and the Cisneros Group will determine the outcome of all corporate matters
requiring stockholder approval, including the election of all of our directors
and transactions such as mergers.
Moreover, AOL and the Cisneros Group will control our business direction and
policies. AOL and the Cisneros Group exercise their control over our business
through exclusive voting rights and veto powers granted to them as holders of B
stock and C stock. For example, each of AOL and the Cisneros Group, along with
the directors appointed by them who serve on the special committee of our board
of directors, has the power to veto:
. all amendments to our restated certificate of incorporation and restated
by-laws;
. the selection of nominees to our board of directors; and
. all issuances of our capital stock.
The Cisneros Group has not previously operated any interactive services
business of the kind that we conduct and plan to conduct.
AOL and the Cisneros Group have interests that conflict with your interests and
are free to place their interests ahead of yours
Because AOL and the Cisneros Group operate in the interactive services and
media industries, their control of AOL-LA creates actual and potential
conflicts of interest between them and us. Neither our restated certificate of
incorporation nor our agreements with AOL and the Cisneros Group prevent them
from pursuing other opportunities that might be advantageous to us, acquiring a
minority interest in businesses that compete with us or, in some instances,
directly competing with us. Consequently, they each have the power to take
actions that may be directly opposed to our interests and your interests as an
investor.
For example, AOL and the Cisneros Group may each offer Spanish- and
Portuguese-language interactive services targeted to markets outside of Latin
America. AOL may also offer any non-AOL-branded TV- or wireless-based online
services or non-AOL-branded Spanish and Portuguese language portals in Latin
America. Our business would be adversely affected if AOL or the Cisneros Group
were to engage in any of these business opportunities. AOL and the Cisneros
Group are not restricted from competing with us for advertising and e-commerce
revenues.
Our restated certificate of incorporation does not require AOL or the
Cisneros Group to inform us of any business opportunities or to make any
business opportunities available to us. Moreover, our restated certificate of
incorporation protects AOL and the Cisneros Group and obligates us to indemnify
them against liability for breach of fiduciary duty should they choose to
pursue an opportunity that might be favorable to us or recommend the
opportunity to a third party. Our directors and officers affiliated with AOL
and the Cisneros Group are similarly protected.
10
<PAGE>
Because AOL and the Cisneros Group each hold preferred stock, their claim to
our assets will be senior to yours if we are liquidated. Moreover, their
preferred stock is entitled to receive cumulative annual dividends at the rate
of $0.0736 per share, payable in additional shares of preferred stock. This
means that their senior claim to our assets will increase over time, and that
they will be able to convert their preferred shares into a larger percentage of
our common stock in the future.
Some of our directors and executive officers own AOL common stock or options
to purchase AOL common stock. Their interests in AOL's equity may present them
with incentives that are different from your incentives, which may heighten the
conflicts described above.
Because AOL and the Cisneros Group control our ability to offer new types of
interactive services, our revenues, growth and ability to compete may be
adversely affected
Because of restrictions and limitations in our charter documents, we may not
be able to respond quickly, or at all, to new services offered by competitors
or take advantage of new business opportunities, which could adversely affect
our growth or reduce our revenues.
First, we cannot engage in any business activity other than providing
personal computer-based, or PC-based, and AOL-branded TV- and wireless-based
interactive services in Latin America without the approval of AOL and the
Cisneros Group for as long as:
. AOL continues to own at least 50,929,167 shares of B stock, or 50% of the
number of shares of series B preferred stock that we originally issued to
it; and
. the Cisneros Group continues to own at least 50,929,167 shares of C
stock, or 50% of the number of shares of series C preferred stock that we
originally issued to it and two of our directors and one of our executive
officers.
Second, even if AOL acquires or develops AOL-branded TV- and wireless-based
online services, we will not be able to offer these services in Latin America,
although we have the license to do so, without the approval of both of the
directors appointed by AOL and the Cisneros Group who serve on the special
committee of our board of directors. Disputes may also arise with AOL over
whether our licensed rights extend to particular services, due to possible
ambiguities in the terms PC-based, TV-based and wireless-based services.
These limitations on our ability to offer new products and services beyond
AOL-branded PC-, TV- and wireless-based interactive services in Latin America
may prevent us from pursuing potentially lucrative business opportunities. For
example, we are prevented from offering our services to Spanish- and
Portuguese-speaking consumers in countries outside of Latin America.
Limitations and conditions on our rights to offer AOL-branded online services
and portals in Latin America could harm the value of these rights and our
ability to effectively compete
We have entered into a license agreement with AOL under which we have
exclusive rights to offer AOL-branded PC-based online services and, as they are
developed by AOL, AOL-branded TV-and wireless-based online services in Latin
America. These rights to use AOL's brand name and services are vital to our
success as an interactive services provider. However, they are subject to
important conditions and limitations, some of which are beyond our control,
which could preclude us from exercising our rights or materially diminish their
value to us and could adversely affect our business.
First, we have no rights to offer AOL-branded wireless-based online services
unless the services are developed by AOL for commercial launch within four
years of the effective date of the registration statement for this offering.
Our rights to offer TV-based services are also contingent upon AOL's developing
these services.
11
<PAGE>
Second, we will lose our exclusivity:
. to AOL-branded PC-based online services, upon the later of December 15,
2003 or the date on which either AOL or the Cisneros Group owns less
than 20% of our outstanding capital stock; and
. to AOL-branded TV- and wireless-based online services, upon the later of
July , 2005 or the date on which either AOL or the Cisneros Group owns
less than 20% of the outstanding capital stock of AOL-LA.
Third, AOL may terminate our license agreement if we materially breach its
terms.
Fourth, our license to offer a network of Spanish- and Portuguese-language
AOL-branded portals in Latin America is non-exclusive. If we do not exercise
our option to purchase exclusive rights, AOL could offer competing portals or
extend licensed rights to a third party.
Except for CompuServe-branded services, we have no rights to market non-AOL-
branded interactive services owned by AOL, including Netscape, DigitalCity and
MovieFone. These limitations may prevent us from pursuing potentially lucrative
business opportunities.
Our ability to maintain commercial operations would be seriously harmed if AOL
fails to provide us with proprietary technology and other services related to
our interactive services
We have entered into a services agreement with AOL under which we pay AOL to
provide us with all the technology and support we require to offer our
interactive services in Latin America. Under the services agreement, AOL has
agreed to run our interactive services on its host computers in the U.S. and to
develop the localized versions of our interactive services that we intend to
offer in various countries in Latin America. Because we do not have the
resources, including personnel and technology, to develop or run our
interactive services independently of AOL, any failure on AOL's part to meet
its obligations under the services agreement would severely affect our
business. Further, if AOL delays in localizing our software, future launches of
our interactive services may be postponed, which would weaken our ability to
compete and to grow our business. AOL has no obligation to reimburse us for
losses caused by its failure to deliver any services under the services
agreement, and AOL may terminate the services agreement if we materially breach
its terms. The termination of the services agreement with AOL would critically
impact our business.
If AOL and the Cisneros Group fail to agree on matters related to our business,
our business may be adversely affected for as long as they remain in deadlock
Since AOL and the Cisneros Group jointly control AOL-LA through provisions
contained in our restated certificate of incorporation, restated by-laws, and
stockholders' agreement, either AOL or the Cisneros Group can block a wide
variety of actions. Should AOL and the Cisneros Group disagree on the direction
of AOL-LA or on any matter over which each has exclusive veto rights, our
business may be adversely affected until the disagreement is resolved. For
example, under our restated certificate of incorporation, AOL, as the holder of
our B stock, and the Cisneros Group, as the holder of our C stock, must each
separately approve many corporate and business matters, including:
. our offering AOL-branded TV- and wireless-based online services in
Latin America;
. any expansion of our business beyond offering PC-, TV- and wireless-
based interactive services in Latin America; and
. any changes to significant corporate governance provisions in our
restated certificate of incorporation and restated by-laws.
The list of matters that both AOL and the Cisneros Group must approve is
extensive and extends beyond major corporate governance issues.
12
<PAGE>
FINANCIAL RISKS
We expect to continue to incur losses and we may not achieve or maintain
profitability, which may cause our stock price to decline
We incurred net losses of approximately $53.1 million from December 15,
1998, the date of our inception, through March 31, 2000. We expect to continue
to incur net losses as we expend substantial resources to develop our business.
We cannot predict what impact, if any, continued losses will have on our
ability to finance our operations in the future. We will need to generate
significant revenues to achieve profitability and we may not be able to do so.
Because our short operating history makes it difficult to evaluate our
prospects, our future financial performance may disappoint investors and result
in a decline in our stock price
You must consider our prospects given the risks, expenses and challenges we
might encounter because we are at an early stage of development in a new and
rapidly evolving market. We launched our first AOL-LA country service and our
first AOL-LA country Internet portal in November 1999 in Brazil. We have only a
limited operating history for you to evaluate our business and our future
financial performance may disappoint investors and result in a decline in our
stock price. For the nine month period ended March 31, 2000, $2.9 million, or
56%, of our revenues reflect subscription fees attributable to our CompuServe
Classic subscribers that we acquired from AOL. We expect these CompuServe
revenues to decline significantly. You should not evaluate our business or
financial prospects based upon our historical subscription revenues.
If we are not able to convert our subscribers into paying subscribers, we will
not be able to increase our revenues as planned
Due to our limited operating history, we cannot predict the extent to which
we will be successful in converting trial subscribers and those whose payments
are late into paying subscribers. If we fail to successfully convert these
subscribers, we will have difficulty increasing our revenue at the rates
required to reduce our operating losses and achieve profitability.
As of March 31, 2000 and June 25, 2000, we had approximately 96,300 and
129,000 subscribers in Brazil, respectively. Because our marketing efforts
include offering a free trial period to our subscribers, and because of the
early stage of our business, a substantial portion of our subscribers are in
their free trial period. We expect that trial subscribers will represent a
substantial portion of our total subscriber population in the near term.
Although we expect that the percentage of trial subscribers will fluctuate, it
will not be unusual at any particular date in the near term for a majority of
our subscribers to be trial members. The percentage of trial members is likely
to be at its highest during periods following our launch in a new market and in
connection with heavy promotional activity, which may include offering extended
trial periods. We expect to launch our service in Mexico and Argentina in the
third calendar quarter of 2000.
As of March 31, 2000, approximately 22% of our subscribers who were past
their trial period had not made payment within 25 days of their billing date.
As of June 25, 2000, approximately 8% of our subscribers who were past their
trial period had not made payment within 25 days of their billing date.
Approximately 80% of our subscribers in Brazil have chosen to use the boletos
method of payment rather than credit cards. A significant number of the
subscribers using boletos who have received an invoice have not made timely
payment. The boleto is a customary form of payment, under which Brazilian banks
that we designate act as conduits for collecting payments. We send each
subscriber a bill and the subscriber pays the bill at a local bank. These local
banks then send payments to our designated banks. We are enhancing our systems
to validate billing information for all subscribers, new and existing, that
choose to use boletos as a form of payment. As we go through the validation
process for existing subscribers, we are terminating those subscribers for whom
we cannot gather valid billing information.
13
<PAGE>
Because AOL and the Cisneros Group only have limited commitments to fund our
capital requirements after this offering, if we are unable to obtain financing
from other sources, we may be unable to sustain our business
To support our operations up to the date of this offering, both AOL and the
Cisneros Group have provided us with various services as well as cash. However,
neither AOL nor the Cisneros Group is obligated to provide any future funding
following this offering, except that each of AOL and the Cisneros Group is
committed to provide $35.0 million by December 31, 2000. If we are unable to
obtain additional financing as needed, we may be required to reduce the scope
of our operations or anticipated expansion, which is likely to have an adverse
effect on our business. We cannot accurately predict the timing and amount of
our capital requirements. Consequently, we may require further financing sooner
than anticipated. Any additional equity financing, if available, may be
dilutive to our stockholders, and any debt financing, if available, may involve
restrictions on our financing and operating activities.
Because we expect that most of our revenues will be paid in Latin American
currencies, the value of our revenues will decline if these currencies
depreciate relative to the U.S. dollar
Although our reporting currency is the U.S. dollar, most of our revenues
will be received in the currencies of the countries in which we offer our
interactive services. The currencies of many Latin American countries,
including Brazil, Mexico and Argentina, have experienced substantial volatility
and depreciation in the past. Our revenues will decline in value if the local
currencies in which we are paid depreciate relative to the U.S. dollar, which
would adversely affect our business. Due to our constantly changing currency
exposure and the potential substantial volatility of currency exchange rates,
we cannot predict the effect of exchange rate fluctuations on our business.
We have not tried to limit our exposure to exchange rate fluctuations by
using foreign currency forward exchange contracts as a vehicle for hedging. A
foreign currency forward exchange contract would obligate us to exchange
predetermined amounts of specified foreign currencies at specified exchange
rates on specified dates and to make or receive an equivalent U.S. dollar
payment equal to the value of the exchange. Our business may be adversely
affected by foreign currency exchange rate fluctuations if we fail to enter
into these hedging transactions or if these transactions are unsuccessful.
Future currency exchange losses also may increase if we become subject to
exchange control regulations restricting our ability to convert local
currencies into U.S. dollars.
RISKS RELATED TO OUR MARKET STRATEGY
The availability of free and low-cost Internet access services may adversely
affect our ability to attract and retain members, generate revenues from online
subscription fees and achieve profitability
We expect to generate the substantial majority of our total revenues from
our online service subscription fees. The availability of lower priced or free
Internet services in Latin America may, however, adversely impact our ability
to attract and retain paying subscribers, generate revenues and achieve
profitability. As in other markets throughout the world, free Internet access
services are now available in Brazil, Mexico and Argentina, and providers of
these services in Brazil claim to have registered a substantial number of
users. Universo Online, or UOL, one of Brazil's largest internet service
providers, and Terra Networks, each offer free Internet access services as well
as billable Internet access subscription plans in Brazil. Various Brazilian
banks, including Bradesco and Unibanco, have begun offering free limited
Internet access services in Brazil to their online banking customers. Further,
UOL reduced the price for its unlimited Internet access subscription plan
significantly below the price of our unlimited Internet access plan. In
reaction to these developments, we reduced our price by 29% for our unlimited
Internet access plan. Our price is still higher than those of our competitors,
and we may need to make further reductions to our subscription fees to be more
competitive.
14
<PAGE>
We are experiencing higher than expected subscriber cancellations in Brazil,
presumably because of the availability of free service. Due to this increased
competition from free service providers, we have not only lowered our prices
but have also substantially increased our advertising spending and our spending
for content in an effort to attract more subscribers. If these additional
expenditures do not generate substantially higher revenues, our operating
losses will increase.
Intense competition in Latin America may adversely affect our ability to
generate revenues and acquire market share
We compete in a rapidly growing marketplace with a wide range of
competitors, including providers of online and Internet access services and
portals. Competition is intense and may increase, which could adversely affect
our ability to generate revenues and acquire market share.
In general, we compete with providers of Spanish- and Portuguese-language
interactive services, including Internet access providers, portals, search
engines and web directories. Our principal regional market competitors include
El Sitio, in which the Cisneros Group owns a minority interest, StarMedia,
Terra Networks, which is affiliated with Telefonica, a leading
telecommunications provider in Latin America, and UOL. Other competitors in our
core target markets include Telmex in Mexico, which has an alliance with
Microsoft and offers a Prodigy-branded service, and Ciudad Internet in
Argentina. There are currently hundreds of other Internet access providers in
Latin America, including providers of free Internet access services such as
Internet Gratis, and new portals are being launched on a monthly basis. For
example, Yahoo! has recently launched portals in Brazil and Mexico.
Some of our competitors and potential future competitors may have the
following advantages:
. longer operating histories;
. greater name recognition in some markets; and
. larger established customer bases.
Our competitors may develop interactive services that achieve greater market
acceptance and new competitors may emerge and acquire significant market share.
Future technological improvements may make the Internet easier to navigate and
therefore the factors that differentiate our online services may lose their
relevance. Further, competitors that own or have established alliances with
cable, satellite or telecommunications companies may have distribution,
technical or financial advantages, including the ability to offer free Internet
access or Internet access services at lower prices. These factors could
adversely impact our business.
Past and future media coverage could adversely affect consumer acceptance of
our interactive services, which could affect our ability to acquire market
share and generate revenues
Several Brazilian media have reported that consumer protection authorities
in Brazil received consumer complaints about the installation of America Online
Brazil software on their PCs. A non-governmental private consumer protection
association, ADEC, has filed a complaint against us based on similar claims. If
we are unsuccessful in defeating its claims, our business could be adversely
affected. The Brazilian media has reported ADEC's claim. Past and future media
coverage of AOL-LA and our interactive services could adversely affect consumer
acceptance of our interactive services.
Volatile economic, social and political conditions in Latin America could make
it difficult for us to develop our business, generate revenues or achieve or
sustain profitability
Economic, social and political conditions in Latin America are volatile.
This volatility could make it difficult for us to develop our business,
generate revenues or achieve or sustain profitability. Historically, volatility
has been caused by:
. currency devaluations;
. significant governmental influence over many aspects of local economies;
15
<PAGE>
. political, social and economic instability; and
. imposition of trade barriers.
Most or all of these factors have occurred at various times in the last two
decades in our core Latin American markets: Brazil, Mexico and Argentina. We
have no control over these matters. Economic conditions in Latin America are
generally less attractive than those in the U.S. Poor social, political and
economic conditions may inhibit use of online services and the Internet, create
uncertainty in our operating climate and cause advertisers to reduce or
eliminate their interactive services advertising spending, all of which may
adversely impact our business.
Failure to effectively penetrate our target market and delays in future
launches of our interactive services would harm the development of our business
and our ability to generate revenues
If we cannot effectively penetrate our target market or if future launches
of our interactive services are delayed, our business objectives would be
compromised. Our success will depend on the growth of the Internet in Latin
America and how well our interactive services are received by our target market
of consumers who already have computers, or who are financially able to
purchase them, and who are able and willing to pay for Internet access. We
intend to launch our AOL-LA country services and portals in Mexico and
Argentina in the third calendar quarter of this year. After that we plan to
introduce our interactive services in additional countries in Latin America.
We have developed our launch schedule based on assumptions about:
. the number of personal computers owned by individuals within the markets
and the potential for future purchases;
. levels of Internet use;
. the accessibility, reliability and cost of telecommunications network
services; and
. intensity of price competition for existing and potential Internet
users.
If our expectations in these areas are not met, future launches may be
delayed and our business objectives may be compromised.
If our relationship with Banco Itau is not successful, our reputation,
financial condition and competitive position may be harmed
Our strategic marketing alliance with Banco Itau is subject to a number of
risks and uncertainties. As part of our relationship, we will issue 31,700,000
shares of our class A common stock to Banco Itau at the closing of the
offering. If we are unable to recover this substantial investment, our business
could suffer. For example:
. Our future revenue projections are highly dependent on Banco Itau's
ability to attract a significant number of subscribers to our co-branded
service. If we and Banco Itau are not successful in attracting a
significant number of subscribers, or if these subscribers do not choose
to pay for the service but instead use only the free hours allotted to
them, we will not achieve the revenue levels that we expect.
. If we and Banco Itau disagree on future marketing programs, new product
development or the direction of the alliance, it is unlikely we will
fully recover the working capital and other resources we contribute to
the alliance.
. Because our agreement with Banco Itau severely limits our ability to
enter into strategic relationships with other financial institutions in
Brazil, we may be unable to take advantage of potentially lucrative
business opportunities.
16
<PAGE>
. Because we and Banco Itau will be marketing a co-branded service, if
Banco Itau experiences any financial difficulties or negative publicity
for any reason, our reputation and financial condition could be
adversely affected.
Because we expect to generate revenues from advertisements, our business would
be adversely affected if a market for interactive services advertising in Latin
America fails to develop
If the market for online service and Internet advertising in Latin America
fails to develop or develops more slowly than expected, our ability to generate
advertising revenues will be harmed. Currently, there are no widely accepted
standards for measuring the effectiveness of advertising on online services and
the Internet. If the industry does not develop standard measurements to support
and promote online service and Internet advertising in Latin America, existing
advertisers may not maintain their current levels of spending for this type of
advertising and prospective advertisers may be reluctant to advertise on online
services and the Internet, which would reduce potential advertising revenues.
Moreover, advertisers may choose not to advertise on our online services or
portals if they do not perceive our member and user demographics to be
desirable. Furthermore, software programs that limit or prevent advertising
from being delivered to a computer while the user is visiting portals on the
Internet are available. Widespread adoption of this software would adversely
affect the commercial viability of Internet advertising.
Our ability to generate revenues would be adversely affected if e-commerce
fails to gain acceptance as a viable means for transacting business in Latin
America
Numerous factors could delay or prevent the emergence of e-commerce in Latin
America, which would impair our ability to generate revenues through our
interactive services and adversely impact our business. Reasons why e-commerce
in Latin America may not gain acceptance among consumers and merchants include:
. the small percentage of consumers holding credit cards, which are the
primary method of payment for e-commerce transactions in the U.S.;
. perceived lack of security of commercial data, such as credit card
numbers;
. concerns over privacy of consumers' personal data; and
. lack of adequate distribution and fulfillment operations for goods
purchased.
Moreover, unlike in the U.S., consumers and merchants in Latin America can
be held fully liable for credit card and other losses due to third-party fraud.
The incidence of credit card fraud is higher in Latin America than in the U.S.
Because secure methods of payment for e-commerce transactions have not been
widely adopted in Latin America, both consumers and merchants have a relatively
low confidence level in the integrity of e-commerce transactions. Also, many
banks and other financial institutions have generally been reluctant to give
merchants the right to process online transactions due to concerns about credit
card fraud. If concerns about credit card fraud persist, our ability to
generate revenues from e-commerce may be limited, which could have an adverse
effect on our business.
Additionally, customs duties and taxes are imposed on deliveries of
international parcels in many countries in Latin America, making international
e-commerce transactions more costly. 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 merchants and consumers from engaging in e-
commerce transactions.
Our inability to manage expansion effectively could cause us to fail to meet
the needs of existing members and users or to attract new members and users
We will need to expand our operations to support the growth of our
interactive services. However, if our member base grows rapidly, our
managerial, operational and financial resources, systems and internal controls
17
<PAGE>
may be strained significantly. For example, we must be able to manage
concurrently the demands that will be placed on our executive management team
in the U.S. and on our local management teams in Latin America as we launch our
interactive services in our target markets. To accommodate a rapidly expanding
member and user base and manage our growth, we must continue to implement and
improve these systems and controls and effectively hire, train and manage our
employees.
Because competition for qualified personnel is intense, we may not be able to
retain or recruit qualified personnel, which could impact the management and
development of our business
Our success depends in part upon both the continued services of our
executive officers and other key employees and our ability to attract and
retain highly skilled and qualified personnel. The loss of the services of one
or more of our key personnel could adversely impact our business. Since
competition for talented people is intense, we may have difficulty in
attracting and retaining skilled and qualified personnel in each of the
countries where we expect to launch our interactive services.
RISKS RELATED TO THE INTERNET AND TECHNOLOGY INFRASTRUCTURE
Our servers, which are owned and maintained by AOL, may be subject to system
failures, computer viruses or other unanticipated problems that may damage our
reputation and result in a loss of members and in a decrease in use of our
portals
Any damage to or failure of AOL's servers could adversely impact our
business. The host computers that run our interactive services, which we refer
to as our servers, are owned and maintained by AOL in three locations within
the U.S. Our operations therefore depend entirely on AOL's ability to protect
this equipment and the information stored there against events such as damage
by fire, power loss, failures by third party service providers, computer
viruses and unauthorized intrusions. Our property and business interruption
insurance for our Brazilian, Mexican and Argentine operations may not
sufficiently cover our losses. Moreover, if AOL experiences frequent or
persistent system failures, our reputation and business could be permanently
harmed even if the failures do not directly affect the systems that run our
interactive services.
If the telecommunications networks we use are not reliable or are not able to
accommodate our anticipated growth, the quality of our online services and our
ability to make our online services available to our members would be harmed
We depend entirely upon third party telecommunications network providers to
transmit data between AOL's servers in the U.S. and our members and content
providers in Brazil and we will be similarly dependent on these providers as we
launch our AOL-LA country services throughout Latin America. If these third
party telecommunications networks do not function properly, the quality of our
online services, or even our ability to deliver our online services, would be
compromised, which would adversely affect our business.
Our primary areas of concern involve the capacity and reliability of these
networks. Most of our data is transmitted between Brazil and the U.S. by fiber
optic cable, although some of our data is transmitted by satellite because
adequate quantities of fiber optic cable are not yet available for overseas
transmissions between the U.S. and Latin America. Fiber optic cable offers
greater capacity and is generally more reliable than satellite-based
technology. We will need to enter into additional fiber optic network contracts
in both Mexico and Argentina. If we are unable to enter into additional fiber
optic cable contracts in our core markets as our needs expand, or if adequate
quantities of fiber optic cable do not become available to our third party
network providers, our business may be adversely affected.
If our third party network providers lack the capacity to accommodate a
rapid increase in use of our online services, members may encounter delays in
accessing and using our online services. In the past, local and long distance
networks in Latin America have experienced capacity problems. If these third
party network providers
18
<PAGE>
are unable to meet their contractual obligations or if our data transmission
needs exceed our projected levels, we would face the challenge of having to
arrange for alternative sources of incremental capacity in a timely fashion and
on favorable commercial terms. If our data transmission needs cannot be
regularly met by our existing or future carriers, or through alternative
sources, it would be difficult, if not impossible, for us to grow our online
service business.
Underdeveloped local and long distance telephone service may limit the growth
of the Internet in Latin America, which will harm our ability to generate
revenues from our interactive services
If improvements to and expansion of the Latin American local and long
distance telephone service are not made, our ability to deliver our interactive
services to consumers and the market acceptance of online services and the
Internet in Latin America will be jeopardized and our business will suffer.
Members and users of our interactive services initiate access through local and
long distance telephone lines. Local and long distance telephone service in
Latin America is significantly less developed than in the U.S. For example, in
1999, there were approximately 66 telephone lines for every 100 people in the
U.S., compared to approximately 15 in Brazil, 11 in Mexico and 20 in Argentina.
The quality and availability of local and long distance telephone service may
vary considerably within a particular country, which may affect the rate at
which we are able to expand our interactive services to potential consumers on
a national scale. Moreover, adequate quantities of local and regional telephone
lines may not be readily available should online service and Internet use
increase more rapidly than anticipated.
If the cost of local access calls does not continue to decline in Latin
America, consumers may conclude that our interactive services are not cost
effective, which could reduce our revenues from subscription fees
Unlike in the U.S., local calls are metered in Latin America and online
service and Internet users pay for Internet access fees as well as local calls
that connect them to an Internet access provider. We believe this has had a
negative impact on the growth of online services and Internet use in Latin
America. If competition among local and long distance telephone companies in
our target markets does not continue to reduce telephone call charges for
Internet use, our revenues may decline because consumers may be unwilling to
pay both subscription fees for Internet access and fees for local calls.
If we fail to adapt our online services to accommodate faster methods of
Internet access or if we fail to offer new technologies, we may lose members or
fail to attract new members and our revenues may decline
Unless we can accommodate high-speed Internet and online service access, new
technologies, such as TV- and wireless-based services, and operating system
platforms other than Windows 95 and Windows 98 in a timely manner, our
interactive services will be less appealing to consumers and our revenues may
decline. We expect high-speed Internet and online service access to become more
widely available in Latin America. High speed access offers significantly
faster connections and enhanced features, including the delivery of voice and
full-motion video, as compared to the dial-up online access that we currently
offer. We will be at a competitive disadvantage if we cannot allow our members
to connect to our online services at these higher speeds.
Moreover, although we have the right under our license agreement to offer
AOL-branded TV- and wireless-based online services, our ability to offer these
services depends upon AOL developing them. In the case of wireless-based
services, our rights will only extend to services developed for commercial
launch by AOL within four years of the effective date of the registration
statement for this offering. We will be at a competitive disadvantage if we are
not able to offer our online services over these new technologies.
Additionally, our members can access our online services only through the
Windows 95 and Windows 98 operating system platforms.
19
<PAGE>
RISKS RELATED TO LEGAL AND REGULATORY MATTERS
We may become subject to burdensome government regulations affecting
interactive services, which could increase our costs of doing business or
impair our ability to generate revenues
The legal and regulatory environment that pertains to interactive services
in Latin America remains uncertain and may change. Latin American countries may
adopt laws and regulations or apply existing laws to interactive services,
including e-commerce and online service and Internet advertising. Uncertainty
and new regulations could increase our costs, prevent us from delivering our
interactive services and could also slow the growth of the Internet
significantly, which could delay growth in demand for our interactive services
and limit our ability to generate revenues.
New and existing laws and the interpretation of existing laws may cover
issues such as:
. copyright, trademark and patent infringement;
. access to networks;
. sales and other taxes;
. content provided on our services;
. user privacy and data protection;
. pricing controls; and
. cross-border commerce.
Because our licensed rights to AOL's trademarks and domain names are a valuable
asset and integral to our brand identity, unauthorized use of intellectual
property that we license from AOL could lead to public confusion about our
brand and adversely affect our business
AOL's or our own inability to protect our licensed rights to AOL's
trademarks and domain names against infringement or misappropriation could lead
to public confusion about our brand and adversely affect our business. For
example, AOL has experienced difficulty in obtaining the rights to the domain
names www.aol.com.br in Brazil and www.aol.cl in Chile, which incorporate the
AOL trademarks that have been licensed to us by AOL. AOL is engaged in or is
considering initiating legal proceedings to obtain these domain names.
Similarly, in Brazil, Mexico, Argentina, Chile, Colombia and Venezuela, AOL has
initiated opposition proceedings to prevent registration of marks by third
parties that are confusingly similar to AOL's marks. We cannot assure you that
AOL will prevail in any legal proceedings or be able to register successfully
all of the domain names that relate to its trademarks.
Given the global reach of the Internet, the trademarks and other forms of
licensed intellectual property that we license from AOL will be displayed in
countries that offer less intellectual property protection than the U.S. We
have distributed and will continue to distribute software, licensed to us by
AOL, for our online services under agreements that grant members a license to
use the software. Our members indicate acceptance of the terms of these
licenses by clicking on a button on their monitor screen but do not actually
sign the license. These licenses may therefore be unenforceable under the laws
of Brazil and other jurisdictions in which we expect to offer our online
services.
Defending against intellectual property infringement claims could be time
consuming and expensive and, if we are not successful, could subject us to
significant liability and disrupt our business
We cannot be certain that our interactive services do not or will not
infringe on valid patents, copyrights or other intellectual property rights
held by third parties. We may incur substantial expense or disruption in
defending against third party infringement claims, regardless of their merit.
Successful infringement claims
20
<PAGE>
against us may result in substantial liability or materially disrupt the
conduct of our business. We have received communications from third parties
asserting that features, content or names related to our services may infringe
patents, copyrights, trademarks and other rights of these parties. We cannot
assure you that third parties will not make infringement claims against us in
the future for current or future features or content of our interactive
services or that any claim would not result in litigation or require us to
enter into royalty and other similar arrangements. Third parties may also
challenge AOL's marks and these challenges may result in limitation or loss of
our rights to use AOL's proprietary marks.
RISKS RELATED TO THE OFFERING
Our stock price is likely to be highly volatile and you may lose all or part of
your investment
Following this offering, the trading price of our class A common stock,
assuming that a trading market develops, may be highly volatile. Failure to
meet market expectations because of quarterly fluctuations in our financial
results could cause our stock price to decline and you could lose all or part
of your investment. Moreover, factors that are not related to our operating
performance could cause our stock price to decline. The stock market has
periodically experienced significant price and volume fluctuations that have
affected the market prices for the securities of technology companies,
particularly Internet companies. Consequently, you may experience a decrease in
the market value of your class A common stock or lose all or part of your
investment, regardless of our operating performance or prospects.
We may use the net proceeds of this offering in ways with which you may not
agree or which prove to be ineffective
We have not committed the net proceeds of this offering to any particular
purpose. We will therefore have significant flexibility in applying the net
proceeds of this offering, including ways with which you may disagree. We may,
when the opportunity arises, use a portion, or all, of the net proceeds to
acquire or invest in businesses, products and technologies. If we do not apply
the funds we receive effectively, our accumulated deficit will increase and we
may lose significant business opportunities.
The substantial number of shares that will be eligible for sale 180 days after
this offering may cause the market price for our class A common stock to drop
significantly
A substantial number of shares of class A common stock will be eligible for
sale 180 days after this offering. The occurrence of sales, or the perception
that sales could occur, could cause the amount of our stock available, or
perceived to be available, for sale in the market to exceed demand, which could
cause the market price of our class A common stock to drop significantly.
Immediately following this offering, the issuance of the class A common stock
to Banco Itau and the concurrent distribution by the Cisneros Group, 60,754,374
shares of class A common stock will be outstanding. An additional 216,304,794
shares of class A common stock will be issuable to AOL and the Cisneros Group
in exchange for their B stock and C stock, as well as upon exercise of the AOL
warrant. AOL and the Cisneros Group have registration rights for the class A
common stock issuable to them and Banco Itau has separate registration rights
for the class A common stock issued to it.
The net tangible book value of your class A common stock will be less than the
initial public offering price that you paid for your shares, and as a result,
you may not receive the full amount of your investment if we are liquidated
The initial public offering price per share of our class A common stock is
substantially higher than the net tangible book value per share of our class A
common stock. You will experience immediate and substantial dilution in pro
forma as adjusted net tangible book value of $14.45 per share, assuming an
initial public offering price of $16.00 per share. Because the net tangible
book value of your shares will be diluted immediately following this offering,
if we are liquidated, you may not receive the full amount of your investment.
21
<PAGE>
Because we do not plan to pay cash dividends on our shares, holders of our
class A common stock will not be able to receive a return on their shares
unless they sell them
We have never declared or paid any cash dividends on our shares of class A
common stock and do not anticipate paying cash dividends in the future. The
special committee of our board of directors must unanimously approve the
payment of any dividends before our full board of directors can approve a
dividend payment. Further, before the payment of any dividends on our shares of
class A common stock, we must pay cumulative dividends, payable in series B and
series C preferred stock, as and when declared by our board of directors, on
our shares of series B and series C preferred stock.
22
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These statements are
not historical facts, but rather are based on our beliefs, assumptions,
expectations and projections about our business and industry. These statements
are only predictions and involve known and unknown risks and uncertainties that
may cause our or our business and our industry's actual results to be
materially different from any future results expressed or implied by these
forward-looking statements. We have described these risks in the risk factors
section and elsewhere in this prospectus. In some cases, you can identify
forward-looking statements by terminology such as may, will, should, expect,
plan, anticipate, believe, estimate, predict, potential, continue or the
negative of these terms or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. The forward-looking statements made in
this prospectus relate only to events as of the date on which the statements
are made.
This prospectus contains market data related to our business and the
Internet. This market data includes projections that are based on a number of
assumptions. These projections assume that:
. social, political and economic conditions will be stable in our target
markets;
. no catastrophic failure of the Internet will occur;
. the number of people online and the total number of hours spent online
will increase significantly over the next four years;
. the value of online advertising dollars spent per online user hour will
increase;
. the download speed of content will increase significantly; and
. Internet security and privacy concerns will be adequately addressed.
If any one or more of these assumptions turns out to be incorrect, our
actual results may differ from the projections based on these assumptions. Even
if these assumptions turn out to be correct, the markets related to interactive
services may not grow over the next four years at the rates projected by the
market data, or at all. The failure of these markets to grow at these projected
rates may have a material adverse effect on our business and the market price
of our shares of class A common stock.
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are not making an offer of the class A common
stock in any state where the offer is not permitted. You should not assume that
the information provided by this prospectus is accurate as of any date other
than the date on the front of this prospectus.
23
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from our sale of 25,000,000 shares of
class A common stock in this offering will be $374 million. If the
underwriters exercise their over-allotment option in full, we estimate that
the net proceeds will be $431 million. These estimates reflect the deduction
of the underwriting discount and estimated offering expenses and assume an
initial public offering price of $16.00 per share.
We intend to use the net proceeds of this offering for:
. expansion of our interactive services, including marketing, brand and
content development;
. expansion of telecommunications network capacity;
. capital expenditures; and
. for working capital and general corporate purposes, including possible
acquisitions of or investments in complementary businesses, products or
technologies.
As of the date of this offering, we have no understandings, commitments or
agreements to make any material acquisitions or investments. Pending our use
of the net proceeds of the offering for the purposes described above, we
intend to invest the net proceeds in short-term, interest-bearing, investment-
grade securities.
This discussion is merely an estimate based on our current business plans.
Our actual expenditures may vary depending upon circumstances not yet known.
Neither we nor the Cisneros Group will receive any proceeds from the
distribution by the Cisneros Group.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our shares of class A
common stock. We intend to retain any earnings to fund our future growth and
the operation of our business. Therefore, we do not anticipate paying any cash
dividends on our shares of class A common stock in the future. The special
committee of our board of directors must unanimously approve the payment of
any dividends before our full board of directors can approve a dividend
payment. Further, before the payment of any dividends on our shares of class A
common stock, we must pay dividends, payable in series B and series C
preferred stock, as and when declared by our board of directors, on our shares
of series B and series C preferred stock.
24
<PAGE>
CAPITALIZATION
The following table presents our capitalization as of March 31, 2000 on an
actual, pro forma and pro forma as adjusted basis. Our pro forma capitalization
gives effect to:
. the conversion of 1,996,424 shares of series C preferred stock into
1,996,424 shares of class A common stock by Cristina Pieretti, Steven
Bandel and Eduardo Hauser, who received shares of series C preferred
stock in the corporate reorganization;
. our issuance of 31,700,000 shares of class A common stock to Banco Itau;
and
. the concurrent distribution of 2,057,950 shares of class A common stock
by the Cisneros Group.
Our pro forma as adjusted capitalization also gives effect to our sale of
25,000,000 shares of class A common stock in this offering at an assumed
initial public offering price of $16.00 per share, after deducting the
underwriting discount and estimated offering expenses.
You should read this information with our financial statements and the notes
to those financial statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of March 31, 2000
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents (1).................. $ 34,584 $ 34,584 $408,584
======== ======== ========
Stockholders' equity:
Preferred stock, $0.01 par value; 500,000,000
shares authorized (2):
Series B and C cumulative redeemable
convertible--150,000,000 shares of series B
and 150,000,000 shares of series C
authorized;
101,858,334 shares of series B cumulative
redeemable preferred issued and outstanding
on an actual, pro forma and pro forma as
adjusted basis ............................. 1,019 1,019 1,019
101,858,334 shares of series C cumulative
redeemable preferred issued and outstanding
on an actual basis; 97,803,960 shares issued
and outstanding on a pro forma and a pro
forma as adjusted basis..................... 1,019 978 978
Common stock, $0.01 par value; 1,750,000,000
shares authorized (3):
Class A--1,250,000,000 shares authorized; no
shares issued or outstanding on an actual
basis; 35,754,374 shares issued and
outstanding on a pro forma basis; 60,754,374
shares issued and outstanding on a pro forma
as adjusted basis .......................... -- 358 608
Class B and C--250,000,000 shares of class B
and 250,000,000 shares of class C
authorized; no shares issued or outstanding
on an actual, pro forma or pro forma as
adjusted basis ............................. -- -- --
Additional paid-in capital................... 94,940 601,823 975,573
Subscription receivable from affiliate (1)... (12,679) (12,679) (12,679)
Unearned services from Banco Itau(4)......... -- (507,200) (507,200)
Accumulated other comprehensive income....... (1,182) (1,182) (1,182)
Accumulated deficit.......................... (53,116) (53,116) (53,116)
-------- -------- --------
Total stockholders' equity................. 30,001 30,001 404,001
-------- -------- --------
Total capitalization..................... $ 30,001 $ 30,001 $404,001
======== ======== ========
</TABLE>
--------
(1) Reflects approximately $87.4 million contributed by the Cisneros Group in
equity capital from December 15, 1998 through March 31, 2000. Excludes
$27.7 million that we received from the Cisneros Group through June 2000
or $15.0 million that we received from AOL in June 2000. Also excludes the
additional $35.0 million funding commitment from each of AOL and the
Cisneros Group, which is to be paid by December 31, 2000.
(2) Excludes the AOL warrant, an immediately exercisable warrant to purchase
16,642,500 shares in any combination of our series B preferred, class A
common or class B common stock at an exercise price equal to the initial
public offering price, that we will grant to AOL as of the effective date
of this offering.
(3) Excludes options that we expect to grant to purchase a total of 8,000,000
shares of class A common stock that we will grant to employees, directors
and consultants as of the effective date of this offering.
(4) Reflects the value of the services to be received from Banco Itau in
exchange for the shares to be issued to them.
25
<PAGE>
DILUTION
Dilution represents the difference between the initial public offering price
of class A common stock in this offering and the net tangible book value per
share of our capital stock following this offering. We have calculated our net
tangible book value per share at March 31, 2000 by:
. subtracting our total liabilities from our total tangible assets; and
. dividing the difference by the number of outstanding shares of our class
A common stock and series B and series C preferred stock.
Our pro forma net tangible book value per share at March 31, 2000 gives
effect to:
. the conversion of 1,996,424 shares of series C preferred stock into
1,996,424 shares of class A common stock by two of our directors and one
of our executive officers, who will receive shares of series C preferred
stock in the reorganization transaction;
. the issuance of 31,700,000 shares of class A common stock to Banco Itau;
and
. the concurrent distribution of 2,057,950 shares of class A common stock
by the Cisneros Group.
Dilution
As of March 31, 2000, our net tangible book value was approximately $30.0
million, or $0.15 per share of capital stock.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................. $16.00
Pro forma net tangible book value per share at March 31,
2000......................................................... 0.13
Increase in pro forma net tangible book value per share
attributable to new
investors purchasing shares in this offering................. 1.42
----
Pro forma as adjusted net tangible book value per share after
the offering................................................... 1.55
------
Dilution per share to new investors............................. $14.45
======
</TABLE>
Capital stock
The following table summarizes, on a pro forma as adjusted basis, as of
March 31, 2000, the total number of shares of capital stock issued by us, the
total cash paid to us and the average cash price per share paid to us by:
. AOL for series B preferred stock, paid prior to this offering;
. the Cisneros Group for series C preferred stock, paid prior to this
offering;
. investors in this offering for class A common stock, based upon an
assumed initial public offering price of $16.00 per share, before
deducting the underwriting discount and estimated offering expenses; and
. Banco Itau, former and current employees of the Cisneros Group receiving
shares in the concurrent distribution, and two of our directors and one
of our executive officers for class A common stock. No cash
consideration is shown for these shares due to the nature of the
arrangement with Banco Itau, the gifts of shares by the Cisneros Group
to its employees and the purchase of shares by two directors and an
executive officer from the Cisneros Group at its cost.
<TABLE>
<CAPTION>
Total
Shares Issued Cash Consideration Average
------------------- -------------------- Price
Number Percent Amount Percent Per Share
----------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
AOL ....................... 101,858,334 39% $ 15,000,000 3% $ 0.15
The Cisneros Group ........ 97,803,960 38 115,099,000 22 1.18
Investors in this
offering.................. 25,000,000 10 400,000,000 75 16.00
Other holders of class A
common stock.............. 35,754,374 13 -- -- --
----------- --- ------------ --- ------
Total.................... 260,416,668 100% $530,099,000 100% $ 2.04
=========== === ============ === ======
</TABLE>
26
<PAGE>
As of the effective date of this offering, we will issue to AOL the AOL
warrant, an immediately exercisable warrant to purchase any combination of
16,642,500 shares of series B preferred stock or class A or class B common
stock at an exercise price equal to the initial public offering price. We also
expect to grant options to employees, directors and consultants to purchase a
total of 8,000,000 shares of class A common stock at an exercise price equal to
the initial public offering price. No other stock options or warrants have been
granted or issued. These tables assume no exercise of the outstanding stock
options or the AOL warrant.
27
<PAGE>
SELECTED FINANCIAL DATA
You should read the selected financial data presented below and our
financial statements, the notes to those financial statements and the
management's discussion and analysis of financial condition and results of
operations section appearing elsewhere in this prospectus. The statement of
operations and balance sheet data as of and for the period from December 15,
1998, the date of inception, to June 30, 1999 are derived from our audited
financial statements included elsewhere in this prospectus. The statement of
operations and balance sheet data as of and for the period from December 15,
1998, the date of inception, to March 31, 1999 and as of and for the nine
months ended March 31, 2000 are derived from our unaudited financial statements
included elsewhere in this prospectus. Our historical results are not
necessarily indicative of the operating results to be realized in the future.
<TABLE>
<CAPTION>
Period from
Period December 15,
from 1998 (date
December 15, of Nine Months
1998 (date of inception) Ended
inception) to March 31, March 31,
to 1999 2000
June 30, 1999 (unaudited) (unaudited)
------------- ------------ -----------
(In thousands)
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Subscriptions........................ $ 1,644 $ 889 $ 3,878
Advertising and e-commerce........... -- -- 1,333
------- ------ --------
Total revenues..................... 1,644 889 5,211
------- ------ --------
Costs and expenses:
Cost of revenues..................... 1,091 616 10,429
Sales and marketing.................. 12 -- 35,192
Product development.................. 312 145 1,948
General and administrative........... 1,979 715 10,087
------- ------ --------
Total costs and expenses........... 3,394 1,476 57,656
------- ------ --------
Loss from operations................... (1,750) (587) (52,445)
Other income, net...................... 9 (2) 1,241
------- ------ --------
Loss before (provision) benefit for
income taxes.......................... (1,741) (589) (51,204)
(Provision) benefit for income taxes... (131) (33) (40)
------- ------ --------
Net loss............................... $(1,872) $ (622) $(51,244)
======= ====== ========
</TABLE>
<TABLE>
<CAPTION>
As of
As of March 31,
June 30, 2000
1999 (unaudited)
-------- -----------
(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................................. $17,716 $34,584
Working capital............................................ 16,156 22,390
Total assets............................................... 19,467 49,199
Total stockholders' equity................................. 16,166 30,001
</TABLE>
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Consolidated Results of Operations
Revenues. Total revenues consist of subscription revenues, advertising
revenues and e-commerce revenues. The following table presents the components
of our revenues for the periods from December 15, 1998 to June 30, 1999,
December 15, 1998 to March 31, 1999, and for the nine months ended March 31,
2000.
<TABLE>
<CAPTION>
December
15, 1998
(date of
December 15, 1998 inception)
(date of to March Nine Months Ended
inception) to 31, 1999 March 31, 2000
June 30, 1999 (unaudited) (unaudited)
----------------- ----------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Subscriptions................. $ 1,644 100.0% $889 100.0% $ 3,878 74.4%
Advertising and e-commerce.... -- -- -- -- 1,333 25.6
-------- -------- ---- ------ -------- --------
Total revenues.............. $1,644 100.0% $889 100.0% $ 5,211 100.0%
======== ======== ==== ====== ======== ========
</TABLE>
Subscription revenues. For the periods presented, our subscription revenues
were generated from members paying fees to subscribe to the CompuServe Classic
service and, to a lesser extent, the AOL-LA country service in Brazil. We
expect that future subscription revenues will be generated primarily from
members paying fees to subscribe to the AOL-LA country services and to a lesser
extent from the CompuServe Classic service.
Subscription revenues for the nine months ended March 31, 2000 were
approximately $3.9 million and approximately $1.6 million for the period from
December 15, 1998 through June 30, 1999.
AOL-LA subscription revenues. For the nine months ended March 31, 2000,
approximately $939,000, or 24%, of our subscription revenues were generated
from members subscribing to our Brazil service, which was launched during
November 1999. As of March 31, 2000 and June 25, 2000, we had approximately
96,300 and 129,000 subscribers in Brazil, respectively. Approximately 22% of
our subscribers who were past their trial period as of March 31, 2000 had not
made payment within 25 days of their billing date. Approximately 8% of our
subscribers who were past their trial period as of June 25, 2000 had not made
payment within 25 days of their billing date. A substantial portion of our
subscribers at March 31 and June 25 were in their standard free trial period.
We have been attempting to build our subscriber base by aggressively marketing
our AOL-LA country service in Brazil, which is generating new subscribers.
Accordingly, we expect in the near term that a substantial percentage of our
subscribers will be in their trial period, as we believe is typical of Internet
subscription businesses in the early stages of their growth. Although we expect
the actual percentage of trial users to fluctuate, it may not be unusual at any
particular date in the near term for a majority of our subscribers to be trial
members. The percentage of trial members is likely to be highest following our
launch in a new market and in connection with particular promotional campaigns,
which may include offering extended trial periods. We began operations in
Brazil in November 1999 with all of our subscribers in their trial period, and
we are still heavily promoting our service in Brazil. We expect to launch our
service in Mexico and Argentina in the third calendar quarter of 2000.
We currently offer Brazilian subscribers two alternative methods by which
they can pay their subscription fees, credit cards and boletos bancarios. The
boleto is a customary form of payment, under which Brazilian banks that we
designate act as conduits for collecting the payments. We send each member a
bill and the member pays the bill at a local bank. These local banks then send
the payments to our designated banks. This is a common method for payment in
Brazil, but is more costly for us than payment through credit cards and results
in a longer collection cycle. As the boleto is a common form of payment in
Brazil, approximately 80% of our subscribers in Brazil have selected this
method of payment. Although we have not experienced any significant
difficulties collecting subscription fees from members using credit cards, a
significant number of our subscribers using boletos who have received an
invoice have not made timely payment.
29
<PAGE>
To decrease the number of late paying subscribers, we are in the process of
enhancing our systems to validate billing information during the registration
process or during the subscriber's trial period. We are also in the process of
trying to validate billing information for the late paying subscribers and, as
we go through this validation process, we are terminating those subscribers for
whom we cannot gather valid billing information. We are also considering making
available various alternative methods of payment, such as direct debit and
payment through a third party.
For subscribers in Brazil that have elected to pay their subscription fees
with credit cards, we recognize subscription revenues when the fees become due.
For subscribers in Brazil who pay through means other than credit cards, we
recognize subscription revenues when we receive payment.
In January 2000, we reduced our monthly fee for unlimited access from
R$35.00, which is equal to approximately U.S.$19.33, to R$24.95, which is equal
to approximately U.S.$13.78, in response to the availability of free Internet
access and price cuts by our competitors. We may need to make further
reductions in the future.
For the first five years of our alliance with Banco Itau, Banco Itau will
subsidize a minimum of one free hour per month for every approved member of the
co-branded service. Any payments received from Banco Itau for those hours will
be reflected as a reduction of cost of revenues in the statement of operations.
We expect that our subscriber numbers will increase significantly because of
this agreement. At the same time, our revenue per subscriber may decrease
because members of the co-branded service may stay within the free hours to
avoid having to pay any subscription fees. Our joint objective with Banco Itau,
however, is for these members to pay for additional hours on the service, which
would generate additional subscription revenues.
We anticipate launching our AOL-LA country services in Mexico and Argentina
in the third calendar quarter of this year. Subject to market conditions, we
anticipate that, for the six months following the launch of our country
services in Mexico and Argentina, we will offer new members of those services a
90 day free trial period.
CompuServe Classic subscription revenues. For the nine months ended March
31, 2000, $2.9 million, or 76%, of our subscription revenues were generated
from our CompuServe Classic service. Due to a declining base of subscribers to
the CompuServe Classic service, subscription revenues from this service have
been declining. The CompuServe subscriber base was approximately 18,000
subscribers when we acquired them from America Online on December 15, 1998 and
approximately 6,700 subscribers at March 31, 2000. We believe that our
CompuServe Classic subscription base has declined because we have not been
marketing the service to retain and increase members. Since we do not expect to
add new CompuServe Classic members, we anticipate that our subscription
revenues from the CompuServe Classic service will continue to decline.
At the time we acquired the subscribers to the CompuServe Classic service,
we entered into a contract with a third party to manage and administer the
CompuServe Classic service. In exchange for these services, this third party
retained a portion of these subscription fees. We recorded the net subscription
fees due to us as revenues. In June 1999, we modified the contract to eliminate
the sharing of all subscription fees and to include the payment of a service
fee to the third party. Since that time, we have recorded gross subscription
fees due to us from the CompuServe Classic service, and the related service
fees are included in cost of revenues for the nine months ended March 31, 2000.
Advertising and e-commerce revenues. An important component of our business
strategy is to generate advertising and e-commerce revenues from our online
services and our portals.
Advertising revenues are derived principally from:
. advertising arrangements under which we receive fees based on the number
of advertisements displayed on our interactive services; and
. sponsorship or co-sponsorship arrangements that allow advertisers to
sponsor an area on our interactive services in exchange for a fixed
payment either in cash or, in some instances, in equity.
30
<PAGE>
For advertising arrangements that require us to display a specified number
of advertisements for a fixed fee, we recognize advertising revenues as the
advertisements are displayed. We also derive revenues from sponsorship or co-
sponsorship arrangements that provide for advertising and other services. We
recognize these revenues on a straight line basis over the term of the
contract, provided we are meeting our obligations under the contract. Payments
received from advertisers before we display their advertisements on our
interactive services are recorded as deferred revenues. As of March 31, 2000,
we had deferred revenues of approximately $4.8 million from advertising
arrangements.
We also expect to derive revenues from e-commerce transactions conducted
through our interactive services. These revenues will be in the form of a flat
payment, a percentage of each e-commerce transaction that is attributable to
our interactive services, or both. We may receive cash or, in some instances,
equity. We will recognize revenues from e-commerce transactions when we are
notified of sales that are attributable to our interactive services.
Advertising and e-commerce revenues for the nine months ended March 31, 2000
were approximately $1.3 million. We did not generate any advertising and e-
commerce revenues during the period from December 15, 1998 through June 30,
1999. Although we expect advertising and e-commerce revenues to increase in
future periods, we expect to derive the substantial majority of our revenues
from subscriptions to our AOL-LA country services.
We have not yet recognized any barter revenue. We will recognize future
barter revenue based on the fair value of the advertising that we agree to
provide, where we can demonstrate fair value by reference to recent similar
cash-based transactions.
Costs and expenses. The following table presents the components of our costs
and expenses for the period from December 15, 1998 to June 30, 1999, December
15, 1998 to March 31, 1999 and for the nine months ended March 31, 2000.
<TABLE>
<CAPTION>
For the
Period from
For the Period December 15,
from 1998 (date of
December 15, 1998 inception) to
(date March 31, Nine Months Ended
of inception) 1999 March 31, 2000
to June 30, 1999 (unaudited) (unaudited)
----------------- ------------- ------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Cost of revenues.......... $ 1,091 32.1% $ 616 41.7% $ 10,429 18.1%
Sales and marketing....... 12 0.4 -- 0.0 35,192 61.0
Product development....... 312 9.2 145 9.8 1,948 3.4
General and
administrative........... 1,979 58.3 715 48.5 10,087 17.5
-------- -------- ------ ------ --------- --------
Total costs and
expenses............... $ 3,394 100.0% $1,476 100.0% $ 57,656 100.0%
======== ======== ====== ====== ========= ========
</TABLE>
Cost of revenues. Cost of revenues includes:
. network-related costs consisting primarily of fees paid to third parties
to carry our data over their telecommunications networks;
. fees we pay to AOL for use of their servers that run our interactive
services;
. fees we pay to AOL and the Cisneros Group for technical support and
training;
. personnel and related costs for customer support and product and content
development;
. fees paid to selected content providers; and
. amortization of capitalized product development costs.
31
<PAGE>
For the nine months ended March 31, 2000, cost of revenues was approximately
$10.4 million and consisted primarily of costs to launch our AOL-LA country
service in Brazil and preparation of our anticipated launch in Mexico and
Argentina, as well as the continued servicing of our CompuServe Classic
subscribers. These costs also included payments made or due to AOL and other
third parties for the costs of using their computer systems, including costs of
equipment, operations staffing and establishing our call centers. These costs
include payments made to a third party for the management and administration of
the CompuServe Classic service under our contract. During this period, the cost
of services provided by AOL was approximately $1.8 million. We expect that our
cost of revenues will continue to grow and will exceed or represent a
significant portion of our total revenues as we expand our capacity to
accommodate new users of our interactive services.
For the periods from December 15, 1998 to March 31, 1999 and from December
15, 1998 to June 30, 1999, cost of revenues were approximately $616,000 and
$1.1 million. These costs, which are primarily payable to AOL, reflect the
costs we incurred to provide service to our CompuServe Classic subscribers.
Sales and marketing. Sales and marketing expenses include our costs to
acquire and retain our members, the operating expenses for our sales and
marketing efforts and other general marketing costs. The costs to acquire and
retain our members include direct marketing costs as well as the costs of brand
advertising on television and in newspapers, magazines and other media.
For the nine months ended March 31, 2000, sales and marketing expenses were
approximately $35.2 million and primarily reflect the costs related to the
launch of our AOL-LA country service in Brazil in November 1999. During this
period, we engaged in a significant amount of advertising to promote our brand
as well as direct marketing to acquire subscribers of the service. For the
periods from December 15, 1998 to March 31, 1999 and from December 15, 1998 to
June 30, 1999, sales and marketing expenses were insignificant. We expense all
costs related to member acquisition as they are incurred.
We anticipate that we will account for the costs of our strategic
interactive services and marketing agreement with Banco Itau as a sales and
marketing expense, which we will amortize over its useful life.
We have recently increased our sales and marketing expenditures in response
to the competitive situation in Brazil. As we launch into new markets, we
expect that our sales and marketing expenses will increase significantly as we
continue to expand our interactive services and attempt to attract new members
and users.
Product development. Our product development expenses mainly consist of
charges from AOL for personnel and related costs to localize our interactive
services and for any development work that we request AOL to provide. We
expense as incurred product development costs that we incur before any product
or service developed by AOL has reached technological feasibility, also known
as beta. We capitalize costs incurred after technological feasibility has been
established up until completion of beta testing. Once beta testing is complete
and the product or service is commercially available, costs are again expensed
as incurred.
Product development costs expensed for the nine months ended March 31, 2000
were approximately $1.9 million, approximately $145,000 for the period from
December 15, 1998 through March 31, 2000, and approximately $312,000 for the
period from December 15, 1998 through June 30, 1999. These product development
costs represent research and development costs payable to AOL primarily for
localization of our software and other requested development work. In the nine
months ended March 31, 2000, a significant portion of these costs was due to an
increase in technical support from AOL for the launch of our AOL-LA interactive
services in Brazil and the anticipated launch of our interactive services in
Mexico and Argentina.
General and administrative. For the nine months ended March 31, 2000, our
general and administrative costs were approximately $10.1 million. Our general
and administrative expenses increased during this period as we hired additional
management and administrative personnel to support the launch of our
interactive services in Brazil in November 1999 and the anticipated launch of
our interactive services in Mexico and
32
<PAGE>
Argentina. Both AOL and the Cisneros Group provided us with management and
administrative services to support the launch. During this period, we incurred
support fees of approximately $2.1 million for support services provided by AOL
and $52,000 for services provided by the Cisneros Group. We anticipate that our
general and administrative expenses will continue to increase in fiscal 2000
due to the growth of management and administrative personnel required to
support the anticipated launch of our AOL-LA interactive services in Mexico and
Argentina in the third calendar quarter of this year.
From December 15, 1998 through March 31, 1999, general and administrative
costs were approximately $715,000. Expenses during this period were primarily
attributable to personnel costs and general office expenses.
From December 15, 1998 through June 30, 1999, general and administrative
costs were approximately $2.0 million. Expenses during this period were
primarily attributable to personnel costs, general office expenses and support
fees of approximately $1.0 million payable to AOL and $291,000 payable to the
Cisneros Group.
Other income, net. Other income, net consists primarily of interest income
and foreign currency losses. For the nine months ended March 31, 2000, other
income, net was $1.2 million and consisted of $1.3 million of interest income
and $59,000 of foreign currency losses. This interest was primarily
attributable to capital contributions from the Cisneros Group.
Income taxes. The provision for income taxes was approximately $40,000 for
the nine months ended March 31, 2000 and approximately $131,000 from December
15, 1998 to June 30, 1999.
Liquidity and Capital Resources
Up to the date of this offering, we have financed our operations primarily
through capital contributed by the Cisneros Group. From the beginning of our
operations through March 2000, we received approximately $87.4 million in cash
from the Cisneros Group. In April 2000, the Cisneros Group contributed an
additional $12.7 million, which fulfilled its initial capital contribution
commitment. AOL and the Cisneros Group each contributed $15.0 million to us in
June, and each is obligated to pay us an additional $35.0 million by December
31, 2000.
We have used our capital to finance our operations and the marketing and
development of our interactive services. We plan to continue to make
expenditures for advertising and brand marketing to expand our member and user
base. For example, we have committed to pay $20.0 million in exchange for the
exclusive right to sponsor Rock in Rio, a rock concert to be held in Rio de
Janeiro, Brazil in January 2001. We are providing this funding in monthly
installments from May to December 2000. We will also continue to purchase
telecommunications network capacity under contracts with third party
telecommunications network providers, incur capital expenditures and pay AOL
fees for use of their servers and for software localization.
We anticipate that our cash on hand, the cash provided by this offering and
the cash to be contributed by AOL and the Cisneros Group will be sufficient to
fund our operations through December 31, 2001. If necessary, we may seek to
sell additional equity or debt securities or to enter into a credit facility.
We may use a portion of our cash for the acquisition and subsequent funding of
technologies, products or businesses complementary to our business. We
anticipate that any major acquisition may require additional funding and we
cannot assure you that we will be able to obtain this funding on favorable
terms.
Current assets were approximately $38.2 million at March 31, 2000 and $19.5
million at June 30, 1999, while current liabilities were approximately $15.8
million and $3.3 million at those same dates. At March 31, 2000, we had working
capital of approximately $22.4 million, compared to working capital of
approximately $16.2 million at June 30, 1999.
33
<PAGE>
The increase in current assets was primarily attributable to an increase in
cash and cash equivalents contributed by the Cisneros Group. The increase in
current liabilities was due to increases in amounts payable to external vendors
and to AOL, primarily for increases in accrued telecommunications and marketing
costs, as well as an increase in deferred revenues and support services.
At March 31, 2000, our material operating commitments were approximately
$66.4 million, which represents our minimum obligations under third party
telecommunications network contracts through the end of fiscal 2003,
obligations under leases for office space and our exclusive sponsorship of Rock
in Rio.
Seasonality
We expect our subscriber revenues to be highest during our first and fourth
fiscal quarters, which is the winter season in much of Latin America, and
lowest during our second and third fiscal quarters, which is the summer season
in much of Latin America.
34
<PAGE>
BUSINESS
Overview
Our mission is to be a leader in the development in Latin America of the
global interactive medium that is changing the way people communicate, stay
informed, are entertained, learn, shop and conduct business. Our family of AOL-
branded interactive services will include the AOL-LA country services, our
comprehensive online services which will be available to subscribing members,
and the AOL-LA country Internet portals and our Latin American regional
Internet portal.
Our interactive services will be developed on a country-by-country and
regional basis and will be tailored to local interests. We expect to derive our
revenues principally from member subscriptions to our AOL-LA country services
and will seek to build our online service member base and portal user base to
generate additional revenues from advertising and e-commerce.
The AOL-LA country services will provide our members with easy and reliable
access to local, regional and global online communities, localized versions of
AOL's interactive products, content and e-commerce opportunities. Our AOL-LA
country services will seamlessly integrate the Internet, enabling members to
access and explore the Internet without leaving the service. We believe the
AOL-LA country services will encourage members to participate in interactive
communities through tools such as Spanish and Portuguese versions of AOL
Instant Messenger, Buddy Lists, e-mail, public bulletin boards, online meeting
rooms, conversations, or chat, and auditorium events. Members can also
personalize their online experience through a variety of features, including
customized news and stock portfolio updates and parental and e-mail controls.
Our AOL-LA country services will also provide members with local and regional
content organized into channels, making areas of interest easy to find, as well
as access to the extensive proprietary global content of the AOL service.
Our AOL-LA country Internet portals and our Latin American regional Internet
portal will offer Internet users local, regional and global communities,
content and e-commerce opportunities. We will provide Internet users with a
forum for exchanging information, opinions and ideas by offering some of the
same community building tools that will be available on the AOL-LA country
services, including AOL Instant Messenger and Buddy Lists. Our portals will
feature the AOL Netfind tool, which will provide users with what we believe
will be an easy and efficient way to search and navigate the wealth of content
and e-commerce opportunities on the Internet. We will draw on local cultures
and interests to aggregate and organize content tailored to our local
communities.
We have the exclusive right to offer AOL-branded PC-based online services in
Latin America. Under our license agreement with AOL, we also have the exclusive
right to offer AOL-branded TV-based online services in Latin America if AOL
develops these services. We also have the exclusive right to offer in Latin
America any AOL-branded wireless-based online services developed by AOL for
commercial launch within four years of the effective date of the registration
statement for this offering. We do not have the right to offer Netscape,
Digital City, MovieFone or any other non-AOL branded interactive services
except for CompuServe.
Our three core target markets in Latin America are Brazil, Mexico and
Argentina. In November 1999, we concurrently launched our first AOL-LA country
service, America Online Brazil, and our first AOL-LA country Internet portal,
our Brazilian portal at www.americaonline.com.br. As of March 31, 2000, our
network provided for access to our America Online Brazil service in 27 cities
in Brazil. In the third calendar quarter of this year, we plan to expand our
network in Brazil and introduce localized versions of the AOL-LA country
services and portals in Mexico and Argentina as well as our Latin American
regional portal. After that, we intend to introduce our interactive services in
additional countries in Latin America.
In Brazil, we have entered into a strategic marketing alliance with Banco
Itau, one of the largest banks in Latin America with approximately seven
million customers and one million users of its interactive financial services.
We have agreed to create a co-branded customized version of our America Online
Brazil service that Banco Itau will market to its customers. We will issue
31,700,000 shares of our class A common stock to Banco Itau at the closing of
this offering in exchange for its commitment to achieve various subscriber and
revenue levels. If Banco Itau fails to meet these subscriber and revenue
levels, then it has agreed to make substantial cash payments to us. We believe
that our relationship with Banco Itau will significantly expand our presence in
Brazil.
35
<PAGE>
Our Opportunity
Latin America and the Internet
In less than a decade, the Internet has become a global mass medium that
allows millions of people worldwide to find information, interact with others,
be entertained and conduct business electronically. Latin America is comprised
of more than 20 Spanish- and Portuguese-speaking countries in North, Central
and South America and the Caribbean with a total population of approximately
500 million people. Although Internet use in Latin America is in a relatively
early stage of development, we believe that the region is one of the fastest
growing Internet markets. The table below illustrates the projected compound
annual growth rate, or CAGR, of all Internet users and Internet access devices
in Latin America and our core target markets. Because we expect the majority of
our members and users to be residential customers, our potential member and
user base will not include all Internet users in these markets.
<TABLE>
<CAPTION>
Number of Internet
Number of Internet Users Accessing Devices
------------------------------- ----------------------------
CAGR from CAGR from
1998 2003 1998 to 2003 1998 2003 1998 to 2003
------- -------- ------------- ------ ------- ------------
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Total Latin America..... 5.3 29.6 41% 3.4 24.7 49%
Brazil ................. 2.5 11.4 35 1.6 9.6 44
Mexico.................. 1.0 6.9 48 0.6 5.6 56
Argentina .............. 0.3 3.0 59 0.4 3.5 53
</TABLE>
The source of the data in this table is a report published by the
International Data Corporation, or IDC.
Numerous factors are contributing to the increased use of the Internet in
Latin American markets such as Brazil, Mexico and Argentina. We believe that
these include:
. Internet accessing device penetration. The installed Internet accessing
device base is growing rapidly in Latin America, due in part to the
increased affordability of these devices and advances in access device
and modem speed and performance;
. Increased awareness. Increased promotion of the Internet and other
interactive services has led to heightened awareness of the Internet;
. Latin America-focused products and services. Improvements in the
availability of Spanish and Portuguese content and products on the
Internet have made the Internet more attractive to Latin American
consumers;
. Telecommunications improvements. Privatization and deregulation of
telecommunications providers are facilitating network infrastructure
improvements and reducing local and long distance telephone rates; and
. Demand for information. We believe that demand in Latin America for
unlimited access to news and other information has led to increased use
of the Internet.
Advertising and e-commerce
Fueled by the growth of Internet use, the Internet has emerged as an
attractive new medium for advertising and an important channel for merchants to
conduct e-commerce. It provides advertisers with a vehicle of mass
communication that enables them to target desired demographic groups in
specific geographic locations and obtain valuable data about consumer buying
patterns and preferences. We believe that online merchants are able to operate
with reduced infrastructure and overhead, while providing consumers with a
convenient method
36
<PAGE>
to evaluate and buy a broad selection of goods and services. The table below
presents the projected growth of e-commerce and Internet advertising revenues
in Latin America and our core target markets.
<TABLE>
<CAPTION>
E-commerce Spending Internet Advertising Spending
---------------------------- --------------------------------------
CAGR from CAGR from
1998 2003 1998 to 2003 1998 2003 1998 to 2003
------ -------- ------------ ---------- ----------- ---------------
(In millions) (In millions)
<S> <C> <C> <C> <C> <C> <C>
Total Latin America..... $166.8 $8,021.2 117% $ 24.0 $ 949.0 109%
Brazil.................. 93.0 2,700.8 96 15.0 509.0 102
Mexico.................. 21.8 1,877.2 144 5.0 241.0 117
Argentina............... 12.8 1,223.5 149 1.0 38.0 107
</TABLE>
In this table, the source of the data for e-commerce spending is IDC and the
source of the data on Internet advertising spending is Forrester Research, Inc.
Our Competitive Advantages
We believe that our America Online-branded interactive services, our
relationships with AOL, the Cisneros Group and Banco Itau and our experienced
management team will give us significant competitive advantages.
The AOL-LA Country Services
We believe that our AOL-LA country services will be unique in their seamless
integration of local, regional and global interactive communities and the
Internet, and in their array of interactive tools, content and e-commerce
opportunities.
The AOL Commitment
. Capital contribution. AOL contributed $15.0 million to AOL-LA in June
2000 and has agreed to contribute an additional $35.0 million by
December 31, 2000.
. The AOL brand. We believe that the AOL brand has become synonymous with
high quality and easy-to-use interactive services and will help us to
attract members and users.
. AOL technology. Our online services and portals are being developed
using AOL's technology and expertise and contain proven tools and
features that we believe differentiate our interactive services from
other services. We expect to benefit from AOL's future technological
developments in the areas of TV- and wireless-based online services. AOL
will provide us with new AOL-branded products and services tailored for
our local markets. We will pay AOL to localize these new services, but
we are not obligated to reimburse AOL for the costs that it incurred to
develop the new services for the U.S. market.
. AOL infrastructure. We will use AOL's servers, located in the U.S., to
exchange information with our members, users and content providers,
store information and operate our interactive services. By sharing this
infrastructure with AOL and its other international affiliates, we can
reduce our own operating costs because AOL allocates the cost of the
infrastructure across an aggregate base of approximately 23 million
subscribers. We believe that we will also benefit from AOL's expertise
in infrastructure maintenance and development. We expect to benefit from
the reliability and scale of the AOL infrastructure and believe AOL's
existing servers will be able to accommodate our projected growth. We
believe AOL's infrastructure will also enable us to provide better
service to our members. For example, we will be able to provide members
who travel with access to their local online service from more than 120
countries through AOL's Globalnet roaming network.
. Global community and content. Members of the AOL-LA country services
will have access to AOL's and its international affiliates' worldwide
online services, including:
--extensive proprietary global content on AOL's channels; and
--the ability to interact with AOL's global community of approximately
23 million members.
37
<PAGE>
. AOL's relationships. We expect to benefit from the numerous
relationships AOL has established with telecommunications companies,
content providers, advertisers and e-commerce merchants during its 14
years in the interactive services industry.
The Cisneros Group Commitment
In Latin America, the Cisneros Group, through its various member companies,
joint ventures, partnerships and investments, is, we believe, a leading active
participant in broadcast television, direct-to-home satellite television,
pay-TV programming and other entertainment, media and communications
enterprises. Through its participation in these Latin American enterprises, we
believe that the Cisneros Group possesses market intelligence and expertise. We
plan to take advantage of the Cisneros Group's insights into Latin American
markets. The Cisneros Group has made the following commitments:
. Capital contribution. The Cisneros Group has contributed an aggregate
amount of approximately $115.0 million to AOL-LA. The Cisneros Group is
obligated to pay us an additional $35.0 million by December 31, 2000.
. Use of the Cisneros Group's media assets to advertise our interactive
services. The Cisneros Group has agreed, on a best efforts basis, to
help us obtain access to advertising and promotional opportunities
available through its Latin American media and communication assets. It
will attempt to obtain advertising and promotional air time for us at
rates at least as favorable to those charged to any other person, other
than affiliates.
. Content creation. The Cisneros Group has agreed to use its best efforts
to provide assistance to develop online content based on the Cisneros
Group's extensive programming line-up and pay-TV channels, such as Much
Music and Locomotion.
We believe that the following companies are the principal entities
affiliated with the Cisneros Group which offer advertising, promotional and
content opportunities that may help us to develop our interactive services
business in Latin America. Except for Venevision, the Cisneros Group does not
own a controlling interest in any of the companies listed. We are not a party
to any agreements with any of these companies at this time. The Cisneros Group
has agreed to attempt, on a best efforts basis, to provide us with access at
rates at least as favorable as those charged to anyone else, except for
affiliates. However, we have no assurance that their efforts will be successful
and it is possible that we may not receive access at favorable rates or at all.
. Venevision is, we believe, Venezuela's leading television network.
Through its international distribution network, programming produced or
acquired by Venevision and its affiliates reaches viewers throughout
Latin America. The Cisneros Group has agreed to provide us with cross-
promotion opportunities and to allow us to purchase advertising on
Venevision.com, the website of Venevision. The Cisneros Group has also
agreed that Venevision will make commercially reasonable best efforts to
arrange for its exclusive celebrities to take part periodically in AOL-
LA's online meeting rooms.
. Galaxy Latin America, or GLA, provides DirecTV, a direct-to-home
satellite television service, to viewers in Latin America. Approximately
53 Galaxy Latin America channels provide pay-per-view movies and events,
which are available on demand, while the remaining 111 channels offer
continuous programming. GLA also offers 66 channels of CD-quality music.
Members of the Cisneros Group have direct or indirect equity investments
in the local operating companies that are licensed by GLA for the day-
to-day operation of the DirecTV service in Brazil, Venezuela, Colombia,
Costa Rica, Ecuador, Panama, Nicaragua and Puerto Rico. Our
stockholders' agreement provides that the Cisneros Group will use its
commercially reasonable best efforts to cause GLA to promote our
interactive services in GLA's programming line-up and electronic
programming grid. Moreover, in Brazil, we have already distributed
approximately 74,000 CDs through GLA distributors to DirecTV's Brazilian
subscribers.
38
<PAGE>
. Cisneros Television Group, or CTG, is, we believe, one of the leading
pay-TV programming channel groups in Latin America, including channels
such as Much Music, Locomotion, AEI Latin America, Cl@se and HTV. The
Cisneros Group has agreed to make commercially reasonable best efforts
to promote our services in country-specific programming through its
affiliated programming properties in Latin America, including CTG's
channels.
. Imagen Satelital is, we believe, one of the leading pay-TV programming
producers and distributors in Argentina and Chile. Imagen Satelital owns
or represents an aggregate of 17 pay-TV channels including I-Sat, Space,
Infinito, Uniseries and Jupiter Comic. The Cisneros Group has agreed to
use commercially reasonable best efforts to promote our services in
country-specific programming in these channels.
. Chilevision is, we believe, currently the fourth largest Chilean
broadcast television network. The Cisneros Group will make commercially
reasonable best efforts to obtain promotion from Chilevision through its
affiliated channels.
The Banco Itau Commitment
Banco Itau is one of the largest banks in Latin America with approximately
seven million customers and one million users of its interactive financial
services. We have agreed to develop a customized co-branded version of our
America Online Brazil service that will be identified with both the Banco Itau
and America Online Brazil brands.
Banco Itau has committed to:
. promote the co-branded service to its customers as the principal means
of accessing Banco Itau's interactive financial services;
. either achieve subscriber and revenue levels over a five year period or
make substantial cash payments to us;
. throughout the first five years of the strategic alliance, pay for a
minimum of one free hour of use of the co-branded service per month for
each approved customer of Banco Itau;
. allow us to use its brand to promote the co-branded service as well as
our America Online Brazil service; and
. pay for the cost of producing, packaging and distributing CDs containing
the software for connecting to the co-branded service, except that we
will pay for production of the first three million CDs.
Our Management
We have an experienced senior management team that provides valuable
insights into the interactive services industry and the needs and demands of
the Latin American markets. In Mexico and Argentina, we are continuing to
assemble local management teams of comparable caliber. Our management teams
will benefit from working closely with AOL and the Cisneros Group, drawing on
their collective expertise and experience in the interactive services, media
and telecommunications industries.
Our Strategy
Our strategy is to develop AOL-LA brand recognition, grow our member and
user base and expand beneficial relationships with advertisers, content
providers and e-commerce merchants.
Provide superior online services. We intend to establish the AOL-LA country
services as high quality online services that provide:
. Seamless integration of local, regional and global online interactive
communities and the Internet, easy-to-use tools and features, and
content and e-commerce opportunities of local interest;
39
<PAGE>
. Reliable connections to our online services by contracting for ample
network capacity with multiple providers. We have entered into
agreements with Netstream and Embratel in Brazil to provide us with
network capacity that exceeds our anticipated needs for the next two
years. We have also entered into agreements with Avantal in Mexico and
Impsat in Argentina, and we are seeking expanded network capacity in
these countries; and
. Online and offline customer service, available free of charge 24 hours a
day, 7 days a week.
Implement a three-phase approach to the introduction of our interactive
services in Latin America. We intend to launch our interactive services in
Latin America in three phases. Based on forecasts of key indicators of Internet
growth, we identified Brazil, Mexico and Argentina as presenting the most
favorable market opportunities for the initial launches of our interactive
services. The table below presents forecasts of these indicators in our core
target markets as a percentage of the total Latin American market:
<TABLE>
<CAPTION>
Number of Number of Internet
Internet Internet Accessing E-commerce Advertising
Population in Users in Devices in Spending Spending in
1999 2003 2003 in 2003 2003
------------- --------- ------------------ ---------- -----------
<S> <C> <C> <C> <C> <C>
Brazil.................. 35% 39% 39% 34% 54%
Mexico.................. 20 23 23 23 25
Argentina............... 8 12 12 15 4
--- ---- ---- ---- ----
Total................. 63% 74% 74% 72% 83%
=== ==== ==== ==== ====
</TABLE>
In this table, the source of the population data is Strategy Research
Corporation, the source of the Internet advertising spending data is Forrester
Research and IDC provided all other data.
We launched our interactive services in Brazil in November 1999. Our second
phase, which will begin in the third calendar quarter of this year, will focus
on the launch of our AOL-LA country services and portals in Mexico and
Argentina. In our third phase, we plan to offer our interactive services in
additional countries in Latin America, depending on the market readiness of
each country.
Localize and customize our interactive services. As we launch our
interactive services in various countries throughout Latin America, we will
localize and customize our online services and portals specifically for each
country. While each AOL-LA country service will share common technology, we
will tailor each service to cater to local interests and preferences:
. our services will be in local languages;
. tools and features will be customized to appeal to local members;
. content will be provided by local content providers and will be designed
to appeal to the shared interests and cultures of local members;
. e-commerce opportunities will be selected to reflect local interests and
tastes;
. members will, in many instances, have local dial-up numbers to connect
to our online services; and
. customer service representatives will be available through a local toll-
free number.
Establish a presence on the Internet. We will use our AOL-LA country
Internet portals and Latin American regional Internet portal to establish our
brand name, promote the AOL-LA country services and generate advertising and e-
commerce revenues on the Internet. We believe that by establishing a presence
on the Internet, we will have the flexibility to introduce new services on
either our online services or our portals, depending on the nature of the
service and the demands of our members and users. We anticipate that our
portals will be a cost-effective method of enhancing our brand identity.
Increase the size of our member and user base.
. We intend to make it convenient and efficient for consumers to try our
online services. In Brazil, we have distributed approximately 18 million
CDs containing the America Online Brazil service software through
various marketing channels. We plan to distribute approximately three
million CDs per month
40
<PAGE>
as part of our current marketing program. We will also pursue other
innovative marketing initiatives. For example, we plan to launch a sign-
on-a-friend program in Brazil that will involve paying members a fee for
each additional member they refer to our America Online Brazil service;
. We plan to use extensive traditional advertising campaigns, including
broadcast television, radio, print publication and outdoor, and other
marketing campaigns to increase awareness of the AOL-LA brand and
attract members and users; and
. We plan to enter into agreements with leading companies that will enable
us to market our interactive services to a significant number of
existing and potential Internet users. In Brazil, we have entered into
agreements for the bundling of our software with 3Com modems and Palm
pilots. We have also entered into agreements with companies such as Sony
Music and ICQ for the promotion of our interactive services.
Expand our family of AOL-branded services to new technologies. We intend to
expand our family of AOL-branded services beyond PC-based online services. We
will offer in Latin America TV- and wireless-based services as these services
are developed by AOL and to the extent our license agreement with AOL and
restated certificate of incorporation permit. We also plan to work with AOL to
introduce new localized versions of the software for the AOL-LA country
services that will enable members to connect through high-speed technologies,
including digital subscriber line, cable and satellite and provide additional
online content to members connecting through these high-speed technologies.
Our Services
The AOL-LA Service
Our AOL-LA country services will offer the following features:
Seamless Access to the Internet. We will provide our members with access to
and use of the Internet without having to leave our online services. A simple
tool bar on the AOL-LA country services will allow members to move seamlessly
between the features and content on our online service and the Internet. Access
to the Internet also includes newsgroups and file transfer capabilities.
Online Community Features. We believe that our AOL-LA country services will
promote interactive online communities through the following features:
E-Mail: Enables members to send messages to other members' private
electronic mailboxes, or to non-subscribers through e-mail.
Public Bulletin Boards: Facilitate the sharing of information and opinions
on subjects of general or specialized interest.
Buddy Lists: Enable members to keep an up-to-the moment account of whether
fellow members and users of the web version of AOL Instant Messenger are
online, with an optional blocking feature.
AOL Instant Messenger, or AIM: Allows members and users of the web version
of AIM to exchange private, personalized electronic text messages in real
time without having to access an electronic mailbox. When a message is sent
by AIM, the message pops up on the receiver's screen.
Online Community Center: Serves as a country-specific, regional or global
place for AOL-LA members to interact with each other. Our online community
center includes a member directory that provides a quick way to find
family, friends or colleagues on our online services.
Interactive Conversations, or Chat: Allows members to engage in discussions
covering topics such as current events, family, parenting, romance, the
arts, finance and sports in existing or self-created public or private
meeting rooms.
41
<PAGE>
AOL Live: Features interviews with celebrities and other personalities. The
interviews will be structured to operate like live auditorium events, with
members asking questions of the celebrity while exchanging views among
themselves.
Amor@AOL: Enables members to publish personal ads in Spanish or Portuguese
to find romance or friendship and will provide links to AOL's Love@AOL,
which facilitates international friendship and romance.
Channel Line-Up. We plan to develop customized channels for each AOL-LA
country service, with the following channels forming the basis of each
service's line-up:
AOL Today: Communicates the day's news, entertainment and financial
headlines to members when they log onto the service. The channel also
provides information about local weather, horoscopes, online events and
highlights of special features on other content channels.
News: Provides comprehensive current local, regional and international
news, including headlines and highlights and in-depth articles authored by
leading news providers. News content developed by our in-house content
development team will include week-in-review and current events sections
and political news discussions.
Finance: A compilation of local and regional financial news, stock quotes,
investment tips and other business information provided by financial
analysts and respected journals. This channel will also focus on educating
members about local and international economic policies.
Entertainment: Contemporary music, movie and TV articles and reviews,
celebrity news and gossip, and entertainment events. This channel will also
feature daily polls on member views and interests.
Internet: Provides current Internet news, advances in technology, tips to
navigating the Internet and website reviews.
Kids: Kids-oriented entertainment, featuring special articles, animated
celebrities, superheroes and games.
Sports: Local and international sports news, including real-time scores,
commentaries, sport celebrity interviews, team and player profiles and an
area recapping the week's top sports events.
Computing: Computing news, tips and product reviews. This channel will also
have areas for downloading software and areas with information about
computer viruses.
Travel: Recommendations and information on local and global travel
destinations, fare-finders, trip planners, travel tips and virtual tours.
Education: Features research tools, encyclopedias and dictionaries,
homework helpers and advice on many education-related issues, including
preparatory guides.
Local: A guide to the local area and its largest cities, including movie
and restaurant reviews, traffic reports, maps and entertainment guides.
International: Connects members to AOL's international services and offers
international news, business, culture and country information, foreign
newspapers, world maps and other extensive global content.
Lifestyles: Health and fitness tips, medical and nutritional advice,
parenting information, personals, fashion news, teenager-focused content
and special interest features.
Shopping: Extensive consumer information and links to stores, enabling
members to browse and buy a variety of products, including books, music and
food. We will also work with e-commerce merchants to bring members online
promotions and bargains.
42
<PAGE>
Personalization and Control Features. Members will be able to personalize
their experience on our AOL-LA country services through a number of features
and tools, including:
. Multiple screen names, or e-mail accounts, per membership, allowing up
to five members of a household to use the service at no additional
charge.
. Parental controls to help parents guide their children's online
experience, including tools that limit access to particular areas or
features on the AOL-LA country services.
. Mail controls that allow members to limit who may send them e-mail and
to block specific types of e-mail.
. A reminder service that sends an e-mail in advance of important events.
. Stock portfolios that automatically update market prices.
. Favorite places, which allow members to mark particular Internet sites
or areas on our online services to facilitate subsequent visits to those
sites or areas.
. Portfolio direct and news profiles, which send stories of particular
interest to members.
. Marketing preferences that enable members to elect not to receive
selected marketing offers.
. A web security browser that will encrypt confidential information,
providing more secure online shopping.
Online and Offline Help. We will offer our members both online help and
offline customer support services. Our AOL-LA country services' help feature
will assist members with their inquiries online. Offline, we will have call
centers providing free customer service 24 hours a day, 7 days a week.
Service Plans and Pricing. Members will be able to select from one of
several competitively priced service plans. Our service plans will include:
. unlimited use plans, which will offer unlimited online access for a
fixed monthly fee; and
. limited use plans, which will offer a combination of a fixed monthly fee
for a specified number of hours of online access and the option to spend
additional time online, billed at an hourly rate.
For example, in Brazil, we offer four service plans priced in the Brazilian
currency, the real:
. unlimited access for a fixed monthly fee of R$24.95, which is equal to
approximately U.S.$13.78;
. 20 hours of access for a monthly fee of R$19.95, which is equal to
approximately U.S.$11.02, and additional time online billed at R$1.30,
or approximately U.S.$0.72, per hour;
. 10 hours of access for a monthly fee of R$14.95, which is equal to
approximately U.S.$8.26, and additional time online billed at R$1.95, or
approximately U.S.$1.08, per hour; and
. 5 hours of access for a monthly fee of R$9.95, which is equal to
approximately U.S.$5.50, and additional time online billed at R$2.95, or
approximately U.S.$1.63, per hour.
In January 2000, we reduced our fee for unlimited access in response to the
availability of free Internet access and price cuts by our competitors, and we
may need to make additional reductions in the future. Our current fee for
unlimited access is R$24.95, which is equal to approximately U.S.$13.78. This
reflects a price reduction of R$10.05, which is equal to approximately
U.S.$5.55, from the fee we charged when we launched the AOL Brazil country
service in November 1999.
Free Trial. We intend to make our AOL-LA country services, including
Internet access, available for free to new subscribers for a limited period of
time. During this trial period, consumers can explore our service without
discontinuing their current Internet access service, if any, and without
incurring any fees or hidden costs.
43
<PAGE>
We offer new members of the America Online Brazil service 250 hours of free
service during their first 30 days of membership. Subject to market conditions,
we anticipate that, for the six months following the launch of our country
services in Mexico and Argentina, we will offer new members of those services a
90 day trial period. Approved customers of Banco Itau that subscribe to the co-
branded service within one year of its launch will be entitled to a four month
free trial period. In future years, we anticipate we will make shorter trial
periods available to members of the co-branded service.
AOL-LA Web Portals
We intend to establish a regional Latin American portal and a network of
country Internet portals that will be freely available to all Internet users.
We launched our first country Internet portal in Brazil at
www.americaonline.com.br in November 1999. Our portal network will also have
links to the worldwide network of AOL portals, including AOL's flagship portal
in the U.S. at www.aol.com, and portals in the United Kingdom, Canada, Germany,
France, Australia, Japan, Hong Kong and Sweden. Each portal will be a
destination for users seeking a broad array of community features, local
content and e-commerce opportunities. We also intend to provide Internet users
with a simple and efficient way to search the Internet and a forum for
exchanging information, opinions and ideas by offering some of the same tools
and features that will be available on the AOL-LA country services, including:
. AOL Netfind, an Internet search engine, which enables easy searching and
navigation of the web;
. Web directory, which integrates popular websites and features into user-
friendly information centers; and
. AOL Instant Messenger, which enables Internet users to communicate in
real-time with their friends, family and colleagues.
As of June 30, 2000, approximately 50,000 Internet users in Brazil
downloaded and become registered users of AOL Instant Messenger.
Regional Portal. We plan to launch a Latin American regional Internet portal
in the third calendar quarter of this year. Drawing on the common cultures and
languages of the entire region, this portal will be a hub focusing on the
shared interests of Spanish and Portuguese speaking people. We believe it will
serve as both a destination for users seeking a regional perspective and
regional community experience and a gateway to our country-specific portals.
The community, content and e-commerce products and features will be tailored to
the region and will be accessible in Spanish or Portuguese depending on the
user's preference. The regional portal will initially link to the Brazilian
portal and then to the Mexican and Argentine portals. As we develop and launch
additional country Internet portals throughout Latin America, we will link them
to our regional portal to provide comprehensive access to information and
services throughout the region.
Country Portals. We plan to launch a network of country Internet portals in
Latin America. We launched our Brazilian portal at www.americaonline.com.br in
November 1999 and have promotional portals in Mexico and Argentina. We plan to
launch our Mexican and Argentine portals in the third calendar quarter of this
year. Our country Internet portals will provide local community features, as
well as content and e-commerce opportunities to Spanish and Portuguese speaking
Internet users. Each portal will be tailored to reflect local tastes and
interests and provide a resource for persons seeking country-specific
information and services. We will draw on the content and programming of our
localized AOL-LA country services to provide in-depth content on our portals
that will include local and global news, finance, entertainment, Internet news,
kids' entertainment, sports, computers, travel, education, lifestyles and
shopping. Each portal will also provide users with the opportunity to download
the AOL-LA country online services software.
The ICQ Service
AOL has granted us the right in Latin America to promote its ICQ service,
which features communications software and an associated portal. The ICQ
service enables its worldwide community of approximately 65 million users,
including approximately seven million in Latin America, to find and communicate
with each other in real-time. It also allows users to:
. determine when other users are online;
44
<PAGE>
. exchange files or voice messages;
. conduct Internet searches;
. communicate with a friend while surfing the same Internet site;
. collaboratively work on a document or play a game;
. send and receive free e-mail;
. send greeting cards; and
. create personal reminders.
The global ICQ service will be accessible to our members through a button on
our online services toolbar and to users of our network of Internet portals.
CompuServe
We have the right to market the CompuServe brand in Latin America. We intend
to service our existing base of subscribers and will market this brand if we
choose to offer a more value-oriented product in Latin America.
Strategic Alliance with Banco Itau
We have entered into a ten year strategic alliance with Banco Itau, one of
the largest banks in Latin America, which provides limited online financial
services to approximately one million of its approximately seven million
banking customers. We will cooperate with Banco Itau to create a co-branded,
customized version of our America Online Brazil service that Banco Itau will
market to its customers. We believe that this relationship will enable us to
expand our Internet presence in Latin America by allowing us to gain access to
Banco Itau's online as well as offline customer base.
The co-branded service will be substantially the same as our AOL-LA country
service in terms of technology and content, except that we will offer a co-
branded welcome screen for Banco Itau customers, a Banco Itau toolbar icon, a
special version of our finance channel and links that will directly connect
Banco Itau's customers to its online financial services. Subscribers to the co-
branded service will have access to our full line of features, including e-mail
with an AOL screen name, instant messaging, Internet access, interaction with
our worldwide online community and our twenty-four hour customer service. Banco
Itau's customers that register for the co-branded service within one year of
its launch will be entitled to a four month free trial period, with shorter
trial periods in future years. For five years after the launch, Banco Itau will
subsidize at least one hour of usage per month following the expiration of a
subscriber's trial period. However, we believe that once Banco Itau's customers
have the opportunity to use the co-branded service, many will choose to pay for
our unlimited use plan.
We will issue to Banco Itau 31,700,000 shares of our class A common stock at
the closing of this offering in exchange for services and other contributions
it will provide as part of the strategic alliance. For example, Banco Itau is
obligated to promote the co-branded service as the principal means of accessing
Banco Itau's interactive financial services. Although Banco Itau is not
required to spend a minimum amount for marketing of the co-branded service, it
will have to make significant cash payments to us if it fails to achieve agreed
upon subscriber membership and revenue levels during the first five years of
the alliance.
Customer Service
One of our key strategies is to focus on customer service. We intend to
implement this strategy by offering comprehensive online and offline customer
support.
45
<PAGE>
Offline Customer Service. We have established a local call center in Brazil
and plan to establish local call centers in Mexico and Argentina in the third
calendar quarter of this year. As we launch our interactive services in
additional countries in Latin America, we intend to establish regional call
centers to maximize quality and shared infrastructure. We plan to staff each
call center with knowledgeable customer service representatives who will be
available 24 hours a day, 7 days a week to assist our members in their local
language with inquiries relating to products, technical support, billing,
online security and online community monitoring. We also intend to establish
overflow facilities, as we did at the time of the launch of the America Online
Brazil service and portal, to handle increased call volumes, particularly
during major initiatives. Our customer service is free of charge and will be
provided through a toll-free number. Our call center in Brazil is staffed with
476 Portuguese-speaking customer service representatives, comprised of both
employees and independent contractors.
Online Help. Our AOL-LA country services will provide extensive help
features to assist new users coming online for the first time. Members will be
able to reach customer service representatives by e-mail and AOL Instant
Messenger. The services will also have the notify AOL feature that allows
members to contact us for security assistance and the download sentry alert
feature that reminds members not to download files attached to e-mails sent
from strangers.
Content
We have adopted AOL's strategies for selecting, categorizing and searching
local, regional and global content. Our AOL-LA interactive services will
feature content obtained from leading content providers, proprietary content
developed by our in-house content development team working with various
independent contractors, and member-generated content, including movie and book
reviews, message board commentary and online discussions.
Our agreements with third party content providers range from simple links
between our interactive services and the provider's website to an integration
of their content into our interactive services. We select our content providers
based on the quality and depth of their content. In some instances, our content
providers will license their content to us in exchange for marketing,
advertising and e-commerce opportunities on our interactive services. In other
instances, we pay our content providers cash for licensing their content to us.
Our agreements with our content providers may also involve their marketing our
services to their clients, sharing the advertising revenues generated by the
advertisements displayed on their content pages or giving us advertising space
on their content pages. In some cases we may also receive cash payments from
our content providers or an equity interest as payment, or partial payment, for
arrangements entered into with content providers that are development stage
companies.
We have entered into regional anchor tenancy agreements with various content
providers, including Hollywood.com, LatinStocks.com, Turner Broadcasting and
Time Inc. Anchor tenants are content providers whose content we prominently
display in fixed locations on our interactive services that we believe are
frequently viewed by our members and users. As regional anchor tenants,
Hollywood.com's content will be displayed on each of our AOL-LA interactive
services' entertainment channels and LatinStock.com's content will be displayed
on each of our finance channels. In Brazil, we have also entered into
agreements with approximately 65 content providers, including a variety of
anchor tenancy and other agreements with local providers, including Jornal do
Brasil, Gazeta Mercantil, CBS Telenoticias, Reuters, Gazeta Esportiva, Canal
Web, 89 Rockwave and Editora Delta.
We also recently entered into agreements with Turner Broadcasting System
Latin America, Inc., and Time Inc., affiliates of Time Warner, under which we
will distribute news and entertainment content through our interactive
services. The Turner Broadcasting content includes CNNenEspanol.com,
CCNBrasil.com, CartoonNetworkLA.com and TNTLA.com. The Time content includes
Spanish- and Portuguese-language versions of Time and Fortune magazine
newspaper supplements and English-language versions of the Latin America
edition of Time magazine.
46
<PAGE>
Advertising and e-commerce
We will seek to generate a portion of our revenues from advertising and e-
commerce on our online services and portals. We intend to rapidly increase the
number of our members and users, which will afford advertisers and e-commerce
merchants an attractive audience to whom they can advertise and sell their
products. We believe that advertisers and e-commerce merchants will benefit as
members and users of AOL and its international affiliates explore our AOL-LA
country services and portals.
Our relationship with AOL may also give us the option to participate in many
of the global advertising and e-commerce arrangements into which AOL enters. We
will evaluate any opportunities to complement our existing portfolio of
advertisers and e-commerce merchants on a case-by-case basis.
Advertising. The country-specific and regional focus of our interactive
services will enable advertisers to execute advertising and marketing campaigns
that take advantage of the common languages, cultures and interests of the
region while retaining the ability to tailor their campaigns to specific
demographic groups. We will offer our advertisers a variety of customized
programs for the marketing of products and services, including:
. advertising arrangements under which we receive fees based on the number
of advertisements displayed on our interactive services; and
. sponsorship or co-sponsorship arrangements that allow advertisers to
sponsor an area on our interactive services in exchange for a fixed
payment.
In return for these advertising arrangements, we will receive cash payments,
the opportunity for revenue sharing, or both. We have entered into and will
continue to seek barter arrangements, including co-marketing and cross-
promotion agreements, or choose to accept an equity interest as payment, or
partial payment, for arrangements entered into with development stage
companies.
We have established, and will continue to establish, a wide variety of
relationships with local and global advertisers. In Brazil, the advertisers on
our pre-launch promotional site included IBM, Citibank, Sul America, Telefonica
and PageNet. Current sponsors of channels on our America Online Brazil service
and portal include Citibank, DirecTV, Banco Real, Sony and Investshop.
E-commerce. The interactive nature of our services permits e-commerce
merchants to capture valuable data about consumer buying patterns and
preferences. We believe that e-commerce merchants will be able to operate with
minimal infrastructure and reduced overhead, while providing customers with a
convenient method to evaluate and buy a broad selection of goods and services.
We will offer e-commerce merchants an opportunity to sell their products
through our interactive shopping channels and promote their products on our
online service and portals.
In return for these e-commerce arrangements, we will receive either a flat
payment, a percentage of each e-commerce transaction that is attributable to
our interactive services, or both. We may also choose to accept an equity
interest as payment, or partial payment, for arrangements entered into with
development stage companies. In Brazil, we have arrangements with approximately
130 e-commerce merchants, including Xerox, 3Com, Sony Music and Mercado Libre.
Marketing
Our marketing goals are to attract consumers to subscribe to, and retain
existing members of, our online services, and attract Internet users to our
portals by building brand awareness and encouraging consumers to try our
interactive services.
We plan to make it convenient for consumers to try our online services. Each
time we launch our online service in a new market or release a new version of
the online service software, we intend to distribute CDs
47
<PAGE>
containing the software for our localized online service. These CDs will offer
consumers the opportunity to use our online service free of charge for a
limited trial period. We will distribute these CDs through a broad range of
distribution vehicles. In Brazil, we already have distributed approximately 18
million CDs containing our America Online Brazil service software. We plan to
distribute approximately three million additional CDs per month through a
variety of channels including direct mail, magazines and newspapers, shopping
malls, schools and other promotions. We have entered into an agreement with
Sony Music, one of the sponsors of our America Online Brazil service and
portal, for the distribution of our software CDs with a selection of its music
CDs. Under our agreement with Time, Time will distribute our software CDs with
the Latin America edition of Time magazine. Our CDs will also be available
through a local toll-free telephone number and consumers will be able to
download our online services software from our portals.
We will use extensive traditional advertising campaigns, including
television, radio and print publication, to increase consumer awareness of the
AOL-LA brand and attract members and users. Our advertising campaign for the
launch of our America Online Brazil service and portal included a series of
billboard, print and television advertisements centered around a number of
well-known Brazilian celebrities. We intend to continue to use similar
campaigns that focus on the ease of use of the AOL-LA country services in the
promotion of our products and services in Brazil and for the promotion of our
interactive services in Mexico and Argentina when we launch in those markets.
We are also seeking to build additional alliances that will enable us to
market our interactive services to a significant number of existing and
potential Internet users. In addition to our alliance with Banco Itau, we
intend to enter into agreements with PC, software and modem manufacturers for
the bundling of our online service software with their products. In Brazil, we
have entered into agreements for the bundling of our America Online Brazil
service software with 3Com modems and Palm pilots.
We also intend to utilize other innovative marketing strategies. We are the
exclusive sponsor of Rock in Rio, a rock concert to be held in Rio de Janeiro,
Brazil in January 2001, which will give us the opportunity to promote our
services. We also have the right to sell sub-sponsorships and will handle all
online ticket sales as well as online sales of any CDs and videos produced from
the concert. We also plan to launch a sign-on-a-friend program in Brazil that
will involve paying members a fee for each additional member they refer to our
America Online Brazil service.
Local and Long Distance Telephone Service, Telecommunications Network Capacity
and Technology
Local and Long Distance Telephone Service. In each of our Latin American
target markets, our members will initiate access to our online services through
local and long distance telephone lines. These lines are owned and operated by
local and regional telephone service companies. Adequate and affordable
telephone service in Latin America is central to the development of our
business.
The telephone service industry in Latin America is undergoing considerable
change. Many of the largest countries, including Brazil, Mexico and Argentina,
have begun to deregulate and privatize their telephone industries. Many Latin
American telephone companies in recent years have undertaken significant
investments in their infrastructure. These investments have resulted in an
improvement in the quality of telephone service in these countries. Although
the telephone service industry in Latin America is significantly less developed
than in the U.S., we believe that the local and long distance telephone service
available is of adequate quality and sufficient quantity to meet the needs of
our prospective members. Moreover, we believe that the current trend of
investment by the largest telephone service companies will continue, adding
additional capacity in our target markets to service the increasing demands
placed on the telephone service industry by the growth in Internet use.
However, adequate quantities of local and regional telephone lines may not be
readily available should Internet use increase more rapidly than anticipated.
Additionally, local and long distance telephone charges are expected to
decline because of increased competition created by deregulation. Nevertheless,
because local calls in most Latin American countries are metered, the total
cost of Internet access in Latin America is substantially higher than in the
U.S.
48
<PAGE>
Telecommunications Network Capacity. Third party telecommunications network
providers will transmit our online services data between the local and long
distance telephone services used by our members in Latin America and AOL's
servers, which run all our interactive services, in the U.S. These third party
networks provide the modems that allow our members to establish a connection to
our online services. They also carry our data between Latin America and the
U.S. by satellite and through fiber optic cable.
In Brazil, we have contracts with Netstream, an affiliate of AT&T, and
Embratel, an affiliate of MCI WorldCom, to provide the modems through which our
members connect to our America Online Brazil service and to carry our data
within Brazil. Netstream and Embratel also carry our data from Brazil to the
U.S. through their affiliates and third party suppliers. Under our contracts
with Netstream and Embratel we will be able to offer consumers access to our
America Online Brazil service in 60 cities in Brazil. We believe that these
contracts will provide us with excess network capacity for the next two years.
Our contracts with Netstream and Embratel expire on October 18, 2002 and May 3,
2002. As of March 31, 2000, we provided access to our America Online Brazil
service in 27 cities in Brazil, and we intend to expand into additional cities
later this year.
In Mexico, we have entered into a network contract with Avantel, an
affiliate of MCI WorldCom, and in Argentina we have entered into a network
contract with Impsat. Our contract with Avantel expires in January 2003 and our
contract with Impsat expires in December 2002.
In each of our target markets we intend to work closely with our network
providers to ensure satisfactory network performance. We intend to seek out
network providers that have multiple operations centers for network monitoring,
and we have developed quality control standards that our providers must meet.
Fiber optic cable is our preferred means of transmitting data between Latin
America and the U.S. because it offers greater capacity and is generally more
reliable than satellite-based transmissions. Most of our data is transmitted
between Brazil and the U.S. by fiber optic cable, although some is still
transmitted by satellite because adequate quantities of fiber optic cable are
not yet available for these transmissions. We expect that additional fiber
optic cable will become available for data transmissions between the U.S. and
Latin America under our contract with Embratel in August 2000 and under our
contract with Netstream in September 2000. At that time all data transmitted
between Brazil and the U.S. will be transmitted through fiber optic cable. We
believe this change will improve our network performance and the response time
of our America Online Brazil service. We will need to enter into additional
fiber optic network contracts in both Mexico and Argentina.
In Brazil, we believe that we have secured adequate network capacity through
our contracts with Netstream and Embratel. However, this capacity is based on
our projections of use in particular geographic areas. If our assumptions are
incorrect, members of our AOL-LA country services may experience delays in, or
be prevented from, accessing our online services. Our contracts with Netstream
and Embratel commit us to purchase a minimum amount of network capacity and we
may be subject to similar minimums as we expand into other countries in Latin
America. If the number of our subscribers, or their use of our online services,
does not increase as we anticipate, our network costs will not correspondingly
decrease.
Technology. Our servers are owned and maintained by AOL in three locations
in the United States: Reston, Dulles, and Manassas, Virginia. The AOL-LA
content and the tools to operate our online services are located on these
servers. Our Brazilian portal is also hosted on these servers. In the future,
we plan to install servers in Brazil and in other countries in Latin America to
further improve the performance of our interactive services.
Our members can access our online services only through personal computers
using the Windows 95 and 98 operating systems and our Windows-compatible online
service software. Our online services will support the V.90 standards for high-
speed access at 56 kbps, or kilobits per second. We currently offer AOL 4.0 to
subscribers of our America Online Brazil service.
49
<PAGE>
Competition
We operate in the highly competitive and rapidly evolving businesses of
online services and Internet access, advertising and e-commerce. However, we
believe that our AOL-LA country services will be unique in their seamless
integration of local, regional and global interactive communities and the
Internet, and in the array of interactive tools, content and e-commerce
opportunities offered on the services.
We will compete with providers of Spanish- and Portuguese-language
interactive services, including Internet access services, portals, search
engines and web directories. We compete in the broader Latin American regional
market as well as in country specific local markets. Our principal regional
market competitors include El Sitio, in which the Cisneros Group owns a
minority interest, Globo, StarMedia, Terra Networks, an affiliate of
Telefonica, and UOL. Our primary local competitors in our core target
countries include UOL in Brazil, Telmex in Mexico, which has an alliance with
Microsoft for the development of content and offers a Prodigy-branded service,
and Ciudad Internet in Argentina.
We also compete for advertising revenues with traditional media such as
newspapers, magazines, radio and television.
We believe the principal factors in competing for members in the
interactive services industries include:
. service features and performance;
. ease of use;
. marketing and distribution channels;
. brand recognition; and
. reliability and price.
Our Brazilian online service subscription fees are generally higher than
those offered by our competitors. Moreover, free Internet access is now widely
available in Brazil and throughout Latin America. We may have difficulty in
attracting a sufficient number of members willing to pay our subscription
fees. We reduced our price for our unlimited Internet access subscription plan
in January and further price reductions may be necessary. Also, we have
substantially increased our advertising spending and our spending for content.
We believe that the principal competitive factors in generating advertising
and e-commerce revenue include the number of visitors to an online service or
Internet site, duration and frequency of visits and demographics of visitors.
We believe that we have the ability to compete effectively in these areas.
The AOL License Agreement, Intellectual Property and Proprietary Rights
Our license
Under our license agreement with AOL, we have:
. a royalty free, exclusive license to offer AOL-branded PC-based online
services in Latin America;
. the exclusive right to offer AOL-branded TV-based online services in
Latin America if AOL develops these services;
. the exclusive right to offer in Latin America any AOL-branded
wireless-based online services developed by AOL for commercial launch
within four years of the effective date of the registration statement
for this offering; and
. a non-exclusive license to offer a localized network of AOL-branded
portals in Latin America, with an option to license exclusively any
Spanish- or Portuguese-language AOL-branded portals that AOL may
develop for the Latin American market, subject to our payment of a
license fee.
50
<PAGE>
We also have the rights to use all related AOL proprietary software and
technology as well as AOL registered domain names and principal trademarks in
Latin America.
We have agreed to interconnect our America Online Brazil country service and
all future AOL-LA country services to the services provided by AOL and its
international affiliates. This interconnection will provide our members with
access to the AOL services and AOL international interactive services and will
permit AOL members worldwide to access the AOL-LA country services. AOL is
obligated to license to us, or to use commercially reasonable efforts to obtain
for us, the license rights it has in third party software products used in
operating the AOL-branded interactive services. These third-party licenses may
be royalty-free or may require payments by us.
From December 15, 1998 through March 31, 2000 we did not make any payments
to AOL for services received under the license agreement. We believe that
annual payments for these services will not exceed $60,000 in the future. Based
on our management's experience negotiating similar contracts, as well as its
knowledge of our competitors' cost structures, we believe that the terms of the
license agreement are at least as favorable as we could have obtained from an
unaffiliated third party.
We have the same rights to offer CompuServe-branded services. We only have
the right to offer AOL- and CompuServe-branded interactive services. We also
have a non-exclusive right to market and promote AOL's ICQ service in Latin
America. We do not have the right to offer Netscape, DigitalCity, MovieFone or
any other non-AOL-branded interactive service.
Termination of our exclusive rights
We will lose the exclusivity of our licensed rights:
. to AOL-branded PC-based online services, upon the later of December
15, 2003 or the date on which either AOL or the Cisneros Group owns
less than 20% of the outstanding capital stock of AOL-LA.
. to AOL-branded TV-based and wireless-based online services, upon the
later of five years from the effective date of the registration
statement for this offering or the date on which either AOL or the
Cisneros Group owns less than 20% of the outstanding capital stock of
AOL-LA.
These 20% thresholds may be lowered if:
. an additional strategic stockholder is admitted as a stockholder of
AOL-LA;
. we issue more shares of our capital stock; or
. AOL exercises its warrant.
AOL may terminate our rights under the license if we materially breach its
terms.
Trademarks and domain names
AOL has granted us rights to use its registered domain names, www.aol.com,
www.americaonline.com, and related domain names in Latin America. We believe
that AOL is taking appropriate steps to protect its rights in these and other
related domain names in Latin America. For example, third parties have
registered the domain names www.aol.com.br in Brazil and www.aol.cl in Chile
and AOL is currently involved in or is considering initiating legal proceedings
to protect these domain names. In Brazil, Mexico, Argentina, Chile, Colombia
and Venezuela, AOL has initiated opposition proceedings to prevent registration
of marks by third parties that are confusingly similar to AOL's marks. Although
AOL intends to protect its rights vigorously, we cannot assure you that AOL
will be able to register successfully all of the domain names that relate to
the trademarks.
51
<PAGE>
We rely on a combination of contract provisions and patent, copyright,
trademark and trade secret laws to protect our rights in our online services as
licensed to us by AOL. We have distributed and will continue to distribute
software, licensed to us by AOL, for our online services under agreements that
grant members a license to use the software. We rely on the protections
afforded primarily by copyright laws to protect against the unauthorized
reproduction of the software. We also rely in part on electronic licenses which
members do not manually sign, but rather agree to by clicking a button on their
monitor screen. These licenses may be unenforceable under the laws of Brazil
and other jurisdictions in which we expect to offer our online services. We
attempt to protect our trade secrets and other confidential information through
agreements with employees and consultants.
Although we intend to protect our rights vigorously, we cannot assure you
that these measures will be successful. Policing unauthorized use of the
software for our online services is difficult and the steps taken may not
prevent the misappropriation of our licensed technology and intellectual
property rights. Moreover, effective patent, trademark, trade secret and
copyright protection may be unavailable or limited in Latin America.
AOL has obtained U.S. federal trademark registrations of a number of marks,
including AOL, America Online, Buddy List, and AOL's triangle design logo, and
has trademark rights in the U.S. and abroad in many other proprietary names,
including www.aol.com, AOL Instant Messenger, AOL Netfind, You've Got Mail and
CompuServe.
We believe that our exercise of our licensed rights under our agreement with
AOL does not infringe on the proprietary rights of third parties. However, we
have received communications from third parties asserting that features,
contents or names of some of our services may infringe their patents,
copyrights, trademarks and other rights. We are not involved in any litigation
of this type that would have a material adverse effect on our ability to
develop, market and sell or operate our services. We cannot assure you that in
the future third parties will not make infringement claims against us for
current or future features or content of our services or that any claim would
not result in litigation or require us to enter into royalty or other similar
arrangements. Third parties may also challenge AOL's marks and these challenges
may result in limitation or loss of our licensed rights to AOL's proprietary
marks.
Government Regulation and Legal Uncertainties
We believe that existing government regulations will not materially restrict
our ability to offer our interactive services in our core target countries.
In Brazil, there are no license or registration requirements applicable to
interactive services. However, the Brazilian legislature is considering a law
governing e-commerce that will subject web hosting service providers to civil
and criminal sanctions if they have actual knowledge of an offer of illegal
goods, services or information made through their service and they do not
immediately suspend or interrupt access. This bill would also require Internet
access providers to keep confidential all non-public information transmitted or
stored on their networks, unless a court orders that the information be
disclosed.
In Mexico, the federal telecommunications law requires providers of value-
added services, including Internet access services, to register with the
Mexican federal telecommunications commission, and we have obtained this
registration.
In Argentina, Internet access providers must hold a correspondent license
from the Argentine telecommunications authority, and we have received this
license. The Argentine national government does not specifically regulate
information available on the Internet. However, Argentine laws and regulations
on consumer protection, contract, competition and advertising generally apply
to portal and e-commerce service providers. Moreover, the Argentine
constitution protects an individual's right to know what information about him
is contained in any public registry or database and demand that any false or
discriminatory information be changed, removed, kept confidential or updated.
52
<PAGE>
We intend to support proposals designed to enhance market access and
competition in the offering of both dial-up and high-speed interactive services
in our target markets and believe that the adoption of these proposals would
have a beneficial effect on the development of interactive services. We are
unable, at this time, to predict whether any of these proposals will be
adopted.
Employees
As of June 30, 2000, we had 600 full-time employees, of whom 429 were
located in Brazil, 45 in Florida, 71 in Mexico and 55 in Argentina. We consider
our relations with our employees to be good.
Facilities
Our principal executive office is located in approximately 37,000 square
feet of office space in Fort Lauderdale, Florida, under a lease that expires in
2006. Our Brazilian headquarters and call center is located in Santo Andre in
approximately 19,800 square feet of office space under a lease expiring in
August 2004 and our business development and marketing office is located in Sao
Paulo in approximately 4,800 square feet of office space under a lease expiring
in June 2002. We have also established a sales office and call center in Mexico
City in approximately 19,900 square feet of office space under a lease expiring
in March 2005. Our Argentina headquarters, located in Buenos Aires, is located
in approximately 14,000 square feet under a lease expiring in November 2002. As
we expand into other countries in Latin America, we anticipate establishing
sales offices and call centers regionally and locally.
Legal Proceedings
On December 28, 1999, ADEC, a non-governmental, private consumer protection
association, filed a complaint against us in the Brazilian State of Rio de
Janeiro seeking monetary damages and a preliminary restraining order. ADEC is
seeking R$10.0 million, or approximately U.S.$5.5 million, in damages on behalf
of consumers who have allegedly complained about the installation of our
America Online Brazil software on their PCs. The preliminary restraining order
would have required us to stop distributing our CD software in Brazil. While
ADEC obtained the order, we were successful in having it revoked and ADEC later
lost an appeal of the revocation. Although we believe that ADEC's claims are
without merit and will continue to contest them vigorously, we may not be
successful in defeating its claims. If we are unsuccessful, ADEC's claims could
have a material adverse effect on our business.
53
<PAGE>
MANAGEMENT
Executive Officers and Directors
After completion of this offering, our board of directors will have 14
members. AOL and the Cisneros Group are each entitled to elect five directors.
AOL has elected:
.Miles R. Gilburne;
.J. Michael Kelly;
.Michael Lynton;
.Robert W. Pittman; and
.Gerald Sokol, Jr.
The Cisneros Group has elected:
.Steven I. Bandel;
.Gustavo A. Cisneros;
.Ricardo J. Cisneros;
.Robert S. O'Hara, Jr.; and
.Cristina Pieretti.
Banco Itau is entitled to nominate one individual for election as a
director. Banco Itau has nominated Roberto Egydio Setubal and he will be
elected to the board of directors immediately after the completion of this
offering.
Our three remaining directors will be:
. Vernon E. Jordan, Jr.;
. William H. Luers; and
. M. Brian Mulroney.
These directors will be appointed by the board immediately after the
offering and remain in office until our annual meeting, when they will be
elected by the holders of our outstanding capital stock. Because AOL and the
Cisneros Group will together control 97.05% of the voting power of our capital
stock following this offering, the issuance of shares to Banco Itau and the
concurrent distribution by the Cisneros Group, they will have the power to
elect these three directors, as well as the director nominated by Banco Itau,
at our annual meetings.
After the completion of this offering, the individuals listed below will be
our executive officers or members of our board of directors.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Charles M. Herington.............. 40 President and Chief Executive Officer
Javier Aguirre.................... 41 Chief Financial Officer
Gustavo Benejam................... 45 Chief Operating Officer
David A. Bruscino................. 37 Vice President and General Counsel
Guy Garcia........................ 45 Vice President, Content Strategy
John D. Gardiner.................. 35 Vice President, Business Development
Travis Good....................... 40 Vice President, Technology and Operations
Eduardo Hauser.................... 31 Vice President, Corporate Development
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Steven I. Bandel.......................................... 47 Director
Gustavo A. Cisneros....................................... 55 Director
Ricardo J. Cisneros....................................... 53 Director
Miles R. Gilburne......................................... 49 Director
J. Michael Kelly.......................................... 44 Director
Michael Lynton............................................ 40 Director
Robert S. O'Hara, Jr. .................................... 61 Director
Cristina Pieretti......................................... 48 Director
Robert W. Pittman......................................... 46 Director
Gerald Sokol, Jr. ........................................ 37 Director
Vernon E. Jordan, Jr...................................... 64 Director Nominee
William H. Luers.......................................... 71 Director Nominee
M. Brian Mulroney......................................... 61 Director Nominee
Roberto Egydio Setubal.................................... 46 Director Nominee
</TABLE>
Charles M. Herington. Mr. Herington has been our president and chief
executive officer since February 1999. Before joining AOL-LA, Mr. Herington
served as president of Revlon America Latina from January 1998 to February
1999. From 1990 through 1997, Mr. Herington held a variety of senior management
positions with PepsiCo Restaurants International, including regional vice
president of KFC, Pizza Hut and Taco Bell for South America, Central America
and the Caribbean from September 1995 to September 1997, regional vice
president of KFC for Latin America from February 1994 to September 1995,
general manager of KFC Puerto Rico from February 1992 to February 1994, general
manager of franchise markets for KFC Latin America from February 1991 to
February 1992 and marketing director for KFC for Latin America from May 1990 to
February 1991. Between 1981 and 1990, Mr. Herington served in various
managerial positions at Procter & Gamble.
Javier Aguirre. Mr. Aguirre is our chief financial officer, a position he
has held since June 1999. From September 1998 to June 1999, Mr. Aguirre was the
finance director for Wal-Mart Argentina. Before joining Wal-Mart Argentina, Mr.
Aguirre was senior director of finance and administration of PepsiCo
Restaurants International in Sao Paulo, Brazil, from May 1996 to August 1998.
From May 1994 to April 1996, Mr. Aguirre was the director of finance and
planning of PepsiCo Restaurants International in Mexico City. Between 1979 and
1994, Mr. Aguirre held several managerial positions at Ford Motor Company in
Michigan and in Mexico City.
Gustavo Benejam. Mr. Benejam has served as our chief operating officer since
April 2000. From October 1996 to March 2000, Mr. Benejam was vice president of
Frito Lay International for the Caribbean, Andean and South Cone regions. From
May 1995 to October 1996, Mr. Benejam was president of the Latin America
division of Pepsi Cola International.
David A. Bruscino. Mr. Bruscino has been our vice president and general
counsel since May 2000. From September 1988 to April 2000, Mr. Bruscino was an
attorney with the law firm of Baker & Hostetler LLP in Cleveland, Ohio, and was
a partner of that firm beginning in 1996.
Guy Garcia. Mr. Garcia has served as our vice president of content strategy
since August 1999. From March 1998 to July 1999, he was director of programming
at AOL Interactive Properties and director of creative and editorial
development at AOL Studios. From November 1997 to February 1998, Mr. Garcia
served as executive producer for Digital City Inc. During this time, he also
served as the founding editor for Digital City New York. In February 1995, Mr.
Garcia co-founded the Total New York website and served as the site's editor
and site director until October 1997. From February 1994 to February 1995, Mr.
Garcia was a freelance writer contributing to various magazines.
55
<PAGE>
John D. Gardiner. Mr. Gardiner has served as our vice president of business
development since March 1999. From March 1999 to May 2000, Mr. Gardiner also
served as our general counsel. From May 1995 to March 1999, Mr. Gardiner was
employed in the legal department at AOL, holding the position of assistant
general counsel. From January 1993 to May 1995, Mr. Gardiner was an associate
at the law firm of Shaw, Pittman, Potts and Trowbridge in Washington, D.C.
Travis Good. Mr. Good has been our vice president of technology and
operations since March 1999. From May 1995 to February 1999, he held a variety
of management positions at AOL, including general manager for AOL's Global
Network Navigator and director of product marketing for AOL Client Software.
From January 1995 to May 1995 he was director of Internet services for Cable &
Wireless. From March 1994 to January 1995, Mr. Good served as general manager
of GE Information Services' distributorship in Mexico. From December 1987 to
March 1994, he served in a variety of positions at General Electric
Corporation.
Eduardo Hauser. Mr. Hauser is our vice president of corporate development, a
position he has held since March 1999. Before joining AOL-LA, Mr. Hauser was
employed from September 1988 to March 1999 by different companies in the
Cisneros Group, serving in a variety of positions, including vice president,
news of Venevision from September 1997 to March 1999, and as managing director
of Highgate Properties, a company within the Cisneros Group, from September
1993 to September 1997.
Steven I. Bandel. Mr. Bandel has been a member of our board of directors
since January 2000 and was appointed to the board by the Cisneros Group. Since
January 1995, Mr. Bandel has held several senior management positions at
companies within the Cisneros Group, with responsibilities in the areas of
finance, communications and corporate development. Mr. Bandel has the title of
president and chief operating officer of the Cisneros Group. Mr. Bandel is also
a director of Pueblo Xtra International, Inc., a company within the Cisneros
Group.
Gustavo A. Cisneros. Mr. Cisneros has been a member of our board of
directors since January 2000 and was appointed to the board by the Cisneros
Group. Since 1975, Mr. Cisneros has overseen the management and operations of
the Cisneros Group and is an executive officer and director of many of its
constituent companies. Mr. Cisneros, together with members of his family, or
trusts established for their benefit, owns direct or indirect beneficial
interests in the companies forming the Cisneros Group. Mr. Cisneros is a
director of Evenflo & Spalding Holdings Corporation, RSL Communications Ltd.,
Pueblo Xtra International, Inc. and Pan American Beverages, Inc. Mr. Cisneros
is a founding member of the international advisory board of the Council on
Foreign Relations, as well as a member of the board of trustees of the Museum
of Television & Radio. He is a director of the chairman's council of the
Americas Society and serves on the international advisory council of Power
Corporation of Canada. He is also a charter member of the AEA Investors, Inc.
advisory board. Mr. Cisneros is a trustee of Rockefeller University, a member
of the board of directors of Georgetown University, a member of the
international advisory board of Columbia University and a founding member of
the advisory committee for the David Rockefeller Center for Latin American
Studies at Harvard University. He is a director of the Joseph H. Lauder
Institute of Management and International Studies of the Wharton School of the
University of Pennsylvania.
Ricardo J. Cisneros. Mr. Cisneros has been a member of our board of
directors since January 2000 and was appointed to the board by the Cisneros
Group. Since 1975, he has served as an executive officer and a director of a
number of the companies within the Cisneros Group, including Venevision and
Operadora Sercra C.A. Mr. Cisneros has also been a director of several
financial institutions in Venezuela and the United States. He serves on the
boards of the Simon Bolivar Foundation and is also the director of the
Fundacion Diego Cisneros in Venezuela.
Miles R. Gilburne. Mr. Gilburne has been a member of our board of directors
since January 2000 and was appointed to the board by AOL. From February 1995
through December 1999, he served as senior vice president, corporate
development of AOL. Before joining AOL, Mr. Gilburne was a founding attorney of
the Silicon Valley office of the law firm of Weil, Gotshal & Manges. Mr.
Gilburne is also a partner in the Cole-Gilburne Fund, a venture capital fund.
Mr. Gilburne is also a director of AOL.
56
<PAGE>
J. Michael Kelly. Mr. Kelly has been a member of our board of directors
since January 2000 and was appointed to the board by AOL. Mr. Kelly has been
senior vice president and chief financial officer of AOL since July 1998.
Before joining AOL, he had been executive vice president of finance and
planning and chief financial officer of GTE Corporation since June 1997. Mr.
Kelly was appointed GTE's senior vice president of finance in 1994.
Michael Lynton. Mr. Lynton has been a member of our board of directors since
January 2000 and was appointed by AOL. He has served as president of AOL
International since January 2000. From September 1996 to December 1999, Mr.
Lynton was chairman and chief executive officer of the Penguin Group. From
September 1993 to June 1996, Mr. Lynton served as president of Disney
Publishing--Magazines and Books, and between 1987 and 1993 he served as
president of Hollywood Pictures for The Walt Disney Company.
Robert S. O'Hara, Jr. Mr. O'Hara has been a member of our board of directors
since January 2000 and was appointed to the board by the Cisneros Group. Since
1974, Mr. O'Hara has been a member of Milbank, Tweed, Hadley & McCloy LLP, a
law firm in New York, N.Y.
Cristina Pieretti. Ms. Pieretti has been a member of our board of directors
since January 2000 and was appointed to the board by the Cisneros Group. From
1992 to March 1995, and since February 1996, Ms. Pieretti has held a number of
senior management positions with marketing and operations responsibilities at
companies within the Cisneros Group in the consumer goods, retail and
telecommunications industries. From March 1995 to February 1996, Ms. Pieretti
was a partner at Booz-Allen & Hamilton, a consulting firm. Ms. Pieretti has the
title of vice president of operations of the Cisneros Group. Ms. Pieretti is
also a director of Pueblo Xtra International, Inc., a company within the
Cisneros Group.
Robert W. Pittman. Mr. Pittman has been a member of our board of directors
since January 2000 and was appointed to the board by AOL. He has been president
and chief operating officer of AOL since February 1998. Previously, he was
president and chief executive officer of AOL Networks, a division of AOL, from
November 1996 until February 1998. He held the positions of managing partner
and chief executive officer of Century 21 Real Estate Corp. from October 1995
to October 1996. Before that time, Mr. Pittman had been president and chief
executive officer of Time Warner Enterprises, a division of Time Warner
Entertainment Company, LP, between 1990 and 1995, and chairman and chief
executive officer of Six Flags Entertainment Corporation from December 1991 to
September 1995. Mr. Pittman founded MTV in 1981 and became president of MTV
Networks in 1985. He is also a director of AOL, Cendant Corporation and
barnesandnoble.com inc.
Gerald Sokol, Jr. Mr. Sokol has been a member of our board of directors
since January 2000 and was appointed to the board by AOL. He has served as
senior vice president and general manager of AOL International since September
1999 and before that was vice president of finance of AOL International since
February 1999. From August 1996 to January 1999, Mr. Sokol held several
positions with NTN Communications, Inc., most recently serving as president,
chief executive officer and chairman of the board of directors. From July 1987
to May 1996, Mr. Sokol held several positions with Tele-Communications, Inc.,
most recently serving as vice president and treasurer. Mr. Sokol is also a
director of Chinadotcom Corporation and 8848.net.
Vernon E. Jordan, Jr. Mr. Jordan has been nominated to become a member of
our board of directors. Since January 2000, he has been a managing partner of
the investment banking firm of Lazard Freres & Company and of counsel at the
law firm of Akin, Gump, Strauss, Haver & Feld, L.L.P. At Akin, Gump, Strauss,
Haver & Feld, L.L.P., he was a senior partner from 1992 to 1998 and a partner
from 1982 to 1992. He is a member of the board of directors of the American
Express Company, AMFM Inc., J.C. Penney Company, Inc., Dow Jones & Company,
Inc., Revlon Group Incorporated, Revlon, Inc., Ryder System, Inc., Sara Lee
Corporation, Union Carbide Corporation and Xerox Corporation.
57
<PAGE>
William H. Luers. Mr. Luers has been nominated to become a member of our
board of directors. He has been chairman, chief executive officer and president
of the United Nations Association of the United States of America since
February 1999. From May 1986 to February 1999, Mr. Luers served as president of
the Metropolitan Museum of Art in New York, New York. He is a member of the
board of directors of IDEX Corporation, Wickes Inc., and several incorporated
mutual funds managed by Scudder Kemper Investments, Inc.
M. Brian Mulroney. Mr. Mulroney has been nominated to become a member of our
board of directors. He has been a senior partner in the law firm of Ogilvy
Renault in Montreal, Quebec, Canada since August 1993. From September 1984 to
June 1993, Mr. Mulroney served as the Prime Minister of Canada. He is a member
of the board of directors of the Archer Daniels Midland Company, the Trizec
Hahn Corporation, Cendant Corporation, Quebecor Inc., Cognicase Inc. and Sun
Media Corporation.
Roberto Egydio Setubal. Mr. Setubal has been nominated by Banco Itau to
become a member of our board of directors. Since 1984 he has overseen the
commercial operations of Banco Itau, and in 1994 he was appointed to the
position of president and chief executive officer of Banco Itau and all of its
affiliated and associated banks and companies. Mr. Setubal is also executive
vice-president of Itausa, the holding company of Group Itau. Since 1990, Mr.
Setubal has been involved in the Brazilian Federation of Banks, serving as
president and chairman of the board of directors since 1997. Mr. Setubal is
also a member of the Basel Committee on Banking Supervision and the
International Monetary Conference, Latin American section. Mr. Setubal serves
on the advisory council of Institute Ethos, and he is also a member of the
board of directors of Ford Latin America.
Board of Directors
Our restated certificate of incorporation fixes our board of directors at 14
members. Each year at our annual meeting, our stockholders will elect our
directors to a one-year term of office. AOL, the holder of all of our B stock
and the Cisneros Group, the holder of all of our C stock, are each entitled to
elect five members to our board of directors. The holders of all outstanding
shares of our capital stock, voting together as a single class, are entitled to
elect the remaining four members to the board of directors. Banco Itau is
entitled to nominate one of these four directors and AOL and the Cisneros Group
have agreed to vote their shares of capital stock in favor of the election of
Banco Itau's nominee. By virtue of controlling 97.05% of the voting power of
our capital stock, AOL and the Cisneros Group will have the power to elect
these four directors.
Banco Itau's right to nominate one director will continue for two years
after the effectiveness of this offering, and then for as long as it continues
to own at least approximately 41% of the shares of class A common stock
originally issued to it and the strategic interactive services and marketing
agreement remains in effect.
Committees of the Board of Directors
The Special Committee. Before or immediately following this offering, we
will establish a special committee of the board of directors. The special
committee will consist of two members, one of whom will be selected by the
directors elected by AOL as the holder of B stock and one of whom will be
selected by the directors elected by the Cisneros Group as the holder of C
stock. The initial members of the special committee will be Gerald Sokol, Jr.
and Cristina Pieretti. The special committee will evaluate corporate actions
such as:
. amendments of our restated certificate of incorporation and restated by-
laws;
. amendments of our stockholders' agreement;
. mergers and acquisitions;
. any issuance of, or change in, any of our capital stock;
58
<PAGE>
. the transfer of any of our material assets;
. loans by us in excess of $50,000;
. capital expenditures in excess of $50,000;
. borrowings by us in excess of $50,000;
. the declaration of any dividends on our securities;
. the selection of nominees to be recommended by our board for election by
all outstanding shares of our capital stock voting together;
. the admission of additional strategic stockholders;
. our launch of AOL-branded TV- and wireless-based online services in
Latin America, as well as any agreements between us and third parties
that relate to these launches;
. the adoption and modification of business plans;
. the appointment or dismissal of our independent auditors;
. the establishment of any subsidiary or any material change in a
subsidiary's business;
. litigation by us that involves amounts in excess of $100,000 or that is
adverse to either AOL or the Cisneros Group;
. our establishment of, or any significant modification to, any
significant investment or cash management policies;
. our discontinuance of any material business activity;
. our entering into any partnership, joint venture or consortium;
. our issuance of press releases containing material non-public
information;
. our entering into agreements outside of the ordinary course of our
business;
. the approval of the final annual audited consolidated financial
statements of any subsidiary;
. our filing for bankruptcy or our decision not to prevent or oppose any
involuntary filing for bankruptcy;
. adoption of or material amendment to any employee benefit or executive
compensation plan or severance payment; and
. hiring or firing any personnel with an annual salary in excess of
$100,000 or increasing their compensation above $100,000.
Each of these actions will require the unanimous approval of the special
committee before being submitted for approval by the full board of directors.
Because of their role in choosing the members of the special committee, both
AOL and the Cisneros Group effectively have the power to veto these corporate
actions. If either AOL or the Cisneros Group loses its right to representation
on the special committee, the special committee will be dissolved. If the
special committee is dissolved, the approval of the board of directors as a
whole will be required to approve any corporate actions previously evaluated by
the special committee.
The Audit Committee. We will also establish an audit committee of the board
of directors, which will consist of two or more unaffiliated and independent
directors, before or promptly following this offering. The audit committee will
review, act on and report to the board of directors on various auditing and
accounting matters, including the selection of our auditors, the scope of the
annual audits, fees to be paid to the auditors, the performance of our
independent auditors and our accounting practices.
59
<PAGE>
The Compensation Committee. Before this offering, we will also establish a
compensation committee of the board of directors, which will consist solely of
two or more unaffiliated and independent directors. The compensation committee
will determine the salaries and incentive compensation of our officers and
provide recommendations for the salaries and incentive compensation of our
other employees and consultants. The compensation committee will also
administer our stock plan, which is described below.
Compensation of Directors
Upon the effectiveness of this offering, we will issue to each member of our
board of directors an option to purchase 60,000 shares of our class A common
stock at the initial public offering price. The directors may receive
additional compensation in a manner to be determined by our board. Directors
will also be reimbursed for actual reasonable costs incurred in attending our
board and committee meetings.
Compensation Committee Interlocks and Insider Participation
Following this offering, our board of directors will appoint the members of
our compensation committee. None of the members of our compensation committee
will have been an officer or employee of AOL-LA at any time since December 15,
1998, the date of our inception. No executive officer of AOL-LA will serve as a
member of the board of directors or compensation committee of any entity that
has one or more executive officers serving as a member of our board of
directors or compensation committee. Before appointing the members of the
compensation committee, the board of directors will make decisions about the
compensation of our executive officers.
Executive Compensation
The following table presents the total compensation paid or accrued:
. to our chief executive officer during our fiscal years ended June 30, 1999
and June 30, 2000; and
. to our four other most highly compensated executive officers who earned more
than $100,000 in our fiscal year ended June 30, 2000.
We refer to these officers as our named executive officers.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-----------------------
Other Annual
Name and Principal Position Year Salary Bonus (3) Compensation
--------------------------- ---- -------- --------- ------------
<S> <C> <C> <C> <C>
Charles M. Herington (1)................... 2000 $354,124 $200,000 $43,500
President and Chief Executive Officer 1999 145,833 200,000 33,463
Javier Aguirre............................. 2000 150,671 -- --
Chief Financial Officer
Gustavo Benejam (2)........................ 2000 68,750 125,000 --
Chief Operating Officer
John D. Gardiner........................... 2000 156,945 -- --
Vice President, Business Development......
Eduardo Hauser............................. 2000 153,440 36,250 --
Vice President, Corporate Development
</TABLE>
--------
(1) Mr. Herington began his employment with us in February 1999. His current
annual base salary is $358,000. Other annual compensation includes Mr.
Herington's automobile allowance and payment of membership fees.
(2) Mr. Benejam began his employment with us in April 2000. His current annual
base salary is $275,000.
(3) Additional bonus amounts for the fiscal year ended June 30, 2000 have not
yet been determined.
60
<PAGE>
We did not grant any options to our named executive officers during the
fiscal year ended June 30, 2000. None of our named executive officers exercised
any options during the fiscal year ended June 30, 2000 or held any options at
June 30, 2000.
Employment Agreements
Charles M. Herington. Mr. Herington serves as our president and chief
executive officer. His annual base salary is $358,000. Mr. Herington received a
bonus of $200,000 when he began working for us, and received an additional
$200,000 bonus on February 26, 2000, the first anniversary of his employment
with us. Mr. Herington is eligible to receive an annual bonus of up to 130% of
his base salary, based on his performance and the achievement of specified
financial targets, which AOL-LA and Mr. Herington have not yet agreed upon.
As long as Mr. Herington continues to be employed by us, on each of January
13, 2001 and 2002, we will grant him an option to purchase $2.0 million worth
of class A common stock at the then current fair market value. Mr. Herington
will also receive an option as of the effective date of this offering to
purchase $2.0 million worth of class A common stock at the initial public
offering price because of his continued employment with us through January 13,
2000. All options will vest on the third anniversary of each grant date. Mr.
Herington also holds options to purchase AOL common stock.
If we terminate Mr. Herington during the first two years of his employment
with us, for any reason other than:
. his willful and material violation of AOL-LA's company policy, which is
not cured within 30 days after he has received written notice from the
board of directors;
. his failure to comply with the lawful direction of the board of
directors;
. his commission of a material act of dishonesty or fraud; or
. his conviction or plea of no contest to a felony,
he is entitled to receive his salary for 36 months following termination as
well as a portion of his annual bonus. If this termination occurs after the
first two years of his employment with us, he is entitled to receive his salary
for 24 months following termination, as well as a portion of his annual bonus.
Options granted to Mr. Herington before his termination will continue to vest
during the applicable severance payment period.
Javier Aguirre. Mr. Aguirre is our chief financial officer. His annual base
salary is $151,000 and he also received a signing bonus of $68,250. Mr. Aguirre
is eligible to receive an annual bonus of up to 35% of his base salary, based
on his performance and on the achievement of specified performance objectives.
He is also eligible to receive options to purchase AOL-LA class A common stock.
Gustavo Benejam. Mr. Benejam is our chief operating officer. He receives an
annual base salary of $275,000 and he also received a signing bonus of
$250,000. On the first anniversary of his employment, Mr. Benejam is eligible
to receive an additional bonus payment of $125,000. Mr. Benejam is also
eligible to receive an annual bonus targeted at 50% of his annual base salary
based on performance objectives. He is also eligible to receive options to
purchase AOL-LA class A common stock.
David A. Bruscino. Mr. Bruscino serves as our vice president and general
counsel. His annual base salary is $150,000. Mr. Bruscino is also eligible to
receive an annual bonus of up to 35% of his base salary, based on his
performance and on the achievement of specified performance objectives. He is
also eligible to receive options to purchase AOL-LA class A common stock.
Guy Garcia. Mr. Garcia is our vice president of content strategy. He
receives an annual base salary of $105,000 and is also eligible to receive an
annual bonus of up to 35% of his base salary, based on his performance and on
the achievement of specified performance objectives. He is also eligible to
receive options to purchase AOL-LA class A common stock.
61
<PAGE>
John D. Gardiner. Mr. Gardiner serves as our vice president of business
development and receives an annual base salary of $157,000. Mr. Gardiner is
also eligible to receive an annual bonus of up to 35% of his base salary, based
on his performance and on the achievement of specified performance objectives.
He is also eligible to receive options to purchase AOL-LA class A common stock.
Mr. Gardiner holds options to purchase AOL common stock.
Travis Good. Mr. Good serves as our vice president of technology and
operations and receives an annual base salary of $126,000. He is also eligible
to receive an annual bonus of up to 25% of his base salary, based on his
performance and on the achievement of specified performance objectives. He is
also eligible to receive options to purchase AOL-LA class A common stock. Mr.
Good holds options to purchase AOL common stock.
Eduardo Hauser. Mr. Hauser serves as our vice president of corporate
development and receives an annual base salary of $153,000. On the one-month
anniversary of his employment, Mr. Hauser received a bonus of $36,250, and on
the first anniversary of his employment he received an additional $36,250. Mr.
Hauser is eligible to receive an annual bonus of up to 35% of his base salary,
based on his performance and on the achievement of specified performance
objectives. He is also eligible to receive options to purchase AOL-LA class A
common stock.
Stock Plan
2000 Stock Plan
Our 2000 stock plan will be approved by our board of directors and by our
stockholders, AOL and the Cisneros Group, in July 2000. A total of 13,208,333
shares of class A common stock will be reserved for issuance under the stock
plan. We expect to grant options to purchase a total of 8,000,000 shares of
class A common stock to our employees, consultants and directors.
The stock plan will be administered by the compensation committee, which
will determine the terms of stock options and stock awards, including:
. the determination of which employees, directors and consultants will be
granted options or awards;
. the exercise price or purchase price, if any, and the number of shares
subject to a stock option or stock award; and
. the schedule upon which options become exercisable or upon which
restrictions on stock awards lapse.
The maximum term of options granted under the stock plan will be ten years.
Upon a change of control of AOL-LA, the compensation committee will provide
that outstanding options and stock awards under the plan will be:
. assumed by the successor corporation or replaced with a comparable right
to shares of capital stock of the successor corporation;
. outstanding for a specified number of days, after which they will
terminate if they have not been exercised or accepted; or
. terminated in exchange for a cash payment equal to the difference
between the exercise or purchase price, if any, and the fair market
value of the shares subject to the option or award.
If any of the treatments of options described above would make a change of
control transaction ineligible for a pooling-of-interest accounting, the
compensation committee may substitute shares of class A common stock or other
items. However, the compensation committee can do this only if the substitution
is of equal value to the cash or other items that would have been paid under
the chosen treatment. If there is a change of control, all outstanding options
may, in the discretion of the board of directors, become fully vested and any
AOL-LA repurchase rights to outstanding stock awards may be waived.
62
<PAGE>
Limitation of Liability and Indemnification
The Delaware General Corporation Law authorizes corporations to limit or
eliminate, subject to specified conditions, the personal liability of directors
to corporations and their stockholders for monetary damages for breach of their
fiduciary duties. Our restated certificate of incorporation limits the
liability of our directors to the fullest extent permitted by Delaware law.
Our restated certificate of incorporation and restated by-laws also provide
that we will indemnify any of our directors and officers who, by reason of the
fact that he is one of our officers or directors, is involved in a legal
proceeding of any nature. We will repay specified expenses incurred by a
director or officer in any civil or criminal action or proceeding, specifically
including derivative suits, which are actions brought by stockholders in our
name. These indemnifiable expenses include, to the maximum extent permitted by
law, attorney's fees, judgments, civil or criminal fines, settlement amounts
and other expenses customarily incurred in legal proceedings. A director or
officer will not receive indemnification if he is found not to have acted in
good faith and not in a manner he reasonably believed to be in, or not opposed
to, our best interest.
This limitation of liability and indemnification does not affect the
availability of equitable remedies. Moreover, we have been advised that in the
opinion of the SEC, indemnification for liabilities arising under the
Securities Act is against public policy as expressed in the Securities Act and
therefore may not be enforceable.
Our restated certificate of incorporation also protects AOL and the Cisneros
Group against liability for breach of fiduciary duty should they choose to
pursue an opportunity that might be favorable to us or recommend the
opportunity to someone else. Our directors and officers affiliated with or
appointed by AOL and the Cisneros Group are similarly protected. We are
required to indemnify AOL and the Cisneros Group and our directors and officers
affiliated with or appointed by each of them for any liabilities a court may
impose on them for breach of fiduciary duty for their failure to make
opportunities available to us.
63
<PAGE>
RELATED PARTY TRANSACTIONS
The Reorganization
Before this offering, the business of AOL-LA has been conducted by
affiliates of AOL Latin America, S.L. AOL Latin America, S.L. is a limited
liability company organized in Spain in December 1998. AOL Latin America, S.L.
was formed by AOL and the Cisneros Group as a joint venture in which:
. AOL contributed royalty free license rights in exchange for its
ownership interest. AOL's contribution of these rights was recorded at
AOL's historical cost basis, which was zero; and
. the Cisneros Group contributed an aggregate amount of approximately
$100.1 million in exchange for its ownership interest. The Cisneros
Group then sold at cost approximately 1.96% of its interest to Eduardo
Hauser, Cristina Pieretti and Steven Bandel.
Upon the effectiveness of this offering, AOL-LA will become the holding
company of, and will indirectly own all of, AOL Latin America, S.L. and its
affiliates through a corporate reorganization. Under the corporate
reorganization:
. AOL and the Cisneros Group will exchange their ownership interests in
the two holding companies that own AOL Latin America, S.L. and
affiliates for 101,858,334 shares of our series B preferred stock and
99,861,910 shares of our series C preferred stock, the Cisneros Group
holdings being prior to its concurrent distribution of 2,057,950 shares
to current and former employees;
. Eduardo Hauser, Cristina Pieretti and Steven Bandel will exchange their
ownership interests in one of the two holding companies that own AOL
Latin America S.L. for 1,996,424 shares of our series C preferred stock.
Their shares of series C preferred stock will immediately convert to
shares of class A common stock; and
. AOL will receive the AOL warrant.
We plan to conduct our operations in Latin America through various
subsidiaries. For example, we are conducting our operations in Brazil through
our indirectly wholly-owned subsidiary, AOL Brasil Ltda., a Brazilian limited
liability company.
The Stockholders' Agreement with AOL and the Cisneros Group
We have entered into a stockholders' agreement with AOL and Riverview Media
Corp., a company within the Cisneros Group, that contains various provisions
that will affect the way we operate our business and govern many important
aspects of the relationships among AOL, the Cisneros Group and us.
Voting Agreement. AOL and the Cisneros Group have agreed to vote all of
their shares of B and C stock, which collectively represent 97.05% of the
voting power of our outstanding capital stock, to elect the four directors
nominated by our special committee for election by the holders of all shares of
our outstanding capital stock, voting together. Under the registration rights
and stockholders agreement with Banco Itau, AOL and the Cisneros Group have
agreed to vote their shares of capital stock in favor of an individual
nominated by Banco Itau to serve as one of these four directors.
Non-Compete. AOL, the Cisneros Group and any entity in which either of them
owns a 35% or greater interest may not acquire more than a 35% interest in a
competitor of AOL-LA. The Cisneros Group may, however, own up to a 50% interest
in RSL-LA or Galaxy Latin America, regardless of whether these companies are
providing competitive online services. Any entity that provides PC-based online
services in Latin America to a substantial consumer base is considered a
competitor of AOL-LA. After the later of December 15, 2003 or the date on which
either AOL or the Cisneros Group owns less than 20% of our outstanding capital
stock, these restrictions will no longer apply to AOL, the Cisneros Group and
their affiliates.
64
<PAGE>
Until the later of five years from the effective date of the registration
statement for this offering or the date on which either AOL or the Cisneros
Group owns less than 20% of our outstanding capital stock:
. neither the Cisneros Group, nor any entity in which it owns at least a
35% interest, may acquire more than a 35% interest in a competitor that
provides TV- or wireless-based online services in Latin America. However,
the Cisneros Group may own up to a 50% interest in RSL-LA or Galaxy Latin
America, regardless of whether these companies are providing competitive
online services; and
. AOL may not offer in Latin America any AOL-branded TV-based online
services or any AOL-branded wireless-based online services that it
develops for commercial launch within four years of the effective date of
the registration statement for this offering.
The 20% threshold described above will be lowered in some instances,
including:
.if an additional principal stockholder is admitted as a stockholder of AOL-
LA;
. if we issue more shares of our capital stock; or
. if AOL exercises the AOL warrant.
If either AOL or the Cisneros Group breaches these non-compete provisions,
then:
. if the Cisneros Group is the breaching party, we will have the option to
purchase all of the capital stock held by the Cisneros Group at its fair
market value, less any damages resulting from the breach, in cash or by
delivery of a promissory note, payable over a three-year term; or
. if we do not exercise this option, AOL will have the option to purchase
the shares from the Cisneros Group at their fair market value, less any
damages resulting from the breach, in cash or in freely tradeable shares
of AOL common stock in installments over a three-year period; and
. if AOL is the breaching party where PC-based online services are
involved, the Cisneros Group will have the option to require AOL to
purchase the Cisneros Group's shares at their fair market value, plus
any damage resulting from the breach, in cash or in freely tradeable
shares of AOL common stock, in installments over a three-year period.
Banco Itau has the right to enforce these non-compete provisions as long as
it owns at least 6% of our outstanding shares of capital stock calculated on a
fully diluted basis and can only enforce the non-compete so long AOL or the
Cisneros Group own at least 20% of our outstanding Capital Stock.
Restrictions on Transfer. Neither AOL nor the Cisneros Group may transfer
their shares of B stock and C stock except:
. to their wholly-owned affiliates or to each other;
. through the sale of their businesses;
. through the admission of another principal stockholder as described in
the admission of additional principal stockholder paragraph, below;
. up to 20% of their shares may be transferred to their employees and, in
the case of the Cisneros Group, to designated Cisneros family members.
Unless the transferred shares are converted into class A common stock,
AOL or the Cisneros Group will retain the voting rights to those shares;
. shares of class A common stock that are issuable upon conversion of
shares of B stock or C stock can be sold in a registered offering or
under Rule 144 of the Securities Act. See "Shares Eligible For Future
Sale;" and
. to another party, other than to a competitor, provided that they first
offer their shares on the same terms to the other stockholder.
Any transfer of B stock or C stock will subject the person acquiring the
shares to the provisions of the stockholders' agreement.
65
<PAGE>
Admission of Additional Principal Stockholders. AOL and the Cisneros Group
may admit one or more additional principal stockholders of AOL-LA. Any
additional stockholder would either receive new shares of our capital stock or
would acquire shares owned by AOL or the Cisneros Group. If the new stockholder
is a strategic stockholder, the Cisneros Group's ownership interest in AOL-LA
will be reduced at a disproportionately greater rate than AOL's ownership
interest in AOL-LA. To achieve the reduction, for example, either we or AOL
would purchase shares held by the Cisneros Group at their fair market value.
Standstill Provisions. Until December 15, 2003, neither AOL nor the Cisneros
Group may acquire any additional shares of our capital stock except:
. shares in an amount equal to 5% of the sum of our outstanding shares of
capital stock at the closing of this offering, including shares issuable
under the over-allotment option;
. shares issuable to AOL upon the exercise of the AOL warrant;
. shares of capital stock that we issue to them as payment for an asset or
right sold to us;
. shares of capital stock acquired in a tender or exchange offer for all
of our securities; and
. as approved by the party not acquiring the shares and the disinterested
members of our board of directors.
Funding Commitments. From December 15, 1998 through April 2000, we received
$100.1 million in cash from the Cisneros Group, which fulfilled its initial
capital contribution commitment. AOL and the Cisneros Group each contributed
$15.0 million to us in June 2000, and each is obligated to pay us an additional
$35.0 million by December 31, 2000.
Commitments made by the Cisneros Group. The Cisneros Group has agreed to
provide advertising, promotional and online content services. See "Business--
Our Competitive Advantages--The Cisneros Group Commitment." From the beginning
of our operations through March 31, 2000, we incurred $343,000 for services,
including personnel services and travel costs, provided by the Cisneros Group.
Some of these services were provided and will be provided in the future at
varying charges depending upon the type of service.
Indemnification provision. Our stockholders' agreement contains provisions
requiring us to indemnify AOL and the Cisneros Group for liabilities imposed
upon them for breach of fiduciary duty based upon their appropriation of our
business opportunities. These provisions, along with provisions in our license
and services agreements requiring us to indemnify AOL, are substantially
similar to those contained in our restated certificate of incorporation.
Term and Termination. The stockholders' agreement will terminate when:
. AOL and the Cisneros Group no longer hold any shares of our capital
stock;
. the parties mutually terminate the stockholders' agreement; or
. June 30, 2048, whichever occurs first.
Either AOL or the Cisneros Group may terminate the stockholders' agreement
if the other stockholder no longer holds at least 10% of our outstanding
capital stock.
The AOL Warrant
We have agreed to issue a warrant to AOL to purchase 16,642,500 shares in
any combination of our series B preferred, class A common or class B common
stock at a per share exercise price equal to the initial public offering price.
The number of shares for which the warrant is exercisable is 6% of the sum of
our outstanding shares of capital stock at the closing of this offering,
including shares issued to Banco Itau, issuable under the
66
<PAGE>
over-allotment option and issuable under our stock plan. The warrant will be
immediately exercisable and will have a ten year term. The number of shares
issuable under the warrant may be increased if we, AOL or the Cisneros Group
issue or transfer shares to one or more additional strategic stockholders. The
warrant allows AOL to pay the exercise price due under the warrant by tendering
to us a portion of the shares subject to the warrant instead of paying the
exercise price in cash.
The Registration Rights Agreement with AOL and the Cisneros Group
We have agreed to provide AOL and the Cisneros Group with registration
rights for the shares of class A common stock issuable upon conversion of their
B stock and C stock, and in the case of AOL, upon the exercise of the AOL
warrant. See "Description of Capital Stock."
The AOL License Agreement
We have entered into a license agreement with AOL. See "Business--The AOL
License Agreement, Intellectual Property and Proprietary Rights."
The AOL Services Agreement
We have entered into a services agreement with AOL under which AOL provides
various services to us, including:
. localization of AOL software and software updates;
. development and installation services, including requested
modifications, enhancements and revisions to AOL's software;
. host computer services;
. network connections from our services to the AOL servers;
. technical support;
. training in areas such as marketing, business development, member
support, public relations, finance and accounting;
. support and maintenance for third-party software licensed to us by AOL;
and
. joint venture assistance.
We have agreed to compensate AOL for these services at rates at least as
favorable to us as those charged by AOL to any other party, including joint
venture affiliates, but excluding affiliates that are at least 75% owned by
AOL. Based on our management's experience negotiating similar contracts, as
well as its knowledge of our competitors' cost structures, we believe that the
terms of the services agreement are at least as favorable as we could have
obtained from an unaffiliated third party.
We have agreed to interconnect our America Online Brazil country service and
all future AOL-LA country services to the services provided by AOL and its
international affiliates. This interconnection, which will be provided free of
charge, will provide our members with access to the AOL service and AOL
International interactive services and will permit AOL members worldwide to
access the AOL-LA country services.
From December 15, 1998 through March 31, 2000, we had incurred expenses
totaling approximately $9.0 million payable to AOL under our services
agreement. We anticipate that payments to AOL for these services will exceed
$60,000 annually in the future, but we are unable to estimate at this time the
amount of the payments.
67
<PAGE>
The ICQ Promotion Agreement
We have entered into an agreement with AOL under which we have the right in
Latin America to promote AOL's ICQ service. As local versions of the ICQ
service are developed, we will engage in other marketing and cross-promotion
activities with AOL.
Relationships with Officers of AOL
Four members of our board of directors appointed by AOL are also executive
officers of AOL and two members of our board of directors are also directors of
AOL.
. Robert W. Pittman is the president and chief operating officer of AOL
and a director of AOL;
. J. Michael Kelly is the senior vice president and chief financial
officer of AOL;
. Michael Lynton is the president of AOL International;
. Gerald Sokol, Jr. is the senior vice president and general manager of
AOL International; and
. Miles R. Gilburne is a director of AOL.
Relationships with Officers of the Cisneros Group
Four of the five members of our board of directors appointed by the Cisneros
Group are also executive officers and directors of companies within the
Cisneros Group.
. Gustavo A. Cisneros oversees the management and operations of the Cisneros
Group and is an executive officer and director of many of its constituent
companies;
. Ricardo J. Cisneros is an executive officer and director of many of the
constituent companies of the Cisneros Group;
. Steven I. Bandel holds several senior management positions in companies in
the Cisneros Group and has the title of president and chief operating officer
of the Cisneros Group; and
. Christina Pieretti holds a number of senior management positions in
companies in the Cisneros Group and has the title of vice president of
operations of the Cisneros Group.
AOL-LA's Purchase of AOL's Latin American CompuServe Classic Subscribers
In December 1998, we acquired AOL's Latin American CompuServe Classic
subscribers for approximately $4.0 million. The cost to acquire these
subscribers was determined using a formula that was based on the expected
number of Latin American CompuServe subscribers at December 15, 1999. Because
the number of subscribers at December 15, 1999 was lower than expected, AOL
repaid $879,000 to us during March 2000. The initial payment of $4.0 million
and the refund of $879,000 have been reflected in stockholders' equity.
Strategic Interactive Services and Marketing Agreement with Banco Itau
Under our strategic interactive services and marketing agreement with Banco
Itau, we have agreed to create a customized co-branded version of our America
Online Brazil service that Banco Itau will market to its customers. Banco Itau
customers that register for the co-branded service and receive approval from
the bank will be considered subscribers at the co-branded service.
Free trials and free monthly hours. Subscribers of the co-branded service
will be entitled to the following free monthly trial periods:
. for one year following the launch of the co-branded service, subscribers
the co-branded service will be entitled to a four month free trial
period;
68
<PAGE>
. during the second year following the launch, subscribers of the co-
branded service will be entitled to a three month trial period; and
. during the subsequent years following the launch, subscribers of the co-
branded service will be entitled to a free trial period no less than that
generally offered by America Online Brazil.
For every month other than the first month during these trial periods, Banco
Itau will pay us a fee for one hour of usage of the service. For five years
following the launch, upon the expiration of the trial period, Banco Itau will
subsidize at least one hour of usage per month by every subscriber of the co-
branded service.
Subscriber and revenue levels. Under the agreement, Banco Itau has committed
to meet the following subscriber and revenue levels or to pay the reference
payments described in the next paragraph:
. On the first anniversary of the launch of the co-branded service, there
will be at least 250,000 verified subscribers of the co-branded service.
A verified subscriber is one who has accessed the co-branded service in
any two of the three months immediately before the anniversary date, as
well as any subscriber who first accesses the service in the month
immediately prior to the anniversary date.
. On the second anniversary of the launch of the co-branded service, there
will be at least 500,000 verified subscribers.
. On the third anniversary of the launch of the co-branded service,
revenues generated from subscribers to the co-branded service will
account for at least 39% of AOL Brazil's aggregate revenues for the
previous 12 month period.
. On the fourth anniversary of the launch of the co-branded service, there
will be at least 2,000,000 verified subscribers, and on that anniversary,
revenues generated from subscribers to the co-branded service will
account for at least 46% of AOL Brazil's aggregate revenues for the
previous 12 month period.
. On the fifth anniversary of the launch of the co-branded service,
revenues generated from subscribers to the co-branded service will
account for at least 56% of AOL Brazil's aggregate revenues for the
previous 12 month period.
Banco Itau may receive credit for attaining these subscriber levels prior to
the anniversary dates. If Banco Itau fails to meet or achieve these subscriber
and revenue levels, Banco Itau is obligated to make annual reference payments
to us. If Banco Itau does not achieve any of the subscriber or revenue levels
over the next five years, it would be obligated to pay us $329.7 million, 65%
of the value of the shares of class A common stock issued to Banco Itau on the
closing of the offering.
Exclusivity. Banco Itau may not:
. offer, co-brand, market or promote an Internet access service to
individuals in Brazil, other than the America Online Brazil service,
except that:
. subject to limitations, Banco Itau may inform its customers that its
banking services are available on or through other internet access
products;
. Banco Itau may establish an independent financial services portal in
Brazil but it may not affirmatively assist the portal in targeting
advertising for that portal directly at Banco Itau customers or
subscribers to the co-branded service; and
. Banco Itau may continue to operate its existing proprietary Internet
website and proprietary service that offers online banking services,
except that it is subject to limitations on the prominence and scope
of its marketing.
69
<PAGE>
Under the agreement, we may not:
. co-brand an Internet access product with another financial institution in
Brazil or create a new brand of Internet access product for a financial
institution in Brazil;
. during the six month period following the launch of the co-branded
service, enter into an agreement with another financial institution in
Brazil to acquire its customers as subscribers to our America Online
Brazil service;
. enter into an agreement with another bank or other financial institution
in Brazil to acquire subscribers to our America Online Brazil service
under which we offer those subscribers discounted or free usage of our
services for more than 12 months;
. enter into an agreement with another bank or financial institution in
Brazil to develop, operate or take an equity interest in an independent
financial services portal and target advertising for that portal to Banco
Itau's customers; and
. allow advertising of other banks and financial institutions in Brazil on
various specified areas and channels on the co-branded service.
If we offer a new Internet access product in Brazil or if we acquire a
company that operates an Internet access product in Brazil, we must offer Banco
Itau the opportunity to develop with us a co-branded version of that product.
Banco Itau may also request that we develop and offer a co-branded version of
any new Internet access products offered in Brazil by third parties.
Termination. In general, if we or Banco Itau commits a material breach of
the strategic interactive services and marketing agreement and fails to cure
the breach, then the non-breaching party will have the right to terminate the
agreement after an arbiter reviews the matter and confirms the uncured material
breach. If the breach relates to an exclusivity provision, the non-breaching
party may elect to continue the agreement with the option to be relieved of the
exclusivity provisions of the agreement applicable to it.
A material breach of the agreement by Banco Itau includes:
. Banco Itau's failure to make payments if it does not meet the agreed upon
subscriber membership and revenue levels during the first five years of
the alliance; and
. Banco Itau's failure to provide specified minimum marketing support for
the co-branded service during the first five years of the alliance,
although it does not have an obligation to spend a minimum amount for
marketing; and
. Banco Itau's breach of its exclusivity provisions described above.
A material breach of the agreement by us includes:
. our inability to successfully launch the co-branded service in ten
specified cities in Brazil on or before May 4, 2001;
. if, after successful launch of the co-branded service, subscribers are
unable to access the co-branded service for specified periods of time;
and
. our breach of the exclusivity provisions described above.
Termination Payments for Banco Itau Breaches. If we terminate the agreement
because Banco Itau fails to make any of the annual reference payments, then
Banco Itau would be obligated to pay us an acceleration payment. The maximum
amount of this acceleration payment if Banco Itau failed to make any of the
reference payments would be $329.7 million, 65% of the value of the shares of
class A common stock to be issued to Banco Itau on the closing date of this
offering. The acceleration payment due in any year is reduced to the extent to
which Banco Itau achieved the verified subscriber and revenue levels in prior
years or made reference payments for failing to meet those levels.
70
<PAGE>
If we terminate the agreement because Banco Itau fails to perform its
minimum marketing commitments or if Banco Itau breaches its exclusivity
obligations, then Banco Itau would be obligated to pay us a termination fee.
The maximum amount of the termination fee is $385.5 million, 76% of the value
of the class A common stock to be issued to Banco Itau. The amount of the
termination fee payable after we launch the co-branded service is reduced in
proportion to the number of days between the launch date and the date on which
Banco Itau's breach occurs. Banco Itau is also obligated to pay us a pro rata
portion of the annual reference payment, if any, for failure to meet the
subscriber and revenue levels for the year in which its breach occurs.
Termination Payments for AOL-LA Breaches. If Banco Itau terminates the
agreement because we fail to launch the co-branded service on or before May 4,
2001, then Banco Itau is not obligated to make any payments to us. If Banco
Itau terminates the agreement because of any other breach of the agreement by
us, then Banco Itau will not be obligated to make any further reference
payments to us other than a pro rata portion of the annual reference payment,
if any, for failure to meet the subscriber and revenue levels for the year in
which our breach occurs.
Termination Payment for Failure to Achieve Minimum Total Subscriber
Levels. If Banco Itau fails to achieve minimum verified subscriber levels
during the five years of the alliance following the launch of the co-branded
service, we may elect to terminate the exclusivity obligations described above,
and Banco Itau may then elect to terminate the agreement. The minimum total
verified subscriber levels that Banco Itau must meet are:
. a total of 100,000 verified subscribers by the first anniversary of the
launch of the co-branded service;
. a total of 200,000 verified subscribers by the second anniversary of the
launch of the co-branded service;
. a total of 300,000 verified subscribers by the third anniversary of the
launch of the co-branded service; and
. a total of 450,000 verified subscribers by the fourth anniversary of the
launch of the co-branded service.
If the agreement is terminated because these minimum verified subscriber
levels are not achieved, Banco Itau is obligated to make an acceleration
payment to us that is directly related to the extent to which Banco Itau
achieved, prior to the termination date, the verified subscriber and revenue
levels in prior years or made reference payments for failing to meet those
levels in prior years. The maximum amount of this acceleration payment would be
$329.7 million. The acceleration payment due in any year is reduced to the
extent to which Banco Itau achieved the verified subscriber and revenue levels
in prior years or made reference payments for failing to meet those levels.
Termination Payments for AOL-LA Changes of Control. If a change of control
of AOL-LA occurs, Banco Itau has the right to terminate the agreement. If Banco
Itau terminates the agreement because of a change of control of AOL-LA and our
successor is any Brazilian bank or other person included in a group controlled
by or under common control with a leading Brazilian bank, then Banco Itau is
obligated to pay us a pro rata portion of the annual reference payment, if any,
for failure to meet the subscriber and revenue levels for the year in which the
termination occurs.
If our successor is not a Brazilian bank and not another person included in
a group controlled by or under common control with a leading Brazilian bank,
then Banco Itau is obligated to pay us an acceleration payment directly related
to the extent to which Banco Itau has achieved the verified subscriber and
revenue levels prior to the termination date or has made annual reference
payments for failure to meet those levels in prior years. The maximum amount of
this acceleration payment would be $329.7 million. The acceleration payment due
in any year is reduced to the extent which Banco Itau achieved the verified
subscriber and revenue levels in prior years or made reference payments for
failing to meet those levels.
71
<PAGE>
Generally, a change of control of AOL-LA occurs if:
. AOL and the Cisneros Group, collectively, do not own shares of our
capital stock representing 50% of the voting power entitled to cast
votes for the selection of directors;
. The Cisneros Group owns shares of our capital stock that entitle it to
greater voting power than AOL;
. AOL and the Cisneros Group, collectively, do not have the right to elect
a majority of the members of our board of directors or a majority of the
members of the special committee of our board;
. One or more persons, other than AOL and the Cisneros Group and their 75%
owned affiliates, acquire the power to prevent our board of directors or
our stockholders from taking action on a substantial range of actions;
or
. We sell, lease or otherwise transfer 60% or more of our assets.
Termination Payments for Banco Itau Changes of Control. If a change of
control of Banco Itau occurs, we have the right to terminate the agreement. If
we terminate the agreement because of a change of control of Banco Itau and its
successor is an Internet access provider, one of our primary competitors or
some other person included in a group controlled by or under common control
with an Internet access provider or one of our primary competitors, then Banco
Itau is obligated to pay us an acceleration payment. This payment will be
directly related to the extent to which Banco Itau has achieved the verified
subscriber and revenue levels prior to the termination date or has made annual
reference payments in substitute of meeting those levels. The maximum amount of
this acceleration payment would be $329.7 million. The acceleration payment due
in any year is reduced to the extent to which Banco Itau achieved the verified
subscriber and revenue levels in prior years or made reference payments for
failing to meet those levels in prior years.
If Banco Itau's successor is not an Internet access provider, is not one of
our primary competitors and is not another person included in a group
controlled by or under common control with an Internet service provider or one
of our primary competitors, then Banco Itau is obligated to pay us a pro rata
portion of the annual reference payment, if any, for failure to meet the
subscriber and revenue levels for the year in which the termination occurs.
Generally, a change of control of Banco Itau occurs if:
. One or more persons, other than members of the two families that
currently control Banco Itau, owns or controls shares of capital stock
of Banco Itau representing more than 50% of the voting power of Banco
Itau;
. One or more persons, other than members of the two families that
currently control Banco Itau, have the right to elect a majority of the
members of Banco Itau's board of directors;
. One or more third parties acquire the power to prevent Banco Itau's
board of directors or its stockholders from taking action on a
substantial range of actions; or
. Banco Itau sells, leases or otherwise transfers 60% or more of its
assets.
Security. Banco Itau's obligation to make payments to us, if any, is secured
by promissory notes of Banco Itau which will be placed in escrow. These
promissory notes secure the termination payments and the payments that Banco
Itau may have to make to us for its failure to meet subscriber and revenue
levels.
The Stock Subscription Agreement with Banco Itau
Number of Shares and the Purchase Price. In exchange for Banco Itau agreeing
to enter into the strategic interactive services and marketing agreement with
us, concurrent with this offering we intend to issue to Banco Itau 31,700,000
shares of class A common stock at the initial public offering price. The number
of shares that
72
<PAGE>
we will issue to Banco Itau is 12% of our outstanding capital stock at the
closing of this offering, which will include the shares issued in this offering
but will exclude:
. shares issuable under the AOL warrant,
. shares of class A common stock issuable under our stock plan, and
. shares of class A common stock issued after June 12, 2000 and before
the closing of this offering.
We have agreed to indemnify Banco Itau for liabilities that are imposed on
it if we breach any representation or covenant in the subscription agreement or
the registration rights and stockholders' agreement.
The Registration Rights and Stockholders' Agreement with Banco Itau
We have entered into a registration rights and stockholders' agreement with
Banco Itau. This agreement limits Banco Itau's ability to compete with us,
gives Banco Itau representation rights on our board of directors and governs
many aspects of Banco Itau's ability to sell its shares of class A common
stock.
Non-Compete. Banco Itau and any entity in which Banco Itau owns a 35% or
greater interest may not acquire more than a 35% interest in one of our
competitors. Any entity that provides PC-based online services in Latin America
to a substantial consumer base is considered a competitor of AOL-LA. These
restrictions will no longer apply to Banco Itau and its affiliates after the
date on which Banco Itau owns less than 6% of our outstanding capital stock.
Until the later of five years from the effective date of the registration
statement for this offering or the date on which Banco Itau owns less than 6%
of our outstanding capital stock, neither Banco Itau, nor any entity in which
it owns at least a 35% interest, may acquire more than a 35% interest in a
competitor that provides TV- or wireless-based online services in Latin
America.
If Banco Itau breaches these non-compete provisions, then:
. we will have the option to purchase all of the capital stock held by
Banco Itau at its fair market value, less any damages resulting from the
breach, in cash or by delivery of a promissory note, payable over a
three-year term; or
. if we do not exercise this option, AOL will have the option to purchase
the shares from Banco Itau at their fair market value, less any damages
resulting from the breach, in cash or in freely tradeable shares of AOL
common stock in installments over a three-year period.
Banco Itau has the right to enforce the provisions of our stockholders'
agreement with AOL and the Cisneros Group that limit AOL's and the Cisneros
Group's ability to compete with us. Banco Itau's right to enforce the non-
compete will continue until the earlier of the date the strategic interactive
services and marketing agreement is terminated, the date on which Banco Itau
owns less than 6% of our outstanding capital stock, and June 2010. See "Related
Party Transactions--The Stockholders' Agreement with AOL and the Cisneros
Group--Non-Compete."
Board Representation. Banco Itau is entitled to nominate one of our 14
directors and AOL and the Cisneros Group have agreed to vote their shares of
capital stock in favor of the election of Banco Itau's nominee. This right to
representation on our board of directors will continue for two years after the
date of the agreement and then for as long as Banco Itau holds at least 41% of
the shares originally issued to it and the strategic interactive services and
marketing agreement remains in effect. Banco Itau's board representative will
also serve on the advisory committee of the board of directors. See
"Management--Board of Directors."
Lock-Up. Banco Itau has agreed not to dispose of or hedge any of its
31,700,000 shares of class A common stock, except as described below. Specified
percentages of Banco Itau's class A common stock will be released from this
lock-up on the first through fifth anniversary of the first to occur of:
.the launch of the co-branded online services, or
.December 2000.
73
<PAGE>
The table below shows the percentage of the shares of class A common stock
owned by Banco Itau that will remain subject to the lock-up on each release
date:
<TABLE>
<CAPTION>
Locked
up
Release Date Shares
------------ ------
<S> <C>
First Release Date................................................... 83.33%
Second Release Date.................................................. 41.67%
Third Release Date................................................... 25.00%
Fourth Release Date.................................................. 8.33%
Fifth Release Date................................................... 0.00%
</TABLE>
The lock-up will terminate if there is a change of control of AOL-LA, if
Banco Itau validly terminates the strategic interactive services and marketing
agreement or if AOL-LA terminates the strategic interactive services and
marketing agreement after the third release date.
Banco Itau has also agreed that in a single day it will not dispose of
shares of class A common stock on the Nasdaq National Market, or any other
market on which the class A common stock is listed, if the disposition will
exceed 10% of the average trading volume during the prior 20 trading days. This
10% restriction does not apply to sales by Banco Itau:
. in underwritten offerings;
. in single block trades if Banco Itau receives a price that is at least
equal to 95% of the prior day's closing price, provided that if Banco
Itau receives less than 100% of the prior day's closing price, Banco Itau
may only complete one series of trades that exceed the 10% restriction
every ten trading days; and
. in a series of trades in a single day if Banco Itau receives a price that
is least equal to 95% of the prior day's closing price, provided that if
Banco Itau receives less than 100% of the prior day's closing price,
Banco Itau may only complete one series of trades that exceed the 10%
restriction every ten trading days.
Further, Banco Itau has agreed that through June 12, 2002 it will comply
with the volume limitations of Rule 144 under the Securities Act for all shares
sold on the Nasdaq National Market. After June 12, 2002, during any 90-day
period it will not sell on the Nasdaq National Market more than the greater of
1% of the number of shares of class A common stock outstanding, calculated on
an as converted basis, as of the start of such 90-day period and the number of
shares of capital stock that may be sold under the volume limitations of Rule
144.
Repurchase Agreements Banco Itau has informed us that it intends to enter
into arrangements with up to five investment banks or banking institutions,
which may include one or more of the underwriters or their affiliates. As part
of these arrangements, Banco Itau will sell its class A common stock in
repurchase or similar transactions following the offering, and to continue to
arrange repurchase or similar transactions during the period in which it holds
shares of class A common stock. Banco Itau has agreed that all of the sales
will comply with Regulation S under the Securities Act. Banco Itau has also
agreed to maintain sole voting control over the shares and that it will take
back the shares upon the expiration of any of these transactions. Banco Itau
will retain the risk of loss on the shares. Although our lock-up agreement with
Banco Itau will not apply to these initial sales, subsequent sales will remain
subject to the lock-up and other restrictions under the subscription agreement
and registration rights agreement.
Registration Rights. We have agreed to provide Banco Itau with registration
rights for the shares of class A common stock that it owns that are not locked
up. See "Description of Capital Stock".
Tag Along Right. Banco Itau has the right to participate on the same terms
in sales or transfers by either or both of AOL and the Cisneros Group of shares
of class A common stock or securities that are convertible into
74
<PAGE>
class A common stock. For this tag along right to be triggered, either or both
of AOL and the Cisneros Group must sell or transfer in a 12 month period more
than 15% of their shares of class A common stock held immediately following
this offering, calculated on an as converted basis. Banco Itau is entitled to
sell the same percentage of shares as whichever of AOL and the Cisneros Group
is selling, or, if both are selling, the same percentage as whichever of AOL
and the Cisneros Group has sold the greatest percentage. Banco Itau may only
sell shares that are not locked up. This tag along right does not apply to
sales by the Cisneros Group to AOL, or if AOL or the Cisneros Group sells or
transfers securities:
. to their 75%-owned affiliates;
. in a public offering;
. in a financing transaction in which they retain the right to vote their
shares; or
. by gift.
Banco Itau's tag along right will terminate if the strategic interactive
services and marketing agreement is terminated for any reason other than a
breach of the agreement by us, or Banco Itau holds less than approximately 21%
of the class A common stock originally issued to it.
Right of First Refusal. Banco Itau has a right of first refusal for any
convertible debt or equity security we intend to offer, except if we offer
convertible debt or equity securities for non-cash consideration. The amount
Banco Itau is entitled to purchase is equal to the number of shares of class A
common stock then held by Banco Itau divided by the total outstanding shares of
class A common stock, calculated on a fully-diluted basis. See "Description of
Capital Stock."
75
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information about the beneficial ownership of
our class A common stock as of July 6, 2000 by:
. the executive officers listed in the summary compensation table;
. each individual who has been selected to be a director following this
offering;
. all current directors and executive officers as a group; and
. each stockholder known by us to own beneficially more than 5% of our
class A common stock.
This table includes beneficial ownership of shares of class A common stock
that the holder has the right to acquire within 60 days of July 6, 2000,
including shares subject to options or conversion rights.
Calculation of Beneficial Ownership
For purposes of calculating the percentage beneficially owned, the number of
shares of capital stock outstanding before this offering, the issuance of class
A common stock to Banco Itau and the concurrent distribution by the Cisneros
Group consists of 203,716,668 shares that were outstanding as of July 6, 2000.
The number of shares of capital stock outstanding after this offering, the
issuance of class A common stock to Banco Itau, and the concurrent distribution
by the Cisneros Group includes an additional 56,700,000 shares of class A
common stock, which reflects 25,000,000 shares issued in this offering and the
31,700,000 shares issued to Banco Itau. The shares distributed in the
concurrent distribution by the Cisneros Group have no effect on the number of
shares of capital stock outstanding after the offering.
For purposes of calculating the number and percentage of outstanding shares
held by each holder named below, any shares which that holder has the right to
acquire within 60 days of July 6, 2000 are considered to be outstanding, but
shares which may be similarly acquired by other holders are considered not to
be outstanding.
We expect to grant options to purchase a total of 8,000,000 shares of class
A common stock to our employees, directors and consultants upon the
effectiveness of this offering. Of these shares, we will issue to each member
of our board of directors an option to purchase 60,000 shares. We have not
finalized the remaining stock option grants, except that we will grant to Mr.
Herington an option to purchase $2.0 million worth of class A common stock at
the initial public offering price.
Voting rights of AOL and the Cisneros Group
After this offering, the issuance of class A common stock to Banco Itau and
the concurrent distribution by the Cisneros Group:
. AOL will control 49.51% of the voting power of our capital stock; and
. the Cisneros Group will control 47.54% of the voting power of our capital
stock.
If AOL exercises the AOL warrant:
. AOL will control 53.29% of the voting power of our capital stock; and
. the Cisneros Group will control 43.98% of the voting power of our capital
stock.
Each share of series B and series C preferred stock and class B and class C
common stock entitles the holder to ten votes. The voting power of 101,858,334
shares of series B preferred stock and 97,803,960 shares of series C preferred
stock is included in the calculation of the total voting power of AOL and the
Cisneros Group.
We believe that the stockholders named in this table have sole voting and
investment power for all shares of class A common stock shown to be
beneficially owned by them based on information they have provided to us, with
the following exception:
. the Cisneros Group's shares are owned by Riverview Media Corp., a
company within the Cisneros Group. Gustavo Cisneros and Ricardo Cisneros
each beneficially own approximately 50% of Riverview Media Corp.
76
<PAGE>
Steven Bandel, Cristina Pieretti and Eduardo Hauser received the shares
beneficially owned by them in our corporate reorganization.
The address for AOL is 22000 AOL Way, Dulles, Virginia 20166. The address
for the stockholders affiliated with the Cisneros Group is c/o Final Avenida La
Salle, Edificio Venevision Urbanivacion Colina de Los Caobos, Caracas,
Venezuela. The address for Banco Itau is Rua Boa Vista 176, Sao Paulo, Brazil.
<TABLE>
<CAPTION>
Shares of Shares of
Class A Common Stock Class A Common Stock
Beneficially Beneficially
Owned Before Owned After
the Offering, the Offering,
Issuance to Issuance to
Banco Itau Banco Itau
and Distribution and Distribution
------------------------------------------------
Beneficial Owner Number Percent Number Percent
---------------- ------------- ----------------------- ----------
<S> <C> <C> <C> <C>
Executive Officers and Direc-
tors
Charles M. Herington.......... 125,000 .06% 125,000 .05%
Javier Aguirre................ 0 0 0 0
Gustavo Benejam............... 0 0 0 0
John D. Gardiner.............. 0 0 0 0
Eduardo Hauser................ 1,018,583 .50 1,018,583 .40
Steven I. Bandel.............. 640,593 .31 640,593 .24
Gustavo A. Cisneros/1....../.. 99,921,910 49.04 97,863,960 37.57
Ricardo J. Cisneros/1....../.. 99,921,910 49.04 97,863,960 37.57
Miles R. Gilburne............. 60,000 .03 60,000 .02
J. Michael Kelly.............. 60,000 .03 60,000 .02
Michael Lynton................ 60,000 .03 60,000 .02
Robert S. O'Hara, Jr. ........ 60,000 .03 60,000 .02
Cristina Pieretti............. 457,248 .20 457,248 .20
Robert W. Pittman............. 60,000 .03 60,000 .02
Gerald Sokol, Jr.............. 60,000 .03 60,000 .02
Vernon E. Jordan, Jr. ........ 60,000 .03 60,000 .02
William H. Luers.............. 60,000 .03 60,000 .02
M. Brian Mulroney............. 60,000 .03 60,000 .02
Roberto Egydio Setubal........ 60,000 .03 60,000 .02
All current executive officers
and directors as a group 22
persons...................... 102,823,334 50.24 100,765,384 38.55
Five Percent Stockholders
America Online, Inc./2...../.. 118,500,834 53.78 118,500,834 42.77
The Cisneros Group of Compa-
nies/3..................../.. 99,861,910 49.02 97,803,960 37.56
Banco Itau S.A./4........../.. 0 0 31,700,000 12.17
</TABLE>
--------
/1/Includes the shares owned by the Cisneros Group of Companies.
/2/Consists of shares of series B preferred stock and the AOL warrant.
/3/Consists of shares of series C preferred stock.
/4/Consists of shares of class A common stock.
77
<PAGE>
DESCRIPTION OF PROVISIONS OF OUR RESTATED CERTIFICATE OF INCORPORATION
THAT AFFECT THE SCOPE OF OUR BUSINESS
AOL, the Cisneros Group and a number of their affiliates engage in
businesses substantially similar to ours. Our restated certificate of
incorporation contains various provisions that address our rights and access to
potential business opportunities. The following summary of material aspects of
those provisions is qualified by reference to our restated certificate of
incorporation, which we have filed as an exhibit to the registration statement
of which this prospectus is a part.
Limitations on the Scope of Our Business. We cannot engage in any business
activity other than providing PC-based and AOL-branded TV- and wireless-based
interactive services in Latin America without the approval of AOL and the
Cisneros Group. This limitation on the scope of our business will continue for
as long as:
. AOL continues to own shares of B stock equal to at least 50% of the
series B preferred stock that we originally issued to it; or
. the Cisneros Group continues to own shares of C stock equal to at least
50% of the series C preferred stock that we originally issued to it.
Before we can offer AOL-branded TV- and wireless-based online services in
Latin America, we will need to obtain the approval of the directors appointed
by AOL and the Cisneros Group who serve on the special committee of our board
of directors.
Allocation of Business Opportunities with AOL and the Cisneros Group. Our
restated certificate of incorporation does not require AOL or the Cisneros
Group to inform us of any business opportunities or to make any business
opportunities available to us. We may only pursue these opportunities if AOL
and the Cisneros Group decide not to pursue the opportunity or to recommend it
to a third party and they consent to our engaging in that business activity. We
may only pursue business opportunities, without first offering them to AOL and
the Cisneros Group, if:
. they are presented or become known to one of our officers who is also
not an officer or director of AOL or the Cisneros Group;
. the opportunity occurs or arises solely in Latin America; and
. the opportunity relates to activities or operations that we are then
conducting or pursuing.
Moreover, if we are offered the opportunity to pursue a particular business
activity that is beyond the scope of our permitted business activities, we must
first offer that opportunity to both AOL and the Cisneros Group. If they each
decide not to pursue the opportunity or to offer the opportunity to a third
party, we may request that they consent to our engaging in that business
activity. However, they are under no obligation to grant their approval and may
compete with us even if they consent to our engaging in that business
opportunity.
Our restated certificate of incorporation also provides that:
. if AOL or the Cisneros Group successfully obtains our corporate
opportunities or if they otherwise compete with us, they will not be
liable to us or our other stockholders; and
. if a legal action is brought against AOL or the Cisneros Group or their
officers, directors, agents, stockholders, members, partners, affiliates
or subsidiaries based on an alleged breach of their fiduciary duty for
competing with us, we will indemnify them for all damages if their
action or inaction is permitted by our restated certificate of
incorporation.
78
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary, which includes all material information about our
capital stock and the relevant provisions of our restated certificate of
incorporation and restated by-laws, is qualified by reference to our restated
certificate of incorporation and restated by-laws, which are included as
exhibits to the registration statement of which this prospectus is a part.
Our authorized capital stock consists of :
.1,250,000,000 shares of class A common stock;
.250,000,000 shares of class B common stock;
.250,000,000 shares of class C common stock;
.150,000,000 shares of series B preferred stock;
.150,000,000 shares of series C preferred stock; and
.200,000,000 shares of undesignated preferred stock.
Upon completion of this offering, the issuance of class A common stock to
Banco Itau and the concurrent distribution by the Cisneros Group, there will
be:
.60,754,374 shares of class A common stock outstanding;
.101,858,334 shares of series B preferred stock outstanding;
.97,803,960 shares of series C preferred stock outstanding; and
.no shares of class B common stock, class C common stock or undesignated
preferred stock outstanding.
As of the effective date of this offering, we will issue to AOL a warrant to
purchase 16,642,500 shares in any combination of our series B stock, class A
common or class B common stock. We also expect to grant options to purchase
8,000,000 shares of class A common stock to our employees, directors and
consultants.
We refer to our series B preferred stock and our class B common stock as B
stock and to our series C preferred stock and our class C common stock as C
stock.
Voting Rights
The holders of class A common stock are each entitled to one vote per share.
Holders of B stock and C stock are each entitled to ten votes per share and
have been granted the exclusive right to vote on a number of important
provisions of our restated certificate of incorporation and restated by-laws.
Actions requiring a majority vote of B stock and C stock, voting separately.
Amendment of our restated certificate of incorporation. The affirmative vote
of a majority of the outstanding shares of B stock, voting separately as a
class, and a majority of the outstanding shares of C stock, voting separately
as a class, is required to amend or repeal the provisions of our restated
certificate of incorporation relating to:
. the expansion of our business beyond PC-, TV- or wireless-based services;
. the extent to which our stockholders, including AOL and the Cisneros
Group, may compete with us for business;
. access to corporate opportunities that may be taken by AOL and the
Cisneros Group;
79
<PAGE>
. the limitation of AOL's and the Cisneros Group's liability to us if they
successfully obtain our corporate opportunities;
. our indemnification of AOL and the Cisneros Group, as well as any of
their officers, directors, agents, stockholders, members, partners,
affiliates or subsidiaries, if they incur damages for lawsuits based on
claims that they breached their fiduciary duty to us by appropriating our
corporate opportunities;
. the terms of our authorized capital stock, including voting, dividend and
conversion rights;
. the election and removal of our directors;
. our special committee; and
. the initiation of litigation that is adverse to either AOL or the
Cisneros Group.
For as long as any shares of B stock or C stock remain outstanding, the
holders of class A common stock and our board of directors will have no voting
rights on these matters, unless required under Delaware law.
Amendment of provisions of our restated certificate of incorporation and
bylaws relating to our officers and directors. Any amendment to the provisions
of our restated by-laws, as they relate to our board of directors and its
committees and the indemnification of our officers and directors, requires the
affirmative vote of the holders of a majority of the outstanding shares of B
stock and C stock, each voting separately as a class.
Other matters on which the B stock and C stock have exclusive voting
rights. Unless otherwise required under Delaware law, the holders of B stock
and C stock have the exclusive right to approve the following:
. mergers and acquisitions;
. any issuance of, or change in, any of our capital stock;
. the transfer of any of our material assets;
. loans by us in excess of $50,000;
. capital expenditures in excess of $50,000;
. borrowings by us in excess of $50,000;
. the establishment of any subsidiary or any material change in a
subsidiary's business;
. the adoption and modification of business plans;
. our establishment or amendment of any significant investment or cash
management policy;
. our discontinuance of any material business activity;
. our entering into any partnership, joint venture or consortium; and
. our filing for bankruptcy or our decision not to prevent or oppose an
involuntary filing for bankruptcy.
As long as any shares of B stock or C stock remain outstanding, these
matters require the affirmative vote of a majority of the outstanding shares of
B stock and C stock, each voting separately as a class.
Voting rights for the election of directors.
The voting rights for the election of the 14 members of our board of
directors are:
. The holders of B stock are entitled to elect five directors;
. The holders of C stock are entitled to elect five directors; and
80
<PAGE>
. The holders of all shares of our outstanding capital stock, voting
together as a single class, are entitled to elect the remaining four
directors. Banco Itau is entitled to nominate one of these four
directors.
Vote required to amend our restated certificate of incorporation.
Any amendment to our restated certificate of incorporation, other than those
over which the holders of B stock and C stock have exclusive voting rights,
must be approved by the affirmative vote of 75% of the voting power of our
outstanding capital stock. Amendments that would adversely alter or change the
powers, preferences or special rights of any class or series of our capital
stock must also be approved by the affirmative vote of the holders of a
majority of the outstanding shares of B stock and C stock, each voting
separately as a class.
Vote required to amend our restated bylaws.
Our restated by-laws may be amended by a majority vote of the board of
directors, subject to the prior approval by our special committee. Unless the
holders of B stock or C stock have exclusive rights to vote on the amendment,
our restated by-laws may also be amended after obtaining the following votes:
. the affirmative vote of a majority of the voting power of all of our
capital stock, voting as a single class;
. the affirmative vote of a majority of the B stock, voting together as a
single class, but only if a director appointed by the holders of the B
stock is entitled to be a member of our special committee; and
. the affirmative vote of a majority of the C stock, voting together as a
single class, but only if a director appointed by the holders of the C
stock is entitled to be a member of our special committee.
Dividends
Holders of series B and series C preferred stock are entitled to receive a
cumulative annual dividend, payable in shares of series B and series C
preferred stock, equal to $0.0736 per share, as and when declared by the board
of directors and before the payment of any dividend to the holders of the class
A common stock. After that, the holders of class A common stock, together with
the holders of B stock and C stock, will share ratably, based on the number of
shares of common stock and preferred stock held, in any dividend declared by
the board of directors. Dividends consisting of shares of class A common stock,
B stock and C stock may be paid only as follows:
. shares of class A common stock may be paid only to holders of class A
common stock;
. shares of class B common stock may be paid only to holders of class B
common stock;
. shares of class C common stock may be paid only to holders of class C
common stock;
. shares of series B preferred stock may be paid only to holders of series
B preferred stock;
. shares of series C preferred stock may be paid only to holders of series
C preferred stock; and
. the number of shares of each class or series of capital stock payable
per share of that class or series of capital stock must be equal in
number.
Conversion of B stock and C stock
AOL, the holder of all the series B preferred stock, and the Cisneros Group,
the holder of all the series C preferred stock, each have the right, at any
time, to convert their shares into shares of class B common stock and class C
common stock on a one-for-one basis. AOL and the Cisneros Group would then have
the right to convert their shares of class B common stock and class C common
stock into shares of class A common stock at any time on a one-for-one basis.
81
<PAGE>
Any shares of B stock transferred by AOL, or any shares of C stock
transferred by the Cisneros Group, will automatically convert into shares of
class A common stock unless the shares are transferred:
. to a wholly owned affiliate;
. through the sale of their businesses;
. through the admission of additional strategic stockholders;
. by AOL to the Cisneros Group;
. by the Cisneros Group to AOL;
. to an employee, but only if the number of shares transferred is less than
20% of the shares held by them and they retain the voting rights to those
shares; and
. by the Cisneros Group to designated Cisneros family members, but only if
the number of shares being transferred is less than 20% of the shares
held by it and it retains the voting rights to the shares.
If at any time the B stock held by AOL, its wholly-owned affiliates and its
employees or C stock held by the Cisneros Group, its wholly-owned affiliates
and its employees constitutes less than 50% of the number of shares that we
originally issued to them, then each share will automatically convert into one
share of class A common stock.
Right of First Refusal
Banco Itau has a right of first refusal for any convertible debt or equity
security we intend to offer unless we offer convertible debt or equity
securities to a strategic stockholder. If we offer convertible debt or equity
securities, we must first offer a portion of the convertible debt or equity
securities to Banco Itau on the same terms. The amount Banco Itau is entitled
to purchase is equal to the number of shares of class A common stock then held
by Banco Itau divided by the total outstanding shares of class A common stock,
calculated on a fully-diluted basis. Banco Itau's right of first refusal does
not apply to:
. class A common stock or preferred stock issued as a stock split or
dividend;
. class A common stock issued upon exercise of options and warrants issued
to our directors, officers, employees or consultants under plans approved
by our board of directors;
. class A common stock issued in a public offering; and
. class A common stock issued upon exercise of stock options and warrants
outstanding on June 12, 2000.
Banco Itau's right of first refusal will terminate upon the earlier to occur
of the termination of the strategic interactive services and marketing
agreement, other than a breach of the agreement by us, or the fourth
anniversary of the effectiveness of this offering.
Liquidation Preference
Our series B and series C preferred stock each has a liquidation preference
equal to $2.4544 per share. If upon any dissolution, liquidation or winding up
of AOL-LA, the liquidation preference of the series B and series C preferred
stock cannot be paid in full, the holders of the series B and series C
preferred stock will share ratably in a distribution of all our legally
available assets. After that, all of our common stockholders, together with all
our series B and series C preferred stockholders, on an as converted basis, are
entitled to share ratably in any of our assets and funds legally available for
distribution to common stockholders. A dissolution, liquidation or winding up
of AOL-LA does not include:
. the sale of all or substantially all of our property or business, other
than through the winding up of our business; or
. the merger or consolidation of us into or with any other corporation.
82
<PAGE>
Mandatory Redemption of Series B and Series C Preferred Stock
On the fifth anniversary of the effective date of this offering, we must
redeem our series B and series C preferred stock. We have the option to redeem
these shares in cash, by delivery of fully paid and nonassessable shares of
class B or class C common stock or by any combination of cash and shares of
class B or class C common stock. The redemption price will be an amount equal
to the liquidation preference, or $2.4544 per share, plus all accumulated and
unpaid dividends through the redemption date. The redemption price is payable
at our option in cash or shares of class A common stock. However, AOL or the
Cisneros Group may each elect to convert their shares of series B or series C
preferred stock into an equal number of shares of class B or class C common
stock at any time before the date on which the redemption is to occur.
After the redemption date, unless we are then in default of payment of the
redemption price:
. dividends on the series B and C preferred stock shall cease to
accumulate;
. the series B and series C stock shall no longer be outstanding; and
. all rights of the holders of our series B and C preferred stock, except
the right to receive the redemption price and accumulated dividend
amounts and liquidation penalties, if any, through the redemption date,
will cease.
Antidilution
The series B preferred stock and series C preferred stock are entitled to
customary antidilution protection if there is a stock dividend, split or
recapitalization of our common stock. If a dividend is paid or distribution is
made to any holders of any class of common stock, the same dividend or
distribution shall be made to each outstanding share of common stock,
regardless of class.
Undesignated Preferred Stock
Following the offering, our board of directors will be authorized, subject
to the approval of the holders of the B stock and C stock, to issue
periodically up to an aggregate of 200,000,000 shares of undesignated preferred
stock. The board is authorized to issue these shares in one or more series and
to fix the numbers, powers, designations, preferences and any special rights of
each series, including:
. dividend rights and rates;
. conversion rights;
. voting rights;
. terms of redemption, including any sinking fund provisions, and
redemption price or prices;
. liquidation preferences; and
. the number of shares constituting any series and the designation of the
series.
We have no plans to issue any additional shares of preferred stock. However,
the issuance of additional shares of preferred stock, or the right to purchase
preferred stock, could:
. decrease the amount of earnings and assets available for distribution to
current stockholders;
. adversely affect the rights and powers, including voting rights, of the
outstanding capital stock; and
. delay or prevent a change of control of AOL-LA or an unsolicited
acquisition proposal.
Options
We plan to grant options to employees, directors and consultants to purchase
a total of 8,000,000 shares of class A common stock.
83
<PAGE>
The AOL Warrant
Upon the effectiveness of this offering and as part of our corporate
reorganization, we will issue a warrant to AOL to purchase 16,642,500 shares in
any combination of our series B preferred, class A common or class B common
stock at a per share exercise price equal to the initial public offering price.
The number of shares for which the warrant is exercisable is 6% of the sum of
our outstanding shares of capital stock at the closing of this offering,
including shares issued to Banco Itau, issuable under the over-allotment option
and issuable under our stock plan. The warrant will be immediately exercisable
and will have a ten year term. The number of shares issuable under the warrant
may be increased if AOL and the Cisneros Group admit one or more strategic
stockholders. The warrant allows AOL to pay the exercise price due under the
warrant by tendering to us a portion of the shares subject to the warrant
instead of paying the exercise price in cash.
Registration Rights
AOL and the Cisneros Group have rights to cause us to register shares of
class A common stock issued to them upon conversion of their shares of B stock
and C stock, and in the case of AOL, upon exercise of the AOL warrant. Banco
Itau has separate registration rights for the class A common stock issued to
it.
Our registration rights agreement with AOL and the Cisneros Group provides
that AOL and the Cisneros Group and persons to whom they transfer their shares,
other than the persons receiving shares in the concurrent distribution by the
Cisneros Group, have the right to include any shares of class A common stock
that they hold in registration statements that we file. Further, beginning 180
days after the effective date of this offering, AOL and the Cisneros Group may
each demand that we register their shares of class A common stock, provided
that the amount of shares subject to each demand is equal to at least one
percent of the number of outstanding shares of class A common stock or has a
market value at least equal to $50 million. There are no limits on the number
of times AOL and the Cisneros Group can exercise their demand rights. We are
obligated to pay the costs for the exercise of their registration rights.
Banco Itau and persons to whom they transfer their shares have the right to
include in registration statements that we file any of their shares of class A
common stock that are not subject to lock-up agreements. Beginning one year
after we issue the shares to Banco Itau, and on no more than three subsequent
occasions, Banco Itau may demand that we register their shares of class A
common stock that are not subject to lock-up agreements. We will register their
shares only if the amount of shares subject to each demand has a market value
of at least $50 million. Further, on no more than four subsequent occasions,
Banco Itau may demand that we register their shares that are not subject to
lock-up agreements on a Form S-3 registration statement, provided that the
amount of shares included has a market value of at least $25 million. We are
obligated to pay the costs of the exercise of Banco Itau's registration rights.
If we register Banco Itau's shares in an underwritten offering, the
underwriter may reduce the number of shares that are included in the
registration statement if it believes that a reduction is necessary for an
orderly distribution of the shares. Banco Itau has also agreed that, if
requested, in subsequent underwritten AOL-LA public offerings, it will enter
into customary lock-up agreements for all of its shares not included in the
underwritten offering. These lock-up agreements will only apply if all
stockholders holding in excess of 15% of the outstanding class A common stock
at the time of the subsequent underwritten public offering agree to similar
lock-up agreements.
Delaware Law and Charter and Restated By-Law Provisions
The provisions of Delaware law and of our restated certificate of
incorporation and restated by-laws discussed below could discourage or make it
more difficult to accomplish a proxy contest or other change in
84
<PAGE>
our management or the acquisition of control by a holder of a substantial
amount of our voting stock. It is possible that these provisions could make it
more difficult to accomplish, or could deter, transactions that stockholders
may otherwise consider to be in their best interests or the best interests of
AOL-LA.
Other Rights
Upon the closing of the offering, the issuance of class A common stock to
Banco Itau and the concurrent distribution by the Cisneros Group, all the
outstanding shares of class A common stock, series B preferred stock and series
C preferred stock will be legally issued, fully paid and nonassessable.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. For a stockholder to properly bring business before a
meeting of stockholders, including nominations of directors, the stockholder
must first have given timely notice of the proposal to our secretary in
writing. For an annual meeting, a stockholder's notice generally must be
delivered between 45 and 75 days before the anniversary of the mailing date of
the proxy statement for the previous year's annual meeting. For a special
meeting, the notice must generally be delivered at least 90 days before the
special meeting or ten days after the day on which public announcement of the
meeting is first made. A detailed description of the form of the notice and
information required in the notice are specified in the restated by-laws. If it
is determined that business was not properly brought before a meeting as
required by our restated by-laws, the item of business will not be conducted at
the meeting.
Special Meeting of Stockholders. Special meetings of the stockholders may be
called only by our board of directors by a resolution adopted by a majority of
all directors.
Super-Majority Stockholder Vote required for Certain Actions. Our restated
certificate of incorporation requires the affirmative vote of the holders of at
least 75% of our outstanding voting stock to amend or repeal any of the
provisions discussed in this section of the prospectus or to reduce the number
of authorized shares of common stock or preferred stock. This 75% stockholder
vote is independent of any separate class vote that is required for different
classes of capital stock.
Section 203 of the Delaware General Corporation Law regulating takeovers
generally makes it more difficult for a third party to take control of a
company. The provisions of Section 203 prohibit a third party owning more than
15% of a company's stock from entering into transactions with the company
unless the transaction meets specified corporate approval requirements. We have
elected not to be subject to the provisions of Section 203.
Transfer Agent and Registrar
The transfer agent and registrar for the class A common stock will be
EquiServe Trust Company.
85
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Before this offering, there has been no public market for the shares of
class A common stock. Upon the completion of this offering, the conversion of
series C preferred stock into class A common stock by two of our directors and
one of our executive officers, our issuance of class A common stock to Banco
Itau and the concurrent distribution by the Cisneros Group, we will have
60,754,374 shares of class A common stock issued and outstanding. The following
shares of class A common stock will be issuable in the future:
. 199,662,294 shares of class A common stock may be issued upon conversion
of outstanding shares of B stock and C stock on a one-for-one basis at
any time following the completion of this offering.
. 16,642,500 shares of class A common stock will be issuable to AOL upon
exercise of the AOL warrant. The per share exercise price will be equal
to the initial public offering price.
. 13,208,333 shares of class A common stock will be issuable upon exercise
of options granted under our stock plan.
The 25,000,000 shares of class A common stock being sold in this offering
and the 2,057,950 shares of class A common stock being distributed by the
Cisneros Group will be eligible for immediate public resale following the
completion of the offering and the concurrent distribution, except for any
shares acquired by our affiliates. AOL and the Cisneros Group and our directors
and executive officers are considered to be our affiliates. The 2,057,950
shares distributed by the Cisneros Group will be subject to lock-up agreements
with the underwriters.
Rule 144
The 216,304,794 shares of class A common stock issuable to AOL and the
Cisneros Group upon conversion of shares of our B stock and C stock and
exercise of the AOL warrant, as well as the 1,996,424 shares issued to our two
directors and one executive officer, are restricted shares within the meaning
of Rule 144 under the Securities Act. These restricted shares, as well as any
other shares held by our affiliates, may only be sold in compliance with Rule
144, unless we register them under the Securities Act. All of these shares will
be subject to lock-up agreements with the underwriters.
Regulation S
The 31,700,000 shares of class A common stock to be issued by us to Banco
Itau were issued under Regulation S under the Securities Act, which applies to
sales by United States companies outside of the United States. These shares may
be resold under Regulation S by Banco Itau in offshore transactions, but may
not be resold into the United States or to U.S. persons until one year after
their purchase date. At that time these shares must be sold as restricted
shares within the meaning of Rule 144, unless we register them under the
Securities Act. All of these shares will be subject to lock-up agreements with
the underwriters.
Registration Rights
All shares of class A common stock issuable to AOL and the Cisneros Group
upon conversion of shares of our B stock and C stock and exercise of the AOL
warrant, as well as the shares of class A common stock issued to Banco Itau,
will have registration rights attached to them. Registration of these shares
under the Securities Act would result in their becoming tradable without
restrictions immediately upon the effectiveness of a registration statement.
Lock-Up Agreements
Until 180 days after the date of this prospectus:
. AOL, the Cisneros Group and their affiliates who hold shares of our stock;
. our directors and executive officers;
86
<PAGE>
. current and former employees of the Cisneros Group receiving shares in
the concurrent distribution by the Cisneros Group; and
. Banco Itau
have agreed with the underwriters not to dispose of or hedge any shares of our
class A common stock or any securities convertible into or exercisable for our
class A common stock. Transfers can be made sooner if approved by Salomon Smith
Barney Inc. and Donaldson, Lufkin & Jenrette Securities Corporation.
Banco Itau has also agreed with us not to dispose of or hedge any of its
shares of class A common stock until no earlier than the first anniversary of
the launch of the co-branded online service. Banco Itau's shares will be
released from this lock-up by specified percentages over the subsequent four
years. Banco Itau's lock-up arrangements are described more fully in "Related
Party Transactions--The Stock Subscription Agreement with Banco Itau--The
Registration Rights and Stockholders' Agreement with Banco Itau."
Stock Options
We anticipate that a registration statement on Form S-8 covering the class A
common stock that may be issued upon the exercise of options under our stock
plan will be filed promptly following the offering. The shares of class A
common stock covered by the Form S-8 registration statement generally may be
resold in the public markets without restrictions, except in the case of our
affiliates. Following the expiration of the 180 day lock-up period, our
affiliates generally may only resell these shares under the provisions of Rule
144, except for the holding period requirement.
87
<PAGE>
U.S. TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general discussion of the principal U.S. federal income
and estate tax consequences of the ownership and disposition of our class A
common stock by a non-U.S. holder. As used in this prospectus, the term non-
U.S. holder is a person other than:
. a citizen or individual resident of the U.S. for U.S. federal income tax
purposes;
. a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or of any political
subdivision of the U.S.;
. an estate whose income is includible in gross income for U.S. federal
income tax purposes regardless of its source; or
. a trust, in general, if it is subject to the primary supervision of a
court within the U.S. and the control of one or more U.S. persons.
This discussion does not consider:
. U.S. state and local or non-U.S. tax consequences;
. specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if the non-U.S. holder is a
partnership, that the U.S. tax consequences of holding and disposing of
our class A common stock may be affected by determinations made at the
partner level;
. the tax consequences for the shareholders or beneficiaries of a non-U.S.
holder;
. special tax rules that may apply to non-U.S. holders, including banks,
insurance companies, dealers in securities and traders in securities who
elect to apply a mark-to-market method of accounting; or
. special tax rules that may apply to a non-U.S. holder that holds our
class A common stock as part of a straddle, hedge, or conversion
transaction.
The following is based on provisions of the U.S. Internal Revenue Code of
1986, applicable Treasury regulations, and administrative and judicial
interpretations, all as of the date of this prospectus, and all of which may
change retroactively or prospectively. The following summary is for general
information. Each non-U.S. holder should consult a tax advisor to determine the
U.S. federal, state, local and non-U.S. income and other tax consequences of
acquiring, holding and disposing of shares of our class A common stock.
Dividends
If dividends are paid on shares of class A common stock, dividends paid to a
non-U.S. holder of class A common stock generally will be subject to
withholding of U.S. federal income tax at a 30% rate, or a lower rate as
provided by an applicable income tax treaty. Non-U.S. holders should consult
their tax advisors to determine their entitlement to benefits under a relevant
income tax treaty.
Generally, dividends are subject to U.S. federal income tax on a net income
basis at regular graduated rates if they are:
. effectively connected with a non-U.S. holder's conduct of a trade or
business in the U.S.; or
. if an income tax treaty applies, attributable to a permanent
establishment, or in the case of an individual, a fixed base, in the
U.S., as provided in that treaty.
These dividends are not generally subject to the 30% withholding tax if the
non-U.S. holder files the appropriate U.S. Internal Revenue Service form with
the company paying the dividends. Any U.S. trade or business income received by
a non-U.S. holder that is a corporation may also be subject to an additional
branch profits tax at a 30% rate or a lower rate as specified by an applicable
income tax treaty.
88
<PAGE>
Dividends paid before January 1, 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
that country for purposes of the withholding previously discussed and for
purposes of determining the applicability of a tax treaty rate. For dividends
paid after December 31, 2000:
. a non-U.S. holder of class A common stock who claims the benefit of an
applicable income tax treaty rate generally will be required to satisfy
applicable certification and other requirements;
. in the case of class A common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of
the partnership and the partnership will be required to provide
information, including a U.S. taxpayer identification number; and
. look-through rules will apply for tiered partnerships.
A non-U.S. holder of class A common stock that is eligible for a reduced
rate of U.S. withholding tax under an income tax treaty may obtain a refund or
credit of any excess amounts withheld by filing an appropriate claim for refund
with the IRS.
Gain on Disposition of Class A Common Stock
A non-U.S. holder generally will not be subject to U.S. federal income tax
for gain recognized on a disposition of class A common stock unless:
. the gain is U.S. trade or business income;
. the non-U.S. holder is an individual who holds the class A common stock
as a capital asset within the meaning of Section 1221 of the Internal
Revenue Code, is present in the U.S. for more than 182 days in the
taxable year of the disposition and meets other requirements;
. the non-U.S. holder is subject to tax under the provisions of the U.S.
tax law applicable to some U.S. expatriates; or
. we are or have been a U.S. real property holding corporation for federal
income tax purposes at any time during the shorter of the five-year
period ending on the date of disposition or the period that the non-U.S.
holder held our class A common stock.
If the gain is U.S. trade or business income, the branch profits tax
described above may also apply to a corporate non-U.S. holder.
Generally, a corporation is a U.S. real property holding corporation if the
fair market value of its U.S. real property interests equals or exceeds 50% of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business. We believe that
AOL-LA has not been and is not currently, and we do not anticipate our
becoming, a U.S. real property holding corporation for U.S. federal income tax
purposes.
Federal Estate Tax
Class A common stock owned or treated as owned by an individual who is a
non-U.S. holder at the time of death will be included in the individual's gross
estate for U.S. federal estate tax purposes, unless an applicable estate tax or
other treaty provides otherwise.
Information Reporting and Backup Withholding Tax
Under specified circumstances, U.S. treasury regulations require information
reporting and backup withholding at a rate of 31% on some payments on class A
common stock. Under existing applicable law, non-U.S. holders of class A common
stock generally will be exempt from these information reporting requirements
89
<PAGE>
and from backup withholding on dividends paid before January 1, 2001 to an
address outside the U.S. For dividends paid after December 31, 2000, however, a
non-U.S. holder of class A common stock that fails to certify its non-U.S.
holder status as required by applicable U.S. treasury regulations may be
subject to backup withholding at a rate of 31% on payments of dividends.
Payment of Proceeds
The payment of the proceeds of the disposition of class A common stock:
. by a holder to or through the U.S. office of a broker or through a non-
U.S. branch of a U.S. broker generally will be subject to information
reporting and backup withholding at a rate of 31% unless the holder
either certifies its status as a non-U.S. holder under penalties of
perjury or establishes another exemption;
. to or through a non-U.S. office of a non-U.S. broker will not be subject
to backup withholding or information reporting unless the non-U.S.
broker is a U.S. related person; and
. by or through a non-U.S. office of a broker that is a U.S. person or a
U.S. related person, information reporting, but currently not backup
withholding, on the payment applies unless the broker receives a
statement from the owner, signed under penalty of perjury, certifying
its non-U.S. status or the broker has documentary evidence in its files
that the holder is a non-U.S. holder and the broker has no actual
knowledge to the contrary.
For this purpose, a U.S. related person is:
. a controlled foreign corporation for U.S. federal income tax purposes;
. a foreign person 50% or more of whose gross income is derived from the
conduct of a U.S. trade or business; or
. effective after December 31, 2000, a foreign partnership if, at any time
during its taxable year,
--at least 50% of the capital or profits interest in the partnership is
owned by U.S. persons, or
--the partnership is engaged in a U.S. trade or business.
Effective after December 31, 2000, backup withholding may apply to the
payment of disposition proceeds by or through a non-U.S. office of a broker
that is a U.S. person or a U.S. related person. However, back-up withholding
will not apply if certification requirements are satisfied or an exemption is
otherwise established and the broker has no actual knowledge or reason to know
that the holder is a U.S. person. Non-U.S. holders should consult their own tax
advisors to determine the application of the information reporting and backup
withholding rules to them, including changes to these rules that will become
effective after December 31, 2000.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the IRS.
90
<PAGE>
UNDERWRITING
Donaldson, Lufkin & Jenrette Securities Corporation and Salomon Smith Barney
Inc. are joint book runners for this offering. Subject to the terms and
conditions stated in the underwriting agreement, each underwriter named below
has agreed to purchase, and we have agreed to sell to each underwriter, the
number of shares appearing opposite the name of each underwriter.
<TABLE>
<CAPTION>
Number
Name of shares
---- ---------
<S> <C>
Salomon Smith Barney Inc. .....................................
Donaldson, Lufkin & Jenrette Securities Corporation ...........
Lehman Brothers Inc. ..........................................
Cazenove & Co. ................................................
----------
Total ....................................................... 25,000,000
----------
</TABLE>
Purchase of shares
The underwriting agreement provides that the obligations of the underwriters
to purchase the shares included in this offering are subject to various
conditions, including the approval of various legal matters by counsel. The
underwriters are obligated to purchase all the shares, other than those covered
by the over-allotment option described below, if they purchase any of the
shares.
Sale of shares to the public
The underwriters, for whom Salomon Smith Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation, Lehman Brothers Inc. and Cazenove & Co. are
acting as representatives, propose to offer some of the shares directly to the
public at the public offering price on the cover page of this prospectus and
some of the shares to various dealers at the public offering price less a
concession not in excess of $ per share. The underwriters may allow, and
these dealers may reallow, a concession not in excess of $ per share on
sales to other dealers. If all of the shares are not sold at the initial
offering price, the representatives may change the public offering price and
the other selling terms. The representatives have advised us that the
underwriters do not intend to confirm any sales to any accounts over which they
exercise discretionary authority.
Over-allotment option
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus, to purchase up to 3,750,000 additional shares of
class A common stock at the public offering price less the underwriting
discount. The underwriters may exercise this option solely for the purpose of
covering this offering's over-allotments, if any. If this option is exercised,
each underwriter will be obligated, subject to various conditions, to purchase
a number of additional shares approximately proportionate to its initial
purchase commitment.
Directed share program
At our request, the underwriters will reserve up to approximately 1,250,000
shares of class A common stock to be sold at the initial public offering price
under our directed share program. The number of shares of class A common stock
available for sale to the general public will be reduced if participants in the
directed share program purchase reserved shares. The underwriters will offer
any reserved shares which are not so purchased to the general public on the
same basis as the other shares offered in this prospectus.
Lock-up agreements
Until 180 days after the date of this prospectus:
. AOL, the Cisneros Group and their affiliates who hold shares of our
stock;
91
<PAGE>
. our officers and directors; and
. current and former employees of the Cisneros Group receiving shares in
the concurrent distribution by the Cisneros Group
will not dispose of or hedge any shares of our class A common stock or any
securities convertible into or exchangeable for class A common stock. Transfers
can be made sooner with the prior written consent of Salomon Smith Barney Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation. The underwriters, in
their sole discretion, may release any of the securities subject to these lock-
up agreements at any time without notice.
Banco Itau has agreed with us not to dispose of or hedge any of its shares
of class A common stock until no earlier than the first anniversary of the
launch of the co-branded online services. Banco Itau's shares will be released
from this lock-up by specified percentages over the subsequent four years.
Banco Itau's lock-up arrangements are described more fully in "Related Party
Transactions--The Stock Subscription Agreement with Banco Itau--The
Registration Rights and Stockholders' Agreement with Banco Itau."
Determination of the initial public offering price
Before this offering, there has been no public market for the class A common
stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us and the representatives. Among the
factors considered in determining the initial public offering price were:
. our record of operations;
. our current financial condition;
. our future prospects;
. our markets;
. the economic conditions in and future prospects for the industry in which
we compete;
. our management; and
. prevailing general conditions in the equity securities markets,
including current market valuations of publicly traded companies
considered comparable to us.
We cannot assure you, however, that the prices at which the shares will sell
in the public market after this offering will not be lower than the price at
which they are sold by the underwriters or that an active trading market in the
class A common stock will develop and continue after this offering.
Nasdaq listing
We have applied to have the class A common stock included for quotation on
the Nasdaq National Market under the symbol .
Underwriting discount and commissions
The following table shows the underwriting discount and commissions to be
paid to the underwriters by us for this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of class A common stock.
<TABLE>
<CAPTION>
Paid by AOL-LA
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share.......................................... $ $
Total.............................................. $ $
</TABLE>
92
<PAGE>
Salomon Smith Barney Inc. or Donaldson, Lufkin & Jenrette Securities
Corporation, on behalf of the underwriters, may purchase and sell shares of our
class A common stock in the open market. These transactions may include short
sales, syndicate covering transactions and stabilizing transactions. Short
sales involve syndicate sales of common stock in excess of the number of shares
to be purchased by the underwriters in the offering, which creates a syndicate
short position. Covered short sales are sales of shares made in an amount up to
the number of shares represented by the underwriters' over-allotment option.
Transactions to close out the covered syndicate short involve either purchases
of the common stock in the open market after the distribution has been
completed or the exercise of the over-allotment option. The underwriters may
also make "naked" short sales of shares in excess of the over-allotment option.
The underwriters must close out any naked short position by purchasing shares
of common stock in the open market. A naked short position is more likely to be
created if the underwriters are concerned that there may be downward pressure
on the price of the shares in the open market after pricing that could
adversely affect investors who purchase in the offering. Stabilizing
transactions consist of the bids for or purchases of shares in the open market
while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc. or Donaldson, Lufkin & Jenrette Securities
Corporation, in covering syndicate short positions or making stabilizing
purchases, repurchases shares originally sold by that syndicate member.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common stock. They may also cause the price
of the common stock to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The underwriters may
conduct these transactions on the Nasdaq National Market or in the over-the-
counter market, or otherwise. If the underwriters commence any of these
transactions, they may discontinue them at any time.
We estimate that our total expenses of this offering will be $5 million.
The representatives and their affiliates have performed investment banking
and advisory services for AOL, the Cisneros Group and Banco Itau in the past
for which they have received customary compensation and reimbursement of
expenses. The representatives may continue to engage in transactions with, and
perform services for, AOL-LA, AOL, the Cisneros Group and Banco Itau in the
ordinary course of business.
Indemnification
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act, or to contribute to payments
the underwriters may be required to make because of those liabilities.
93
<PAGE>
LEGAL MATTERS
The validity of the issuance of the class A common stock offered by us in
this offering will be passed upon for us by Mintz, Levin, Cohn, Ferris, Glovsky
and Popeo, P.C., Boston, Massachusetts. The underwriters have been represented
by Cravath, Swaine & Moore, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements as of June 30, 1999 and for the period from December 15,
1998, our date of inception, to June 30, 1999, as described in their report. We
have included our consolidated financial statements in the prospectus and
elsewhere in the registration statement in reliance on Ernst & Young LLP's
report, given on 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 S-1 under the Securities Act for the class A common stock
offered by this prospectus. This prospectus, which is part of the registration
statement, does not contain all of the information, exhibits, schedules and
undertakings in the registration statement. For further information pertaining
to us and our class A common stock, we refer you to our registration statement
and its exhibits and schedules. Statements contained in this prospectus about
the contents or provisions of any contract, agreement or document summarize all
material information about the documents. However, these statements do not
always provide a complete description of the provisions of the document and in
each instance where a copy of the document has been filed as an exhibit to the
registration statement, we refer you to the exhibit for a more complete
description of the matters involved.
The registration statement can be inspected and copied at the Securities and
Exchange Commission's following locations:
Public Reference Room Northeast Regional Midwest Regional
Office Office Office
450 Fifth Street, N.W. Seven World Trade Citicorp Center
Washington, D.C. 20549 Center 500 West Madison Street
Suite 1300 Suite 1400
New York, NY 10048 Chicago, IL 60661-2511
The registration statement is also publicly available through the Securities
and Exchange Commission's site on the Internet's world wide web, located at
http://www.sec.gov.
We will also file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may
obtain copies of the documents that we file electronically with the Securities
and Exchange Commission through the Securities and Exchange Commission's
website located at http://www.sec.gov. You can also request copies of these
documents, for a copying fee, by writing to the Securities and Exchange
Commission.
94
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors.............................................. F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Operations....................................... F-4
Consolidated Statements of Changes in Stockholders' Equity.................. F-5
Consolidated Statements of Cash Flows....................................... F-6
Notes to The Consolidated Financial Statements.............................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
America Online Latin America, Inc.
We have audited the accompanying consolidated balance sheet of America
Online Latin America, Inc. as of June 30, 1999, and the related consolidated
statements of operations, changes in stockholders' equity and cash flows for
the period December 15, 1998 (the Company's inception) to June 30, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatements. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the 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 audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of America Online
Latin America, Inc. at June 30, 1999, and the consolidated results of its
operations and its cash flows for the period December 15, 1998 (the Company's
inception) to June 30, 1999, in conformity with accounting principles generally
accepted in the United States.
Ernst & Young LLP
January 20, 2000,
except as to Note 1,
as to which the date is .
McLean, Virginia
The foregoing report is in the form that will be signed upon completion of
the reorganization described in Note 1 to the financial statements.
/s/ Ernst & Young LLP
McLean, Virginia
July 6, 2000
F-2
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
March 31,
June 30, 2000
1999 (unaudited)
-------- ------------
(In thousands, except
share data)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $17,716 $ 34,584
Trade accounts receivable, less allowances of $180 and
$258.................................................... 1,448 702
Other receivables........................................ 53 550
Prepaid expenses and other current assets................ 240 2,396
------- --------
Total current assets................................... 19,457 38,232
Property and equipment at cost, net...................... 9 6,013
Investments including available-for-sale securities...... -- 3,686
Product development costs, net........................... -- 681
Other assets............................................. 1 587
------- --------
Total assets........................................... $19,467 $ 49,199
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Trade accounts payable................................... $ 40 $ 6,269
Payable to affiliates.................................... 2,685 4,057
Other accrued expenses and liabilities................... 183 2,106
Deferred revenue......................................... -- 2,272
Accrued personnel costs.................................. 262 967
Income taxes payable..................................... 131 171
------- --------
Total current liabilities.............................. 3,301 15,842
------- --------
Long-term liabilities:
Deferred revenue......................................... -- 3,233
Other liabilities........................................ -- 123
------- --------
Total liabilities...................................... 3,301 19,198
------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 500,000,000 shares
authorized:
Series B and C cumulative redeemable convertible--
150,000,000 and 150,000,000 shares authorized;
101,858,334 shares of series B and 101,858,334 shares
of series C issued and outstanding at June 30, 1999
and March 31, 2000 ($250,000 liquidation value each).. 2,038 2,038
Common stock, $.01 par value; 1,750,000,000 shares
authorized:
Class A--1,250,000,000 shares authorized; no shares
issued or outstanding at June 30, 1999 and March 31,
2000.................................................. -- --
Class B and C--250,000,000 and 250,000,000 shares
authorized; no shares issued or outstanding at June
30, 1999 and March 31, 2000...........................
Additional paid-in capital............................... 94,061 94,940
Subscription receivable from affiliate................... (77,979) (12,679)
Accumulated other comprehensive (loss) income............ (82) (1,182)
Accumulated deficit...................................... (1,872) (53,116)
------- --------
Total stockholders' equity............................. 16,166 30,001
------- --------
Total liabilities and stockholders' equity............. $19,467 $ 49,199
======= ========
</TABLE>
See accompanying notes
F-3
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period from
For the Period from December 15, 1998
December 15, 1998 (date of inception) to Nine Months
(date of inception) to March 31, Ended March 31,
June 30, 1999 2000
1999 (unaudited) (unaudited)
---------------------- ---------------------- ---------------
(In thousands)
<S> <C> <C> <C>
Revenues:
Subscriptions......... $ 1,644 $ 889 $ 3,878
Advertising and e-
commerce............. -- -- 1,333
------- ------ --------
Total revenues...... 1,644 889 5,211
Costs and expenses:
Cost of revenues,
$1,052, $616 and
$1,815 from
affiliates........... 1,091 616 10,429
Sales and marketing... 12 -- 35,192
Product development,
$312, $145 and $1,948
from affiliates...... 312 145 1,948
General and
administrative,
$1,317, $528 and
$2,152 from
affiliates........... 1,979 715 10,087
------- ------ --------
Total costs and
expenses........... 3,394 1,476 57,656
Loss from operations.... (1,750) (587) (52,445)
Other income, net....... 9 (2) 1,241
------- ------ --------
Loss before provision
for income taxes....... (1,741) (589) (51,204)
Provision for income
taxes.................. (131) (33) (40)
------- ------ --------
Net loss................ $(1,872) $ (622) $(51,244)
======= ====== ========
</TABLE>
See accompanying notes
F-4
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Comprehensive
Loss for the
Period from
December 15, 1998
(date of
inception) to
June 30, 1999
Subscription Accumulated and the Nine
Preferred Stock Common Stock Additional Receivable Other Months Ended
------------------ ------------- Paid-in From Comprehensive Accumulated March 31, 2000
Shares Amount Shares Amount Capital Affiliate (Loss) Income Deficit Total (unaudited)
----------- ------ ------ ------ ---------- ------------ ------------- ----------- ------- -----------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 15,
1998
(inception)..... -- $ -- -- $-- -- -- -- -- --
Stock issued:
Capital
contribution
upon
inception...... 203,716,668 2,038 -- -- $98,061 $(100,099) -- -- --
Payment of
subscription
receivable from
affiliate...... -- -- -- -- -- 22,120 -- -- $22,120
Acquisition of
CompuServe
subscribers..... -- -- -- -- (4,000) -- -- -- (4,000)
Foreign currency
translation
adjustment...... -- -- -- -- -- -- $ (82) -- (82) $ (82)
Net loss......... -- -- -- -- -- -- -- $ (1,872) (1,872) (1,872)
----------- ------ --- ---- ------- --------- ------- -------- ------- --------
Balances at June
30, 1999........ 203,716,668 $2,038 -- $-- $94,061 $ (77,979) $ (82) $ (1,872) $16,166 $ (1,954)
========
Payment of
subscription
receivable from
affiliate....... -- -- -- -- -- 65,300 -- -- 65,300
Payment from
affiliate for
CompuServe
subscribers..... -- -- -- -- 879 -- -- -- 879
Foreign currency
translation
adjustment...... -- -- -- -- -- -- 4 -- 4 $ 4
Unrealized loss
on available-
for-sale
securities...... -- -- -- -- -- -- (1,104) -- (1,104) (1,104)
Net loss......... -- -- -- -- -- -- -- (51,244) (51,244) (51,244)
----------- ------ --- ---- ------- --------- ------- -------- ------- --------
Balances at March
31, 2000
(unaudited)..... 203,716,668 $2,038 -- $-- $94,940 $ (12,679) $(1,182) $(53,116) $30,001 $(52,344)
=========== ====== === ==== ======= ========= ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period from
For the Period from December 15, 1998 Nine Months
December 15, 1998 (date of inception) to Ended
(date of inception) to March 31, March 31,
June 30, 1999 2000
1999 (unaudited) (unaudited)
---------------------- ---------------------- -----------
(In thousands)
<S> <C> <C> <C>
Cash flows from
operating activities:
Net loss................ $(1,872) $ (622) $(51,244)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... -- -- 405
Changes in assets and
liabilities:
Trade accounts
receivable........... (1,443) (711) 778
Other receivables..... (53) -- (486)
Prepaid expenses and
other current
assets............... (240) -- (211)
Other assets.......... (1) (183) (585)
Trade accounts
payable.............. 40 46 5,733
Payable to
affiliates........... 2,681 1,290 458
Accrued expenses and
other current
liabilities.......... 183 90 1,949
Deferred revenue and
other liabilities.... -- -- 1,717
Accrued personnel
costs................ 262 38 662
Income taxes payable.. 131 33 39
------- ------ --------
Total adjustments... 1,560 603 10,459
------- ------ --------
Net cash used in
operating activities... (312) (19) (40,785)
Cash flows from
investing activities:
Purchase of property and
equipment.............. (9) -- (6,147)
Product development
costs.................. -- -- (770)
------- ------ --------
Net cash used in
investing activities... (9) -- (6,917)
Cash flows from
financing activities:
Payments of subscription
receivable from
affiliate.............. 22,120 12,120 65,300
Dividend for CompuServe
subscribers............ (4,000) (4,000) 878
Payments of offering
costs.................. -- -- (1,938)
------- ------ --------
Net cash provided by
financing activities... 18,120 8,120 64,240
------- ------ --------
Effect of exchange rate
changes on cash and
cash equivalents....... (83) (3) 330
------- ------ --------
Net increase in cash and
cash equivalents....... 17,716 8,098 16,868
Cash and cash
equivalents at
beginning of period.... -- -- 17,716
------- ------ --------
Cash and cash
equivalents at end of
period................. $17,716 $8,098 $ 34,584
======= ====== ========
</TABLE>
See accompanying notes
F-6
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization
On January 20, 2000, America Online Latin America, Inc. ("AOL-LA" or the
"Company") filed the registration statement that includes these financial
statements with the Securities and Exchange Commission for its offer and sale
of shares of its class A common stock and a concurrent distribution of shares
of class A common stock by the Cisneros Group of Companies (the "Cisneros
Group") to current and former employees of companies within the Cisneros Group.
Currently, the Company's business is conducted by affiliates of AOL Latin
America, S.L., a limited liability company organized in Spain in December 1998.
AOL Latin America, S.L. is a joint venture between America Online, Inc. ("AOL")
and the Cisneros Group. In December 1998, 50% interests in AOL Latin America,
S.L. were issued to AOL and the Cisneros Group. AOL contributed royalty free
license rights in exchange for its ownership interest. AOL's non-cash capital
contribution of the royalty free license rights was recorded at AOL's
historical cost basis, which was zero. The Cisneros Group agreed to contribute
an aggregate amount of approximately $100 million through July 2, 2001 in
exchange for its ownership interest. Subsequently, the Cisneros Group sold at
its cost 1.96% of the shares of the company holding its interest in AOL Latin
America S.L. to two executives of the Cisneros Group (Steven Bandel and
Cristina Pieretti, directors of the Company) and a former executive of the
Cisneros Group who is now an executive of the Company (Eduardo Hauser). The
Cisneros Group and these three individuals entered into commitments, legally
binding on all parties, to sell these shares in December 1998. There was no
corresponding compensation expense since the price paid for the shares was the
same price the Cisneros Group paid for the stock at the formation of the
Company.
Upon the effectiveness of the offering, AOL-LA will indirectly own all of
AOL Latin America, S.L. and its affiliates, through a corporate reorganization
in which AOL, the Cisneros Group and the three individuals named above will
exchange their interests in AOL Latin America, S.L. and its affiliates for
shares of the Company's series B preferred and series C preferred stock. After
the reorganization AOL will hold 101,858,334 shares of the Company's series B
preferred stock and the Cisneros Group will hold 99,861,910 shares of the
Company's series C preferred stock. The three individuals will receive
1,996,424 shares of series C preferred stock, and these shares will be
converted into 1,996,424 shares of class A common stock. AOL will also receive
a warrant to purchase 16,642,500 shares in any combination of the Company's
series B preferred, class A common or class B common stock at a per share
exercise price equal to the initial public offering price. The number of shares
for which the warrant is exercisable is 6% of the sum of the Company's
outstanding shares of capital stock on the closing of the offering, including
shares issuable under the over-allotment option, plus the shares of class A
common stock issuable under the Company's stock plan. The warrant will be
issued to AOL in exchange for the exclusive right to offer in Latin America any
AOL-branded wireless-based online services. This non-cash capital contribution
is valued at AOL's historical cost basis which is zero. The accompanying
financial statements reflect the reorganization as of the earliest period
presented. Immediately after the closing of the offering, AOL-LA also will
issue 31,700,000 shares of class A common stock to Banco Itau and its
affiliate, Banco Banerj in connection with the establishment of a strategic
marketing alliance between the Company and Banco Itau. The 31,700,000 shares of
class A common stock issued to Banco Itau and its affiliate will be equal to
12% of the outstanding capital stock (after giving effect to such issuance of
such shares) on a fully diluted basis, however, without taking into account the
AOL warrant, shares issuable under the Company's 2000 stock plan and shares
issued after June 12, 2000 and before the closing of this offering.
The Company seeks to become the leading provider of interactive services in
Latin America. The Company intends to bring to the Latin American market
localized AOL-branded interactive services and the opportunity to join AOL's
global online community of more than 23 million users in 15 countries and seven
languages.
F-7
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company's family of America Online-branded interactive services will
include the AOL-LA country services, its comprehensive online services which
will be available to subscribing members, and the AOL-LA country Internet
portals and the Latin American regional Internet portal. The Company's network
of country and regional Internet portals will offer content, community and e-
commerce opportunities to all Internet users. The Company's interactive
services will be developed on a country-by-country and regional basis and will
be tailored to local interests. The Company expects to derive its revenues
principally from member subscriptions to its AOL-LA country services and will
seek to build its online service member base and portal user base to generate
additional revenues from advertising and e-commerce.
The Company currently has the exclusive right to offer AOL-branded PC-based
online services in Latin America. Under its license agreement with AOL, it also
has the exclusive right to offer AOL-branded TV-based online services in Latin
America if AOL develops these services. The Company also has the exclusive
right to offer in Latin America any AOL-branded wireless-based online services
developed by AOL for commercial launch within four years of the effective date
of the registration statement for this offering. The Company also has the right
in Latin America to promote AOL's ICQ service, which features leading, real-
time communications software and an associated portal. The ICQ service enables
its worldwide community of approximately 65 million users, including
approximately 7 million users in Latin America, to find and communicate with
each other in real-time. As local versions of the ICQ service are developed,
the Company will engage in other marketing and cross-promotion activities with
AOL.
The Company began operations in December 1998. The Company acquired AOL's
Latin American CompuServe Classic subscribers in December 1998 and launched the
first AOL-LA online service and portal in Brazil in November 1999.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation. These financial statements include the accounts
of the Company, its subsidiaries and its predecessors on a consolidated basis
since the Company's inception on December 15, 1998. All significant
intercompany accounts and transactions have been eliminated.
Basis of Presentation. The accompanying unaudited condensed consolidated
financial statements as of and for the period from December 15, 1998, the
Company's inception, to March 31, 1999 and for the nine months ended March 31,
2000, which include the accounts of the Company and its wholly and majority
owned subsidiaries, have been prepared in accordance with generally accepted
accounting principles for interim financial information and with Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments, consisting
only of normal recurring accruals considered necessary for a fair presentation,
have been included in the accompanying unaudited interim financial statements.
Operating results for the nine months ended March 31, 2000 are not necessarily
indicative of the results that may be expected for the full year ending June
30, 2000.
Fiscal Year. The Company's fiscal year ends June 30. The information
included in the notes to the financial statements as of and for the nine months
ended March 31, 2000 is unaudited.
Revenue Recognition. The Company recognizes subscription revenues over the
period that it provides the service following expiration of the member's trial
period. For subscribers in Brazil that have elected to pay their subscription
fees with credit cards, the Company recognizes subscription revenues when the
fees become due. For subscribers in Brazil who pay through means other than
credit cards, however, the Company does not record subscription revenues until
cash payment is received. For advertising arrangements that require the
F-8
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Company to display a specified number of advertisements for a fixed fee, the
Company's advertising revenues are recognized as the advertisements are
displayed. The revenues derived from sponsorship or co-sponsorship arrangements
which provide for advertising and other services are recognized on a straight
line basis over the term of the contract provided the Company is meeting its
obligations under the contract. Payments received from advertisers before the
Company displays their advertisements on its interactive services are recorded
as deferred revenues.
The Company also expects to derive revenues from e-commerce transactions
conducted through its interactive services as either a flat payment or a
percentage of each e-commerce transaction that is attributable to its
interactive services, or both. The Company expects to receive cash or, in some
instances, equity. The Company will recognize revenues derived from the
Company's share of the proceeds from e-commerce transactions when it is
notified of sales that are attributable to its interactive services.
Revenue for which payment is made in the form of equity securities is
measured at the fair value of the securities at the earlier of the initiation
of the agreement, if fully vested and non-forfeitable, or the date performance
is complete. The fair value of these securities is determined by using either
market price or other standard valuation models. If the securities to be
received are contingent upon achieving certain performance criteria, the
Company will measure revenue, at that time, based upon the achievement of those
criteria. The Company recognizes these revenues ratably, over the term of the
contract, or when performance is completed. The fair value of these securities
will be determined by using either market price or other standard valuation
methods. In the nine months ended March 31, 2000, the Company received $4.5
million of equity securities for future services.
We have not yet recognized any barter revenue. We will recognize future
barter revenue based on the fair value of the advertising that we agree to
provide, where fair value can be demonstrated by recent cash-based transactions
that are similar.
Property and Equipment. The Company depreciates or amortizes the following
property and equipment using the straight-line method over the following
estimated useful lives:
<TABLE>
<S> <C>
Computer equipment............................................. 2 to 5 years
Leasehold improvements......................................... 4 years
Furniture and fixtures......................................... 5 years
Equipment...................................................... 5 years
</TABLE>
In accordance with Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," the Company
is required to capitalize various costs for the development of internal use
software, including the costs of coding, software configuration, upgrades and
enhancements. None of these costs have been incurred as of the date of this
offering.
Product Development Costs. The Company capitalizes product development
costs, which mainly consist of charges from AOL for personnel and related costs
associated with the localization of the Company's interactive services and any
developments the Company requests AOL to provide, once the product or
enhancement reaches technological feasibility. The Company capitalizes costs
incurred after technological feasibility has been established up until
completion of beta testing. Once beta testing is complete and the product or
service is commercially available, costs are again expensed as incurred. To the
extent the Company retains the rights to software development funded by third
parties, the Company applies these accounting policies to the capitalization of
these costs. Amortization, a cost of revenue, is provided on a product-by-
product basis, using the greater of the straight-line method or the current
year revenue as a percentage of total revenue estimates for the related
software product, not to exceed three years, beginning the month after the date
F-9
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of product release. Quarterly, the Company reviews and expenses the unamortized
cost of any feature identified as being impaired. The Company also reviews the
recoverability of the total unamortized cost of all features and software
products in relation to their estimated online service and other relevant
revenues and, when necessary, makes an appropriate adjustment to net realizable
value.
At March 31, 2000, capitalized product development costs totaled $770,000.
Amortization of these costs was $90,000 for the nine months ended March 31,
2000. Accumulated amortization was $90,000 at March 31, 2000. There were no
capitalized product development costs at March 31, 1999 or June 30, 1999.
Product development costs expensed for research and development totaled $1.9
million for the nine months ended March 31, 2000 and $312,000 for the period
from inception to June 30, 1999.
Subscriber Acquisition and Advertising Costs. The Company accounts for
direct marketing costs incurred to acquire subscribers as well as other
advertising costs as required by AICPA Statement of Position 93-7, "Reporting
on Advertising Costs." The Company has expensed all advertising, marketing and
other subscriber acquisition costs as incurred and includes them in sales and
marketing expenses.
Foreign Currency Translation. Generally, the Company's functional currencies
are the local currencies of the countries in which it conducts its operations.
Assets and liabilities of the Company's wholly-owned foreign subsidiaries are
translated into U.S. dollars at the balance sheet date exchange rates, and
revenues and expenses are translated at average rates prevailing during the
period. Translation adjustments are included in accumulated other comprehensive
(loss) income. The Company includes its foreign currency transaction gains and
losses in its results of operations.
Other Income, Net. For the period ended March 31, 2000, other income, net
consisted of $1.3 million of interest income and $59,000 of foreign currency
transaction losses. For the period ended June 30, 1999, other income, net
consisted of $62,000 of interest income and $53,000 of foreign currency
transaction losses.
Cash and Cash Equivalents. The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
Trade Accounts Receivable. The carrying amount of the Company's trade
accounts receivables approximates their fair market value. The Company recorded
provisions for uncollectible accounts of $358,000 for the nine months ended
March 31, 2000 and $180,000 for the period from inception to June 30, 1999. The
Company wrote off $280,000 of uncollectible accounts during the nine months
ended March 31, 2000, and no amounts were written off for the period from
inception to June 30, 1999.
Investments Including Available-For-Sale Securities. The Company has
classified all debt and equity securities as available-for-sale. Available-for-
sale securities are carried at fair value, with unrealized gains and losses
reported in accumulated other comprehensive income (loss). Realized gains and
losses and declines in value judged to be other than temporary on available-
for-sale securities are included in other income. The cost basis for realized
gains and losses on available-for-sale securities is determined on a specific
identification basis.
As of March 31, 2000, the Company had an available-for-sale equity
investment in a public company with a fair market value of $3.7 million. The
net unrealized loss as of March 31, 2000 on available-for-sale securities was
$1.1 million and is included in accumulated other comprehensive (loss) income.
As of May 31, 2000, the fair market value of the Company's available for
sale equity investment had declined approximately $1.5 million from
approximately $3.7 million as of March 31, 2000 to approximately $2.2 million.
F-10
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In January 1997, the Securities and Exchange Commission issued new rules
requiring disclosure of the Company's accounting policies for derivatives and
market risk disclosure. The Company does not have any material derivative
financial instruments as of March 31, 2000, and believes that the interest rate
risk for its borrowings and the market risk for its available-for-sale
securities are not material to the results of operations of the Company. The
available-for-sale securities subject the Company's financial position to
market rate risk. The Company sells products to a diverse range of customers
and subscribers in Latin America. The Company performs ongoing credit
evaluations of its customers' and subscribers' financial condition and
generally does not require collateral on product sales. The Company maintains
reserves to provide for estimated credit losses. Actual credit losses could
differ from such estimates.
Financial Instruments. The carrying amounts for the Company's cash and cash
equivalents, other receivables, other assets, trade accounts payable, accrued
expenses and liabilities and other liabilities approximate their fair market
value.
Net Loss Per Common Share. Net loss per share is determined as required by
SFAS No. 128, "Earnings per Share." There were no outstanding shares of common
stock for either the basic or diluted loss per common share calculations for
all periods presented.
Stock-Based Compensation. The Company has adopted SFAS No. 123, "Accounting
for Stock-Based Compensation." The provisions of SFAS No. 123 allow companies
to expense the estimated fair market value of stock options. Alternatively,
SFAS No. 123 permits companies to continue to follow the intrinsic value method
described in APB Opinion 25, "Accounting for Stock Issued to Employees," but
disclose the pro forma effects on net income (loss) had the fair market value
of the options been expensed. The Company has elected to apply APB Opinion 25
in accounting for its Stock Plan. See note 4.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. The Company's actual results could
differ from those estimates.
Recent Pronouncements. The Financial Accounting Standards Board, or FASB,
recently issued SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities--Deferral of Effective Date of FASB SFAS No. 133." This
Statement allows the Company to defer the effective date of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," for one year.
As a result, SFAS No. 133 will now apply to all fiscal quarters of all fiscal
years beginning after June 15, 2000. SFAS No. 133 will require the Company to
recognize all derivatives on its balance sheet at fair value. Derivatives that
are not hedges must be adjusted to their fair value through the Company's
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset against the
change in fair value of the hedged assets, liabilities, or firm commitments
through earnings or recognized in other comprehensive income until the hedged
item is recognized in earnings. The ineffective portion of a derivative's
change in fair value will be immediately recognized in earnings. The Company
has not yet determined if it will adopt SFAS No. 133 sooner than required or
what the effect of SFAS No. 133 will be on its earnings and financial position.
Latin American Operations. The Company derives all of its revenues from
operations in Latin America. Social, political and economic conditions in Latin
America are volatile and may impair the Company's operations. This volatility
could make it difficult for the Company to develop its business, generate
revenues or achieve or sustain profitability. Historically, volatility has been
caused by: currency devaluations; significant governmental influence over many
aspects of local economies; political and economic instability; unexpected
changes in regulatory requirements; social unrest or violence; slow or negative
economic growth; imposition of trade barriers; and wage and price controls.
F-11
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Most or all of these factors have occurred at various times in the last two
decades in the Company's core target Latin American markets, Brazil, Mexico and
Argentina. The Company has no control over these matters. Poor social,
political and economic conditions may inhibit online services and Internet use,
create uncertainty in the Company's operating climate and cause advertisers to
reduce their advertising spending, all of which may adversely impact the
Company's business.
Dependence on AOL. In exchange for its AOL-LA ownership interest, AOL
entered into a royalty-free license agreement. Also, AOL entered into a
services agreement whereby AOL provides services to AOL-LA for fees determined
on an AOL allocated cost plus basis. Under the license agreement, the Company
has the exclusive right to offer in Latin America AOL-branded PC-based online
services. The Company also has the exclusive right to offer AOL-branded TV-
based online services in Latin America if these services are developed by AOL.
The Company has the additional exclusive right to offer in Latin America any
AOL-branded wireless-based online services developed by AOL for commercial
launch within four years of the effective date of the registration statement
for this offering. The Company also has a non-exclusive license to offer a
localized network of Spanish- and Portuguese-language AOL-branded portals in
Latin America. However, the Company has an option to license exclusively any
Spanish- or Portuguese-language AOL-branded portals that AOL may develop for
the Latin American market, subject to payment of a license fee. Under the
services agreement, AOL provides services including software localization,
updates, development, and installation services, server connection services,
technical support and training. AOL also provides the Company with business
development, administrative, tax, financial and legal services. Each of these
agreements may be terminated if the Company materially breaches its terms. The
Company will lose exclusivity of its licensed rights to PC-based services, upon
the later of December 15, 2003 or the date on which AOL or the Cisneros Group
owns less than 20% of the outstanding capital stock of AOL-LA, and to TV- and
wireless-based services, on the later of July , 2005 or the date on which
either AOL or the Cisneros Group owns less than 20% of the outstanding capital
stock of AOL-LA. The termination or loss of exclusivity of the Company's
license or services agreement with AOL would adversely impact its business.
Note 3. Related Party Transactions
The cost to the Company due to AOL for the support services under the
services agreement described in Note 2 was approximately $6.6 million for the
nine months ended March 31, 2000 and approximately $2.4 million for the period
ended June 30, 1999. The cost to the Company for support services provided by
the Cisneros Group was approximately $52,000 for the nine months ended March
31, 2000 and approximately $291,000 for the period ended June 30, 1999. The
unpaid portion of these costs is included in payable to affiliates at March 31,
2000 and June 30, 1999. AOL charges fees for providing these services on an AOL
allocated cost plus basis. The Cisneros Group charges fees for services on a
cost basis. Management believes that the expenses for these services are
representative of what would have been incurred by the Company on a stand-alone
basis. Some of AOL's employees who provide these services to the Company
participate in AOL's stock option plans. Certain employees of the Company hired
from AOL have also retained their previously granted AOL stock options.
In December 1998, the Company acquired AOL's Latin American CompuServe
Classic subscribers for approximately $4.0 million. The cost to acquire these
Latin American CompuServe Classic subscribers was determined using a formula
that was based on the expected number of Latin American CompuServe Classic
subscribers at December 15, 1999. Because the number of subscribers at December
15, 1999 was lower than expected, AOL repaid $879,000 to us during March 2000.
The initial payment of $4.0 million and the refund of $879,000 have been
reflected in stockholders' equity.
F-12
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 4. Capital Stock and Stock Plan
Capital Stock
Preferred Stock
The Company is authorized to issue up to 500,000,000 shares of preferred
stock, par value of $.01 per share, in one or more series with rights,
preferences and privileges that are determined by the Company's board of
directors. Before completion of this offering, the Company had issued
101,858,334 shares of series B preferred stock and 101,858,334 shares of series
C preferred stock. All of the outstanding series B preferred stock is owned by
AOL and all of the outstanding series C preferred stock is owned by the
Cisneros Group, except for 1,996,424 shares of series C preferred stock held by
the three individuals named in note 1. The series B and series C preferred
stock are convertible into shares of class B and class C common stock, which
are convertible on a one-for-one basis into shares of class A common stock, in
each case, at any time on a one-for-one basis. Concurrently with the initial
public offering, the Cisneros Group intends to distribute 2,057,950 shares of
class A common stock to some of its current and former employees for past
services to the Cisneros Group. These shares were issued by the Company to the
Cisneros Group as series C preferred stock and will convert into shares of
class A common stock upon their distribution. Also, the 1,996,424 shares of
series C preferred stock held by the three individuals in note 1 will be
converted into 1,996,424 shares of class A common stock.
Series B and series C preferred stock must be redeemed by the Company on
December 15, 2003, in cash or, at the Company's option, by delivery of fully
paid and nonassessable shares of class B or C common stock or any combination
of shares of class B or C common stock or cash in an amount equal to the
liquidation preference or $2.4544 per share, plus in each case all accumulated
and unpaid dividends through the redemption date. However, AOL or the Cisneros
Group may elect to convert their shares of series B or series C preferred stock
into an equal number of shares of class B or class C common stock at any time
before the date on which the redemption is to occur.
Holders of series B and series C preferred stock are entitled to receive a
cumulative annual dividend, payable in series B and series C preferred stock,
equal to $0.0736 per share, as and when declared by the board of directors and
before the payment of any dividend to the holders of the class A, class B and
class C common stock. After that, the holders of class A, class B and class C
common stock, together with the holders of series B and series C preferred
stock, will share ratably, based on the number of shares of common stock and
preferred stock held, in any dividend declared by the board of directors.
The issuance of the series B and series C preferred stock described above is
reflected in the financial statements as though issued at inception.
Common Stock
The Company is authorized to issue 1,250,000,000 shares of class A common
stock, par value $.01 per share, 250,000,000 shares of class B common stock,
par value $.01 per share, and 250,000,000 shares of class C common stock, par
value $.01 per share. Upon completion of this offering, the issuance of the
class A common stock to Banco Itau and the concurrent distribution by the
Cisneros Group, there will be 60,754,374 shares of class A common stock issued
and outstanding, no shares of class B common stock issued or outstanding and no
shares of class C common stock issued or outstanding. The class B and class C
common stock will be convertible into shares of class A common stock at any
time on a one-for-one basis.
The holders of class A common stock are each entitled to one vote per share.
AOL and the Cisneros Group will be entitled to ten votes for each share of
series B and series C preferred stock and, if issued, class B
F-13
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and class C common stock, that they hold. From inception through March 31,
2000, the Cisneros Group contributed approximately $87.4 million to equity
capital. In addition, the Cisneros Group contributed their remaining commitment
of $12.7 million in April 2000.
Under the Company's restated certificate of incorporation, each of AOL and
the Cisneros Group has the right to directly elect five members of the
Company's 14-member board of directors. The affirmative vote of the holders of
a majority of the outstanding series B preferred stock and class B common
stock, voting separately as a class, as well as the holders of a majority of
the outstanding series C preferred stock and class C common stock, voting
separately as a class, is required to approve a large number of corporate and
business matters, as well as to amend or repeal a number of the provisions of
the Company's restated certificate of incorporation. In accordance with the
terms and conditions of a Registration Rights and Stockholders' Agreement among
the Company, AOL, the Cisneros Group and Banco Itau, AOL and the Cisneros Group
have agreed to vote for one nominee designated by Banco Itau for election to
the Company's Board of Directors. Otherwise, holders of class A common stock,
series B preferred stock and series C preferred stock and any issued class B
and class C common stock generally will vote together as a single class,
including the elections of directors who are not elected directly by AOL or the
Cisneros Group, on matters presented to the stockholders for their vote or
approval, except as otherwise required by applicable Delaware law. However,
because AOL and the Cisneros Group will together control 97.05% of the voting
power of the Company's capital stock following this offering, the issuance of
class A common stock to Banco Itau, and the concurrent distribution by the
Cisneros Group, AOL and the Cisneros Group will have the power to elect the
remaining four directors.
Under the stockholder's agreement between AOL-LA, AOL and the Cisneros
Group, AOL and the Cisneros Group have agreed to non-compete provisions. If
either AOL or the Cisneros Group breaches these provisions, AOL-LA and the non-
breaching party may be able to acquire the breaching party's capital stock.
The AOL Warrant
Upon the effectiveness of the offering, the Company will issue a warrant to
purchase 16,642,500 shares in any combination of its series B preferred, class
A common or class B common stock at a per share exercise price equal to the
initial public offering price. The number of shares for which the warrant is
exercisable is 6% of the sum of the Company's outstanding shares of capital
stock at the closing of the offering, including shares issued to Banco Itau,
shares issuable under the over-allotment option and shares issuable under the
Company's stock plan. The warrant will be immediately exercisable and will have
a ten year term. The number of shares issuable under the warrant may be
increased if AOL or the Cisneros Group admit one or more strategic
stockholders. No other warrants are outstanding. The warrant has a net exercise
feature that allows AOL to pay the exercise price due under the warrant by
tendering to the Company a portion of the shares subject to the warrant instead
of paying the exercise price in cash.
Stock Plan
In July 2000, the Company's board of directors and stockholders adopted the
Company's 2000 Stock Plan. Under the stock plan, the Company may grant
incentive stock options and nonqualified stock options to its employees,
consultants and directors. The maximum term of options granted under the stock
plan is ten years. A total of 13,208,333 shares of class A common stock have
been reserved for issuance under the stock plan. The Company plans to grant
stock options to purchase a total of 8,000,000 shares of class A common stock
with an exercise price equal to the initial public offering price.
F-14
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 5. Loss Per Share
Since the Company has losses from operations for both periods represented
and has no common stock outstanding, there are no earnings per share amounts as
described in SFAS No. 128, "Earnings per Share." As a result, any conversion of
preferred stock or the AOL Warrant to common stock would be antidilutive.
Shares potentially dilutive for the nine month period ended March 31, 2000,
include those relating to preferred stock and the AOL Warrant of 203,716,668
and 16,642,500 respectively.
Note 6. Segment Information
Effective June 30, 1999, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." Under SFAS No. 131,
the Company must disclose information based on the way it organizes financial
information for making operating decisions and assessing performance.
Currently, the Company operates in a single segment, interactive services.
Interactive services consist of the delivery of the Company's interactive
products, including the AOL-LA country services and portals and
CompuServe services. Delivery of interactive services by AOL-LA is in a start-
up phase with the launch in Brazil just recently completed and anticipated
launches in Argentina and Mexico later this year.
The Company's revenues for the nine months ended March 31, 2000 were
approximately $2.4 million in Mexico and approximately $2.3 million in Brazil.
The Company's revenues for the period from inception to March 31, 1999 were
primarily in Mexico. The Company's revenues for the period from inception to
June 30, 1999 were $869,000 in Mexico and $188,000 in Brazil. No single
customer of the Company accounted for 10% or greater of the Company's total
revenues in either period.
At March 31, 2000, the Company had long-lived assets of $2.8 million,
$508,000, $1.3 million and $1.4 million in Brazil, United States, Mexico and
Argentina, respectively. At June 30, 1999, the Company had an immaterial amount
of long-lived assets.
Note 7. Property and Equipment
The Company's property and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, March 31,
1999 2000
-------- -----------
(unaudited)
(In thousands)
<S> <C> <C>
Leasehold and network improvements...................... $-- $2,219
Furniture and fixtures.................................. -- 1,542
Equipment............................................... -- 1,331
Computer equipment and internal software................ 9 1,236
--- ------
9 6,328
Less accumulated depreciation and amortization.......... -- (315)
--- ------
Net property and equipment.............................. $ 9 $6,013
=== ======
</TABLE>
Depreciation expense was $315,000 for the nine months ended March 31, 2000.
F-15
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 8. Commitments and Contingency
Commitments
Leases
The Company has entered into facilities and equipment leases primarily
under long-term operating agreements, some of which may have renewal options.
At June 30, 1999 and March 31, 2000, the Company had facility leases with the
following future minimum payments:
<TABLE>
<CAPTION>
Period Ending June 30, June 30, 1999 March 31, 2000
---------------------- ------------- --------------
(In thousands)
<S> <C> <C>
2000....................................... $ 228 $ N/A
2001....................................... 500 1,945
2002....................................... 506 1,895
2003....................................... 406 1,361
2004....................................... 413 1,004
After 2004................................. 450 953
------ ------
$2,503 $7,158
====== ======
</TABLE>
Subsequent to June 30, 1999, the Company entered into significant
additional lease agreements.
Network Services
The Company has entered into third party telecommunications network
capacity contracts. These contracts commit the Company to purchase a minimum
amount of network capacity or to pay a fixed minimum cost for network
capacity. The Company records expense related to these contracts up to the
minimum commitments and expenses any additional costs in the period that it is
incurred. As of June 30, 1999 and March 31, 2000, the fixed minimum costs for
network capacity commitments under these contracts for future periods are as
follows:
<TABLE>
<CAPTION>
Period Ending June 30, June 30, 1999 March 31, 2000
---------------------- ------------- --------------
(In thousands)
<S> <C> <C>
2000....................................... $ 4,046 $ N/A
2001....................................... 7,496 12,986
2002....................................... 8,438 19,545
2003....................................... 2,438 6,739
------- -------
$22,418 $39,270
======= =======
</TABLE>
Subsequent to June 30, 1999, the Company entered into significant
additional network capacity contracts.
Contingency
Legal Proceedings
On December 28, 1999, ADEC, a non-governmental, private consumer protection
association, filed a complaint against the Company in the Brazilian State of
Rio de Janeiro seeking monetary damages and a preliminary restraining order.
ADEC is seeking R$10.0 million, or approximately $5.5 million, in damages on
behalf of consumers who have allegedly complained about the installation of
the Company's America Online Brazil software on their PCs. The preliminary
restraining order would have required the Company to stop distributing its CD
software in Brazil. While ADEC obtained the order, the Company was successful
in having
F-16
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
it revoked and ADEC later lost an appeal of the revocation. Although the
Company believes that ADEC's claims are without merit and will continue to
contest them vigorously, it may not be successful in defeating their claims. If
the Company is unsuccessful, ADEC's claims could have a material adverse effect
on the Company's business.
Note 9. Income Taxes
During the periods ended March 31, 2000 and June 30, 1999, income tax
provision represented the Company's estimated income taxes in certain foreign
locations. Tax losses generated by the Company in foreign jurisdictions during
these periods will be available to be carried forward against future foreign
taxable income, subject to local tax restrictions, if any. For U.S. tax
purposes, the Company has made elections to treat foreign locations as branches
and therefore, loss carry forwards prior to the reorganization will not be
available to the Company. Therefore, for U.S. tax purposes loss carryforwards
at March 31, 2000 and June 30, 1999 are immaterial. Consolidated operating
losses arising in periods after the reorganization will be available for carry
forward by the Company.
The Company anticipates that after the reorganization, there will be further
net operating losses for tax purposes that will be available to offset the
Company's future U.S. and foreign taxable income. If the Company does not use
these carryforwards in a timely manner, they will expire. To the extent that
the Company realizes net operating loss carryforwards that relate to stock
deductions, the resulting benefits will be credited to stockholders' equity. As
of March 31, 2000 and June 30, 1999, the Company had no net deferred tax assets
or liabilities.
In the future, when the Company records deferred income taxes, it will
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. If any deferred tax assets are recorded,
the Company will determine to what extent a valuation allowance is necessary.
When the Company is more likely than not to realize a deferred tax asset, the
benefit related to the deductible temporary differences attributable to
operations will be recognized as a reduction of income tax expense. The Company
will credit to paid-in capital the realized benefits related to the deductible
temporary differences attributable to stock option deductions, if any.
Note 10. Subsequent Events (Unaudited)
The Banco Itau Strategic Alliance
In June 2000, the Company entered into a ten year strategic marketing
alliance with Banco Itau, one of the largest banks in Latin America with
approximately seven million customers and one million users of its interactive
financial services. We have agreed to create a customized co-branded version of
our America Online Brazil service that Banco Itau will market to all of its
customers. We will issue 31,700,000 shares of class A common stock at the
closing of this offering to Banco Itau in exchange for its commitment to
various subscriber and revenue levels.
The Banco Itau shares will be granted at the completion of the offering and
will be fixed, fully vested and non-forfeitable, at that date. There are no
circumstances that require the shares to be returned to AOL-LA, nor does Banco
Itau have to meet any performance criteria to keep the shares. It is estimated
the shares will be valued at approximately $507 million based on $16.00 per
share, the expected offering price.
Banco Itau has agreed to achieve certain subscriber and revenue targets in
the first five years of the agreement. In the event these performance targets
are not met, Banco Itau could be liable for payments back to
F-17
<PAGE>
AMERICA ONLINE LATIN AMERICA, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
AOL-LA. Banco Itau has provided a promissory note that will secure any payments
due AOL-LA. The cost of this agreement will be recorded as a contra-equity
account and captioned as "Unearned Services" in the consolidated statement of
changes in stockholders' equity.
As there are potential, specific payments related to performance in the
first five years of the agreement, it is estimated that $330.0 million of the
unearned services will be amortized on a straight-line basis over that period.
The estimated, remaining balance of the unearned services, $177.0 million, will
be amortized on a straight-line basis over the ten-year term of the agreement.
Capital Contribution
In June 2000, AOL and the Cisneros Group each contributed $15.0 million to
AOL-LA. In addition, in July 2000, AOL and the Cisneros Group each agreed to
contribute an additional $35.0 million to AOL-LA by December 31, 2000.
Rock in Rio Festival Advertising Contract
On May 4, 2000, the Company entered into an agreement to pay $20 million in
exchange for the exclusive right to sponsor the Brazilian Rock in Rio Festival
from January 12 through 21, 2001. The Company is required to provide this
funding from May to December 2000. The Company's share of costs related to any
formalized pre-festival advertising will be expensed as the advertising occurs.
Other costs associated with the sponsorship of the festival will be deferred
until the festival occurs, at which point those deferred costs will be
expensed.
F-18
<PAGE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
25,000,000 Shares
America Online Latin America, Inc.
Class A Common Stock
[LOGO]
--------
PROSPECTUS
, 2000
--------
Salomon Smith Barney
Donaldson, Lufkin & Jenrette
--------
Lehman Brothers
Cazenove & Co.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
Until , 2000, all dealers that buy, sell or trade America Online Latin
America's class A common stock, whether or not participating in this offering,
may be required to deliver a prospectus. This delivery requirement is
independent of the dealers' obligation to deliver a prospectus when acting as
underwriters and for their unsold allotments or subscriptions.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATIVE COVER PAGE FOR CONCURRENT OFFERING PROSPECTUS]
SUBJECT TO COMPLETION, DATED JULY 6, 2000
PROSPECTUS
[COMPANY LOGO]
Shares
America Online Latin America, Inc.
Class A Common Stock
The owners of one of our principal stockholders, the Cisneros Group of
Companies, intend to give up to 2,057,950 shares of our class A common stock to
some current and former employees of companies within the Cisneros Group of
Companies in thanks to these individuals for their past assistance. The
distribution of these shares will be made concurrently with our initial public
offering made by a separate prospectus in which we are offering to sell
25,000,000 shares of our class A common stock through the underwriters named in
that prospectus. Neither we nor the Cisneros Group will receive any proceeds
from the distribution by the Cisneros Group of Companies under this prospectus.
Before our initial public offering, there has been no public market for the
class A common stock. We have applied to have the class A common stock included
for quotation on the Nasdaq National Market under the symbol .
Investing in our class A common stock involves risks. See risk factors
beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
, 2000
<PAGE>
[ALTERNATIVE PLAN OF DISTRIBUTION PAGE FOR CONCURRENT OFFERING]
PLAN OF DISTRIBUTION
One of our principal stockholders, the Cisneros Group of Companies, intends
to distribute up to 2,057,950 shares of our class A common stock to some
current and former employees of companies within the Cisneros Group of
Companies in recognition of past employment services. Neither we nor the
Cisneros Group of Companies will receive any proceeds from the distribution by
the Cisneros Group.
The employees and former employees of the Cisneros Group of Companies
receiving shares in this distribution, have agreed not to dispose of or hedge
any of their class A common stock for a period of 180 days after the date of
this prospectus, without the prior written consent of Salomon Smith Barney Inc.
and Donaldson, Lufkin & Jenrette Securities Corporation.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses, all
of which we will pay, in connection with the issuance and distribution of the
securities being registered:
<TABLE>
<S> <C>
SEC Registration Fee........................................... $ 182,160
Nasdaq National Market Listing Fee............................. 95,000
NASD Filing Fee................................................ 30,500
Printing and Engraving Fees.................................... 873,000
Legal Fees and Expenses........................................ 2,143,000
Accounting Fees and Expenses................................... 700,000
Blue Sky Fees and Expenses..................................... 5,000
Transfer Agent and Registrar Fees.............................. 2,000
Miscellaneous.................................................. 969,340
----------
Total........................................................ $5,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Our restated certificate of incorporation provides that we shall indemnify
to the fullest extent authorized by the Delaware General Corporation Law, each
person who is involved in any litigation or other proceeding because such
person is or was a director or officer of AOL-LA or is or was serving as an
officer or director of another entity at our request, against all expense, loss
or liability reasonably incurred or suffered in connection with such service.
Our restated certificate of incorporation provides that the right to
indemnification includes the right to be paid expenses incurred in defending
any proceeding in advance of its final disposition; provided, however, that
such advance payment will only be made upon delivery to us of an undertaking,
by or on behalf of the director or officer, to repay all amounts advanced if it
is ultimately determined that such director is not entitled to indemnification.
If we do not pay a proper claim for indemnification in full within 60 days
after we receive a written claim for such indemnification, our restated by-laws
authorize the claimant to bring an action against us and prescribe what
constitutes a defense to such action.
Section 145 of the Delaware General Corporation Law permits a corporation to
indemnify any director or officer of the corporation against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding brought because such person is or was a director or officer of the
corporation, if such person acted in good faith and in a manner that he
reasonably believed to be in, or not opposed to, the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he or
she had no reason to believe his or her conduct was unlawful. In a derivative
action, (i.e., one brought by or on behalf of the corporation), indemnification
may be provided only for expenses actually and reasonably incurred by any
director or officer in connection with the defense or settlement of such an
action or suit if such person acted in good faith and in a manner that he or
she reasonably believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification shall be provided if such person
shall have been adjudged to be liable to the corporation, unless and only to
the extent that the court in which the action or suit was brought shall
determine that the defendant is fairly and reasonably entitled to indemnify for
such expenses despite such adjudication of liability.
Our restated certificate of incorporation contains a provision, permitted by
the Delaware General Corporation Law, that generally eliminates the liability
of a director to us or our stockholders for monetary damages for a breach of
fiduciary duty as a director, except for liabilities arising:
. from any breach of the director's duty of loyalty to us or our
stockholders;
II-1
<PAGE>
. from acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law relating to
unlawful payment of dividends or unlawful stock purchase or redemption of
stock; and
. from any transaction from which the director derived an improper personal
benefit.
We intend to enter into insurance policies insuring our directors and
officers against certain liabilities that they may incur in their capacity as
directors and officers.
Additionally, reference is made to the Underwriting Agreement to be filed as
Exhibit 1.1 hereto, which provides for indemnification by the underwriters of
AOL-LA, our directors and officers who sign the Registration Statement and
persons who control AOL-LA, under certain circumstances.
Indemnification of AOL and the Cisneros Group
Each of our restated certificate of incorporation and the stockholders'
agreement between AOL, the Cisneros Group and us provides that we will
indemnify AOL and the Cisneros Group to the fullest extent authorized by the
Delaware General Corporation Law if we or any of our stockholders or any other
person bring an action against AOL or the Cisneros Group seeking damages or
other relief based on a breach or alleged breach of a fiduciary or other duty
by AOL or the Cisneros Group based on AOL or the Cisneros Group engaging or
investing in any business activity, including those that might be similar to
and in competition with us, or based on the pursuit by AOL or the Cisneros
group of an investment or a business opportunity or prospective economic
advantage in which we could have an interest or expectancy. Each of our
restated certificate of incorporation and the stockholders' agreement further
provides that the right to indemnification includes the right to be paid
expenses incurred in defending any proceeding in advance of its final
disposition; provided, however, that such advance payment will only be made
upon delivery to us of an undertaking, by or on behalf of AOL or the Cisneros
Group, to repay all amounts advanced if it is ultimately determined that AOL or
Cisneros Group is not entitled to indemnification. If we do not pay a proper
claim for indemnification in full within 60 days after we receive a written
claim for such indemnification, our restated certificate of incorporation and
the stockholders' agreement authorize AOL or the Cisneros Group to bring an
action against us and prescribe what constitutes a defense to such action.
Item 15. Recent and Anticipated Sales of Unregistered Securities.
In the three years preceding the filing of this Registration Statement, we
have sold the following securities that were not registered under the
Securities Act as summarized below.
(a) Issuances of Capital Stock
On July , 2000, we entered into a contribution agreement with AOL,
Riverview Media Corp., a wholly owned subsidiary of the Cisneros Group, and AOL
Latin America, S.L. under which we will issue 101,858,334 shares of our series
B preferred stock to AOL and 101,858,334 shares of our series C preferred stock
to Riverview Media Corp. and two current executives and one former executive of
the Cisneros Group in exchange for their contribution to us of all their
interests in AOL Latin America S.L. AOL contributed a royalty free license in
exchange for shares of our series B preferred stock. We recorded the value of
the license at AOL's historical cost basis, which was zero. The Cisneros Group
has contributed an aggregate amount of $100.1 million for our series C
preferred stock.
On July , 2000, we entered into a stock subscription agreement with Banco
Itau, under which we will issue 31,700,000 shares of class A common stock to
Banco Itau at the initial public offering price contemporaneously with the
closing of this offering.
(b) Issuance of Warrant
On July , 2000, we will issue a warrant to AOL to purchase any combination
of 16,642,500 shares of series B preferred stock or class A or class B common
stock at a per share exercise price equal to the initial public offering price.
II-2
<PAGE>
(c) Grant of Stock Options
Pursuant to our 2000 Stock Plan, immediately prior to the effectiveness of
our initial public offering, we will issue options to purchase an aggregate of
8,000,000 shares of Class A common stock at the initial public offering price.
Except with respect to the sale to Banco Itau, the sale and issuance of the
above securities were deemed to be exempt from registration under the
Securities Act in reliance on Section 4(2) of the Securities Act, or Regulation
D promulgated thereunder, or Rule 701 promulgated under Section 3(b) of the
Securities Act, as transactions by an issuer not involving a public offering or
transactions pursuant to compensatory benefit plans and contracts relating to
compensation as provided under Rule 701. The recipient of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with the view to or for the sale in connection with any
distribution thereof and appropriate legends will be affixed to the share
certificates and instruments issued in such transactions. All recipients had
adequate access, through their relationships with AOL-LA, to information about
us. We will sell the shares of class A common stock to Banco Itau under
Regulation S.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
@3.1 Restated Certificate of Incorporation of America Online Latin
America, Inc. to be effective upon completion of the initial
public offering.
@3.2 Restated By-laws of America Online Latin America, Inc. to be
effective upon completion of the initial public offering.
*4.1 Form of class A Common Stock Certificate.
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
on the legality of securities being registered.
@10.1 Form of America Online Latin America, Inc. 2000 Stock Plan.
@+10.2 Stockholders' Agreement by and among America Online Latin
America, Inc., America Online, Inc. and Riverview Media Corp.,
dated as of , 2000.
@10.3 Contribution Agreement by and among America Online Latin
America, Inc., AOL Latin America, S.L., America Online, Inc. and
Riverview Media Corp., dated as of , 2000.
@10.4 Registration Rights Agreement by and among America Online Latin
America, Inc.,
America Online, Inc. and Riverview Media Corp., dated as of ,
2000.
@+10.5 AOL License Agreement by and between America Online, Inc. and
America Online Latin America, Inc., dated as of , 2000.
@+10.6 AOL Online Services Agreement by and between America Online,
Inc. and America Online Latin America, Inc., dated as of ,
2000.
@10.7 Form of Warrant to be issued by America Online Latin America,
Inc. to America Online, Inc., dated as of , 2000.
*10.8 Letter of employment for Charles M. Herington, dated February
26, 1999.
10.9 [intentionally omitted]
@+10.10 Agreement by and between Embratel and AOL Brasil Ltda., dated as
of October 18, 1999.
@+10.11 Agreement by and between Netstream Telecom Ltda. and AOL Brasil
Ltda., dated as of September 24, 1999.
@+10.12 Form of Amendment to Agreement by and between Embratel and AOL
Brasil Ltda., dated as of October 18, 1999.
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S> <C>
+10.13 Strategic Interactive Services and Marketing Agreement by and
among America Online Latin America, Inc., AOL Brasil Ltda. and
Banco Itau S.A., dated as of June 12, 2000.
@+10.14 Stock Subscription Agreement by and among America Online Latin
America, Inc., Banco Itau S.A. and Banco Banerj S.A., dated as
of June 12, 2000.
@10.15 Form of Registration Rights and Stockholders' Agreement by and
among America Online Latin America, Inc., Banco Itau S.A. and
Banco Banerj S.A., dated as of , 2000.
@10.16 Form of Escrow Agreement by and among The Bank of New York,
America Online Latin America, Inc., AOL Brasil Ltda. and Banco
Itau S.A., dated as of , 2000.
@+10.17 Agreement by and between Avantel, S.A. and AOL Mexico, S. de
R.L. de C.V., dated as of January 20, 2000.
@+10.18 Agreement by and between Impsat, S.A. and AOL Argentina, S.R.L.,
dated as of December 23, 1999.
*10.19 Contribution Agreement by and among America Online Latin
America, Inc., AOL Latin America, S.L., America Online, Inc. and
Riverview Media Corp., dated as of July 3, 2000.
@21.1 Subsidiaries of America Online Latin America, Inc.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(see Exhibit 5.1)
@24.1 Powers of Attorney.
@99.1 Consent of Roberto Egydio Setubal.
99.2 Consent of Vernon E. Jordan, Jr.
99.3 Consent of William H. Luers
99.4 Consent of M. Brian Mulroney
</TABLE>
--------
* To be filed by amendment.
+ Confidential treatment has been requested for portions of this exhibit. These
portions have been omitted and filed separately with the Commission.
@ Previously filed.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has duly caused this Amendment No. 8 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in Sao Paulo, Brazil, on July 6, 2000.
America Online Latin America, Inc.
/s/ Charles M. Herington
By: _________________________________
Charles M. Herington
Chief Executive Officer
As required by the Securities Act of 1933, this Amendment No. 8 to the
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Charles M. Herington Chief Executive Officer July 6, 2000
______________________________________ (principal executive
Charles M. Herington officer)
* Chief Financial Officer July 6, 2000
______________________________________ (principal financial and
Javier Aguirre accounting officer)
* Director July 6, 2000
______________________________________
Steven I. Bandel
* Director July 6, 2000
______________________________________
Gustavo A. Cisneros
* Director July 6, 2000
______________________________________
Ricardo J. Cisneros
* Director July 6, 2000
______________________________________
Miles R. Gilburne
* Director July 6, 2000
______________________________________
J. Michael Kelly
* Director July 6, 2000
______________________________________
Michael Lynton
* Director July 6, 2000
______________________________________
Robert S. O'Hara, Jr.
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Director July 6, 2000
______________________________________
Cristina Pieretti
* Director July 6, 2000
______________________________________
Robert W. Pittman
* Director July 6, 2000
______________________________________
Gerald Sokol, Jr.
</TABLE>
* By executing his name hereto, Charles M. Herington is signing this document
on behalf of the persons indicated above by the powers of attorney duly
executed by these persons and filed with the Securities and Exchange
Commission.
/s/ Charles M. Herington
By: _________________________________
Charles M. Herington
(Attorney-in-fact)
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
*1.1 Form of Underwriting Agreement.
@3.1 Restated Certificate of Incorporation of America Online Latin
America, Inc. to be effective upon completion of the initial
public offering.
@3.2 Restated By-laws of America Online Latin America, Inc. to be
effective upon completion of the initial public offering.
*4.1 Form of class A Common Stock Certificate.
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
on the legality of securities being registered.
@10.1 Form of America Online Latin America, Inc. 2000 Stock Plan.
@+10.2 Stockholders' Agreement by and among America Online Latin
America, Inc., America Online, Inc. and Riverview Media Corp.,
dated as of , 2000.
@10.3 Contribution Agreement by and among America Online Latin
America, Inc., AOL Latin America, S.L., America Online, Inc. and
Riverview Media Corp., dated as of , 2000.
@10.4 Registration Rights Agreement by and among America Online Latin
America, Inc.,
America Online, Inc. and Riverview Media Corp., dated as of ,
2000.
@+10.5 AOL License Agreement by and between America Online, Inc. and
America Online Latin America, Inc., dated as of , 2000.
@+10.6 AOL Online Services Agreement by and between America Online,
Inc. and America Online Latin America, Inc., dated as of ,
2000.
@10.7 Form of Warrant to be issued by America Online Latin America,
Inc. to America Online, Inc., dated as of , 2000.
*10.8 Letter of employment for Charles M. Herington, dated February
26, 1999.
10.9 [intentionally omitted]
@+10.10 Agreement by and between Embratel and AOL Brasil Ltda., dated as
of October 18, 1999.
@+10.11 Agreement by and between Netstream Telecom Ltda. and AOL Brasil
Ltda., dated as of September 24, 1999.
@+10.12 Form of Amendment to Agreement by and between Embratel and AOL
Brasil Ltda., dated as of October 18, 1999.
@+10.13 Strategic Interactive Services and Marketing Agreement by and
among America Online Latin America, Inc., AOL Brasil Ltda. and
Banco Itau S.A., dated as of June 12, 2000.
+10.14 Stock Subscription Agreement by and among America Online Latin
America, Inc., Banco Itau S.A. and Banco Banerj S.A., dated as
of June 12, 2000.
@10.15 Form of Registration Rights and Stockholders' Agreement by and
among America Online Latin America, Inc., Banco Itau S.A. and
Banco Banerj S.A., dated as of , 2000.
@10.16 Form of Escrow Agreement by and among The Bank of New York,
America Online Latin America, Inc., AOL Brasil Ltda. and Banco
Itau S.A., dated as of , 2000.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S> <C>
@+10.17 Agreement by and between Avantel, S.A. and AOL Mexico, S. de
R.L. de C.V., dated as of January 20, 2000.
@+10.18 Agreement by and between Impsat, S.A. and AOL Argentina, S.R.L.,
dated as of December 23, 1999.
*10.19 Contribution Agreement by and among America Online Latin
America, Inc., AOL Latin America, S.L., America Online, Inc. and
Riverview Media Corp., dated as of July 3, 2000.
@21.1 Subsidiaries of America Online Latin America, Inc.
23.1 Consent of Ernst & Young LLP.
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
(see Exhibit 5.1)
@24.1 Powers of Attorney.
@99.1 Consent of Roberto Egydio Setubal.
99.2 Consent of Vernon E. Jordan, Jr.
99.3 Consent of William H. Luers
99.4 Consent of M. Brian Mulroney
</TABLE>
--------
* To be filed by amendment.
+ Confidential treatment has been requested for portions of this exhibit.
These portions have been omitted and filed separately with the Commission.
@ Previously filed.
